THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2013 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC 5: ECONOMICS

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1 EXAMINATION NO. THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2013 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC 5: ECONOMICS FRIDAY 31 MAY 2013 TIME ALLOWED: 3 HOURS 2.00 PM PM INSTRUCTIONS 1. You are allowed 15 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you are not allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. 2. Number of questions on paper The paper is divided into sections A and B. 4. FIVE questions ONLY to be answered; TWO from Section A and THREE from Section B. 5. Each question carries 20 marks. 6. Begin each answer on a fresh page. 7. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE INVIGILATOR. This question paper contains 5 pages. This question paper must not be removed from the examination hall.

2 1 SECTION A Answer two questions only from this section. 1. (a) Explain the relationship between price and total revenue when demand for a product is elastic. State three factors that a consumer needs to take into consideration when choosing between different goods and services so as to maximize utility. With the aid of a diagram, explain how price ceilings create excess demand. 10 Marks 2. (a) What is a production possibility frontier? Explain the concave shape of the production possibility frontier. Study the diagram below and answer the questions that follow it. Good X G A Good Y (i) Why is point A said to be a point of inefficiency? (ii) Explain two factors that would shift the frontier to point G. (d) Explain two roles of households in the circular flow of income.

3 2 3. (a) In the theory of production, why is capital assumed fixed in the short run? Explain the economic rationale. Based on your knowledge of production, fill in the blank spaces in the table below. Total Output 000 tones Total fixed Total variable Average total Average fixed Average variable Marks Explain the U shape of the short run average cost curve and long run average cost curve. 4. (a) State three differences between a communist economy and a capitalist economy. Explain two advantages and two disadvantages of a free market economy. 8 Marks Explain the difference between price discrimination and product differentiation.

4 3 SECTION B Answer three questions only from this section. 5. (a) Mention two reasons why the measurement of national income is important. Explain three problems associated with measuring and interpreting Gross Domestic Product (GDP). Study the table below. Product (MK 000) Tobacco Tea Cotton Sugar Rice Year 2005 Year 2010 Quantity Price Quantity Price (MK 000) 000Kgs Kg Use the information in the table to compute the real GDP for the year Assume the base year is Marks 6. (a) State three functions of banks in an economy. With the aid of a graph, explain the concept of crowding out of private investment in an economy. 10 Marks Explain how the upward adjustment of interest rates helps to control inflation.

5 4 7. (a) State two ways in which the depreciation of a local currency would improve a country s trade balance position. You are given the following demand and supply of the Kwacha in the foreign exchange markets: Demand: 30,000 8,000e Supply: 25, ,000e Where e is the nominal exchange rate expressed as US Dollars per Malawi Kwacha. (i) Find the fundamental value of the Malawi Kwacha. (ii) State whether the Kwacha is over-valued or under-valued, assuming the exchange rate is USD 0.3 = MK1. 2 Marks (iii) Present graphically your findings in (ii) above. (iv) From the graph in (iii) above, calculate and indicate the type of balance of payment. 8. (a) State three examples of trade in goods and three examples of trade in services. Briefly explain four ways in which a country can improve its balance of payment position. 8 Marks What is the difference between the principle of absolute advantage and that of comparative advantage?

6 5 9. (a) Explain how the Reserve Bank of Malawi uses each of the following policies to control the amount of money in circulation: (i) Open Market Operations, (ii) Discount Window. Suppose the Government decides to pursue an expansionary fiscal policy by lowering the tax rates. Explain the effect of this policy on aggregate demand and national output. (Illustrate your answer with a diagram). 12 Marks E N D