DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)

Question 1 (2015#12bc)
Research shows that the “Individual Visit Scheme” of mainland tourists has brought economic benefits
to Hong Kong. However, more and more Hong Kong residents have called on the government to
reduce the number of mainland tourists to Hong Kong under the Scheme. An economist uses the AS-
AD model to analyse the current situation in Hong Kong. In his analysis, point E in Figure 2 represents
the initial short-run equilibrium of the Hong Kong economy.

(b) He points out that the government can help the economy restore to its long-run equilibrium. With
the aid of Figure 2, explain how the reduction in the number of tourists from the mainland can lower
the output level to Yf . (5 marks)
(c) He also states that even without the help of the government, market forces can restore the
economy to its long-run equilibrium. WITHOUT using a diagram, explain how market forces can lower
the output level to Yf in the long run. (4 marks)

b) Verbal elaboration
 Export would fall
 Resulting in a drop in AD
 So output would fall back to Yf
Indicate of diagram
 AD shift to the left
 Correct position of initial short run aggregate output
 Correct position of new short-run aggregate output at Yf
c)
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)
Hong Kong is facing an inflationary gap.
There is an excess demand in factor market,
creating pressure for factor prices to adjust upward, so that the cost of production would increase over
time and SRAS would fall over time, restoring output to Yf in the long run.

Question 2 (2014#7)

a) Side effects of contractionary fiscal policy

 Negative output effect (fall in GDP) due to a reduction in G and thus AD
 Negative output effect (fall in GDP) due to a rise in sales / income tax, which would lower C/I
demand and thus AD
 Negative (disincentive effect on labor supply and thus on employment (and output) as a result
of higher income taxes
 Any other relevant point
b) Advantages
 An increase in money supply would lower the interest rate
 And raise investment, leading to an increase in real output in short run (given upward-sloping
AS)
 Given idle resources in the economy, more labor (and / or capital) would be used to produce
the bigger output,
 Implying an increase in employment or decrease in unemployment (Contractionary fiscal
policy would not result in an increase in GDP and employment)
Disadvantages
 In the long run (with vertical aggregate supply), an increase in money supply would not create
any effect on output and employment.
 But if the fiscal deficits grow so fast that the money supply has to be increased at a higher rate
that of real output, high inflation would even arise. (Contractionary fiscal policy would not result
in inflation)
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)
Question 3 (2014#10b)

Relaxing of one-child policy would likely result in a rise in the birth rate, implying a bigger work force
and bigger aggregate supply and output in the future.

Question 4 (2014#12c)
The Prime Minister of Japan, Shinzo Abe, adopted a series of policy measures in 2013 to expand the
Japanese economy. One of the policy measures was stepping up the scale of the purchase of
government bonds and other financial assets by the central bank.
c) What would be the short run effects of the above policy on the output and price levels of the
Japanese economy? Explain your answer with the aid of an ASAD diagram. (8 marks)

Verbal elaboration
 The purchase of government bonds increase money supply
 Resulting in a drop of the interest rate
 Investment / consumption expenditure increases
 AD increases
 In short run, the output and price levels increases
Indicate on diagram
 AD shift to the right
 Higher price level
 Higher output

Question 5 (2013#3)
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)
Answer

Question 6 (2013#4)
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)
Answer
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)
Question 7 (2013#8)
Suppose a government is facing a budget deficit. Some politiians have proposed that the government
should raise the income tax to reduce the budget deficit. Evaluate their proposals. (4 marks)
Answer

Question 8 (2013#12c)
With the aid of an ADAS diagram, explain the short run effects of an upward adjustment of required
reserve ratio on output and the price level of the economy.

Verbal Elaboration
An upward adjustment of RRR reduces the money supply, resulting in an increase in interest rate and a
drop in investment expenditure. The AD will fall , so will the price level and output level.
Indicate on diagram
AD shift to the left
Price level falls
Output level fall

MCQ Answers
2012 25A 26A 34C* 36D*
2013 23D 24B 28B* 29A* 31B*
2014 28C* 27A 29D 34C* 35B 38D
2015 26A 38A 39B 27D 37C
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)
2012
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)

2013
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)

2014
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)

2015
26. Which of the following will result in a rightward shift of the aggregate demand curve of a country?
A. The central bank reduces the discount rate.
B. The minimum wage rate is increased.
C. The general price level decreases.
D. Its trading partner suffer from an economic recession.

38. Initially an economy operates at the long-run equilibrium. Which of the following will lead to a
deflationary (output) gap in the economy?
A. The government increases the salaries tax rate.
B. The government reduces the profits tax rate.
C. The government invests in the construction of a cross-border express rail link.
D. The central bank reduces the required reserve ratio.

39. In an economy with severe inflation and income inequality, the government can lower the price level and
reduce the income gap by
A. Increasing the environmental tax on handling household sewage.
B. Increasing the salaries tax and its progressivity.
C. Reducing its spending on social welfare.
D. Reducing the personal allowance of the salaries tax.
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)
27. The government provides cash subsidies for new-born children from their birth to age 10. Which of the
following diagrams best illustrates the effect of the subsidies on the economy after twenty years?
A. B.

C. D.

37. Refer to the following aggregate supply diagram.

When the economy moves from point A to point B, which of the following will NOT change?
(1) Real output
(2) Nominal output
(3) Potential output
A. (1) only
B. (2) only
C. (1) and (3) only
DSE past paper ADAS and Monetary and Fiscal Policy (sample paper and practice paper excluded)
D. (1), (2) and (3)