ECS1601_EXAM_PACK.

ECS1601_EXAM_PACK. ECS1601 - Economics IB. An economic recession occurs in the economies of major trading partners of South Africa. (b) Foreign investors sell South African financial assets. Identify two demand factors and two supply factors of economic growth and explain the possible impact these factors would have on economic growth in South Africa. (6) Demand factors:  Domestic demand: Increase demand for goods and services in the domestic market. This will increase employment and contribute to economic growth.  Exports: An increase in export raises the growth rate and relieves the balance of payments constraint  Import substitution. This is also linked to the balance of payments. If south Africa could manufacturer those goods that were previously imported this would create employment and consequently economic growth. Supply factors:  Natural resources: New techniques or price increases may make it profitable to exploit certain mineral deposits. Increasing this output will increase economic growth  Labour: If South Africa could train up his labour force to a quality labour force with skills that can utilised in creating new innovations and technologies and well as maintain these new discoveries then this will also contribute to economic growth.  Entrepreneurship: This is the fastest way of growing the economy. Entrepreneurs are the driving force behind economic growth. 12 SECTION B QUESTION ANSWER B1 5 B2 2 B3 5 B4 ???? B5 1 B6 4 B7 3 B8 2 B9 3 B10 2 B11 2 B12 4 B13 1 B14 1 B15 2 B16 2 B17 1 B18 1 B19 3 B20 2 B21 4 B22 3 B23 4 B24 2 B25 1 B26 4 B27 1 B28 4 B29 4 B30 4 13 ECS 1601 OCTOBER/NOVEMBER 2016 SOLUTIONS. SECTION A COMPULSORY ESSAY QUESTIONS QUESTION 1: 1(a) BRIEFLY EXPLAIN DEMAND MANAGEMENT POLICIES AND HOW THEY CAN BE USED IN THE ECONOMY (3) There are two policies that can be used to manage the demand for goods and services (i) The Fiscal policy (Government): The two main instruments that the government can use to manage the demand for goods and services are government spending the taxes  Expansionary/Stimulatory policy: Increase Government spending and/or decrease taxes  Restrictive/contractionary policy: Decrease government spending and/or increase taxes. (ii) The monetary policy (SARB): The main instrument used by the Reserve bank is the interest rate.  Expansionary/Stimulatory policy: Decrease the interest rate.  Restrictive/contractionary policy: Increase the interest rate. 1(b) DISTINGUISH BETWEEN A FLOW VARIABLE AND A STOCK VARIABLE. GIVE ONE EXAMPLE OF EACH (4)  Flow variable: This type of variable is measured over a period. E.g On 25th April 2014 the inflow into Gariep dam was measured at 88cubic meters per second.  Stock variable: This particular variable can only be measured exactly at a particular point in time. At 0.00 on 25th April 2014 the level at the Gariep dam was at 95.8% 14 1(c) USE A DIAGRAM TO EXPLAIN HOW A DECREASE IN THE INTEREST RATE WILL AFFECT THE QUANTITY OF MONEY. (4) i L i 0 E0 i 1 E1 L 0 M0 M1 With an decrease in the interest rate from i0 to i i the quantity of money demanded will increase from M0 to M1 and the equilibrium has decreased from E0 to E1 1(d) LIST THREE WAYS IN WHICH GOVERNMENT SPENDING CAN BE FINANCED. (3) (i) Income from property (ii) Taxes (iii) Borrowing QUESTION 2 2(a) USE A DIAGRAM TO EXPLAIN HOW A DECREASE IN GOVERNMENT SPENDING WILL AFFECT THE LEVEL OF INCOME IN THE KEYNESIAN MODEL. (5) INTEREST RATE QUANTITY OF MONEY 15 A A=Y A0 E 0 A1 A0 ∆ G E 1 A1 ∆ Y O Y Y1 Y0 With the decrease in Government spending the aggregate spending curve shifts downwards from A0 to A1 . This impacts on total income which decreases from Y0 to Y1 . The equilibrium level of income decreases from E0 to E1 2 (c) SOUTH AFRICA EXPERIENCED A SEVERE DECLINE IN REAL GROSS DOMESTIC PRODUCTION DURING THE LAST QUARTER OF 2008 AND THE TWO QUARTERS OF THE FIRST HALF OF 2009. USE THE ADAS MODEL TO ILLUSTRATE AND EXPLAIN THE POLICIES THAT COULD BE USED TO RESOLVE THIS SITUATION. (5) TOTAL PRODUCTION/INCOME AGGREGATE SPENDING AGGREGATE SPENDING 16 A AD1 AD AS P 1 ∆P P 0 ∆Y AS AD1 AD 0 Y0 Y1 Y With the severe decline in real gross domestic production during lat quarter of 2008 and the two quarters of the first half of 2009 the following polies can be implemented (i) Fiscal policy: Increase Government spending and/or decease Taxes (ii) Monetary policy: Decrease interest rates. THE QUESTION ONLY ASKS FOR ILLUSTRATION AND THE POLICIES THAT CAN BE USED TO COMBAT THE DECLINE IN GDP NOT AN EXPLANATION OF THE GRAPH. QUESTION 3: SUPPOSE AN ECONOMY IS EXPERIENCING COST-PUSH INFLATION THAT HAS RESULTED IN AN INCREASE IN THE GENERAL PRICE LEVEL, ACCOMPANIED BY A DECREASE IN PRODUCTION. 3 (a) EXPLAIN ANY THREE MEASURES THAT CAN BE USED TO DO AWAY WITH COST-PUSH INFLATION