2000-CE

ECON HONG KONG EXAMINATIONS AUTHORITY

2 HONG KONG CERTIFICATE OF EDUCATION EXAMINATION 2000

ECONOMICS PAPER 2

10.45 am – 11.45 am (1 hour)

Subject Code 120

1. Read carefully the instructions on the Answer Sheet and insert the information
required (including the Subject Code) in the spaces provided.

2. When told to open this book, check that all the questions are there. Look for
the words ‘END OF PAPER’ after the last question.

3. ANSWER ALL QUESTIONS. All the answers should be marked on the

Answer Sheet.

4. Note that you may only mark ONE answer to each question. Two or more
answers will score NO MARKS.

5. All questions carry equal marks. No marks will be deducted for wrong
answers.

ଉཽ‫ە‬ᇢ‫ݝ‬ΓΓঅఎठᦞ
Hong Kong Examinations Authority
All Rights Reserved 2000

2000-CE-ECON 2–1
There are 54 questions. Choose the BEST answer for each question.

1. Good X is a ‘free good’ when

A. there is no opportunity cost involved in using it.

B. its quantity supplied is greater than what consumers are willing
to purchase in the market.
C. nobody wants more of it.
D. its supply is so abundant that consumers place no value on it.

2. Chan and Wong take a journey to City X separately. They can go there either
by plane or by train. The plane takes 2 hours while the train takes 10 hours.
The air ticket costs $1 000 while the train fare is $200. During the journey to
City X, the foregone earning of Chan is $200 per hour and that of Wong is $80
per hour.

For the journey to City X, Chan would take the and Wong would
take the .

A. train ... train

B. train ... plane
C. plane ... train
D. plane ... plane

3.
Unit Price
D
S

P2
P1
S D
0 Quantity

In the above diagram, when the price P1 increases to P2,

A. the excess demand will disappear.

B. the quantity transacted will decrease.
C. the total revenue will necessarily increase.
D. the total revenue will increase only if the demand is inelastic.

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4. Which of the following markets in Hong Kong rely heavily on price
mechanism to solve the three basic economic problems ?

(1) medical service

(2) education
(3) bank loans
(4) electrical appliances

A. (1) and (2) only

B. (1) and (4) only
C. (2) and (3) only
D. (3) and (4) only

5. It became more difficult to find a metered car parking space by the roadside
after the fee for a parking space was reduced from $4 to $2 for every 15
minutes. It was also reported that the fee in a car park remained at $15 per
hour.

Which of the following about the effect on metered car parking by the
roadside is correct ?

A. It can be explained by the law of demand.

B. It is an increase in demand.
C. The equilibrium quantity decreases.
D. The demand is elastic.

6. Hong Kong’s recent economic recession has caused a decline in people’s

income. In view of this, the government decided to lower the effective
minimum wage level of Filipino maids. As a result of these TWO changes,

(1) the demand for Filipino maids should decrease.

(2) the quantity supplied of Filipino maids should decrease.
(3) the excess supply of Filipino maids should decrease.
(4) the total expenditure on the employment of Filipino maids should drop.

A. (1) and (2) only

B. (2) and (3) only
C. (1), (2) and (3) only
D. (1), (3) and (4) only

(This item was deleted.)

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7. The diagram below shows the market of tours for Hong Kong people to Japan.
The initial equilibrium is at E0. Because of economic recession, fewer Hong
Kong people spend their holiday in Japan. Moreover, the Japanese Yen
appreciates against the Hong Kong dollar.

HK$ S2
S0
Ec
S1
Eb E0
Ea Ed
D1

D0
D2
0 Number of visits to Japan
by Hong Kong people

The new equilibrium point in the market will be at

A. Ea
B. Eb
C. Ec
D. Ed

8. Refer to the following demand and supply schedules of a good.

Price per unit $25 $30 $35 $40 $45

Quantity demanded (units) 120 100 80 75 60
Quantity supplied (units) 60 75 80 100 120

According to the above information, we can conclude that

A. the total sales revenue would be $3 000 when the price is $30 per
unit.
B. a unit subsidy of $10 on production would cause the equilibrium
price to drop by $5.
C. a higher salaries tax would raise the market price to a price
greater than $35.
D. the seller could set the price at $40 to gain the highest profit.

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9. Which of the following is an example of joint demand ?

A. the courier service (ಬ Ꭰ ֮ ٙ ࣚ ೭ ) of a local firm and the

postal service of the government
B. the Airport Express train service and the Tung Chung Line train
service
C. magazines and printing paper
D. floppy diskettes and floppy diskette drives

10. The demand elasticity of good X is 1.2. After a decrease in supply, the
equilibrium quantity drops by 30%. The equilibrium price would by
.

A. increase ... 25%

B. decrease ... 25%
C. increase ... 36%
D. decrease ... 36%

11. Suppose the government imposes a unit subsidy on good Y causing a shift of
its supply curve from S1 to S2.

P
S1
P4 S2
P3
P2
P1
D

Q
0 Q1 Q2

The amount of subsidy benefit enjoyed by the sellers of good Y is

A. (P2 − P1) x Q1
B. (P3 − P1) x Q1
C. (P3 − P2) x Q2
D. (P4 − P3) x Q2

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12. Which of the following diagrams shows the result of an improvement in the
technology used in producing digital versatile disc (DVD) players ?

A. DVD Players B. DVDs

Unit Price Unit Price

S2 S
S1

D1
D
D2
0 0
Quantity Quantity

C. Cinema Tickets D. Video Compact Discs (VCDs)

Unit Price Unit Price

S1 S
S2

D1
D
D2
0 0
Quantity Quantity

13. Which of the following is classified as capital ?

A. the singing skill of a superstar

B. the sunlight people enjoy on the beach
C. a strong current in the ocean
D. an oasis in the desert

14. ‘Wild birds in the forests are classified as land in economics.’ This statement
is

A. true, because they are free goods.

B. true, because they are natural resources.
C. false, because they can move while land is geographically
immobile.
D. false, because their supply is not fixed.

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15. Refer to the staff recruitment advertisements below :

ABC Company
XYZ Company
Mail Assistant
Mail Assistant
Requirements :
Requirements :
Age : 20 to 30 Age : 20 to 30
male/female
male/female
Salary : $8 000 per month plus
Salary : $12 000 monthly
$5 for each delivery of
letter/parcel

A. The cost of measuring wage payment is higher in the XYZ

Company.
B. The working incentive of mail assistants is higher in the XYZ
Company.
C. The income of a mail assistant is higher in the ABC Company.
D. The cost of supervision is lower in the ABC Company.

16.
Number of machines Number of workers Total output (units)
3 3 90
3 4 160
3 5 250
3 6 360

The above data refer to a _________ situation in which _________ .

A. short run ... the law of diminishing returns applies

B. short run ... the law of diminishing returns does not apply
C. long run ... economies of scale exist
D. long run ... diseconomies of scale exist

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17. Which of the following implies the existence of economies of scale ?

A. The total cost of production decreases when output increases.

B. The average cost of production decreases when the production
scale increases.
C. Profit increases when output increases.
D. The amount of output increases by a smaller proportion than that
of inputs.

18. There are three types of machines in Mr Wong’s factory as shown below :

Machine Maximum Output per day

X (producing table-surfaces) 100 pieces
Y (producing table legs) 80 sets (one set for one table)
Z (attaching table-surfaces and legs) 60 tables

Mr Wong is considering how many tables to produce in one day in order to

use all the three types of machines fully. Which of the following statements is
correct ?

(1) Mr Wong has to consider the principle of indivisibility.

(2) Mr Wong has to consider the principle of multiples.
(3) An output level of 1 200 tables a day can fully use each type of
machines.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

19. When division of labour is practised,

A. workers have greater job satisfaction.

B. machines are used more intensively.
C. producers produce a greater variety of goods to suit different
consumer tastes.
D. the occupational mobility of workers increases.

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20. Mr Wong and Mr Chan have formed a partnership. Which of the following
statements is correct ?

A. They enjoy limited liability.

B. The transfer of ownership does not need the other partner’s
consent.
C. Each of them is responsible for the business decisions of the other.
D. The accounts of the partnership have to be disclosed to the
public.

21. Which of the following are advantages of turning a private limited company
into a listed company in the stock market ?

(1) The company gains the status of a legal entity.

(2) The company enjoys economies of scale.
(3) The company enjoys a wider source of capital.
(4) Ownership of the company can be transferred freely in the market.

A. (1) and (2) only

B. (1) and (4) only
C. (2) and (3) only
D. (3) and (4) only

22. Limited partners are different from general partners in that the former

A. can only transfer their shares to the existing partners of the firm.
B. can only hold a limited amount of shares of the firm.
C. can only share a limited amount of the profit of the firm.
D. have a limited liability in the business of the firm.

23. Which of the following about preference shares is correct ?

A. Preference shares are issued to the creditors of the company.

B. Preference shares carry a fixed rate of dividend.
C. Preference shares are not allowed to be traded on the stock
market.
D. Preference shareholders have to bear unlimited liability.

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24. A mobile phone company joins hands with a commercial bank. A customer of
the bank can handle matters concerning his accounts by using the mobile
phones produced by the mobile phone company. Which of the following is
least likely a motive of the mobile phone company in this joint venture ?

A. to ensure a steady supply of raw materials

B. to benefit from more efficient use of resources
C. to benefit from economies of scale
D. to promote goodwill

25. Which of the following about a monopoly is correct ?

A. Its product has no substitutes as it is the only seller of the product

of the kind.
B. A monopolist still faces non-price competition.
C. A monopolist can increase the price without losing any
customers.
D. Any business granted a franchise by the government is a
monopoly.

26. Private doctors in Hong Kong charge different prices for their medical
services. This is because

A. people do not have sufficient knowledge of their illnesses.

B. there are many doctors in the market.
C. the private doctors’ services are different.
D. there are entry barriers to becoming a doctor.

27. Mr Wong withdraws $500 000 in cash from a deposit-taking company. He

then deposits $300 000 with a bank as a time deposit and remits the remaining
$200 000 overseas for the settlement of debts.

Which of the following about the money supply M1 and M3 is correct ?

A. Both M1 and M3 will increase.

B. Both M1 and M3 will decrease.
C. M1 will remain unchanged and M3 will decrease.
D. Both M1 and M3 will remain unchanged.

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28. Suppose the money supply of Hong Kong in a certain year was as follows:

$billion
Legal tender in circulation 10
Legal tender held by all deposit-taking institutions 2
Demand deposits with licensed banks 15
Savings and time deposits with licensed banks 60
Negotiable certificates of deposits issued by licensed banks
and held by the public 25
Deposits with restricted licence banks and negotiable
certificates of deposits issued by restricted licence banks
held by the public 32

The money supply M2 (in $ billion) was

A. 85
B. 110
C. 112
D. 144

29. A bank accepts a deposit of $1 000 from a foreign country. Through the credit
creation process, the amount of deposit of the whole banking system increases
by $4 000.

Based on the above information, we can conclude that

A. the legal reserve ratio is 25%.

B. banks do not keep excess reserves.
C. the total money supply has increased by at least $4 000.
D. there is a cash leakage in the credit creation process.

30. As the use of the Octopus card (Զ ሒ ຏ ‫ ) ׬‬for public transport becomes
much more popular,

A. the money supply will increase because the card can perform the
functions of money.
B. the volume of the legal tender in circulation will drop.
C. the value of money will drop because the demand for cash will
be smaller.
D. the maximum amount of deposits created by the banking system
will decrease.

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31. Mr Cheung has $100 000 cash in hand. He needs the money two months later
to use as partial payment for his new house. He may deposit the money into

(1) a licensed bank.

(2) a restricted licence bank.
(3) a deposit-taking company.

A. (1) only
B. (1) and (2) only
C. (1) and (3) only
D. (2) and (3) only

32. Which of the following about the central bank functions performed in Hong
Kong is correct ?

A. The Hongkong Bank is responsible for the central clearance of

the banking system.
B. The Exchange Fund acts as the government’s banker.
C. The Hong Kong Monetary Authority carries out monetary
policies for the government.
D. The Hong Kong Association of Banks supervises banking
activities.

33. Which of the following is included in the calculation of the gross domestic
product (GDP) of Hong Kong ?

A. the estimated rental value of an owner-occupied property in

Hong Kong
B. the low-interest government loans to university students in Hong
Kong
C. the interest paid to foreign investors holding Exchange Fund bills
D. the increase in the price of the shares issued by a bank in Hong
Kong

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34. More Hong Kong people shop in Shenzhen and the real interest rate in Hong
Kong is increasing and being sustained at a high level.

Which of the following GDP components of Hong Kong would be least likely
affected by the above situation ?

A. domestic consumption (C)

B. private investment (I)
C. government expenditure (G)
D. net export (X−M)

35. The following diagram shows a production chain involving the import of $100
worth of gasoline into Hong Kong :

$100 Local $300 Gasoline $1 000

importers Consumers
stations ($500 tax inclusive)

What is the contribution of the production chain to Hong Kong’s GDP at

factor cost ?

A. $400
B. $500
C. $900
D. $1 000

36.
Year GNP at current market prices GNP deflator
($ billion)
1997 2 100 105
1998 2 800 125

Based on the above information, the growth rate of real gross national product
(real GNP) between 1997 and 1998 is

A. 12%
B. 16.3%
C. 33.3%
D. There is insufficient information to find the answer.

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37. The following phenomena are observed in an economy :

(1) industrial output on an upward trend

(2) increasing imports and exports
(3) growth of retail receipts
(4) forecast of economic growth being revised upwards

Which phase of the business cycle is the economy in ?

A. peak
B. recession
C. trough
D. recovery

38. Which of the following would most likely increase employment during an
economic downturn ?

A. restructuring of private firms to improve their efficiency

B. increasing computerization and automation of production process
C. government’s injection of a large amount of funds to help small
enterprises
D. increasing real interest rates

39. Mr A borrows money from a bank for a housing mortgage at a fixed interest
rate of 7% p.a. After that the general price level falls continuously. In this
event, Mr A loses and the bank gains. This is because

A. the value of the mortgaged house has been falling.

B. Mr A’s wage income has been falling.
C. the bank can sell the house if Mr A fails to repay the loan.
D. when the general price level keeps on falling, the purchasing
power of a fixed amount of interest will increase.

40. The payment of salaries tax and profits tax can be made by the Payment by
Phone Service (PPS) by which taxpayers can transfer money from their bank
accounts to the government. This practice satisfies the ___________ principle
of taxation.

A. source
B. certainty
C. convenience
D. equity

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41. Which two of the following diagrams illustrate a regressive tax measured in
terms of an average tax rate ?

(1) (2)
Tax Payment Tax Payment

0 0
Taxable Taxable
Income Income

(3) (4)
Tax Payment Tax Payment

0 0
Taxable Taxable
Income Income

A. (1) and (3) only

B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only

42. Which of the following is a direct tax in Hong Kong ?

A. estate duty
B. rates
C. interest tax
D. sales tax

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43.
Taxable income ($) Tax payment ($)
200 000 22 000
250 000 25 000
300 000 27 000

From the above information, we can conclude that

A. the tax is a progressive tax as the tax payment increases with

taxable income.
B. the tax payment takes a decreasing portion of taxable income as
taxable income increases.
C. the taxation system helps to reduce the income gap.
D. the taxation system reduces the work incentive.

44. Suppose the government uses a great amount of its fiscal reserve to develop
information technology in education. Which of the following is correct ?

A. Government expenditure in other sectors will decrease.

B. The government will have a budget deficit.
C. The average labour productivity will be higher.
D. The banking system will be less able to create deposits.

45. The government will participate in the project for establishing Disneyland in
Hong Kong. During the period of construction, it must

A. increase the tax burden on taxpayers.

B. increase the size of the public sector.
C. increase the ratio of public expenditure to GDP.
D. discourage the incentive of private investment.

46. Suppose there are good X and good Y only. If a country has a comparative
advantage in good X, it will have

A. an absolute advantage in Y.
B. an absolute disadvantage in Y.
C. a comparative advantage in Y too.
D. a higher opportunity cost in producing Y.

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Answer questions 47 and 48 by referring to the following table. It shows the amount
of resources (in man-hours) required to produce 1 unit of good X or 1 unit of good Y
in country A and country B, respectively.

Good X Good Y

Country A 1 2
Country B 3 4

47. With 1 unit of resources, country A can produce either _________ unit(s) of X
or _________ unit(s) of Y while country B can produce either _________
unit(s) of X or _________ unit(s) of Y.

1 1 1
A. 1  
2 3 4
B. 1 2  3 4
1 3
C. 1 1
2 4
3
D. 2 1 1
4

48. Both countries will gain from trade if 1 unit of X can be exchanged for

A. 0.5 Y
B. 0.6 Y
C. 0.75 Y
D. 1Y

49. Suppose the US government decreases the quota for HK garments exported to
the USA. This will lead to

A. a shortage of HK garments in the USA.

B. an increase in the income of garment producers in the USA.
C. a surplus in the balance of trade in the USA.
D. a decrease in the expenditure of US consumers on HK garments.

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50. Suppose country A has a balance of payments deficit in Year 1. In Year 2,
the changes in the balance of payments are as shown below :

$ Billion
Export of goods +28
Export of services +7
Import of goods +35
Import of services +13
Capital inflows +5
Capital outflows +8

Based on the above information, we can conclude that

A. in Year 2, the visible trade deficit has increased.

B. in Year 2, the visible trade deficit has decreased.
C. in Year 2, the balance of payments deficit has increased.
D. in Year 2, the balance of payments deficit has decreased.

51. Which of the following should be included in the calculation of the balance
of Hong Kong’s current account ?

A. A company in Hong Kong pays interests for loans from a bank in

the U.K.
B. A Hong Kong resident purchases a new flat in Shenzhen.
C. A U.S. investor purchases 5 000 units of the Tracker Fund of
Hong Kong.
D. An author in Hong Kong sells the copyright for his new book to
a publisher in Taiwan.

52. Suppose the Japanese Yen appreciates greatly against the US dollar. Due to
the linked exchange rate system,

A. the HK dollar will depreciate greatly against the Japanese Yen.

B. the US dollar will depreciate greatly against the Japanese Yen.
C. the US dollar will depreciate greatly against the euro.
D. the HK dollar will depreciate greatly against the euro.

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53. Which of the following is NOT an opportunity cost of constructing Disneyland
in Hong Kong ?

A. the alternative use of the site

B. the amount of capital invested
C. the pollution created by the construction work
D. the entrance fee of Disneyland

54. In recent years, the government has taken several measures to promote Hong
Kong’s status as a world financial centre. Which of the following is NOT such
a measure taken by the government ?

A. breaking the bank cartel such as the abolition of its interest rate
agreements
B. merging the Stock Exchange of Hong Kong Limited and the
Hong Kong Futures Exchange
C. establishing a growth enterprise market (໌ ᄐ ࣨ ؑ ໱ ) to help
medium-sized companies to raise capital funds
D. setting up a government unit trust fund, the Tracker Fund of
Hong Kong (આ ༄ ഗ ८ ), made up of stocks with a connection
to China (દ ᤂ ഏ ٞ ै ) for the public to invest in

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2000-CE-ECON 2–19 – 18 –
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 2000 Economics Paper 2

Question No. Key Question No. Key

1. C 31. A
2. C 32. C
3. C 33. A
4. D 34. C
5. A 35. A

6. A 36. A
7. B 37. D
8. B 38. C
9. D 39. D
10. A 40. C

11. D 41. A
12. D 42. A
13. A 43. B
14. B 44. C
15. D 45. B

16. B 46. D
17. B 47. A
18. D 48. B
19. B 49. B
20. C 50. C

21. D 51. A
22. D 52. A
23. B 53. D
24. A 54. D
25. B

26. C
27. C
28. B
29. C
30. B

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