EXAMINATION : MACROECONOMICS (MAC) ECONOMICS 1 (ECO101)

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1 Page 1 of 6 EXAMINATION : MACROECONOMICS (MAC) ECONOMICS 1 (ECO101) DATE : 21 MAY 2014 TIME ALLOWED : 3 HOURS TOTAL MARKS : 100 MATERIAL SUPPLIED : ANSWER BOOK INSTRUCTIONS TO CANDIDATES 1. Please refer to the examination rules and regulations as found in the examination answer book. 2. Section A is COMPULSORY. This section is worth 40 marks. 3. Answer ANY THREE (3) questions from Section B. This section is worth 60 marks. 4. Read each question carefully to determine exactly what is required before attempting the answer. 5. Set your answers out in a systematic way under appropriate headings and sub-headings. 6. Number your answers clearly. 7. IMPORTANT: Indicate the questions attempted by drawing a circle around the question number on the front cover of the answer book. NOTE: Examination answer books are the property of the IMM GSM and may not be removed from the examination hall. Answers to examination questions should not include appendices in the form of personal notes to the examining panel.

2 Page 2 of 6 SECTION A (40 MARKS) COMPULSORY QUESTION 1 (MULTIPLE CHOICE) [40] Indicate your answers to each of the following questions in the answer book provided. Each question is worth two (2) marks. For each question below select the MOST APPROPRIATE answer from the choices given. Mark your answer with an X in the correct block in your ANSWER BOOK. 1.1 Simple economies can be described in terms of three major economic flows. These are A. income, spending and saving. B. spending, production and saving. C. income, saving and investment. D. income, spending and production. E. income, spending and net exports. 1.2 The two major types of markets in the simple circular flow of income and expenditure are A. public markets and private markets. B. free markets and regulated markets. C. factor markets and foreign exchange markets. D. goods markets and service markets. E. goods markets and factor markets. 1.3 Which one of the following statements is incorrect? A. The three major flows in the economy are total production, total income and total spending. B. There are two sets of markets in a simple economy: goods markets and factor markets. C. In the simple circular flow of economic activity, real flows of goods and factors, and financial flows, move in opposite directions. D. Firms are buyers in goods markets and sellers in factor markets, while households are buyers in factor markets and sellers in goods markets. E. Firms are the largest purchasers of capital goods. 1.4 If dairy farming is subsidised, we would expect the value of a litre of milk to be A. equal to the price paid by the consumer for a litre of milk. B. greater than the price paid by the consumer for a litre of milk. C. less than the price paid by the consumer for a litre of milk. D. lower because of the subsidy. E. higher because of the subsidy.

3 Page 3 of Since the R200 note was first introduced in South Africa, its value has A. decreased in nominal terms and increased in real terms. B. decreased in nominal terms and decreased in real terms. C. increased in nominal terms and decreased in real terms. D. increased in nominal terms and increased in real terms. E. decreased in real terms, although its nominal value has remained unchanged. 1.6 According to the Keynesian model, the most important determinant of a household s consumption is A. its disposable income. B. its total wealth. C. the number of persons in the household. D. its net wealth. E. the ratio of wage to non-wage income the household earns. 1.7 If a household s income falls from R to R and its consumption falls from R to R15 000, then its A. marginal propensity to consume is 0,67. B. marginal propensity to consume is 0,88. C. marginal propensity to consume is 0,20. D. marginal propensity to save is zero. E. marginal propensity to save is 0, If real gross domestic product is R500 billion and planned aggregate expenditure is R458 billion, then inventories will A. pile up and output will decrease. B. pile up and output will increase. C. be depleted and output will decrease. D. be depleted and output will increase. E. stay constant, as will output. 1.9 In macroeconomic theory A. total production is always equal to total income. B. total production is always greater than total income. C. total production is always less than total income. D. total production may be greater than total income. E. total production may be less than total income Which one of the following is not an assumption of the simple Keynesian model? A. Prices are given B. Interest rates are given C. Wages are given D. The money stock is given E. Production (supply) is the driving force that determines the level of economic activity

4 Page 4 of In the Keynesian model, government expenditure A. is undertaken solely to regulate the level of unemployment. B. affects the size of the multiplier because it varies with income. C. always increases when taxes increase because government has more to spend. D. can be ignored if it equals the level of taxation. E. is taken to be independent of income because government decides on the level Which of the following is not a legitimate area of intervention by government in a mixed economy? A. Regulation of the pricing behaviour of monopoly industries B. Regulation of price increases that result from changes in patterns of demand and supply in competitive markets C. Stabilisation of the economy during periods of cyclical instability D. Redistribution of purchasing power via progressive taxation and transfers E. The provision of funds for public goods such as parks and street lights 1.13 In the Keynesian model, exports are taken to A. be dependent on disposable income. B. increase when output increases. C. increase when imports increase. D. be independent of local conditions. E. decrease when imports increase South Africa has a comparative (relative) advantage over France in the production of maize if it A. produces maize with fewer material inputs than France. B. can match France s output of maize and have resources left over. C. can produce maize with the same resources as France but faster. D. has an absolute advantage over France. E. produces maize at a lower opportunity cost than France Australia has an absolute advantage over South Africa in wool production if, during a year, Australia A. can produce more wool than South Africa. B. specialises in wool production. C. can produce less wool than South Africa. D. can produce more wool than South Africa with a given amount of resources. E. consumes more wool than South Africa on average Money overcomes the problem of a double coincidence of wants inherent in the barter system through its function as a A. medium of exchange. B. unit of account. C. standard of deferred payment. D. store of value. E. financial intermediary.

5 Page 5 of A decrease in the rate of interest A. lowers the opportunity cost of money and leads to an increase in the B. raises the opportunity cost of money and leads to an increase in the C. lowers the opportunity cost of money and leads to a decrease in the D. raises the opportunity cost of money and leads to a decrease in the E. does not affect the 1.18 Which of the following best describes the M1 measure of the money stock? A It is the M3 money measure minus the M2 money measure B. M1 includes cash and medium term deposits C. M1 is cash plus demand deposits D. M1 is cash minus demand deposits E. M1 is the most comprehensive measure of money stock available 1.19 Which one of the following is an example of an expansionary fiscal policy? A. A decrease in interest rates B. An increase in interest rates C. An increase in government spending D. A decrease in government spending E. An increase in taxes 1.20 Which one of the following statements about inflation is true? Inflation refers to A. a sudden and self-contained increase in prices. B. a small increase in prices. C. too much money chasing too few goods. D. a sustained increase in the general price level. E. an increase in the purchasing power of money. SECTION B (60 MARKS) ANSWER ANY THREE (3) QUESTIONS QUESTION 2 [20] 2.1 List and briefly discuss the four (4) basic factors of production. (8) 2.2 List and discuss the five (5) objectives of the government s macroeconomic policy. (10) 2.3 List two (2) possible reasons for an appreciation of the rand against the US dollar. (2)

6 Page 6 of 6 QUESTION 3 [20] 3.1 Use two (2) separate diagrams to illustrate how goods and services, income and spending flow between households and firms. Explain the different flows. (10) 3.2 Use a diagram to indicate the circular flow of income and spending between households, firms, the government and the foreign sector. Show injections and withdrawals. (10) QUESTION 4 [20] 4.1 Draw and describe a Lorenz curve. Explain what it represents. (10) 4.2 How would you explain the multiplier to a friend or family member? Draw a diagram and explain. (10) QUESTION 5 [20] 5.1 List the four (4) main components of the government or public sector in South Africa. (4) 5.2 Give three (3) valid reasons for government intervention in the economy. (3) 5.3 What determines the size of the multiplier in a Keynesian model that includes both a government and a foreign sector? (3) 5.4 Use examples to explain the difference between absolute advantage and comparative (or relative) advantage in international trade. (10) EXAM TOTAL: 100