ECS1601 May/Jun 2016 exam paper — questions

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  1. Question 1 · National income accounting and GDP · 13 marks

    Answer the following five short-answer parts on money, government, the balance of payments and GDP: (a) Provide a definition of money. (b) Explain the difference between the three broad functions performed by government. (c) Give a definition of the South African balance of payments. (d) Explain the distinction between nominal prices and real prices. (e) Identify and list four shortcomings associated with using GDP as a measure of total production in the economy.Show the full question

  2. Question 2 · Keynesian income determination and the multiplier · 16 marks

    Answer the following four parts on the Keynesian and AD-AS models. (a) Draw and use a diagram to explain how an increase in the tax rate will affect the level of income in the economy, assuming that the price level remains fixed. (b) A change in trade policy has caused a substantial decrease in the amount of steel produced in South Africa and an increase in the amount of steel imported into South Africa, which in turn has led to a substantial increase in total imports; using the Keynesian model, explain how this development will affect the economy, and also state how it will affect employment in South Africa. (c) Using the AD-AS model, explain the effect that an increase in the level of interest rates would have on the economy. (d) Durban is due to host the Commonwealth Games in 2022, an event expected to bring about a substantial increase in the number of foreign tourists visiting the country; with the aid of a diagram, explain how you would expect this to affect the rand/dollar exchange rate, and then, without drawing a diagram, explain how you would expect imports and exports to be affected by this change in the exchange rate.Show the full question

  3. Question 3.1 · Unemployment and the labour market · 5 marks

    Using the data obtained from Statistics South Africa's Quarterly Labour Force Survey for the second quarter of 2015 (April to June 2015, figures in thousands): the population aged 15 to 64 years was 35 955; the labour force was 20 887; of these, 15 657 were employed, made up of 12 996 in the formal sector (including agriculture and private households) and 2 661 in the informal sector; 5 230 were unemployed; 15 068 people were not economically active, of whom 2 434 were discouraged work-seekers and 12 633 fell into the 'other' not economically active category. Using these figures: (i) calculate the unemployment rate according to the strict definition of unemployment, and (ii) calculate the unemployment rate according to the expanded definition of unemployment.Show the full question

  4. Question 3.2 · Keynesian income determination and the multiplier · 5 marks

    A diagram of the Keynesian model shows aggregate spending (A, in R million) on the vertical axis and income (Y, in R million) on the horizontal axis, with a 45-degree line and an upward-sloping aggregate expenditure line labelled A = C + I, which has a vertical intercept of 200. Dashed lines on the diagram indicate that when income (Y) is 600, aggregate expenditure (A) is 560, and when income (Y) is 700, aggregate expenditure (A) is 620. Using this diagram: (i) calculate the marginal propensity to consume, (ii) calculate the multiplier, and (iii) calculate the new equilibrium level of income if investment increases by R100 million.Show the full question

  5. Question 4 · Exchange rates, balance of payments and trade · 11 marks

    During August 2015 the rand/US dollar exchange rate moved from R12,73 per dollar on 3 August 2015 to R13,34 per dollar on 31 August 2015. State whether this movement represents a depreciation or an appreciation of the rand, and explain how this change in the exchange rate would affect the current account of South Africa's balance of payments. Next, describe the effect that an increase in government expenditure has on the economy, making sure to explain clearly why the resulting increase in income is larger than the initial increase in government expenditure. Finally, explain why the multiplier in an open economy is smaller than the multiplier in a closed economy.Show the full question

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