Management economics 3 FINAL ASSESMENT 2016 ATTENDANCE FORM

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1 ATTENDANCE FORM Surname Initials Student number Venue GENERAL INSTRUCTIONS 1. Do not remove the staple hand this paper in as a whole. 2. Remove only the top page (this page), and hand it in together with this paper at the end of the session. 3. Make sure that your paper has 13 numbered pages. Management economics 3 FINAL ASSESMENT 1

2 University of Johannesburg DEPARTMENT OF ECONOMICS FINAL ASSESMENT NOVEMBER Management Economics 3 Date: 22/10 Examiners: F Kirsten Internal Moderator: Prof H van Zyl External Moderator: TAM Makola Time: 120 minutes Total Marks: Noiseless calculators may be used. 2. Answer all questions. 3. This paper consists of 13 pages. Marks Total Audit TOTAL /100 % 2

3 Question 1 (20) 1.1 The South African national government expenditure surpassed R1 trillion in the 2012/13 fiscal year, almost double the R567 billion spent in 2007/08. This was a finding from Stats SA s Financial Statistics of National Government report, an annual release containing details of national government spending. Exploring expenditure trends over the last six years, the report shows that the increase in expenditure was mostly driven by increased allocations from national government to provincial governments. This increased from about R298 billion (53%) in 2007/08 to about R550 billion in 2012/13, to 54% of the total expenditure. This indicates the increased importance of the role of provinces in the South African government (Statsa, 2014). Given the information above use a Keynesian transmission mechanism to explain the impact of the Government increase in expenditure on private investments and conclude your answer by highlighting important role of local government in South Africa. (12) Primary effect: 3

4 Secondary effect: Conclusion on role of South Africa provincial government: 1.2 There are three main sources of financing a budget deficit, with different macroeconomic consequences of the three options. Complete the following table to illustrate the impact of the financing decision on the economy.(8) Source of financing budget deficit Macroeconomic consequence (expansionary, restrictive, neutral Impact on interest rate (increase, decrease, neutral). 4

5 Question 2 (10) 2.1 Derive the Aggregate demand (AD) curve. Provide full explanation of the derivation.(5) Explanation 2.2 Assume the following labour market information of a particular country. (5) Total population: 25m people People of working age: 15m people Active labour force: 12m people Employed: 9m people Determine the following: Task Economically inactive population. Unemployed population. Unemployment rate. Labour force participation rate. Answer 5

6 Question 3 (20) Use the table to answer the questions that follow: Period Real GDP % Growth C I G X- Z Aggregate Expenditure (see c) Note that: Y = C + I + G + X Z where C is Household Consumption, I is Investment, G is Government and X Z is net exports. a) Determine the marginal propensity to consume. Use the following formula: (1) ΔC / ΔGDP b) Determine the expenditure multiplier and the autonomous tax multiplier. Provide the equation in both cases. (4) Expenditure Multiplier: Tax multiplier: c) Use the information in the table and calculate the autonomous consumption expenditure. (2) d) Calculate the equilibrium income level in this economy. (2) 6

7 e) Calculate the average percentage economic growth of this economy over the full time period, round it off to two decimal point. (2) f) Is this an economy that dissaves or saves? Motivate your answer by using empirical evidence. (1) g) Explain what policy response, as well as the amount, government can implement to help this economy reach equilibrium in period 5. (Hint: include all calculations) (5) i) Assume the government decides to introduce a tax rate of 10%. Calculate the impact of this tax burden on the economy, given the initial data as presented in the table and compare with the equilibrium income as calculated in (g). (3) 7

8 Question 4 (20) 4.1 Complete the following table which provides connections between different policies and effects on domestic and international factors. Determine the direction of change resulting from monetary or fiscal policy changes on money supply and interest rates, ceteris paribus. Indicate the correct answer with a big cross X. (7) The SARB buys government bonds, thus raising the cost of borrowing in the country. 1 Money supply Increases Decreases No change 2 Interest rates Increases Decreases No change 3 Exchange value of currency Appreciates Depreciate No change 4 Quantity of exports Increases Decreases No change 5 Quantity of imports Increases Decreases No change 6 Balance of payments trade balance Toward surplus Toward deficit 7 Balance of payments capital account Toward surplus Toward deficit 4.2 The recent drought in South African has caused the Inflation to rise currently above the 3-6% range set by the South African Reserve Bank (SARB), What should the response of the SARB be in this case? Should they employ restrictive or expansionary monetary policy? Explain by using the Keynesian transmission mechanism how the SARB is going to use the repo rate to combat this higher inflation. And also refer to what impact this can have on employment in South Africa. (13) 8

9 Primary effect: Secondary effect: Impact on SA employment Question 5 (10) 5.1 Some economic commentators are of the opinion that a sharp decrease in net exports and a major decline of the financial account of the balance of payments can push the South African economy into an economic recession phase over the next few quarters. Explain briefly the nature of interest rate movements and government finances that you can expect. (4) 9

10 5.2 Given the expectation of an economic recession, what can you expect on the status of the following economic indicators? (3) Growth in retail sales: Business confidence index: 5.3 Explain briefly firm s decision making in terms of capital expenditure and inventory management if the economy should move into a recession phase.(3) Capital expenditure: Inventory management: Question 6 (10) 6.1 The recent IMF report shows that South Africa s GDP growth rate is between 1 and 2%. This is substantially lower than the 4-6% required by the National Development plan to be achieved every year until Given your knowledge about Macroeconomic objectives, indicate how each of the following objectives could be used to reach the target set by the National development plan and if not indicate why? (4) Lower unemployment Price stability BOP stability 10

11 Economic development 6.2 Explain the impact of the 2015/2016 drought on the South African economy using an AD-AS model. Label all curves and show the direction of change clearly. (6) P ASLR AS 0 S P 0 AD 0 0 Short run effect Yf Y Long run effect 11

12 Question 7: National Accounts (10) You are given the following information for a hypothetical economy in 2012 Rbil Exports of goods and services 657 Net Current transfers (net receipts +) -22 Net Primary income to the rest of the world -53 Balance on current account of BoP -96 Compensations of employees 1088 Net taxes on production 31 Net taxes on products 222 Gross capital formation 468 Gross national income at market prices 2354 Gross operating surplus 1066 Imports 784 Final consumption expenditure by general government 487 Change in not gold and other foreign reserves 17 Index CPI at 2005 prices 134 Million Total Population 50 Economically active population 32 People without a job for more than 7 days who are willing to start work within the next 16 week People without a job for more than 7 days who are willing to start work within the next 11 week and have actively looked for a job in the last month The following information is given for the same economy in 2011 CPI at 2005 prices 125 Nominal GDP at market prices (Rbil) 2284 Total Population (million) 48 12

13 Questions 1 Nominal Expenditure on gross Domestic products market prices) 2 Gross value added at factor cost 3 Final consumption expenditure by households 4 Gross Domestic Expenditure 5 Population growth rate 6 Expanded Unemployment rate 7 Inflation rate 8 Real GDP at market prices Economic growth rate (Use expenditure Method) 10 Real GDP per capita both years (Use Expenditure Method) 13