THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2010 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC 5: ECONOMICS

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1 Examination No. THE PUBLIC ACCOUNTANTS EXAMINATION COUNCIL OF MALAWI 2010 EXAMINATIONS ACCOUNTING TECHNICIAN PROGRAMME PAPER TC 5: ECONOMICS WEDNESDAY 8 DECEMBER 2010 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. In the year 2002, maize production at Nchalo failed due to draught. So between May and June the price of maize increased from K600 to K900 per bag. In return, quantity demanded decreased from 550 bags to 450 bags over the same period. (a) Calculate the arc price elasticity of demand for maize at Nchalo between May and June Study the following diagram: Price A B C Quantity (i) (ii) Which demand curve best describes your answer in (a) above? 2 Marks If there was one maize trader at Nchalo and assuming that the supply curve is a positive slope, which curve would be more desirable in case of a decrease in price? Please explain. 3 Marks Name and explain four factors that would determine the price elasticity of supply of a product. 8 Marks Define the term cross- elasticity of demand. 2 Marks

3 Food 2 2. Assume that tobacco farmers in Malawi have complained that they usually sell their crop at very low prices, and in return, the government imposes a price floor on the tobacco leaf. (a) Define the term price floor. 2 Marks Using a graph, explain clearly how price floor may end up hurting tobacco producers whom the government may be trying to protect. 6 Marks Mention and explain five other factors that may determine how much revenue Malawian tobacco farmers would generate in a growing season. 10 Marks Explain the difference between price ceiling and price floor. 2 Marks 3. Study the diagram below which shows a theoretical production possibility frontier for an economy. 20 A 14 B *U Production Possibility Frontier Education (a) Define the term production possibility frontier. 2 Marks Calculate and interpret the opportunity cost, if there is movement from A to B. Is it correct to argue that the Malawi economy can be represented by point U? Give reasons for your answer. Construct a production possibility frontier which would show economic growth. 3 Marks (e) State any five factors that can lead to an outward shift in the production possibility frontier.

4 3 4. (a) Distinguish between public goods and merit goods. 2 Marks State three differences between a market economy and a planned economy. 3 Marks Using demand and supply analysis, examine the effect on the equilibrium price and quantity traded of beef cattle in Europe of each of the following events. Please, consider each event separately. (i) A decline in the price of cattle feed. (ii) A rise in the demand for chicken. (iii) A fall in the subsidy paid to beef cattle producers.

5 4 SECTION B Answer three questions only from this section. 5. (a) What is barter trade? 2 Marks State five disadvantages of barter trade. Explain the difference between commodity money and non-commodity money. Clearly explain any three ways in which inflation prevents money from performing its functions effectively. 9 Marks 6. (a) Name two withdrawals and two injections into the circular flow of income. State five difficulties that are associated with calculating national income. Explain three factors that can influence the overall size and rate of growth of national income. 3 Marks Explain four weaknesses of using national income per capita as a guide to comparing the standard of living in different countries. 8 Marks 7. (a) According to the Keynesian model, explain three factors that influence the amount of consumption. 6 Marks Assume that the national income in a small closed economy is K20,000 and the average and marginal propensity to consume is 80 percent: (i) Calculate the marginal propensity to save. 2 Marks (ii) Calculate the consumption level. 2 Marks (iii) Calculate the investment level. 2 Marks (iv) What would be the new level of national income if investment increased by K2,000? 2 Marks Explain three factors that explain the size of the multiplier. 6 Marks

6 5 8. Traditionally, the Malawi government registers high public sector borrowing requirement (PSBR) and many economists have argued that this situation is retrogressive. (a) What is PSBR? 2 Marks The Government may increase direct and indirect taxes in order to reduce its PSBR. (i) Name and explain two direct taxes employed in Malawi. (ii) Name and explain two indirect taxes employed in Malawi. Define the term crowding-out effect. 2 Marks State four advantages that may accrue to Malawi due to the reduction in its outstanding public debt. 8 Marks 9. Since 1994, there has been sustained pressure, especially from labour unions, to have the minimum wage increased in Malawi. However, some economists argue that this may lead to unemployment in the country. (a) Define the term unemployment. 2 Marks (i) Name the type of unemployment that would occur as a result of the increase in the minimum wage. 2 Marks (ii) Explain the type of unemployment that would occur as a result of the increase in the minimum wage. Explain two negative effects of unemployment. Although Malawi s wage control system, particularly in the public sector, may help create employment, it has its own weaknesses. State four weaknesses that wage controls may have in an economy. (e) State two ways in which the Government can reduce cyclical unemployment?

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