Ecs1601 Week 2 Study Guide
ECS1601/202/2/2011
STREPIESKODE BAR CODE
Department of ECONOMICS
Economics IB (ECS1601) Tutorial letter 202/2011 (Second semester)
1.
Solutions to Assignments 03 and 04.
UNISA
2
Dear Student The purpose of this tutorial letter is to provide you with the correct answers to the assignments. 1. The solutions to Assignments 03 and 04. Assignment 03 - Unique number 810132 Explanations 3.1 The correct alternative is (3)
According to the assumptions of the simple Keynesian model, the economy only consists of the two sectors; households and firms. See section 18.2 of the text book. 3.2 [1] The correct alternative is (2) Incorrect. In macroeconomic theory, total spending is not always equal to total production. Total spending …show more content…
may be greater than, less than or equal to total production. Correct. See the explanation above. Incorrect. There is no guarantee that total spending will be equal to total production or income. The correct alternative is (4) Incorrect. Say’s law states that supply creates its own demand, hence there can never be insufficient spending to achieve full employment. This is consistent with the believe that all leakages will automatically find their way back into the circular flow of income and spending. Correct. See (a) above. Correct. See (a) above. The correct alternative is (3) Incorrect. Consumption is not positively related to interest rate, but it is positively related to income. Correct. Due to other non-income determinants of consumption spending, consumption is positive even when income is zero. Correct. As income increases, part of the additional income is saved hence the increase in consumption will be smaller that the increase in income.
[2] [3]
3.3 a.
b. c. 3.4 a. b. c.
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3.5 [1] [2] [3] [4]
The correct alternative is (1) Marginal propensity to consume indicates the proportion of additional income that will be used for consumption. Incorrect. Marginal propensity to consume is the ratio of the change in consumption to the change in income. Incorrect. Incorrect. Marginal propensity to consume is the proportion of an increase in consumption through an increase in income. The correct alternative is (3) Correct.
3.6
The shift of the investment function is caused by other factors other than the interest rate. Such factors include improvement in profit expectations or business sentiment. a. b. c. Incorrect. An increase in the repo rate would cause a movement along the investment function and not a shift of the curve. Incorrect. A decline in the lending rate would cause a movement along the investment function and not a shift of the curve. Correct. When the profit expectations improve, the level of investment at each interest rate will increase. This is indicated by the rightward shift of the investment function. The correct alternative is (3)
3.7
Movement from b to a represents a decrease in investment spending. Since investment is negatively related to interest rate, such a decrease in investment spending could have been due to an increase in interest rate. a. b. c. Correct. A movement from b to a is due to an increase in interest rate. Incorrect. Incorrect. There is no systematic relationship between investment and income.
4
3.8 a. b.
The correct alternative is (4) Incorrect. Using the formula, C = + cY, where c is the marginal propensity to consume, then from the function C = 50 + 3/4Y, c = ¾. Correct. Aggregate spending = C + , where C is the consumption spending and is the investment spending. Thus, if A = 500 + 3/4Y and = 50, then = 500 – 50 = 450 Correct. The multiplier is
1 1− c 1 = 3 1− 4 1 = 1 4 =4 = Where c is the m arg inal propensity to consume substitute c with 1 4 =1x 4 1 3 and subtract from 1 4
c.
1÷
3.9
The correct alternative is (1)
a.
Correct.
The equilibrium income = multiplier times total autonomous spending. We first have to calculate the multiplier:
1 1− c 1 = 2 1− 3 1 = 1 3 =3 = Where c is the m arg inal propensity to consume substitute c with 1 3 =1x 3 1 2 and subtract from 1 3
1÷
b. c.
Correct. Correct.
A
Y0
=α x = 3 x 30 = 90
A
and autonomous spending
= 30
A
α
I
C
Since A =
+ cY+ , then from the given function, A = 20 + 2/3Y + 10,
= 30 and c = 2/3.
I
C
I
C
α
I
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3.10 The correct alternative is (2) a. b. c. The multiplier is the ratio between the eventual change in income and the autonomous total spending. Correct. The greater the marginal propensity to consume, the greater the multiplier will be. Incorrect. The marginal propensity to consume does not depend on the multiplier. Correct.
3.11 The correct alternative is (3) A decrease in the leakages such as taxes causes an increase in the multiplier. Consider the following example: The formula for the multiplier with taxes is:
= 1 1 − c (1 − t )
Suppose c = 2/3; t1 = 1/2 and t2 = 1/4; where t1 and t2 are different tax rates. When the tax rate is 1/2, the multiplier is:
= = 1− = 1 1 − c (1 − t ) 1
2 1 1− 3 2
1 2 1 1− 3 2 1 = 1 1− 3 1 = 2 3 3 = 2 3 = or 1,5 2
α α
6
But, when a tax rate decreased to 1/4, the multiplier increases to:
= = 1− = 1 1 − c (1 − t ) 1
3.12 The correct alternative is (2) The assumption of exogenous interest rates does not imply that the interest rate is ignored. The assumption only means that the model cannot be used to explain how interest rates increase or decrease. 3.13 The correct alternative is (5) a. b. c. Correct. Government spending is added to the other components of aggregate spending. This leads to an increase in aggregate spending. Incorrect. Government spending has no effect on the multiplier. Incorrect. The introduction of government spending increases the equilibrium level of income.
3.14 The correct alternative is (2) Government spending is assumed to be exogenous. This implies that there is no systematic relationship between government spending and total income. 3.15 The correct alternative is (5) a. b. c. Incorrect. Taxes are withdrawals from the circular flow of income and spending. Incorrect. Disposable income is the income available to the households after tax deductions. Incorrect. The introduction of the proportional income tax reduces the multiplier. See the discussion on taxes in section 19.1 of the text book.
1 2 3 1− 3 4 1 = 1 1− 2 1 = 1 2 2 = 1 =2
α
2 1 1− 3 4
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3.16 The correct alternative is (3) The introduction of tax in the Keynesian model reduces the income of consumers, that is, disposable income decreases. This means that consumers have less available to spent, less is put back into the economy (which negatively affects the multiplier). Thus, the consumption function swivels downwards. This also causes the aggregate spending function to swivel downwards. See figure 19-4 and figure 19-5 in the text book. 3.17 The correct alternative is (1)
= =
1 1 − c (1 − t ) + m 1
3.18 The correct alternative is (1) Total autonomous spending A = C + I + G + (X _ Z) = 100 + 300 + 200 + (150 - 100) million = R650m Y0 = α x A = 2 x R650m = R1 300m
α
1− =
2 1 1 + 1− 3 10 10
1 2 9 1 + 1− 3 10 10 1 = 3 1 1− + 5 10 1 = 5 10 10 = 5 =2
8
3.19 The correct alternative is (2) The government spending: R200m The tax revenue at equilibrium level of income: tY 1 = R1 300m 10 = R130m Tax revenue minus government spending: R130m – R200m = - R70m Hence the government is running a budget deficit of R70 million. 3.20 The correct alternative is (1) The equilibrium level of income (Y0) is below the full-employment level of income (Yf ). Autonomous spending must increase by: Yf = R2 150m (given) Y0 = R1 300m (calculated in 3.18) = 2 (calculated in 3.17)
α
∆A =
∆Y
2 150 − 1 300 = 2 850 = 2 = R 425m
Only increasing investment spending by R425m will have the desired effect.
α
*** *** ***
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Assignment 04 - Unique number 786243 Explanations 4.1 a. b. c. The correct alternative is (5) Incorrect. The level of economic activity is determined by the interaction of aggregate supply and aggregate demand. Incorrect. Both the models deal with the total production of goods and services. The study of the production of a particular good is a micro-economic issue. Incorrect. AD and AS are not simply summations of market demand and supply for different goods and services produced in the economy. The AD-AS model relates real output (real GDP) to the average price level. See Section 20.1 of the prescribed book. The correct alternative is (4) Incorrect. An increase in government expenditure increases aggregate demand and, as a result, equilibrium output and prices increase. Incorrect. Aggregate demand (AD) shows the total expenditures on final goods and services produced in the economy. Incorrect. When the interest rate decreases, investment will increase due to the low cost of borrowing. An increase in investment will lead to an increase in aggregate demand. Correct. See Figure 20-2 in the textbook. The correct alternative is (4) Correct. See section 20.2 of the textbook. Incorrect. The effectiveness of the monetary transmission mechanism is determined by the sensitivity of investment to interest rates. Incorrect. The size of the multiplier determines the magnitude of the increase in aggregate demand.
4.2 [1] [2] [3]
[4] 4.3 a. b. c.
10
4.4
The correct alternative is (3)
If investment demand is interest inelastic, a change in the interest rate will not have any real impact on investment spending and the transmission mechanism breaks down.
If, on the other hand, investment demand is very interest elastic, a change in the interest rate will have a large impact on investment spending. Total expenditure will increase; aggregate demand will increase, leading to an increase in the price level and the level of production and income.
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For a given increase in aggregate demand, the steeper the AS curve, the less effective is monetary policy.
4.5
The correct alternative is (3)
A decrease in aggregate supply will increase the price level and decrease production. A decrease in aggregate demand decreases the price level and the level of production decreases. We can conclude that the level of production will definitively fall, but the effect on the price level cannot be predicted (it depends on the relative sizes of the changes in aggregate demand and aggregate supply). 4.6 a. The correct alternative is (5) Incorrect. If households save a larger proportion of their income, there will be a fall in total spending and aggregate demand. Production decreases and unemployment increases. Incorrect. When the interest rate increases, investment will decrease leading to a decrease in aggregate demand and production. Unemployment will increase. Correct. Raising the demand for domestically produced goods and services and reducing imports will lead to an increase in domestic production. Hence unemployment decreases.
b. c.
12
4.7 a. b.
The correct alternative is (5) Incorrect. Inflation exists when there is a considerable increase in the prices of most (not all) goods and services. CPI in 2006 − CPI in 2005 100 Incorrect
% ∆ in prices = CPI in 2005 121 − 110 100 = x 110 1 = 10% x 1
c.
Correct.
Stagflation is a situation where increases in the price level are accompanied by decreases in the level of output.
4.8 [1]
The correct alternative is (4) Incorrect. High inflation in South Africa can damage the country’s international competitiveness by making its exports more expensive when compared to exports from other countries. Incorrect. As inflation tends to decrease the value of existing savings, it discourages people to save more or to take out life insurance. Incorrect. Inflation redistributes income to the government. Correct. People with fixed mortgage bonds benefit from inflation because the real value of their loans decreases as prices increase. The correct alternative is (2) Incorrect. Demand-pull inflation refers to inflation that occurs when the aggregate demand for goods and services exceeds the aggregate supply. Demand-pull inflation is usually accompanied by a simultaneous increase in the general price level and output level. Incorrect. An increase in interest rate will shift the AD curve and not the AS curve to the left. When the interest rate increases, investment will decrease due to the high cost of borrowing. A decrease in investment will lead to a decrease in aggregate demand, which will shift the AD curve to the left. Correct. Decreases in the cost of credit (the interest rate), increase investment spending. An increase in investment spending increases aggregate demand, which shifts the AD curve to the right and leads to a simultaneous increase in the price level and the level of output.
[2] [3] [4]
4.9 a.
b.
c.
4.10 The correct alternative is (3) [1] [2] [3] [4] Incorrect. See statement 4.9 (c) above. Incorrect. Exports is a component of aggregate demand, the AD curve (not the AS curve) will shift to the right. Correct. A decrease in productivity increases the input costs of production, which is shown by a shift of the AS curve to the left. The price level increases. Incorrect. A drought will reduce the level of production, the AS curve shifts to the left, increasing the price level.
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4.11 The correct alternative is (3) [1] [2] [3] [4] Incorrect. See statement 4.9 (b) above. Incorrect. Increased profit margins will shift the AS curve to the left. Correct. A decrease in the cost of imported capital decreases the input costs of production, which is shown by a shift of the AS curve to the right. Incorrect. A restrictive fiscal policy, due to an increase in tax rate and/or a decrease in government expenditure, shifts the AD curve to the left.
4.12 The correct alternative is (4)
Unemployme nt rate = = number of unemployed persons 100 x 1 total labour force 80 000 100 x 160 000 1
= 50%
4.13 The correct alternative is (1) [1] [2] [2] [2] Workers who lose their jobs as a result of privatisation are structurally unemployed.
Incorrect. This is an example of frictional unemployment. Incorrect. This is an example of cyclical unemployment. Incorrect. This is an example of seasonal unemployment. Correct.
4.14 The correct alternative is (3) [1] Incorrect. An increase in taxes reduces disposable income and consumption. Hence aggregate spending and aggregate demand will fall, resulting in a decrease in the demand for labour. Incorrect. An increase in the interest rate reduces investment spending; decreasing aggregate spending and aggregate demand, resulting in a decrease in the demand for labour. Correct. Increased demand for exports will increase aggregate demand and production. Thus stimulating the demand for labour. Incorrect. An increase in the size of the population affects the supply of labour.
[2]
[3] …show more content…
[4]
4.15 The correct alternative is (3) a. b. c. An increase in real production (i.e. economic growth) is a necessary but not sufficient condition for reducing unemployment. Incorrect. The slope of the production function decreases as employment increases. Correct. The production function shows the link between the level of real production and the level of employment. Correct.
14
4.16 The correct alternative is (2) [1] [2] [3] [4] Incorrect. Hyperinflation is inflation that is very high or even out of control. Correct. Stagflation is an economic situation in which economic stagnation (which increases unemployment) and inflation occur simultaneously Incorrect. Cyclical unemployment occurs when a slump or recession in the economy (as a result of a temporary lack of demand) gives rise to unemployment. Incorrect. Seasonal unemployment arises because certain occupations require workers only for part of each year.
4.17 The correct alternative is (2) [1] [2] [3] [4] Incorrect. A positive increase in real production results when the total real production is growing at a faster rate than the population. Correct. GNI = GDP – net primary payments Incorrect. One of the problems with the measurement of GDP is that it does not take negative externalities into account. Incorrect. Economic growth is measured by determining the annual increase in real GDP.
4.18 The correct alternative is (1) a. Incorrect. The business cycle is the pattern of upswings and downswings that can be discerned in economic activity over a number of years. It describes a pattern of fluctuation around a long term trend. Correct. See statement (a) above. Incorrect. The downswing comes to an end when the economy reaches a trough.
b. c.
4.19 The correct alternative is (5) a.
b. Correct. Correct. Capital deepening is when the growth in stock of capital (20%) is greater than the growth in the number of workers (18%). Capital widening occurs when the capital stock is increased to accommodate an increasing labour force. That is, the stock of capital increases by the same percentage (22%) as the increase in the labour force. Capital intensity is when the growth the growth in stock of capital is greater than the growth in the number of workers. In 2006 the capital intensity decreased (the growth in the labour force (20%) exceeded the growth in stock of capital
(19%).
c.
Correct.
4.20 The correct alternative is (3) [1] [2] [3] [4] Incorrect. An increase in consumption increases aggregate demand and production. Incorrect. A decrease in the interest rate stimulates investment spending, aggregate demand and production. Correct. A decrease in government spending is an example of contractionary fiscal policy; it reduces aggregate spending and aggregate demand and production. Incorrect. Import substitution implies goods that were previously imported are now produced locally.
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*** *** *** Please do not hesitate to contact one of the lecturers should you experience any difficulties with the explanations. Good luck with your studies. Your Economics 1B lecturers
STREPIESKODE BAR CODE
Department of ECONOMICS
Economics IB (ECS1601) Tutorial letter 202/2011 (Second semester)
1.
Solutions to Assignments 03 and 04.
UNISA
2
Dear Student The purpose of this tutorial letter is to provide you with the correct answers to the assignments. 1. The solutions to Assignments 03 and 04. Assignment 03 - Unique number 810132 Explanations 3.1 The correct alternative is (3)
According to the assumptions of the simple Keynesian model, the economy only consists of the two sectors; households and firms. See section 18.2 of the text book. 3.2 [1] The correct alternative is (2) Incorrect. In macroeconomic theory, total spending is not always equal to total production. Total spending …show more content…
may be greater than, less than or equal to total production. Correct. See the explanation above. Incorrect. There is no guarantee that total spending will be equal to total production or income. The correct alternative is (4) Incorrect. Say’s law states that supply creates its own demand, hence there can never be insufficient spending to achieve full employment. This is consistent with the believe that all leakages will automatically find their way back into the circular flow of income and spending. Correct. See (a) above. Correct. See (a) above. The correct alternative is (3) Incorrect. Consumption is not positively related to interest rate, but it is positively related to income. Correct. Due to other non-income determinants of consumption spending, consumption is positive even when income is zero. Correct. As income increases, part of the additional income is saved hence the increase in consumption will be smaller that the increase in income.
[2] [3]
3.3 a.
b. c. 3.4 a. b. c.
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3.5 [1] [2] [3] [4]
The correct alternative is (1) Marginal propensity to consume indicates the proportion of additional income that will be used for consumption. Incorrect. Marginal propensity to consume is the ratio of the change in consumption to the change in income. Incorrect. Incorrect. Marginal propensity to consume is the proportion of an increase in consumption through an increase in income. The correct alternative is (3) Correct.
3.6
The shift of the investment function is caused by other factors other than the interest rate. Such factors include improvement in profit expectations or business sentiment. a. b. c. Incorrect. An increase in the repo rate would cause a movement along the investment function and not a shift of the curve. Incorrect. A decline in the lending rate would cause a movement along the investment function and not a shift of the curve. Correct. When the profit expectations improve, the level of investment at each interest rate will increase. This is indicated by the rightward shift of the investment function. The correct alternative is (3)
3.7
Movement from b to a represents a decrease in investment spending. Since investment is negatively related to interest rate, such a decrease in investment spending could have been due to an increase in interest rate. a. b. c. Correct. A movement from b to a is due to an increase in interest rate. Incorrect. Incorrect. There is no systematic relationship between investment and income.
4
3.8 a. b.
The correct alternative is (4) Incorrect. Using the formula, C = + cY, where c is the marginal propensity to consume, then from the function C = 50 + 3/4Y, c = ¾. Correct. Aggregate spending = C + , where C is the consumption spending and is the investment spending. Thus, if A = 500 + 3/4Y and = 50, then = 500 – 50 = 450 Correct. The multiplier is
1 1− c 1 = 3 1− 4 1 = 1 4 =4 = Where c is the m arg inal propensity to consume substitute c with 1 4 =1x 4 1 3 and subtract from 1 4
c.
1÷
3.9
The correct alternative is (1)
a.
Correct.
The equilibrium income = multiplier times total autonomous spending. We first have to calculate the multiplier:
1 1− c 1 = 2 1− 3 1 = 1 3 =3 = Where c is the m arg inal propensity to consume substitute c with 1 3 =1x 3 1 2 and subtract from 1 3
1÷
b. c.
Correct. Correct.
A
Y0
=α x = 3 x 30 = 90
A
and autonomous spending
= 30
A
α
I
C
Since A =
+ cY+ , then from the given function, A = 20 + 2/3Y + 10,
= 30 and c = 2/3.
I
C
I
C
α
I
5
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3.10 The correct alternative is (2) a. b. c. The multiplier is the ratio between the eventual change in income and the autonomous total spending. Correct. The greater the marginal propensity to consume, the greater the multiplier will be. Incorrect. The marginal propensity to consume does not depend on the multiplier. Correct.
3.11 The correct alternative is (3) A decrease in the leakages such as taxes causes an increase in the multiplier. Consider the following example: The formula for the multiplier with taxes is:
= 1 1 − c (1 − t )
Suppose c = 2/3; t1 = 1/2 and t2 = 1/4; where t1 and t2 are different tax rates. When the tax rate is 1/2, the multiplier is:
= = 1− = 1 1 − c (1 − t ) 1
2 1 1− 3 2
1 2 1 1− 3 2 1 = 1 1− 3 1 = 2 3 3 = 2 3 = or 1,5 2
α α
6
But, when a tax rate decreased to 1/4, the multiplier increases to:
= = 1− = 1 1 − c (1 − t ) 1
3.12 The correct alternative is (2) The assumption of exogenous interest rates does not imply that the interest rate is ignored. The assumption only means that the model cannot be used to explain how interest rates increase or decrease. 3.13 The correct alternative is (5) a. b. c. Correct. Government spending is added to the other components of aggregate spending. This leads to an increase in aggregate spending. Incorrect. Government spending has no effect on the multiplier. Incorrect. The introduction of government spending increases the equilibrium level of income.
3.14 The correct alternative is (2) Government spending is assumed to be exogenous. This implies that there is no systematic relationship between government spending and total income. 3.15 The correct alternative is (5) a. b. c. Incorrect. Taxes are withdrawals from the circular flow of income and spending. Incorrect. Disposable income is the income available to the households after tax deductions. Incorrect. The introduction of the proportional income tax reduces the multiplier. See the discussion on taxes in section 19.1 of the text book.
1 2 3 1− 3 4 1 = 1 1− 2 1 = 1 2 2 = 1 =2
α
2 1 1− 3 4
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3.16 The correct alternative is (3) The introduction of tax in the Keynesian model reduces the income of consumers, that is, disposable income decreases. This means that consumers have less available to spent, less is put back into the economy (which negatively affects the multiplier). Thus, the consumption function swivels downwards. This also causes the aggregate spending function to swivel downwards. See figure 19-4 and figure 19-5 in the text book. 3.17 The correct alternative is (1)
= =
1 1 − c (1 − t ) + m 1
3.18 The correct alternative is (1) Total autonomous spending A = C + I + G + (X _ Z) = 100 + 300 + 200 + (150 - 100) million = R650m Y0 = α x A = 2 x R650m = R1 300m
α
1− =
2 1 1 + 1− 3 10 10
1 2 9 1 + 1− 3 10 10 1 = 3 1 1− + 5 10 1 = 5 10 10 = 5 =2
8
3.19 The correct alternative is (2) The government spending: R200m The tax revenue at equilibrium level of income: tY 1 = R1 300m 10 = R130m Tax revenue minus government spending: R130m – R200m = - R70m Hence the government is running a budget deficit of R70 million. 3.20 The correct alternative is (1) The equilibrium level of income (Y0) is below the full-employment level of income (Yf ). Autonomous spending must increase by: Yf = R2 150m (given) Y0 = R1 300m (calculated in 3.18) = 2 (calculated in 3.17)
α
∆A =
∆Y
2 150 − 1 300 = 2 850 = 2 = R 425m
Only increasing investment spending by R425m will have the desired effect.
α
*** *** ***
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Assignment 04 - Unique number 786243 Explanations 4.1 a. b. c. The correct alternative is (5) Incorrect. The level of economic activity is determined by the interaction of aggregate supply and aggregate demand. Incorrect. Both the models deal with the total production of goods and services. The study of the production of a particular good is a micro-economic issue. Incorrect. AD and AS are not simply summations of market demand and supply for different goods and services produced in the economy. The AD-AS model relates real output (real GDP) to the average price level. See Section 20.1 of the prescribed book. The correct alternative is (4) Incorrect. An increase in government expenditure increases aggregate demand and, as a result, equilibrium output and prices increase. Incorrect. Aggregate demand (AD) shows the total expenditures on final goods and services produced in the economy. Incorrect. When the interest rate decreases, investment will increase due to the low cost of borrowing. An increase in investment will lead to an increase in aggregate demand. Correct. See Figure 20-2 in the textbook. The correct alternative is (4) Correct. See section 20.2 of the textbook. Incorrect. The effectiveness of the monetary transmission mechanism is determined by the sensitivity of investment to interest rates. Incorrect. The size of the multiplier determines the magnitude of the increase in aggregate demand.
4.2 [1] [2] [3]
[4] 4.3 a. b. c.
10
4.4
The correct alternative is (3)
If investment demand is interest inelastic, a change in the interest rate will not have any real impact on investment spending and the transmission mechanism breaks down.
If, on the other hand, investment demand is very interest elastic, a change in the interest rate will have a large impact on investment spending. Total expenditure will increase; aggregate demand will increase, leading to an increase in the price level and the level of production and income.
11
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For a given increase in aggregate demand, the steeper the AS curve, the less effective is monetary policy.
4.5
The correct alternative is (3)
A decrease in aggregate supply will increase the price level and decrease production. A decrease in aggregate demand decreases the price level and the level of production decreases. We can conclude that the level of production will definitively fall, but the effect on the price level cannot be predicted (it depends on the relative sizes of the changes in aggregate demand and aggregate supply). 4.6 a. The correct alternative is (5) Incorrect. If households save a larger proportion of their income, there will be a fall in total spending and aggregate demand. Production decreases and unemployment increases. Incorrect. When the interest rate increases, investment will decrease leading to a decrease in aggregate demand and production. Unemployment will increase. Correct. Raising the demand for domestically produced goods and services and reducing imports will lead to an increase in domestic production. Hence unemployment decreases.
b. c.
12
4.7 a. b.
The correct alternative is (5) Incorrect. Inflation exists when there is a considerable increase in the prices of most (not all) goods and services. CPI in 2006 − CPI in 2005 100 Incorrect
% ∆ in prices = CPI in 2005 121 − 110 100 = x 110 1 = 10% x 1
c.
Correct.
Stagflation is a situation where increases in the price level are accompanied by decreases in the level of output.
4.8 [1]
The correct alternative is (4) Incorrect. High inflation in South Africa can damage the country’s international competitiveness by making its exports more expensive when compared to exports from other countries. Incorrect. As inflation tends to decrease the value of existing savings, it discourages people to save more or to take out life insurance. Incorrect. Inflation redistributes income to the government. Correct. People with fixed mortgage bonds benefit from inflation because the real value of their loans decreases as prices increase. The correct alternative is (2) Incorrect. Demand-pull inflation refers to inflation that occurs when the aggregate demand for goods and services exceeds the aggregate supply. Demand-pull inflation is usually accompanied by a simultaneous increase in the general price level and output level. Incorrect. An increase in interest rate will shift the AD curve and not the AS curve to the left. When the interest rate increases, investment will decrease due to the high cost of borrowing. A decrease in investment will lead to a decrease in aggregate demand, which will shift the AD curve to the left. Correct. Decreases in the cost of credit (the interest rate), increase investment spending. An increase in investment spending increases aggregate demand, which shifts the AD curve to the right and leads to a simultaneous increase in the price level and the level of output.
[2] [3] [4]
4.9 a.
b.
c.
4.10 The correct alternative is (3) [1] [2] [3] [4] Incorrect. See statement 4.9 (c) above. Incorrect. Exports is a component of aggregate demand, the AD curve (not the AS curve) will shift to the right. Correct. A decrease in productivity increases the input costs of production, which is shown by a shift of the AS curve to the left. The price level increases. Incorrect. A drought will reduce the level of production, the AS curve shifts to the left, increasing the price level.
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4.11 The correct alternative is (3) [1] [2] [3] [4] Incorrect. See statement 4.9 (b) above. Incorrect. Increased profit margins will shift the AS curve to the left. Correct. A decrease in the cost of imported capital decreases the input costs of production, which is shown by a shift of the AS curve to the right. Incorrect. A restrictive fiscal policy, due to an increase in tax rate and/or a decrease in government expenditure, shifts the AD curve to the left.
4.12 The correct alternative is (4)
Unemployme nt rate = = number of unemployed persons 100 x 1 total labour force 80 000 100 x 160 000 1
= 50%
4.13 The correct alternative is (1) [1] [2] [2] [2] Workers who lose their jobs as a result of privatisation are structurally unemployed.
Incorrect. This is an example of frictional unemployment. Incorrect. This is an example of cyclical unemployment. Incorrect. This is an example of seasonal unemployment. Correct.
4.14 The correct alternative is (3) [1] Incorrect. An increase in taxes reduces disposable income and consumption. Hence aggregate spending and aggregate demand will fall, resulting in a decrease in the demand for labour. Incorrect. An increase in the interest rate reduces investment spending; decreasing aggregate spending and aggregate demand, resulting in a decrease in the demand for labour. Correct. Increased demand for exports will increase aggregate demand and production. Thus stimulating the demand for labour. Incorrect. An increase in the size of the population affects the supply of labour.
[2]
[3] …show more content…
[4]
4.15 The correct alternative is (3) a. b. c. An increase in real production (i.e. economic growth) is a necessary but not sufficient condition for reducing unemployment. Incorrect. The slope of the production function decreases as employment increases. Correct. The production function shows the link between the level of real production and the level of employment. Correct.
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4.16 The correct alternative is (2) [1] [2] [3] [4] Incorrect. Hyperinflation is inflation that is very high or even out of control. Correct. Stagflation is an economic situation in which economic stagnation (which increases unemployment) and inflation occur simultaneously Incorrect. Cyclical unemployment occurs when a slump or recession in the economy (as a result of a temporary lack of demand) gives rise to unemployment. Incorrect. Seasonal unemployment arises because certain occupations require workers only for part of each year.
4.17 The correct alternative is (2) [1] [2] [3] [4] Incorrect. A positive increase in real production results when the total real production is growing at a faster rate than the population. Correct. GNI = GDP – net primary payments Incorrect. One of the problems with the measurement of GDP is that it does not take negative externalities into account. Incorrect. Economic growth is measured by determining the annual increase in real GDP.
4.18 The correct alternative is (1) a. Incorrect. The business cycle is the pattern of upswings and downswings that can be discerned in economic activity over a number of years. It describes a pattern of fluctuation around a long term trend. Correct. See statement (a) above. Incorrect. The downswing comes to an end when the economy reaches a trough.
b. c.
4.19 The correct alternative is (5) a.
b. Correct. Correct. Capital deepening is when the growth in stock of capital (20%) is greater than the growth in the number of workers (18%). Capital widening occurs when the capital stock is increased to accommodate an increasing labour force. That is, the stock of capital increases by the same percentage (22%) as the increase in the labour force. Capital intensity is when the growth the growth in stock of capital is greater than the growth in the number of workers. In 2006 the capital intensity decreased (the growth in the labour force (20%) exceeded the growth in stock of capital
(19%).
c.
Correct.
4.20 The correct alternative is (3) [1] [2] [3] [4] Incorrect. An increase in consumption increases aggregate demand and production. Incorrect. A decrease in the interest rate stimulates investment spending, aggregate demand and production. Correct. A decrease in government spending is an example of contractionary fiscal policy; it reduces aggregate spending and aggregate demand and production. Incorrect. Import substitution implies goods that were previously imported are now produced locally.
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ECS1601/202
*** *** *** Please do not hesitate to contact one of the lecturers should you experience any difficulties with the explanations. Good luck with your studies. Your Economics 1B lecturers