ECONOMICS INQUIRY FOR HKDSE

HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION

ECONOMICS PAPER 1
(Mock Test 7)

Time allowed: 1 hour

INSTRUCTIONS

1. Read carefully the instructions on the Answer Sheet. After the announcement of the start of the
examination, you should first stick a barcode label and insert the information required in the spaces
provided. No extra time will be given for sticking on the barcode label after the ‘Time is up’
announcement.

2. When told to open this book, you should check that all the questions are there. Look for the words
‘END OF PAPER’ after the last question.

3. All questions carry equal marks.

4. ANSWER ALL QUESTIONS. You are advised to use an HB pencil to mark all the answers on the
Answer Sheet, so that wrong answers can be completely erased with a clean rubber. You must mark the
answers clearly; otherwise you will lose marks if the answers cannot be captured.

5. You should mark only ONE answer for each question. If you mark more than one answer, you will
receive NO MARKS for that question.

6. No marks will be deducted for wrong answers.

Not to be taken away before the

end of the examination session

HKDSE-ECON 1-1 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

There are 40 questions in this paper. Choose the BEST answer for each question.

1. Which of the following statements are normative statements?

(1) Decreasing the salaries tax rate aggravates income inequality.

(2) Decreasing the salaries tax rate is the best way to improve employment.
(3) People’s disposable income will increase after decreasing the salaries tax rate.
(4) The government should boost the economy by decreasing the salaries tax rate during deflation.

A. (1) and (3) only

B. (2) and (4) only
C. (1), (2) and (4) only
D. (1), (3) and (4) only

2. Suppose the government plans to build elderly hostels on an urban renewal site. In which of the following
situations will the cost of building the elderly hostels decrease?

A. The proposal of building the elderly hostels is finally abolished.

B. The import price of raw materials used for building the elderly hostels decreases.
C. A statutory minimum wage is enforced during the building of elderly hostels.
D. The occupation rate of the elderly hostels is low after they are completed.

3. Which of the following statements about interest is correct?

A. Interest must be in the form of money.

B. Interest does not exist if there is deflation.
C. People will defer their current consumption if the interest rate decreases.
D. People will defer their current consumption if the interest rate increases.

4. Indoor badminton courts managed by the Leisure and Cultural Services Department are ________ because
________.

A. private goods … people have to pay when they use the badminton courts
B. private goods … they are excludable and rival in consumption
C. public goods … no one has an exclusive right to use them
D. public goods … they are provided by the government

5. Which of the following would increase the occupational mobility of labour in an economy?

(1) the retirement age is lowered to 50 years old

(2) subsidy is provided to people who take courses under the retraining programme
(3) the entrance requirement is lowered for many professional jobs in the labour market

A. (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

HKDSE-ECON 1-2 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

6. The labour supply of Hong Kong will decrease if

A. more companies provide full-pay paternity leave (侍產假) for their employees.
B. the government lowers the minimum working age.
C. the average working hours of labour increases.
D. the government relaxes controls on importing labour.

7. Miss Lo is the owner of a shop selling handmade accessories. She pays her designers and craftsmen wages on a
piece rate basis. Which of the following would be a possible reason for Miss Lo choosing to pay her workers on a
piece rate instead of a time rate basis?

A. This can reduce the fluctuation on the monthly expenditure on wages.

B. This can lower the cost of measuring contribution of workers.
C. This can improve the quality of output.
D. This can raise labour productivity.

8.
Firm A Firm B
Number of owners 30 5
Legal status Legal entity Not a legal entity
Needs the consent of
Transfer of ownership Freely transferable
other owners

According to the above table, which of the following statements is correct?

A. Both firms cannot issue shares to the public.

B. Firm A has more capital than Firm B.
C. Firm A is at a greater risk of being taken over by others than Firm B.
D. Firm B bears less liability than Firm A.

9. Refer to the following table showing revenue and production costs of a competitive firm.

Output (units) 2 3 4 5 6 7
Total revenue ($) 22 33 44 55 66 77
Total cost ($) 5 10 17 26 37 50
Average variable cost ($) 2 3 4 5 6 7

We can conclude that

A. the maximum profit the firm can make is $29.

B. the profit-maximising output level of the firm is 4 units.
C. the fixed cost of the firm is $5.
D. the product price is $10.

HKDSE-ECON 1-3 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

10. The following table shows the information of a firm during a certain period.

At the beginning of At the end of the

the period period
Total output (units) 8,000 10,000
Number of workers employed 50 40
Average number of working hours
8 10
per worker per day

Which of the following is a possible reason for the difference in labour productivity between the beginning and
the end of the period?

A. Some machines were worn out.

B. The firm changed its payment method from piece rate to time rate.
C. There is a higher degree of specialisation in production.
D. The 10 most productive workers left the firm for study.

11. Sammy is a comic books lover. Every week, he visits comic bookstores and buys 2 comic books no matter what
the prices of the comic books are. From this we can conclude that his demand for comic books is

A. perfectly elastic.
B. perfectly inelastic.
C. unitary elastic.
D. inelastic.

12. In recent years, domestic sports equipment companies play an active role in advertising and innovating new
products. This results in a 10% increase in the product price and a 30% increase in the total expenditure on
domestic sports equipment. Which of the following statements is correct?

A. The total revenue of foreign sports equipment companies may rise or fall depending on the elasticity
of demand.
B. The quantity demanded of imported sports equipment remains unchanged.
C. The demand for the domestic sports equipment is inelastic.
D. The quantity transacted of the domestic sports equipment increases.

HKDSE-ECON 1-4 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

13. Wearing contact lenses is becoming popular nowadays. At the same time, the technology of producing contact
lens solutions is advanced. Which of the following diagrams could represent a result of the above events?

A. Contact lenses B. Contact lenses

Price Price
S0 S0
S1 S1

D1 D
D0
0 Quantity 0 Quantity

C. Contact lens solutions D. Contact lens solutions

Price Price
S0 S0
S1
S1

D1
D
D0

0 Quantity 0 Quantity

14. The following shows the advertisements of a telecommunication service provider for its smartphone monthly
plan.

Plan A Plan B
Monthly fee: $148  $128 Monthly fee: $198  $178
Voice minutes: 1,000 minutes Voice minutes: 1,500 minutes
Local data usage: 200 MB Local data usage: 500 MB

Suppose all other services provided by the two plans are the same. After the special prices are offered, which of
the following statements about the telecommunication service is correct?

A. The demand for telecommunication service will increase.

B. Relatively more people will choose Plan A.
C. The price of Plan A relative to Plan B will increase.
D. The consumer surplus for Plan B will rise while that for Plan A will drop.

HKDSE-ECON 1-5 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

15. The following is the demand-supply diagram of a milk powder market. E0 is the original equilibrium point.

Price S2
S0
S1
E4

E1 E0 E3
E2

D1
D0
D2
0 Quantity

To encourage people to give birth, a subsidy is provided to milk powder consumers. Meanwhile, some brands of
milk powder in the market are recalled as the powder is contaminated. The new equilibrium point in the milk
powder market will be ________.

A. E1
B. E2
C. E3
D. E4

Refer to the following demand-supply schedule of good X and answer Questions 16 and 17.

Price ($) 4 5 6 7 8 9
Quantity demanded (units) 20 18 16 14 12 10
Quantity supplied (units) 12 14 16 18 20 22

16. If the government imposes a per unit tax of $2 on good X,

A. the total revenue of the complements of good X will increase.

B. the total tax revenue will be $32.
C. the total expenditure of consumers on good X will be $98.
D. consumers will bear a larger proportion of tax burden than producers.

17. With reference to the above question, within the range of the original and new market prices,

A. the demand for good X is elastic.

B. the demand for good X is inelastic.
C. the supply of good X is elastic.
D. the elasticity of supply of good X is higher than its elasticity of demand.

18. An oligopolist

A. is a dominant seller which its market share is over 50%.

B. must follow other oligopolists’ action so as to earn higher profit.
C. faces no competition from new firms as they are difficult to enter the market.
D. can adjust the price to maximise its profit.

HKDSE-ECON 1-6 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

19. If the government reduces the amount of per unit subsidy on a good,

(1) producer surplus will decrease.

(2) the price of the good will increase.
(3) deadweight loss will be smaller.

A. (1) only
B. (1) and (2) only
C. (2) and (3) only
D. (1), (2) and (3)

20. The following diagram shows the Lorenz curves of a country in years 20X4 and 20X9:

% of income

100
A: Lorenz curve in year 20X4
80 B: Lorenz curve in year 20X9

60
B

40
A

20

0 20 40 60 80 100
% of households

According to the above diagram, from year 20X4 to year 20X9,

A. the income distribution became more even.

B. the Gini coefficient increased.
C. the total income of the country remained unchanged.
D. the income of the low income group increased.

21. Which of the following policies can help improve income inequality?

(1) to build more public housing

(2) to implement minimum wage law
(3) to abolish the anti-competitive law

A. (2) only
B. (1) and (2) only
C. (1) and (3) only
D. (1), (2) and (3)

HKDSE-ECON 1-7 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

22. Refer to the following table.

Gross Domestic Product (GDP) components $ million

Private consumption expenditure 150
Government consumption expenditure 250
Net domestic fixed capital formation 100
Changes in inventories -50
Net exports 20
Direct taxes 10
Indirect taxes 30
Subsidies 40
Depreciation X
Net factor income from abroad 20

If the GDP at market prices is $550 million, the value of X is ________.

A. 70
B. 80
C. 90
D. 100

23. Country A’s real GDP grew at a higher rate than its nominal GDP. At the same time, its population dropped. As a
result,

A. its inflation rate is negative.

B. its GDP deflator is negative.
C. its per-capita nominal GDP decreased.
D. its living standard decreased.

24. There is an increasing number of housewives trained to be post-natal care workers (陪月員). If all of them are
employed after training, what will be the effect on the unemployment rate of Hong Kong?

A. The unemployment rate will increase.

B. The unemployment rate will decrease.
C. The unemployment rate will remain unchanged.
D. The effect on the unemployment rate cannot be determined.

25. Which of the following will cause an increase in aggregate supply?

A. a rise in transfer payments

B. a rise in fuel prices
C. a drop in labour force
D. a drop in a sales tax rate

HKDSE-ECON 1-8 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

26. The diagram below shows the aggregate demand (AD) curves, the short run aggregate supply (SRAS) curves and
long run aggregate supply (LRAS) curve of a country. Point E 0 is the initial equilibrium point.

Price level LRAS

SRAS1
SRAS2

E1 E0
E3
E2 AD1
AD2

0 Output

When the government increases the profits tax rate, the short-run equilibrium is at ________ and the long-run
equilibrium is at ________.

A. E1 … E0
B. E1 … E2
C. E2 … E0
D. E2 … E3

27. The table below shows the balance sheet of a banking system.

Assets ($ million) Liabilities ($ million)

Reserves 300 Deposits 800
Loan 500

Suppose the maximum amount of deposits the banking system can expand is $1,500 million. Which of the
following statements is correct?

(1) The required reserve ratio for the banking system is 25%.
(2) The maximum amount of loans the banking system can make is $1,200 million.
(3) The excess reserves of the banking system are $140 million.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

28. Wyman receives HK$300,000 from overseas. He then deposits half of the amount as a demand deposit with a
licensed bank and HK$100,000 as a time deposit with a deposit-taking company. He keeps the remainder as cash
in hand.

What will be the immediate effect of the above actions on the Hong Kong dollar money supply?

A. M1 will increase by HK$50,000 while M2 and M3 will increase by HK$150,000.

B. M1 will increase by HK$200,000 and M3 will increase by HK$300,000.
C. M2 will increase by HK$100,000 and M3 will increase by HK$250,000.
D. M2 will increase by HK$150,000 and M3 will increase by HK$200,000.

HKDSE-ECON 1-9 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

29. Which of the following central bank functions is performed by the Hong Kong Monetary Authority?

A. providing banking services for the government

B. collecting taxes for the government
C. determining the interest rate in Hong Kong
D. managing foreign exchange reserves

30. People hold more money for transaction as their nominal income increases. To stabilise the interest rate, the
central bank can

(1) lower the discount rate.

(2) lower the required reserve ratio.
(3) sell government bonds to the public.
(4) print more money.

A. (1) and (2) only

B. (1) and (4) only
C. (1), (2) and (4) only
D. (2), (3) and (4) only

31. In an open economy, the government has a budget balance and there is a trade surplus. If there is a decrease in
private consumption expenditure, the government will have a ________ and there will be a current account
________.

A. budget deficit … surplus

B. budget deficit … deficit
C. budget surplus … surplus
D. budget surplus … deficit

32. Which of the following persons will most likely lose if there is unexpected deflation in Hong Kong?

A. a foreigner borrowing HK$10,000 from a bank in Hong Kong at fixed rate

B. a foreigner receiving a fixed amount of monthly salary in Hong Kong dollars
C. a Hong Kong resident holding cash
D. a Hong Kong resident holding ibond of which the interest is paid at a rate linked to the inflation in
Hong Kong

33. Mr. Cheung is the owner of a toy shop and is also employed as an consultant of a fashion design company. Which
of the following taxes does he need to pay to the HKSAR Government?

(1) stamp duty

(2) salaries tax
(3) profits tax
(4) property tax

A. (1) and (2) only

B. (1) and (4) only
C. (2) and (3) only
D. (3) and (4) only

HKDSE-ECON 1-10 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

34. Suppose the government increased her spending on arts development. This will result in

(1) an increase in aggregate demand.

(2) an increase in real GDP in the short run.
(3) an increase in budget deficit.
(4) an increase in aggregate output in the long run.

A. (1) and (3) only

B. (2) and (4) only
C. (1), (2) and (4) only
D. (2), (3) and (4) only

35. In Hong Kong, the basic allowance of the salaries tax increased from $108,000 to $120,000 for the year of
assessment 2012/13 and 2012/13 onwards. This would lead to

A. an increase in the proportion of tax revenue in total government revenue.

B. an increase in the ratio of direct taxes to indirect taxes.
C. a budget deficit.
D. a more even post-tax income distribution of Hong Kong citizens.

36. Which of the following can offset the effect of a decrease of the required reserve ratio on the price level?

A. an increase in saving
B. an increase in the desire to import
C. an increase in transfer payments
D. a decrease in discount rate

37. The following table shows the number of chocolate and soft drinks that Country A and Country B can produce
with all of their resources. Both countries allocate all their resources evenly to produce the two products.

Chocolate (units) Soft drinks (units)

Country A 10 AND 25
Country B 30 AND 40

If the terms of trade is 1 unit of chocolate = 2 units of soft drinks,

A. Country A will gain 0.1 units of chocolate per unit of exports.

B. Country A will gain 0.6 units of soft drinks per unit of imports.
C. Country B will gain 1 unit of soft drinks per unit of exports.
D. Country B will gain 0.8 units of chocolate per unit of imports.

38. For a mutually beneficial trade to occur between two countries,

A. the terms of trade must lie between the opportunity costs of the two countries.
B. the transportation cost must be zero.
C. the resource endowments of the two countries must be different.
D. the two countries must have an absolute advantage in producing either one good.

HKDSE-ECON 1-11 (Mock Test 7) © 2012 Aristo Educational Press Ltd.

39.

Date Exchange rate

August 20X1 US$1 = £0.7
February 20X2 US$1 = £0.85

The above change in the exchange rate between the US dollar and the British pound will lead to

A. a rise in the price (in terms of HK$) of exports from U.K. to Hong Kong.
B. a rise in the number of tourists from U.K. to the US.
C. a drop in the total value (in terms of Pound) of exports from Hong Kong.
D. a drop in the quantity of exports from Hong Kong to U.K..

40. Which of the following should be recorded in the credit side of the current account of Hong Kong?

A. A foreign student pays school fee to take a Putonghua course in Hong Kong.
B. A Hong Kong enterprise donates money to Africa for a child sponsorship programme.
C. A Hong Kong firm pays dividends to a foreign investor.
D. A Mainland resident buys a residential flat in Hong Kong.

END OF PAPER

HKDSE-ECON 1-12 (Mock Test 7) © 2012 Aristo Educational Press Ltd.