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ECS1601

Together We Pass

Exam Pack 2018


Written by Dylan Florence

www.togetherwepass.co.za

info@togetherwepass.co.za

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Index
Welcome....................................................................................................................................................................... 3
October/November 2017 Exam .............................................................................................................................. 4
October/November 2017 Suggested Solutions .................................................................................................. 13
May/June 2017 Exam Paper ................................................................................................................................... 16
May/June 2017 Suggested Solutions .................................................................................................................... 27
October/November 2016 Exam ............................................................................................................................ 30
October/November 2016 Suggested Solutions .................................................................................................. 38
May/June 2016 Exam Paper ................................................................................................................................... 41
May/June 2016 Suggested Solutions .................................................................................................................... 52
October/November 2015 Exam ............................................................................................................................ 55
October/November 2015 Suggested Solutions .................................................................................................. 65
May/June 2015 Exam Paper ................................................................................................................................... 68
May/June 2015 Suggested Solutions .................................................................................................................... 77
Thank You .................................................................................................................................................................. 81

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Welcome

I do hope that the following suggested exam answers would help you in achieving a distinction for
ECS1601. Good luck to everyone for the upcoming exams.

Inside are exam papers and the suggested solutions from 2015 and onwards, so enjoy.

Together We Pass

EMAIL support@togetherwepass.co.za
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TWITTER @togetherwepass

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October/November 2017 Exam
Section A

Question 1
a) List the three withdrawals from the circular flow if income and spending.

b) Price stability is one of the macroeconomic objectives. List four other objectives.

c) Explain the difference between gross domestic product (GDP) and gross national income (GNI).

d) In the table below, provide any three differences between the consumer price index and the producer
price index.

Consumer Price Index Producer Price Index

Question 2
a) Use examples to explain the difference between contractionary fiscal policy and expansionary fiscal
policy.

b) Consider the following statement and answer the questions that follow:

In 2007, the US economy entered into the worst recession since the Great Depression. Real GDP
declined by 5,1% and the unemployment rate rose from 4,4% to 10,1%.

Use the AD-AS framework to explain how monetary policy can be used to address the problem of
declining output and rising unemployment.

c) Illustrate and explain, by using a diagram, what will happen to the exchange rate between the rand
and the US Dollar if South African tourists to the United States increase.

Question 3
a) Explain why the simple Keynesian multiplier tends to be bigger than the multiplier derived after the
introduction of the government sector.

b) Suppose you are given the following information about the South African economy. Use the
information to answer questions (i), (ii), and (iii).

Income Consumption expenditure Saving


(Billions in rand) (billions in rand) (billions in rand)
0 260 -260
1 100 1 140 -40
1 200 1 220 -20
1 300 1 300 -
1 400 1 380 20
1 500 1 460 -

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(i) Calculate the marginal propensity to consume and the marginal propensity to save.
(ii) Calculate the multiplier.
(iii) Indicate on the table, the value of saving at income levels 1300 and 1500.

c) Explain how a 1% decrease in the repo rate could affect the general price level in the economy.

Question 4
a) Write a paragraph in which you explain two supply-side policies and two demand-side policies that
can be used to reduce unemployment.

b) Name any two policies that can be used to combat each of the following:

(i) Cost-push inflation


(ii) Demand-pull inflation

c) Define the following concepts:

(i) Economic growth


(ii) Unrecorded activity
(iii) Business cycle
(iv) Capital deepening
(v) Domestic demand.

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Section B

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October/November 2017 Suggested Solutions
Question 1
(a) Imports, savings and tax

(b) Economic growth, balance of payments stability, full employment and equitable income distribution.

(c) Gross Domestic Product is the value of all final goods and services produced within the borders of a
country. Gross national income is on the other hand, the value of GDP minus net primary income
payments to the rest of the world. This means that adjustments have to be made to the GDP figure in
order to arrive at the GNI figure.

(d)

CONSUMER PRICE INDEX PRODUCER PRICE INDEX


Makes use of consumer prices Uses producer prices
Tests consumer purchasing power Tests producer purchasing power
Measures cost of living Measures cost of production

Question 2
(a) An expansionary fiscal policy entails an increase in the level of subsidies or a decrease in taxes or any
combination of the two. A contractionary fiscal policy entails an increase in the tax level or a decrease in
the subsidies or any combination of the two. The difference being that, the former increase the level of
economic activity whilst the latter reduces it.

(b)

Under the given circumstances of the US economy, it would be prudent to lower the interest rates and
raise money supply. This would ceteris paribus, result in an increase a rise in investment, which would
result in a further rise in Aggregate supply, giving rise to higher levels of employment. This can be shown
as in the diagram below:

GPL

AS0

AS1

P0

P1

AD0

Quantity Q0 Q1

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(c) If South African tourists to the United States increases, the first thing they will have to demand, before
demanding US goods, is the US dollar. This will create excess demand for the US dollars, making them
more expensive to buy using South African Rand. This can be shown as in the diagram below:

S
R1
SA RANDr0

D1
D0
0
US Dollars
Quantity
Thus in the diagram above, it can be seen that the excess demand, shown by a shift of the demand
curve from D0 to D1 causes the value of the dollar in terms of the South African Rand to firm from r0 to
r1.

Question 3
(a) The simple Keynesian multiplier tends to be bigger because it does not have a government element.
A government element brings in the issue of taxes, which will be levied on all other sectors of the
economy. This therefore gives rise to more leakages, since taxes are leakages, as opposed to injections.

(b(i))

Marginal Propensity to Consume is calculated as:

Change in consumption / Change in income x 100

I.e. 1200 / 1500 = 0.8

------------------------------------

MPS = 1 - MPC

= 0.2.

(ii) Multiplier: 1 / (1 - MPC)

=1 / 0.2

=5

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(iii) At income levels 1300 and 1500, the value of savings are 0 and 40 billion rand respectively.

(c) The Repo rate is the rate at which banks borrow money from the Central Bank. An increase in the
Repo Rate would lead to firms finding it more difficult to borrow from the Central bank and there will be
a rise in the general price level, due to a decrease in the Aggregate Supply.

Question 4
(a) Supply side policies are policies that put emphasis on Aggregate supply. Demand side policies are
policies that put emphasis on the demand side and demand management of the country or economy.

They aim to reach better use of land, labor, capital and entrepreneurship.

Demand side policies are those that aim to manage aggregate demand. Examples are expansionary
monetary and fiscal policies, which will raise the level of economic activity, boost levels of investment
and lower levels of unemployment.

(b)

(i) Cost Push Inflation

 expansionary monetary policy


 expansionary fiscal policy

(ii) Demand Pull Inflation

 contractionary monetary policy


 Contractionary fiscal policy.

(c)

(i) Economic growth: a persistent rise in the level of GDP coupled with an improvement in the standards
of living.

(ii) Unrecorded activity: a legal economic activity that produces income, but is from an unregistered
business entity such as a vendor, peddler or hawker.

(iii) Business cycle: repetitive upswings and downswings of the level of economic activity.

(iv) Capital deepening: increasing the ratio of capital per unit of labour.

Section B
1. 4 7. 1 13. 2 19. 2 25. 2
2. 3 8. 1 14. 4 20. 2 26. 4
3. 1 9. 4 15. 4 21. 3 27. 4
4. 3 10. 4 16. 2 22. 1 28. 3
5. 2 11. 3 17. 1 23. 1 29. 2
6. 4 12. 1 18. 4 24. 3 30. 3

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May/June 2017 Exam Paper
Section A

Question 1
(i) List two important injections and two important leakages from the circular flow of income and
spending.

(ii) Briefly explain the relationship between the demand for money and the interest rate.

(iii) Briefly describe an expansionary fiscal policy.

(iv) Identify and briefly describe one macroeconomic objective.

(v) Briefly explain why the link between the interest rate and investment spending is important in the
monetary transmission mechanism.

Question 2
Question 2 is based on the following diagram of the rand/dollar exchange market.

Use the above diagram to illustrate and explain the impact of the following events on the rand/dollar
exchange market.

a. An economic recession in the economies of major trading partners of South Africa


b. Foreign investors sell South African financial assets.

Question 3
This question is based on a simple Keynesian model with a government sector.

(i) Use diagrams to illustrate the impact of:

a. An increase in government spending; and


b. An increase in the tax rate.

Make sure you comment on the size of the change in the level of income and output for (a) and (b)

(ii) Identify two factors that can cause an increase in the value of the multiplier in a simple Keynesian
model with a government and foreign sector.

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Question 4
Question 4(i) is based on the following AD-AS model

In this model, certain events took place that led to an increase in the price level and an increase in the
level of output and income.

(i) Use the diagram to identify what possible events could have caused this end result and describe how
these events led to these results.

(ii) Use the following diagrams to illustrate the difference between demand-pull and cost-push inflation.

Demand-pull Inflation Cost-push inflation

Question 5
(i) Structural unemployment is a serious issue that needs to be dealt with in South Africa. Describe
structural unemployment and possible solutions for structural unemployment.

(ii) During the past few years, South Africa has experienced low economic growth rates. One way of
explaining economic growth is to look at the demand factors and the supply factors that determine
economic growth. Identify two demand and supply factors each of economic growth and explain the
possible impact these factors might have on economic growth in South Africa.

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Section B

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May/June 2017 Suggested Solutions

Section A
1 (i) Injections into the circular flow are exports, investment, government expenditure, and
consumer expenditure.

(ii) Money demand is negatively related to the rate of interest. Money demand falls as the rate of
interest. This means that potential demanders for money will not demand more money if the rate of
interest because it becomes expensive for them to repay to the excess units such as banks and other
financial institutions.

(iii) Fiscal policy refers a deliberate attempt by the government to influence the level of economic activity
by use of taxes and subsidies. An expansionary fiscal policy implies a reduction in tax or an increase in
subsidies or any combination of the two.

(iv) Macro economic objectives can be summarized as low inflation, low unemployment, price stability,
exchange rate strength and economic growth.

Economic growth is a sustained increase in the level of GDP coupled with an improvement in the
standards of living of the citizens.

(v) Interest rates is the rate at which borrowers pay for the opportunity cost of taking money from a
lender. A rise in the rate of interest will deter would be borrowers from borrowing more. This means to
say potential investors, who would want to borrow from banks and financial institutions are therefore
not in a position to borrow since it becomes more expensive to do so. Thus interest rates are negatively
related to the level of investment. The higher the rate of interest, the lower the level of investment and
vice versa.

(2)

(a) An economic recession in the trading partners of South Africa will serve to dampen their AD. They will
therefore demand less of all products, including the amount of South African products which they do
demand. This will cause less demand for the South African rand and the rand will lose value.

(b) Foreign investors dispose South African financial assets, there will be less demand for South African
Rand, which will also results in the Rand losing its value.

Increase in investment spending Increase in tax


C+G+I tAX

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(i) The size of the level of income is highly and positively related to the level of investment. The
high the level of investment, the higher the output. Tax levels are also associated the level of
output. Taxes reduce aggregate expenditure and therefore may reduce the level of national
income.

(ii) Size of the multiplier depends on the MPC and MPS. Marginal Propensity to import is also a
key determinant of the size of the multiplier, together with the marginal propensity to
export.

QN 4 (i) The diagram above shows a rightward shift in the level of Aggregate Demand. This seems to
have happened with a corresponding increase in the level of Aggregate Supply. This is what caused the
price level to go up. The shift of the AD curve might have been caused by an expansionary monetary and
fiscal policy.

(iii) Demand pull inflation happens when there is too much demand as compared to aggregate
supply of the said good and service. The demand curve shifts to the right side as below:

As

p1

P0

AD

Ad

Income

Cost push inflation is a result of the cost of production being more than the anticipated. The firms will
therefore produce whatever output is being demanded, but pass on the cost burden to the final
consumer, which is inflationary. Alternatively, they will reduce AS which will create a shortage of the
goods and services. That will lead to the price level going up which is inflation. The can be shown as in
the diagram below:

AS1 AS0

P1

P0

AD0

National Income

(5) (i) Structural unemployment is the type of unemployment which takes place when there is a
mismatch between the current skill set and the required skill set. It can be cured by :

-retraining of staff

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-funding of education by the state

-relocating the structurally unemployed to areas where jobs are available

-Funding retraining programs by employers

-encouraging potential employees to get the necessary skills.

(ii) Demand factors that affect economic growth are domestic demand and exports. Supply factors are
factors such as natural resources, labor, capital and entrepreneurship.

Domestic Demand consists of consumption, investment and government expenditure. These variables
are positively related to the level of economic growth. If government expenditure is increased, then
there will be a higher level of output, especially when firms have been subsidized to produce more. This
leads to fast paced economic growth rate.

Supply factors are factors such as natural resources, labor, capital and entrepreneurship. More
economic use of these factors is what will give rise to higher economic growth pace. Less economic use
of the same will result in low levels of economic growth. The size of labor and its quality as a factor of
production will lead to high output, culminating to higher economic growth. Capital deepening and
capital widening are concepts that also lead to higher levels of economic growth.

SECTION B
B1)5 B11)2 B21) 1

B2)2 B12) 4 B22) 3

B3)5 B13) 1 B23) 4

B4) 4 B14)1 B24) 4

B5)1 B15) 3 B25) 1

B6)4 B16) 2 B26)3

B7)3 B17) 2 B27)1

B8)2 B18) 2 B28)4

B9)3 B19) 1 B29)4

B10)2 B20) 1 B30)4

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October/November 2016 Exam
Section A
Question 1

a. Briefly explain demand management policies and how they can be used in the economy.
b. Distinguish between a flow and a stock variable. Give an example of each.
c. Use a diagram to explain how a decrease in the interest rate will affect the quantity of money
demanded in the money market.
d. List three ways in which government spending can be financed.

Question 2

a. Use a diagram to explain how a decrease in government spending will affect the level of
income in the Keynesian model.
b. Use a diagram to explain how an increase in taxes will affect the level of income in the
Keynesian model.
c. South Africa experienced a severe decline in real gross domestic production during the last
quarter of 2008 and the two quarters of the first half of 2009. Use an AD-AS model to illustrate
and explain the policies that could be used to resolve this situation.

Question 3

a. Explain any three measures that can be used to do away with cost-push inflation’
b. Explain why policy makers regard inflation as a problem. Refer to the effects of inflation in your
explanation.
c. Briefly explain the conflict approach to inflation

Question 4

a. Suppose the gold price rises in South Africa. Using a diagram, explain how this rise in the gold
price will affect the exchange rate between the South African rand and the US dollar, ceteris
paribus
b. Mention and explain two factors that influence the effectiveness of the monetary transmission
mechanism

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Section B

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October/November 2016 Suggested Solutions
Section A

Question 1
a) Demand management policies are set to regulate the total demand for goods and services in the
economy. These policies are fiscal and monetary policy. These policies can be contractionary, which
reduces demand for goods and services through taxes and interest increases or expansionary to
increase demand through decrease of taxes and interests.

b) Flow variable – Time dimension and can be measured at a specific time. E.G Income

Stock variable - No time dimension and can be measured at a particular time. E.G Wealth

c) The decrease of the interest rate will increase the quantity of money demanded from Qo to Q1.

d) Government spending is financed by borrowing, taxes and income from factors of production and
parastatals.

Question 2
a) The decrease of government spending will reduce income from E0 to E1 and shifts the AD curve
downwards.

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b) Taxes increase will reduce level of income because of discourages\d spending, therefore income
changes from E0 to E1 because the taxes make the aggregate spending curve falter.

c) The expansionary monetary and fiscal policy will be used to increase production and stimulate
spending. Therefore, a right-hand shift of the AD0 curve to AD1. The new equilibrium is indicated by Y1.

Production increases to Y1, but price increase also to P1

Question 3
(a)

(i) Government can impost maximum wages and salaries in order to regulate the salaries increase and
can also encourage more training and skills for more people to increase the labour in the labour market,
which can eventually decrease wages and salaries.

(ii) Controlling the exchange rate so that the currency will not depreciate against the currencies of the
exporting countries. This will reduce costs of imported capital goods.

(iii) Encourage research and programs to reduce the effects of natural disasters. E.G drought resistant
crops.

(b)

(i) Inflation is a problem because it benefits debtors at the expense of creditors. This is the distribution
effect which inflation reduces the real value of the money due to price increases.

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(ii) Economic effect due to the increase in prices. It reduces value of existing savings and also
discourages savings in traditional forms. E.G Pension funds. It will cause balance of payments problems
since exports become more expensive than imports.

(iii) Social effect due to the price increases, people become more frustrated and inflation create conflict
and tension.

(iv) Political effect will form society groups that can cause conflict due to an increase in the cost of living.

(c)

The conflict approach to inflation is that the claims of income at current prices is greater than the
planned contributions to national income/

Question 4
a) The rand will appreciate against the US Dollar, causing the rightward shift of the supply curve of
dollars as the more US dollars come to South Africa.

Quantity of US dollars increase from Q0 to Q1 and its price falls from P0 to P1.

b) Interest rate and money stuck influence the effectiveness of the monetary transmission mechanism. If
the interest rate increases, then it increase the money stock, increases investment and also aggregate
spending and income. The reverse is also true.

Section B
1. 1 7. 3 13. 5 19. 4 25. 5
2. 2 8. 1 14. 5 20. 1 26. 4
3. 2 9. 2 15. 3 21. 2 27. 4
4. 1 10. 4 16. 1 22. 4 28. 1
5. 2 11. 1 17. 2 23. 2 29. 1
6. 2 12. 3 18. 3 24. 1 30. 1

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May/June 2016 Exam Paper
Section A

Question 1
(1a) Define money

(1b) Distinguish between the three broad functions of government.

(1c) Define the South African balance of payments.

(1d) Differentiate between nominal and real prices.

(1e) List four problems associated with GDP as a measure of total production in the economy.

Question 2
(2a) Use a diagram to explain how an increase in the tax rate will influence the income level in the
economy, given that the price level is fixed.

(2b) Due to a change in trade policy, there has been a substantial decrease in the amount of steel
produced in South Africa and an increase in the amount of steel imported into South Africa. This has led
to a substantial increase in total imports. Explain how this will affect the economy by making use of the
Keynesian model. Also mention how this will affect employment in South Africa.

(2c) Use the AD-AS model to explain the effect of an increase in the interest rate level in the economy

(2d) In the year 2022 Durban will host the Common Wealth Games, which is expected to cause a
substantial increase in foreign tourists visiting the country. Explain with the aid of a diagram how you
would expect this to influence the rand/dollar exchange rate. Also explain (but not with a diagram) how
you would expect imports and exports to be affected by this change in the exchange rate.

Question 3
(3a) The following figures were obtained from the Quarterly Labour Force Survey (Quarter 2, 2015 edition)
compiled by Statistics South Africa:

April to June 2015

(thousands)

Population aged 15 to 64 years 35 955

Labour force 20 887

Employed 15 657

Formal sector (including agriculture and private 12 996


households)
2 661
Informal sector
5 230
Unemployed
15 068
Not economically active
2 434
Discouraged work-seekers
12 633
Other (not economically active)

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(i) Calculate the unemployment rate according to the strict definition of unemployment.

(ii) Calculate the unemployment rate according to the expanded definition of unemployment.

(3b) Use the information in the following diagram of the Keynesian model to answer the questions that
follow:

(i) Calculate the marginal propensity to consume.

(ii) Calculate the multiplier.

(iii) Calculate the new equilibrium income level if investment increases by R100 million.

Question 4

(4a) During the month of August 2015, the exchange rate of the rand changed as follows:

Date R/$

3 August 2015: 12, 73

31 August 2015: 13, 34

Indicate if this change represents a depreciation or an appreciation of the rand and explain how this
change in the exchange rate will affect the current account of the balance of payments.

(4b) Describe the effect of an increase in government expenditure on the economy. Clearly explain why
the increase in income exceeds the increase in government expenditure.

(4c) Explain why the multiplier for an open economy is smaller than the multiplier for a closed economy.

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Section B
B1. Which of the following statements is/are correct?

(a) Households provide factors of production to firms on the factor market.

(b) Firms provide factors of production to households on the factor market.

(c) Households provide goods and services to firms on the goods market.

(d) Firms provide goods and services to households on the goods market.

[1] a, b, c and d

[2] only a and c

[3] only a and d

[4] only b and c

[5] only b and d

B2. Which of the following statements is/are correct?

(a) Firms provide public goods and services to the government.

(b) Firms pay taxes equal to the value of public goods and services provided to them by government.

(c) Wages are paid to households who provide their labour service to firms and government on the
factor market.

(d) Households allocate the income that they receive to the payment of taxes, to consumption and to
savings.

[1] a, b, c and d

[2] only a and c

[3] only a and d

[4] only b and c

[5] only c and d

B3. Which one of the following statements is correct?

[1] Investment represents a flow of funds to the financial sector.

[2] Investment represents a withdrawal from the circular flow of income and spending.

[3] If the income received by households exceeds the total amounts of taxes paid and consumption by
households, savings by households will be positive.

[4] If the amounts of savings from households and firms that flow to the financial sector exceed the
amount of investment financed by the financial sector, this will be a net injection into the circular flow of
income and spending.

[5] None of the statements is correct.

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B4. Which one of the following is a function of the South African Reserve Bank?

[1] Setting the tax rate

[2] Setting the exchange rate

[3] Setting the interest rate at which banks provide loans

[4] Setting the repo rate

[5] Setting the rate interest rate on long-term deposits with banks

B5. Based on the above diagram, which of the following options is/are correct?

When the interest rate level decreases …

(a) L1 will shift to the right.

(b) L2 will shift to the right.

(c) L will shift to the right.

[1] only a

[2] only b

[3] only c

[4] a, b and c

[5] not a, b or c

B6. On 24 July 2015, the repo rate was increased to 6% per year. Based on this information, which one of
the following statements is correct?

[1] The demand for money will increase due to the increase in the repo rate.

[2] The demand for bank loans will increase due to the increase in the repo rate.

[3] The amount of money that is created by banks will decrease due to the increase in the repo rate.

[4] The money supply will increase when the repo rate increases.
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B7. Which one of the following statements is correct?

[1] If the minimum cash reserve requirement that banks have to adhere to increases, banks will be able
to create more money and the money supply should increase.

[2] When a bank experiences a cash deficit, it can buy financial assets from the SARB to finance this
deficit.

[3] When a bank experiences a cash deficit, it can borrow funds from the SARB at the repo rate to
finance this deficit.

[4] When the SARB sells financial assets to a bank, this can decrease the cash deficit that the bank is
experiencing.

B8. Which one of the following statements is correct?

[1] Current income of government minus government spending is equal to the budget deficit.

[2] The budget deficit is equal to income from property plus taxes plus borrowing by the government.

[3] The government does not pay interest on the amounts that it borrows.

[4] A large amount of government debt implies that the current generation finances government
expenditure that will take place in the future.

Question B9 is based on the information in the following table:

Income level per month Amount of tax paid per month


Tax A Tax B Tax C
R2 000 R1 000 R200 R600
R5 000 R2 000 R500 R2 000
R10 000 R3 000 R1 000 R5 000

B9. Based on the information in the table above, which one of the following statements is correct?

[1] Tax A is an example of a progressive tax.

[2] Tax B is an example of a proportional tax.

[3] Tax C is an example of a regressive tax.

[4] Tax A is an example of a proportional tax.

[5] Tax B is an example of a progressive tax.

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B10. Which of the following options is/are correct?

Fiscal policy can include …

(a) decisions regarding the tax rate.

(b) decisions regarding the level of government expenditures.

(c) decisions regarding the level of the repo rate.

(d) decisions regarding the way in which the budget deficit is financed.

[1] a, b, c and d

[2] only a, b and c

[3] only a, c and d

[4] only a and b

[5] only a, b and d

B11. What option is not a reason why countries trade:

[1] They are economically interdependent.

[2] They prefer autarky.

[3] They have limited resources.

[4] It is to their advantage to specialise in a certain good or product.

B12. High inflation is an example of failing which macro-economic objective?

[1] External stability

[2] Price stability

[3] Full employment

[4] Equitable distribution of income

B13. Which one of the following is not a component of aggregate expenditure?

[1] Consumers’ expenditure

[2] Investment

[3] Autonomous consumption

[4] Induced consumption

[5] Saving

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B14. In the Keynesian model, the multiplier is equal to …

[1] the equilibrium level of output for a given level of aggregate expenditure.

[2] the increase in aggregate expenditure brought about by a change in investment.

[3] the increase in the equilibrium level of income divided by the change in autonomous expenditure.

[4] the increase in autonomous expenditure when equilibrium income increases.

[5] the equilibrium level of consumption corresponding to a given level of aggregate spending.

B15. Consider the following information:

Marginal propensity to consume = 0,9

Investment = R200 million

Autonomous consumption = R70 million

The equilibrium level of income is …

[1] R300 million.

[2] R700 million.

[3] R2 000 million.

[4] R2 700 million.

[5] impossible to determine from the information provided

B16. In the Keynesian model, government expenditure …

[1] is undertaken solely to regulate the level of spending.

[2] increases with investment because investment increases the size of the tax base.

[3] is taken to be autonomous because it is subject to government policy.

[4] can be ignored because investment is taken to be the key determinant of income.

[5] is determined by the level of tax revenue.

B17. Which one of the following statements is correct?

[1] The aggregate demand curve (AD curve) can be shifted by monetary as well as fiscal policy measures.

[2] A restrictive fiscal policy will result in a rightward shift of the aggregate demand curve.

[3] A general increase in wages in the economy will, ceteris paribus, shift the aggregate supply curve
downward (to the right).

[4] A supply shock results in a simultaneous increase in prices and production in the economy.

[5] None of the above statements is correct.

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B18. The immediate effect of a decrease in government expenditure will be to …

[1] move the AD curve to the left.

[2] move the AD curve to the right.

[3] move the AS curve to the left.

[4] move the AS curve to the right.

[5] leave the curves unchanged.

B19. The monetary transmission mechanism …

[1] explains how banks create money.

[2] explains how the central bank transmits messages to the other banks.

[3] describes the ways in which changes in the monetary sector are transmitted to the rest of the
economy.

[4] describes how the Monetary Policy Committee announces its decisions.

[5] explains how developments in the economy affect the monetary sector, especially the banks.

B20. In the AD-AS model, an increase in government expenditure …

[1] will increase the balance of payments deficit and increase unemployment.

[2] will decrease the balance of payments deficit and increase unemployment.

[3] will increase the balance of payments deficit and decrease unemployment.

[4] will decrease the balance of payment deficit and decrease unemployment.

B21. Which of the following statements is incorrect?

[1] Cost-push inflation may result from firms increasing their profit margins.

[2] Attempts to decrease cost-push inflation by restrictive monetary or fiscal policy are likely to produce
even greater unemployment.

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[3] Cost-push inflation may follow from a depreciation of the domestic currency against the currencies of
the country’s major trading partners.

[4] Cost-push inflation is associated with rising prices and declining unemployment.

B22. If the CPI for 2015 is 156 and the CPI for 2014 is 148, what is the inflation rate for 2015 according to
the CPI?

[1] 5,12%

[2] 5,41%

[3] 8,00%

[4] 8,40%

B23. Paul lends R10 000 to his friend Steven for one year. They agree that Steven would pay the

R10 000 back with 5% interest at the end of the year. If the inflation rate is 6%, which of the following
would be true for the real value of the amount that Steven pays back at the end of the year?

[1] It would be less than R10 000.

[2] It would be more than R10 000 but less than R10 500

[3] It would be exactly R10 500.

[4] It would be more than R10 500.

B24. One definition of inflation is that it is a continuous and considerable rise in prices. Which one of the
following is an example of inflation?

[1] A 4% increase in the petrol price

[2] A 4% increase in the interest rate

[3] A 4% increase in the tax rate

[4] A 4% increase in the CPI

B25. Which one of the following will not be appropriate in an attempt to combat demand-pull inflation?

[1] An increase in taxes

[2] Measures to decrease the productivity of labour

[3] A decrease in government spending

[4] An increase in interest rates

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B26. Susan studied nursing. After she graduated, she applied for a position. However, there were only
numerous vacancies for doctors. She is still unemployed. What type of unemployment is Susan
experiencing?

[1] Frictional unemployment

[2] Structural unemployment

[3] Seasonal unemployment

[4] Cyclical unemployment

B27. Which of the following statements is/are correct?

(a) Increased unemployment rates can cause high crime rates, increase depression, increase rioting and
damage political and social structures.

(b) Unemployment can be solved by increasing wage rates.

(c) Unemployment, poverty and inequality are complex and interconnected economic issues.

(d) Labour unions asking for higher wages could increase unemployment.

[1] a, b, c and d

[2] a and c

[3] a, c and d

[4] b and c

B28. Unemployment can be caused by both changes of the demand for labour and the supply of labour.
Which of the following policies can help solve unemployment by influencing the supply of labour?

[1] Government can encourage consumption spending by decreasing taxes.

[2] Government can spend more and therefore increase the aggregate demand in the economy.

[3] Good education and skills development can be provided to all citizens.

[4] The growth of small and medium enterprises can be encouraged.

B29. Economic growth is a measure in the growth of real GDP. Which one of the following countries
experienced the highest economic growth?

[1] South Africa experienced a 1,5% increase in nominal GDP and inflation of 6%.

[2] China experienced an increase of 7,4% in real GDP.

[3] The United States experienced 2,1% growth in real GDP with inflation of almost 0%.

[4] India experienced a 10,5% growth in nominal GDP with a 9,3% inflation.

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B30. Which one of the following is an example of a factor that can encourage economic growth through
the boosting aggregate demand?

[1] An entrepreneur starting to make gold rings for profit

[2] Buying capital to explore and extract natural resources such as gold

[3] Increasing exports of natural resources like gold and platinum

[4] Discovering new deposits of natural resources

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May/June 2016 Suggested Solutions
Question 1
a) Money is anything accepted as an exchange for a good or service.

b) Public goods and services - providing goods and services at a lower cost so that everyone benefits.

Control macroeconomic objectives – ensuring quality and growth.

Intervening in the market system – being an employer and setting prices.

c) Balance of payment shows the receipts and payments of the economy. It has a current account and
capital account.

d) Nominal prices are the actual prices prevailing in the economy while real prices shows purchasing
power of the currency.

e) Double counting

Excluding non-market activities

Excluding informal activities

Data revisions

Question 2
a) The tax rate increase will decrease the level of spending, thereby reducing level of income from E1 to
E2

b) Increase in imports will decrease the level of income from E1 to E2. Employment will decrease
because of decrease in production in South Africa. It will depreciate the rand value.

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c) The quantity of money demanded will be les, thereby shifting the supply curve leftwards, showing an
increase in interest rates from P1 to P2

d) The tourist will supply more dollars in the economy, thereby appreciating the rand. The supply curve
will shift rightwards from S1 to S2.

The exports will be expensive because of the appreciation value of the rand and imports will become
cheaper.

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Question 3
a) i) Unemployment rate = Unemployed labour / labour force x 100%

= 5230 / 20 887 x 100%

= 25%

ii) 5230 + 2464 / 20 887 x 100%

= 37%

b) i) MPC = ∆C / ∆Y

= 620 – 560 / 700 – 600

= 0.6

ii) Multiplier = 1 / 1-c

= 1 / 1-0.6

= 1 / 0.4

= 2.5

iii) Y = ∆ I

= 2.5 (100 Million)

= 250 Million

Question 4
a) The rand has depreciated to the US dollar. This will make exports cheaper and stimulate more exports
to be bought, thereby increasing the current account of the balance of payments.

b) Increase in government spending will increase level of income in the economy. The spending will
increase economic growth and standards of living. The multiplier effect is why the increase in income
exceeds the increase in government spending, as the income generated from each round the spending
is used is calculated to give the value of income level. The additional amount retained adds up to come
up with equilibrium income.

c) The multiplier for a closed economy does not include government taxes and marginal propensity to
import will reduce the multiplier.

Section B
1. 3 7. 3 13. 5 19. 3 25. 2
2. 5 8. 4 14. 2 20. 3 26. 1
3. 3 9. 2 15. 4 21. 4 27. 3
4. 4 10. 5 16. 3 22. 2 28. 3
5. 2 11. 2 17. 1 23. 1 29. 2
6. 3 12. 2 18. 1 24. 4 30. 3

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October/November 2015 Exam
Section A
Question 1

a) Briefly explain two policies that may be used to decrease unemployment which focus on increasing
the demand for labour.

b) Distinguish between cyclical and structural unemployment

c) Explain why an increase in nominal GDP does not necessarily imply that economic growth has taken
place.

d) List three criteria for a good tax system

e) List three functions of the South African Reserve Bank

Question 2

a) Use a diagram to explain how a decrease in investment due to an increase in the interest rate level
will affect the level of income in the Keynesian model.

b) Use a diagram to explain how a decrease in the marginal propensity to import will affect the level of
income in the Keynesian model.

c) South Africa experienced a current account deficit of R2 300 million in the third quarter of 2014 and
24.3% of the South African labour force was unemployed. Use an AD-AS model to illustrate and explain
how this situation creates a policy dilemma

Question 3

The marginal propensity to consume of the population of the Republic of Banana is 0.75. Currently,
autonomous consumption is equal to 8 500 Bans and investment is equal to 4 500 Bans. The full
employment level of income is 115 000 Bans.

a) Calculate the current equilibrium income level

b) By how much should government expenditure increase to reach the full employment level of income?

c) Calculate the marginal propensity to save of the Republic of Banana

Question 4
a) In the 2015/2016 budget, is was announced that the general tax rate was increased by 1%. Explain
how this increase of the general tax rate will affect the following variables in the Keynesian model.

(i) Consumption

(ii) The multiplier

(iii) The equilibrium income level

b) Explain how expansionary monetary policy will influence the price level and the equilibrium level in
the economy in the framework of the AD-AS model.

c) Will the size of the marginal propensity to consume affect the monetary transmission mechanism?
Explain your answer.

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Section B

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October/November 2015 Suggested Solutions
Section A
Question 1

a) Policies to decrease unemployment, focusing on increasing demand for labour

i. Increasing aggregate demand for goods and services. This will increase the need for more labour
due to increased production.
ii. Stimulating consumption and investment spending through lowering taxes and interest rates.
This in increasing money supply to the economy, thereby raising demand for goods and services.

b) Cyclical unemployment occurs when a slump or recession in the economy results in temporary lack of
demand, giving rise to unemployment.

Structural unemployment is confined to certain industries and occurs when there is a mismatch
between worker qualifications and job requirements or jobs disappear because of structural changes in
the economy. For an example, new technology reducing the need for labour.

c) Nominal GDP may increase due to the increase in prices for goods and services which reduces
purchasing power of the monetary value (real GDP).

So when prices increase, it lowers the standards of living which shows no economic growth.

d) Good tax system are neutrality, equity and administrative simplicity.

e) South Africa Reserve Bank functions:

1. Formulating and implementing of monetary policy


2. Help government with economic and statistical services
3. Maintaining financial stability.

Question 2

a) The aggregate income curve shifts downwards from the A0 to A1 because the income would have
fallen from E0 to E1

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b) The level of income will increase from E0 to E1, with the upward shift of the AD curve from A0 to A1

c) The equilibrium level of income Yo is determined by aggregate demand and aggregate supply. Yb
indicate the level of income at which there is exports equal to imports.

Y1 indicates the fall in employment level of income. At Yo, there is employment and deficit on the
current account. Measures to reduce the deficit will increase unemployment, while measures to reduce
unemployment will increase the deficit.

Question 3

a) A = C + cY + 1 Therefore Y = 13000 + 0.75Y

A = 8500 + 0.75(Y) + 1 Y – 0.75Y = 13000

A = 13000 + 0.75Y 0.25Y / 0.25 = 13000 / 0.25

Equilibrium = A = Y Y = 52 000

Equilibrium income = 52 000

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b) ∆Y = 1 / 1-c (∆G)

115000 – 52000 = 1 / 1-0.25 (∆G)

63000 = 1 / 0.25 (∆G)

63000 / 4 = 4 (∆G) / 4

15 750 = ∆G is the required change in government expenditure.

c) Marginal propensity to save is:

s = -C + sY

s = -8500 + 0.25 (52 000)

s = 4500

Question 4
a)

(i) Consumption will reduce due to the increase in taxes as it reduces disposable income which reduces
induced consumption. Note that autonomous consumption does not change.

(ii) The multiplier will reduce due to the increase in tax.

(iii) The equilibrium income level will reduce since taxes takes away more of the spending.

b) Expansionary monetary policy is done by reducing rates to increase money supply. This will increase
price level and also stimulate the production and spending, causing the equilibrium level of income to
increase. This will cause the rightward shift of the AD curve.

c) Marginal propensity to consume affects the monetary transmission because it determines how much
households are willing to spend on goods and services. If households are willing to spend more, it will
increase demand of goods and services, which may stimulate imports to satisfy the demand.

Section B

1. 5 6. 4 11. 4 16. 1 21. 1 26. 4 31. 1 36. 1


2. 3 7. 5 12. 4 17. 4 22. 2 27. 1 32. 2 37. 5
3. 2 8. 4 13. 4 18. 2 23. 3 28. 2 33. 1 38. 2
4. 1 9. 2 14. 1 19. 3 24. 5 29. 2 34. 2 39. 3
5. 5 10. 4 15. 3 20. 3 25. 3 30. 2 35. 3 40. 3

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May/June 2015 Exam Paper
Section A

Question 1
(i) Briefly explain the difference between gross domestic expenditure (GDE) and expenditure on GDP.

(ii) Name two measures that are used to measure inequality

(iii) Give two reasons for the growth in government spending in South Africa since 1960.

(iv) Name two market-orientated monetary policy instruments.

Question 2
(i) Use the following diagram to show what happens with the demand for money if the South African
economy experiences a recession. Remember to label your diagram.

(ii) Use the following diagram to show what happens with the demand for money if the monetary
authorities increase the repo rate. Remember to label your diagram.

(iii) Illustrate on the following diagram the impact of an economic recession in the economies of South
Africa’s trading partners on the rand/dollar exchange rate. Remember to label your diagram.

(iv) Given a Keynesian model of an open economy, illustrate on the following diagram the impact of an
increase in the marginal propensity to import on the equilibrium level of income. Remember to label
your diagram.

(v) Use the following diagram to illustrate the effect of an increase in interest rates on prices and income
in the AD-AS model. Remember to label your diagram.

Question 3
(i) Given the following information:

C = 100 + 0.75Y

Y = 2 000

Calculate:

 Induced consumption if Y = 2 000


 Savings if Y = 2 000

(ii) The following information about a Keynesian model is given:

 Autonomous consumption spending – R250 Million


 Investment spending – R150 Million
 Marginal propensity to consume – 4/5 (0.8)
 Full employment level of income – R1 500 Million

Calculate:

 The autonomous spending;


 The multiplier;
 The equilibrium level of income;
 By how much must investment spending increase to bring about full employment.

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Question 4
(i) Briefly explain the possible impact of an appreciation in the rand/dollar exchange rate on the balance
of payments on South Africa.

(ii) Explain why is it that in the sample Keynesian model, an increase in government spending has a
multiplier effect on the level of income.

(iii) Explain how monetary policy can be used to combat demand-pull inflation.

Section B
1. The three major flows in an economy are

1. Total production, total profit and total spending


2. Total wages, total investment and total income
3. Total interest, total wages and total rent
4. Total production, total income and total spending

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May/June 2015 Suggested Solutions
Section A

Question 1
(i) GDP – Total value of all final goods and services produce less imports plus exports, therefore GDP = C
+ I + G + X –Z.

GNE – Expenditure on final goods and services by households, firms and government on a particular
period including imports, excluding exports, thus GDE = C + I + G + X

Therefore GDP includes exports, but excludes imports whereas GDE does the inverse (Include imports,
but exclude exports)

(ii) Lorenz Curve and cuni coefficient.

(iii) Infrastructure development, law and order enforcement.

(iv)

 Open market operations;

 Automatic facilities;

 Liquidity providing repo operations;

 Minimum reserves.

Question 2.
(i)

Recession shifts demand to the right from do – d1, thereby increasing quantity of money demanded.

(ii)

Increase in repo rate i↑ - md↓

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(iii)

Therefore rand will reduce in value, thereby trading partners reduce demand for rand.

(iv)

Therefore ↑ in marginal propensity to import reduces since imports are subtracted from the AD = C + I +
G + x – Z, meaning A1 shifts to A2.

(v)

Increase interest reduce demand, therefore AD1 shifts to the left to AD2. Income also decreases,
showing Y1 falling to Y2.

Question 3.
(i) Induced Consumption = Cy, therefore 0.75 (2000) = 1500

(ii) 5y = 0.25(2000) = 500

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(iii) Autonomous Spending = C+ I

= 250 + 150

= 400 Million

(iv) A = C + Cy + I

= 250 + 0.8 (1500) + 150

= 250 + 1200 + 150

= 1600 Million

Multiplier = 1/1-c

= 1/1 – 0.8

= 1/0.2

=5

Y = Multiplier (A)

= 5 (C + Cy + 1)

= 5 ( 1600 Million)

= 8000 Million

Equilibrium income.

Question 4.
(i) Appreciation fo the rand to dollar exchange rate meants the rand has increased in value, thereby
making exports more expensive thereby balance of payments deficit since there is less demand for
exports and buying of more imports.

(ii) It has a multiplier effect because it increases the income with amount greater than the initial change
in government spending.

(iii) Higher interest rates which increase cost of borrowing and reduce spending increased interest rates
will make it more attractive to save money, increased interest rates reduce disposable income of those
with mortgages.

Higher interest rates increase the value of the exchange rate leading to lower exports and more imports.

Section B
1. 4 6. 1 11. 1 16. 1 21. 1 26. 2 31. 2 36. 3

2. 3 7. 1 12. 1 17. 2 22. 3 27. 1 32. 2 37. 2

3. 4 8. 3 13. 3 18. 1 23. 2 28. 4 33. 3 38. 1

1. 4 9. 3 14. 2 19. 3 24. 1 29. 3 34. 4 39. 1

5. 2 10. 2 15. 3 20. 3 25. 1 30. 4 35. 1 40. 3

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Thank You

Good luck with your upcoming exam. Study hard, aim higher and achieve the highest mark you can for
ECS1601.

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