ECS1601_EXAM PACK.

ECS1601_EXAM PACK. ECS1601 - Economics IB. The South African Reserve Bank [1] is responsible for the implementation of fiscal policy. [2] is lender of last resort for those consumers who are unable to secure a loan from commercial banks. [3] is co-responsible for tax collection. [4] is responsible for the formulation of monetary policy. 2.8 The positive balance on your cheque account is [1] an asset for you and a liability for your bank. [2] a liability for you and an asset for your bank. [3] an asset for both you and your bank. [4] a liability for both you and your bank. 2.9 Which of the following statements are correct? a. Banks can create demand deposits by granting credit to their clients in the form of overdraft facilities. b. When a person deposits cash in a cheque account there is no immediate change in the quantity of money. c. When the cash reserve requirement increase, the credit multiplier increases. [1] All the statements are correct. [2] a and b [3] a and c [4] b and c [5] c 2.10 The quantity of money available will increase when [1] a person deposits his or her money with a bank. [2] banks keep their reserves with the reserve bank. [3] banks make loans that result in additional deposits. [4] the government keeps its funds with the reserve bank. 2.11 If the required reserve ratio is increased, the money multiplier [1] decreases. [2] remains the same, as long as banks hold no excess reserves. [3] could either increase or decrease. [4] increases. 2.12 When the entire banking system makes use of excess reserves to grant new loans in the form of deposits, [1] the credit multiplier decreases. [2] the credit multiplier increases. [3] the credit multiplier remains unchanged. 2.13 The demand for money [1] for transaction purposes is determined by income and the interest rate. [2] for precautionary purposes is determined by income and the interest rate. [3] for speculation purposes is determined by the interest rate. 2.14 Which of the following statements are correct? a. The demand for money is a function of income and the interest rate. b. In general terms the liquidity preference may be expressed as L = f (Y, i). c. The supply of money is determined by demand for money and the interest rate. [1] All the statements are correct. [2] a [3] b and c [4] a and c [5] None of the statements is correct. Question 2.15 is based on the diagram below, which shows the money market. 2.15 Which of the following statements are correct? a. A change in equilibrium from E1 to E0 could be as a result of an increase in interest rate. b. A change in equilibrium from E0 to E1 could be as a result of a decrease in income. c. A change in equilibrium from E0 to E2 could be as a result of an increase in income. [1] All the statements are correct. [2] a [3] a and b [4] a and c [5] b and c 2.16 The quantity of money demanded for precautionary purposes decreases if [1] total output decreases. [2] consumer incomes increase. [3] the interest rate increases. [4] the inflation rate increases. 2.17 The Reserve Bank can use the open market operations to [1] issue new currency notes. [2] control the money supply. [3] sell foreign exchange. [4] influence the flow of goods and services. 2.18 The purchase and sale of financial assets to and from the banks by the South African Reserve Bank is known as the [1] accommodation policy. [2] credit control policy. [3] public debt management policy. [4] open market policy. 2.19 Which one of the following regarding the demand for money is correct? [1] The speculative demand for money is a function of the income level and the interest rate. [2] The transactions demand for money is inversely related to the interest rate. [3] The position of the money demand curve is determined by the income level. [4] An increase in interest rate will result in a decrease in the precautionary demand for money. 2.20 The South African Reserve Bank feels that the South African economy is overheated. To correct the problem the SARB could [1] sell bonds on the open market. [2] increase tax rates. [3] decrease government spending. [4] lower the reserve requirement. Short Questions: 1. Define monetary policy. (3) 2. Explain the basic function of a financial intermediary. (3) 4. Explain why credit cards are not considered to be money. (2) 5. Distinguish between active balances and passive balances and mention the main determinant of the quantity demanded of each. (4) 6. Use the following diagram to show how the equilibrium in the money market changes if the interest rate increases. (4) 7. Use the following diagram to show how the equilibrium in the money market changes if the level of income in the economy increases. Remember to label your diagram. (4) 8. List four of the main functions of the South African Reserve Bank. (4) STUDY UNIT 3 (CH 16) Multiple Choice Questions: 3.1 Efficient resource allocation occurs when a. enough goods and services are produced. b. all resources are used to produce goods and services. c. it is possible to make one person better off without making another person worse off. d. resources are fully employed. [1] a [2] b and d [3] c [4] d 3.2 Market failure occurs when a. the market fails to produce enough goods and services. b. demand equals supply. c. the market is not in equilibrium. d. the market system is unable to allocate resources efficiently. [1] None of the above statements is correct. [2] a [3] b [4] c [5] d 3.3 An appropriate measure of government’s involvement in economic activity is [1] the volume of government subsidies. [2] the total government spending. [3] the share of government spending in total spending in the economy. [4] the growth of government spending. 3.4 __________ takes a smaller proportion of income from the high-income groups than from the low income groups? [1] Company tax [2] Value-added tax [3] Personal income tax [4] Capital gains tax 3.5 Government spending in South Africa is financed through a. tax revenues collected from households and firms. b. borrowing from the central bank, domestic market and international market. c. income from partial and or full ownership in enterprises. [1] All the statements are correct. [2] a [3] b [4] b and c 3.6 Which of the following statements are correct? a. The difference between government spending and borrowing is called the budget deficit. b. If government finances part of its spending from borrowing from the central bank, it is called inflationary financing. c. Expansionary fiscal policy implies that taxes must increase and government spending must be limited. [1] All statements are correct. [2] a and b [3] b and c [4] a [5] b 3.7 Which of the following statements regarding fiscal policy and the budget are correct? a. Demand management only refers to fiscal policy. b. A budget deficit is likely to occur when government spending is falling and taxation is increasing. c. When the government plans to simulate economic activity it can increase its spending or reduce taxes. [1] a and c [2] b and c [3] a [4] b [5] c 3.8 Which of the following statements regarding financing of government expenditure are correct? a. The budget deficit is positively related to the interest on public debt. b. The government can finance its deficit by buying bonds from the public. c. Inflationary financing occurs when government borrows from the central bank. [1] All the statements are correct. [2] a and b [3] a and c [4] a [5] c 3.9 Which one of the following statements regarding taxes is correct? [1] Taxes which distort relative prices are not neutral. [2] The aim of taxes is to change the behaviour of people. [3] Equity in the tax system ensures simplicity and neutrality. [4] In a good tax system compliance costs are equal to administration costs. 3.10 A tax is [1] regressive when everybody pays the same amount of tax. [2] regressive when all taxpayers pay the same rate. [3] proportional when everybody pays the same amount of tax. [4] proportional when it is levied on goods and services at the same standard rate. 3.11 Which of the following statements regarding taxes are correct? a. A tax is neutral if it has minimum distortion effects on prices. b. Tax avoidance occurs when people do not pay the taxes they are supposed to pay. c. A gate fee at a private park is an example of user charges. [1] a [2] b [3] c [4] a and b [5] All the statements are correct. 3.12 Which one of the following statements regarding tax incidence is correct? [1] The burden of a specific excise tax is smaller for the consumers than for the suppliers. [2] The statutory incidence determines who ultimately bears the burden of the tax. [3] An imposition of a specific excise tax increases the income of the suppliers. [4] Tax burden depends on the relative price elasticities of the demand curve and the supply curve. 3.13 Which of the following statements are correct? a. The statutory or legal incidence of a tax determines who ultimately bears the burden of the tax. b. The degree to which the burden of a tax can be shifted depends on the price elasticities of demand and supply of the good or service in question. c. The government prefers levying excise taxes on the consumption of goods with a high elasticity of demand. [1] None of the statements is correct. [2] a and b [3] a [4] b [5] c Short Questions: 1. Explain why taxes should be as neutral as possible. (3) 2. Distinguish between fiscal and monetary policy. (4) 3. Explain the difference between direct taxes and indirect taxes.