Economics 1B, Option 1, Exam November 2023

ATTENDANCE FORM

Surname

Initials

Student number

Venue

GENERAL INSTRUCTIONS

1. Do not remove the staple – hand this paper in as a

whole.

2. Remove only the top page (this page), and hand it in

together with this paper at the end of the session.

3. Make sure that your paper has 15 numbered pages.

1B FINAL EXAM
Option 1 2023

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Economics1B, Exam, November 2023 2

ECONOMICS 1B
FINAL EXAM
SCHOOL OF ECONOMICS

Date November 2023

Marks 100
Time 2 hours
Examiners: Dr T Zwane, Dr F Kirsten, Prof P Baur, Ms P Nkosi, Mr
N Phiri, Ms Z Mkhize, Mr T Kikaye

1. The paper consists of two sections. Section A comprises of 20 multiple choice questions while
section B consists of additional fill in questions.
2. Noiseless calculators may be used.
3. Answer all the questions.

Surname

Initials

Student number

Marks Total Marks Total

A 20 B.4 13
B.1 14 B.5 12
B.2 14 B.6 13
B.3 9 B.7 5

/100
TOTAL

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Economics1B, Exam, November 2023 3

Section A – Multiple Choice

Answer the multiple-choice questions on the attached answer sheet on page 7. Mark the correct option
clearly with a big cross. Do not remove the staple or any of the pages.

1. Which one of the following is the current governor of the South African Reserve Bank?

[A] Thabo Mbeki

[B] Chris Stals
[C] Tito Mboweni
[D] Gill Marcus
[E] Lesetja Kganyago

2. What factors will cause an increase in the petrol price?

1. The recent increase in the oil price over the last two years.
2. The depreciation of the rand.
3. An increase in the repo rate.
4. An worsening of the Gini coefficient.
5. An increase in money supply.

[A] 1&2
[B] 1, 2 & 4
[C] 1&3
[D] 2, 4 & 5
[E] Not [A], [B], [C] or [D]

3. What information needs to be gathered to establish the general trend of economic activity in
South Africa (as shown by a business cycle?

[A] Real GDP time series

[B] Nominal GDP time series
[C] Time series which include only real GDP, CPIX, Gini coefficient, repo rate, budget
deficit and balance on the financial account.
[D] More than 200 individual time series called composite business cycle indicators.
[E] None of the above.

4. What is the reference cycle (of the business cycle) composed of?

[A] Leading business cycle indicators

[B] Opinion surveys
[C] Measurements of the achievement of macroeconomic objectives
[D] An average of many specific cycles
[E] None of the above.

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Economics1B, Exam, November 2023 4

5. What kind of institution is the South African Bureau of Standards?

[A] Property rights

[B] Regulatory institution
[C] Institution for macroeconomic stabilisation
[D] Institution for social insurance
[E] Institution of conflict management

6. The African Growth and Opportunity Act (AGOA) is a Trade Act from which country or Union?

[A] European Union

[B] South Africa
[C] BRICS
[D] United States
[E] China

7. In which monetary system is gold the medium of exchange?

[A] Barter
[B] Fiat money
[C] Gold standard
[D] Credit money
[E] Symbolic money

8. Which kind of tax generates the highest income for government?

[A] Income Tax

[B] Business Tax
[C] Value Added Tax
[D] Customs Duties
[E] TV Licences

9. Which of the following statements regarding inflation is TRUE.

[A] Headline inflation is higher than core inflation.

[B] PPI and CPI use the same weightings.
[C] Changes in the Oil Price only affects PPI and not CPI.
[D] An increase in unemployment causes an increase in PPI.
[E] A change to business tax will not affect PPI.

10. What information is needed to determine a country's comparative advantage?

[A] Terms of trade

[B] Purchasing power of currencies.
[C] Current account balance of trading partners
[D] Opportunity cost of production
[E] The value of open-market operations

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Economics1B, Exam, November 2023 5

11. What is it called when importers or exporters use forward contracts to protect themselves
against currency losses?

[A] Hedging
[B] Currency speculation
[C] Arbitrage
[D] Spot market operations
[E] Seignorage

12. If the rand is currently R18.88/$ and according to purchasing power parity it should be R7.02/$,
how would one describe the state of the rand?

[A] Indirectly quoted

[B] Fixed
[C] Overvalued
[D] Undervalued
[E] Correctly valued

13. Deficit spending by the government is best described as:

[A] Expansionary Fiscal Policy

[B] Expansionary Monetary Policy
[C] Restrictive Monetary Policy
[D] Restrictive Fiscal Policy
[E] Surplus Spending

14. How will an increase in the interest rate affect real investment and financial investment?

1. Real investment will fall

2. Real investment will rise
3. Financial investment will fall
4. Financial investment will rise

[A] 1&3
[B] 1&4
[C] 2&3
[D] 2&4
[E] Neither of these options above.

15. If South African reserve bank increases the interest rates by 50 basis points, what will be the
most likely outcome.

[A] REPO moves from 8.25 to 8.75

[B] REPO moves from 8.25 to 8.30
[C] REPO moves from 8.25 to 8.20
[D] REPO moves from 8.25 to 7.75
[E] None of the above

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Economics1B, Exam, November 2023 6

16. The reserve requirement ratio enables the South African Reserve bank to:

[A] influence the lending ability of commercial banks.

[B] prevent banks from hoarding too much vault cash.
[C] prevent commercial banks from earning excess profits.
[D] alter the amount of revenue it collects from member banks
[E] Hold more money for Government to spend

17. All of the following are considered to be functions of money except:

[A] Store of value

[B] Standard of value
[C] medium of exchange
[D] Measure of power
[E] all above ate functions of money

18. If the SARB wants to increase the money supply, which of the following is the
most likely approach?

[A] Buy bonds

[B] Lower the discount rate
[C] Increase reserve requirement ratio
[D] Use moral suasion
[E] Reduce taxes

19. Which government department was responsible for imposing new quotas on Chinese imports?

[A] The South African Reserve Bank

[B] The Department of Trade and Industry
[C] The National Treasury
[D] The Department of Public Works
[E] None of the above are government departments

20. Why did the Governor of the SARB recently choose to leave REPO rate unchanged?

1. The CPI-based inflation rate slumped to 4,7%.

2. The SARB predicted that the CPIX-based inflation rate might still rise above the target.
3. Economic growth did not reach the government's goal of 6%.
4. Expanding household debt created fears that excessive spending might drive prices
upwards.

[A] 1&3
[B] 2&4
[C] 2, 3 & 4
[D] 1, 2 & 4
[E] Not [A], [B], [C] or [D]

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Economics1B, Exam, November 2023 7

Section A - Answer Sheet

(Remember to write your student number on the bottom of this sheet as well)

Options

Question A B C D E
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

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Economics1B, Exam, November 2023 8

SECTION B: Fill-in questions

Question B.1 [14]

The following descriptions deal with the nature of economic indicators when the South African economy
finds itself in a recovery phase. Mark your choice clearly with an X (6)

Descriptions True False

1 New motor vehicle sales increases. True False

2 Imports decrease. True False

3 Retail sales increase. True False

4 JSE All Share index decrease. True False

5 Interest rates decrease. True False

6 Government spending increases. True False

Use the diagram below to answer the following question. (5)

Economic
activity G

C
M
J b Y = a + 3.5X
H
F
D K
B
L
a I
E
A

20X1 20X4 Time

Descriptions True False

1 An economic upswing can be represented by the True False
portion of the graph between points E and F.

2 A trough can be represented by point E. True False

3 At point L inflation is decreasing. True False

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 Economics1B, Exam, November 2023 9

4 At point M employment is slowing down. True False

5 Between points M and G growth in job True False

advertisements in a newspaper increases.

j. Show below, with a cross, what the central bank of Wonderland should do with each of the instruments
of monetary policy in order to fight such high inflation during a boom phase: (3)

Interest rate Increase Decrease Not an instrument of

monetary policy
Personal tax rate Increase Decrease Not an instrument of
monetary policy
Open market operations Buy bonds Sell bonds Not an instrument of
monetary policy

Question B.2 [14]

Match the concepts in the following table to the descriptions below. (7)

Concepts
Externalities
Collective good
Exclusion principle
Public good
Subsidies
Indirect taxes
Developmental state

Descriptions Concept
Good if provided to one is provided to all.

Designed to boost consumption and output of products

with positive externalities.

Raise the price of de-merit goods and products with

negative externalities.

Products and services that cannot be provided by the

private sector.

As society benefits from the discovery of a new medical

treatment.

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Economics1B, Exam, November 2023 10

Essential for government to engage in development

planning.

It is economically inefficient to locate a tollgate on a road

that is virtually never used.

The Laffer curve has been used as a justification for cutting taxes on income and wealth, whilst a well-
known French economist Prof Piketty, suggested that an additional wealth tax should be introduced to
promote more equity in the economic system.
With the use of the Laffer Curve (label all axis and graph), fully explain the implications as suggested in
the statement made by Prof Piketty (5)

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 Economics1B, Exam, November 2023 11

Assume the government’s aim is to reduce the inflated budget deficit during a boom phase. The
following questions deal with how automatic stabilisation will occur by referring to the listed aggregates.
(2)

Description Answer
What will happen to Government expenditure? [increase or
decrease].

What will happen to personal income tax? [increase or decrease].

Question B.3 [9]

Read the following extract:

“Gross reserves in South Africa edged lower to $61.998 billion in August 2023 from a record high of
$62.212 billion in July. Declines were seen in foreign currency reserves ($47.871 billion vs $47.97
billion), gold reserves ($7.844 billion vs $7.897 billion) and SDR holdings ($6.283 billion vs $6.345
billion). Meanwhile, the forward position, representing the central bank's unsettled or swap transactions,
fell to $0.515 billion from $0.518 billion.”
Source: Trading Economics, 02 October 2023

a Which macroeconomic objective is discussed in

the above extract?

b What is meant when it says "…the current

account is in deficit."?

c Name two kinds of trade restrictions that can be

used to bring the current account into a surplus.

d In which account of the balance of payments

would you record foreign capital inflows?
e Of the two types of foreign capital flows, what
type of capital inflow is preferred?

f How is an increase in foreign exchange reserves

and capital flows likely to affect a country's
currency relative to other currencies?

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 Economics1B, Exam, November 2023 12

g Ceteris paribus, what effect will an increase in the

gold price have on South Africa's gold and forex
reserves?

h What kind of composite business cycle indicator

will be affected by a change in the gold price
(leading, lagging or coincident)?

Question B.4 [13]

The questions on the next page are based on the diagram for an open economy, given below.

Total
expenditure

C + I + G + (X-Z)

310

80

Y
130 YE YF = 500

Also assume the following:

▪ The tax rate is 8%

▪ The full employment level of output is at 500

1 Is the economy depicted above likely to be

suffering from unemployment or rising
inflation?

2 Would you recommend expansionary or

restrictive economic policy?

3 What is the value of the MPC (based on the

consumption curve alone)?

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 Economics1B, Exam, November 2023 13

4 Given the MPC, show how you would arrive at

a multiplier with a value of 1,54 (put your
answer in the form of a formula with the
relevant values filled in).
5 What is the current equilibrium level of income
(YE) given that the multiplier is equal to 1,54?

6 Given the original information, what would the

new equilibrium income be if a significant
increase of tariffs were to cause Net Exports
to change by 20?

7 If an increase in interest rates were to reduce

autonomous Consumption Expenditure by 40
and change Capital Formation (I) by 20, what
would the new equilibrium income be?

8 What kind of macroeconomic policy is a

change in interest rates an example of?

9 Given the original information, what would the

new equilibrium income be after the tax rate is
lowered to 5%?

10 What kind of macroeconomic policy is a

change in the tax rate an example of?

11 Given the calculated results of the various

policies above, what would be the best kind of
macroeconomic policy for this particular
economy to implement?
12 Is income and output in the total expenditure
model expressed in real terms or in nominal
terms?

13 That tax burden which alters people’s

behavior?

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 Economics1B, Exam, November 2023 14

Question B.5 [12]

MS
25%

Interest rate
(%)

6%
5%
MD

Quantity of money
R200 bn

With reference to the above diagram, answer the following questions:

Question Answer
1 If the reserve requirement is 10%, what is the
monetary base?

2 What is the equation of the demand for

money curve

3 At the current interest rate of 6%, what is the

total value of money demanded?

4 If the monetary authorities decided to reduce

the reserve requirement to 5%, what is
maximum supply of money that could be
created?

5 List 2 factors that can influence the demand

for money.

6 If the monetary authorities increased the

interest rate from 6% to 7%, how much
money would then be demanded?

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 Economics1B, Exam, November 2023 15

7 List 2 functions of Money?

8 Who is the Minister of Finance in South

Africa?

9 List one factor that could influence why

people would hold Money.

Question B.6 [13]

Consider the Keynesian transmission mechanism. The SARB increases the repo rate in order to control
inflation. Indicate the impact of this policy stand on the following aggregates. (5)

Aggregate Increase/Decrease/Unchanged

1 Ms Increase Decrease Unchanged

2 Md Increase Decrease Unchanged

3 Interest rates. Increase Decrease Unchanged

4 Investment spending. Increase Decrease Unchanged

5 Gross Domestic Product. Increase Decrease Unchanged

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Economics1B, Exam, November 2023 16

Assume that a Restrictive Fiscal Policy is applied. Use the correct symbol from the table above to
indicate the impact on the following aggregates. (8)

Impact
Initial substitution impact on the economy.
Income levels. (increase or decrease) Increase Decrease

Demand for imports. (increase or Increase Decrease

decrease)
Current account of the balance of Surplus Deficit
payments. (surplus or deficit)
Interest rates. (increase or decrease) Increase Decrease

Balance of payment (surplus or deficit) Surplus Deficit

Secondary income impact on the economy.

Money supply in the country. (increase or Increase Decrease

decrease)
Imports. (increase or decrease) Increase Decrease

Exchange rate of domestic currency. Appreciate Depreciate

(appreciate or depreciate)

Question B.7 [5]

In the Right-Hand Column, label the name of the economic grouping defined.

Economic grouping defined Name of the economic grouping

Member countries reduce trade barriers amongst
themselves

No trade barriers between member countries

No trade barriers between member countries and the

same tariff barriers between themselves and nom member
countries
Free trade area combined with common movement of
factors of production

How would you classify the EU today?

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