HONG KONG EXAMINATIONS AUTHORITY HONG KONG CERTIFICATE OF EDUCATION EXAMINATION 2002 ECONOMICS PAPER 1

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1 2002-CE ECON PAPER 1 HONG KONG EXAMINATIONS AUTHORITY HONG KONG CERTIFICATE OF EDUCATION EXAMINATION 2002 ECONOMICS PAPER am am (1½ hours) This paper must be answered in English 1. This paper consists of two sections, A and B. 2. Section A contains nine questions. Attempt ALL questions. The whole section carries 38 marks for content and 2 marks for effective communication. 3. Section B contains three questions. Attempt any TWO questions. Each question carries 23 marks for content and 2 marks for effective communication. Hong Kong Examinations Authority All Rights Reserved CE-ECON 1 1

2 Section A (40 marks) Attempt ALL questions. 1. Some job vacancies publications are distributed to people free of charge in MTR stations. Explain whether these publications are free goods in society. (3 marks) 2. Suppose the Organization of Petroleum Exporting Countries cuts its oil production. At the same time, the demand for automobiles decreases. With the aid of a diagram, explain under what condition the price of gasoline would increase. 3. Firm A Firm B Number of workers employed Number of working hours per worker Output (units) Calculate the average labour productivity of each firm and state TWO reasons why the two productivities are different. 4. What is meant by limited liability? (2 marks) 5. State THREE features of the market structure of stores selling computer hardware in the Golden Computer Centre ( ). (3 marks) 6. In Hong Kong, Mr Lee withdrew $ from his savings account in Bank A. He deposited 50% of this amount with a deposit-taking company and remitted through a bank another 20% of this amount overseas. He put the rest of the money in his safety box in Bank B. What is the immediate effect of the above transactions on Hong Kong s money supply M1 and M3? Explain your answer. (6 marks) 7. List TWO functions of a central bank. (2 marks) 2002-CE-ECON 1 2 1

3 8. State and explain TWO principles of taxation put forward by Adam Smith. 9. The following table shows the maximum amount of toys and computers that Country A and Country B can produce in a year with ALL of their resources respectively. Toys (Units) Computers (Units) Country A 15 OR 5 Country B 10 OR 5 Explain whether we can conclude from the above table that Country A has (a) an absolute advantage (b) a comparative advantage in producing toys. END OF SECTION A 2002-CE-ECON Go on to the next page

4 Section B (50 marks) Attempt any TWO questions. 10. The balance sheet of a banking system is as follows : Assets ($Mn) Reserves 20 Loans 80 Liabilities ($Mn) Deposits 100 (a) The public deposits $10 million of cash into the banking system. (i) Suppose the banks do not hold excess reserves. Calculate the maximum possible change in the money supply. Explain your answer. (5 marks) (ii) Give TWO possible reasons why the actual change in the money supply could be less than the maximum possible change. (b) Suppose the banks decrease their interest rates on home mortgage loans. With the aid of a diagram, explain how this would affect the total expenditure on the purchase of private housing. (6 marks) (c) Suppose some large banks reduce their deposit interest rates while some small banks increase their deposit interest rates. Use the concept of opportunity cost to explain how this would affect the flow of deposits between the above two types of banks. (d) Bank A runs its business in Hong Kong. Tom is a consultant from Japan who will work for Bank A for nine months. Afterwards he will return to Japan. Explain whether Tom s salary for these nine months should be included in the calculation of Hong Kong s gross domestic product and gross national product CE-ECON 1 4 3

5 11. (a) The following shows the gross domestic product (GDP) data of economy A in a certain year. $million Private consumption expenditure 400 Net investment expenditure 180 Government consumption expenditure 250 Exports 500 Imports 650 Depreciation 150 Indirect business tax 50 Interest 200 (i) Calculate the GDP at market price of economy A. (3 marks) (ii) Miss Wong, an Economics teacher in a tutorial school, tells her students that the total spending of economy A s consumers in market value must be greater than $400 million. Give THREE reasons to explain why she is correct. (6 marks) (b) There are student places not yet filled in Miss Wong s tutorial school. The school decides to launch an advertising campaign to recruit more students and to keep the tuition fee unchanged. With the aid of a diagram, explain how a successful advertising campaign would fill all the places and increase the total revenue of the school. (c) Students in the tutorial school with good academic achievements are awarded coupons. These coupons can be used to purchase books in some specified bookstores. Explain whether these coupons are money. (3 marks) (d) The tutorial school also publishes textbooks for sale to the public. Give FOUR possible motives of such an expansion CE-ECON Go on to the next page

6 12. Mr Wong runs a bookstore in Hong Kong. He sells books imported from Britain. Suppose the exchange rate between the US dollar and the British pound changes as follows: April US$1 = 0.75 May US$1 = 0.70 (a) (i) Given the linked exchange rate system in Hong Kong, explain whether the HK dollar appreciates or depreciates against the British pound as a result of the above change in the exchange rate. (2 marks) (ii) Suppose the price of books imported from Britain remains unchanged in British pound and the demand for these books is inelastic. With the aid of a diagram, explain how Mr Wong s sales revenue of these books in HK dollars would change. (b) In order to cut expenses, Mr Wong reduces the monthly salaries of the staff working in the bookstore. (i) Give ONE advantage and ONE disadvantage to Mr Wong of paying his staff by time rate over piece rate. (ii) Explain whether the real income of his staff would necessarily fall during deflation. (5 marks) (c) Mr Wong s bookstore has to pay profits tax and rates. (i) Explain which of the above two taxes is an indirect tax. (ii) Explain whether profits tax is progressive, proportional or regressive. (5 marks) END OF PAPER 2002-CE-ECON 1 6 5

7 2002 CE Economics Paper 1 Numerical Answers Economics 1 3. Firm A : 2 units of output per man-hour Firm B : 1.5 units of output per man-hour 6. M1 increased by $ M3 decreased by $ (a) (i) $40 million 11. (a) (i) $830 million 2002-CE-ECON 1 7 6