UNIVERSITY OF FORT HARE
ALICE AND EAST LONDON CAMPUS
ECO112L & ECO112F
BACHELOR OF COMMERCE SUPPLEMENTARY EXAMINATION
DEPARTMENT OF ECONOMICS
JUNE/JULY 2015
………………………………………………………………………………………………………
Time: 3 Hours
Subject: Introduction to Economics (Macro-Economics)
Marks: 100
This paper consists of 19 pages including the cover page
Internal Examiners
Miss D Dewing
Miss B. Mhambi
Instructions
1. Answer ALL questions in section A and section B
2. Answer only one question in section C, both question carry equal marks
3. Section A is to be answered on the answer grid provided.
4. Answer Section B and Section C in answer books
5. The multiple choice answer sheets are to be placed inside the examination book on
completion of the examination.
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MULPTIPLE CHOICE
SECTION A
[50 MARKS]
Question 1
Choose the one alternative that best completes the statement or answers the question
1. Stagflation refers to:
a.
b.
c.
d.
e.
stagnant prices.
hyperinflation.
the trade-off between inflation and unemployment.
rising inflation accompanied by rising unemployment.
jobless growth.
2. In the circular flow of economic activity, ________ households in ________ markets
represents ________ firms. Taxes and imports represent ________ the circular flow.
a.
b.
c.
d.
e.
expenditure by; goods; income to; injections into
expenditure by; factor; income to; withdrawals from
income to; factor; expenditure by; withdrawals from
income to; goods; expenditure by; injections into
expenditure by; factor; income to; injections into.
3. Which of the following is least likely to be associated with market failure, and is consequently
least likely to require any form of state regulation or intervention?
a. Hake fishing off the west coast of South Africa.
b. The provision of education services in government schools.
c. The provision of education services in private schools.
d. The market for fast foods.
e. The provision of lifeguards on Durban’s beaches.
4. Which of the following is likely to lead to an increase in inflation?
a. An increase in taxes.
b. Monetary and credit policies that reduce private consumption.
c. More efficient public activities.
d. An increase in money-financed spending by government.
e. None of the above.
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5. The expanded definition of unemployment in South Africa includes those people who:
a.
b.
c.
d.
e.
do not work full time.
are available for employment but who are not actively seeking employment.
do not earn a wage above the minimum wage.
work in the informal sector.
A and B above.
6. In South Africa, the strict definition (and rate) of unemployment is different from the
expanded or broad definition (or rate) of unemployment because the strict rate excludes:
a. people working in the informal sector.
b. people who are involuntarily unemployed.
c. people who work in subsistence agriculture.
d. discouraged work-seekers who are not actively looking for work.
e. all of the above.
7. In the circular flow of income and spending in South Africa, ________ firms in the factor
market becomes ________ households, while ________ households in the goods market
becomes ________ firms. Expenditure by foreigners on South African products constitutes
________ the circular flow.
a. income to; spending by; income to; spending by; a leakage from
b. income to; income to; spending by; spending by; an injection into
c. spending by; income to; spending by; income to; an injection into
d. spending by; spending by; income to; income to; a leakage from
e. production of; spending by; production of; income to; a leakage from
8. Aggregate spending on South African production comprises:
a.
b.
c.
d.
e.
private consumption, government spending, private investment and total savings.
private consumption, government spending, private investment and net exports.
private consumption, government transfers, private investment and net exports.
private consumption, government investment, private savings and net exports.
private consumption, government spending, private investment and spending by
foreigners on South African goods.
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9. Which one of the following statements is correct?
a. The quality of the factors of production is insignificant; it is only the quantity that
matters.
b. The difference between capital goods and consumer goods is that the former maintain
their full value over time.
c. Capital as a factor of production refers to the amount of money required to produce a
good or service.
d. It is possible to increase the total income for the economy as a whole without increasing
production. This is the miracle of the modern monetary economy.
e. The total income in the economy is equal to the total remuneration of the factors of
production
10. In the context of the circular flow of economic activity, which of the following would NOT
be a traditional activity of the government?
a.
b.
c.
d.
e.
Purchases of labour services from households.
Purchases of capital goods from firms.
Provision of public goods and services.
Transfers of tax revenues to low-income groups or regions.
Sales of consumer goods to foreign buyers.
11. In the circular flow of income and spending, i.e. the basic flow of income and spending
between households and firms supplemented by the foreign, financial and government sectors:
a.
b.
c.
d.
e.
exports are leakages from the circular flow.
investment is a leakage from the circular flow.
savings are injections into the circular flow.
imports are injections into the circular flow.
taxes are leakages from the circular flow.
12. Based on your knowledge of the simple Keynesian model for a closed economy, indicate
which one of the following is an inappropriate policy measure for a country in which
unemployment is caused by low aggregate spending.
a. Creating a more favourable environment for investment spending.
b. Encouraging households to save a larger proportion of their income to stimulate
investment spending.
c. Increased spending by the government on infrastructure.
d. Reducing the rate of taxation.
e. None of the above.
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13. In a mixed economy, which of the following is not a legitimate area of government
intervention?
a.
b.
c.
d.
e.
Expenditure on major infrastructure projects.
Taxation of the profits of private companies.
Taxation of the income of wage and salary earners.
Control of prices that change in response to changes in demand.
Transfers of tax revenues to poor communities.
14. In South Africa, the largest single component of aggregate expenditure is:
a.
b.
c.
d.
e.
net exports.
private consumption spending.
private investment spending.
government spending on consumption and investment goods.
private savings.
15. Which one of the following will increase the size of the multiplier?
a.
b.
c.
d.
e.
An increase in government spending.
A decrease in government spending.
An increase in the tax rate.
A decrease in the tax rate.
None of the above.
16. If government spending is higher than current government revenue, this is known as:
a. a deficit on the current account of the balance of payments.
b. the budget deficit.
c. the public debt.
d. money financing.
e. good fiscal management.
17. The South African personal income tax system is:
a. regressive.
b. a flat-rate tax.
c. proportional.
d. progressive.
e. indirect.
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18. Which one of the following statements is incorrect?
a. The three major flows in the economy are total production, total income and total
spending.
b. There are two sets of markets in a simple economy: goods markets and factor markets.
c. In the simple circular flow of economic activity, “real” flows of goods and factors, and
financial flows, move in opposite directions.
d. Firms are buyers in goods markets and sellers in factor markets, while households are
buyers in factor markets and sellers in goods markets.
e. Firms are the largest purchasers of capital goods.
19. In the simple circular flow of economic activity, goods and services flow via:
a. factor markets to goods markets.
b. factor markets from households to firms.
c. goods markets from households to firms.
d. factor markets from firms to households.
e. goods markets from firms to households.
20. A tax such as VAT would generally be viewed as:
a. progressive, because the consumption expenditure of the rich is greater than that of the
poor.
b. regressive, because low-income households spend a greater proportion of their income on
goods that attract VAT.
c. proportional, because the VAT rate is constant across goods that attract VAT.
d. progressive, because most goods consumed by poor households are zero rated.
e. regressive, because the VAT burden increases as household income rises.
21. In the national accounts:
a.
b.
c.
d.
e.
total production is always equal to total income.
total production is always greater than total income.
total production is always less than total income.
total production may be greater than total income.
total production may be less than total income.
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22. In macroeconomic theory:
a.
b.
c.
d.
e.
total spending is always equal to total production and income.
total spending is always greater than total production and income.
total spending is always less than total production and income.
total spending may be less than total production and income.
Both a and d.
23. Which of the following would be classed as an expansionary fiscal policy?
a. An increase in the quantity of money.
b. A reduction in the number of goods exempted from VAT.
c. An increase in government taxation.
d. An increase in government expenditure.
e. An increase in the VAT rate.
24. Which one of the following statements with regards to the introduction of government
spending is false?
a. The increase in the equilibrium level of income is equal to the increase in autonomous
spending.
b. The increase in the equilibrium level of income is a multiple of the increase in
government spending.
c. The increase in the equilibrium level of income is equal to the multiplier times the
change in government spending.
d. The introduction of government spending increases the amount of consumption spending
by households.
e. Both c and d.
25. Which of the following is a leakage from the circular flow of income and expenditure in
South Africa?
a. Defence expenditure by the South African government, via contracts with local military
suppliers.
b. Government purchases of textbooks for state-run schools.
c. The sale of export fruit to the European Union.
d. Investment by South African Breweries in a new brewery.
e. A decision by a major supermarket chain to sell Danish beer.
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26. Which one of the following statements is incorrect?
a.
b.
c.
d.
e.
Central government forms part of general government.
Provincial government forms part of the public sector.
Local government forms part of general government.
Public corporations form part of general government.
Provincial government forms part of the public sector
27. Which one of the following is not a basic aim of macroeconomic theory?
a.
b.
c.
d.
e.
To describe all the detail pertaining to a specific situation in the economy.
To explain how the economy functions.
To predict what will happen if something changes.
To assist policymakers by analysing economic policy.
Both a and d.
28. Which one of the following statements is incorrect?
a. Theories are sometimes also called models.
b. In macroeconomic theory we deal only with real-world variables, such as GDP and the
CPI.
c. All theories or models are simplifications of reality.
d. The simple Keynesian model is named after the British economist, John Maynard
Keynes.
e. The national accounts are concerned with measurement, not explanation.
29. In macroeconomic theory:
a.
b.
c.
d.
e.
total production is always equal to total income.
total production is always greater than total income.
total production is always less than total income.
total production may be greater than total income.
total production may be less than total income.
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30. Which one of the following statements about consumption spending is incorrect?
a. Spending on non-durable goods such as food is the most stable component of
consumption spending.
b. Spending on durable goods is the most erratic or volatile component of consumption
spending.
c. Consumption spending is determined largely by total income in the economy.
d. Part of consumption spending consists of spending on services.
e. There is a strong inverse relationship between consumption spending and total income in
the economy.
31. Which one of the following statements about the consumption function is incorrect?
a.
b.
c.
d.
Consumption spending cannot be positive if income is zero.
Consumption spending increases as income increases.
Consumption spending decreases as income decreases.
When income increases, consumption increases, but by less than the increase in income –
part of the additional income is saved.
e. Autonomous consumption is that part of consumption spending which is independent of
the level of income.
32. Which one of the following statements is false?
a. The flow of income and spending in the economy runs in the opposite direction to the
flow of goods and services.
b. Firms are suppliers in the goods market.
c. Households are suppliers in the factor market.
d. Households earn income by selling their factors of production in the goods market.
e. Government spends in the goods market and the factor market.
33. In macroeconomic theory, total or aggregate spending is denoted by A and total or aggregate
production of income by Y. Which one of the following statements is incorrect?
a.
b.
c.
d.
e.
When A is greater than Y, there is disequilibrium and Y will tend to increase.
When A is equal to Y, there is equilibrium and Y will remain unchanged.
When A is less than Y, there is disequilibrium and Y will decrease.
When A is greater than Y, there is disequilibrium and A will decrease.
When A is less than Y, producers will have an incentive to cut back on their production.
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34. Which one of the following statements is incorrect? The introduction of taxation, in the
form of a proportional tax, into the simple Keynesian model:
a.
b.
c.
d.
e.
leaves autonomous spending unchanged.
decreases the multiplier.
decreases the equilibrium level of income.
increases the slope of the aggregate spending function.
creates scope for fiscal policy.
35. Which of the following would NOT be expected to generate employment?
a.
b.
c.
d.
e.
Easier access to credit for small business.
Public works programmes.
An increase in imports.
An increase in the labour intensity of production.
A decrease in the relative price of labour.
36. Which one of the following statements is incorrect?
a.
b.
c.
d.
e.
When A is greater than Y, inventories will decrease.
When A is greater than Y, production will decrease.
When A is equal to Y, inventories will remain unchanged.
An increase in inventories acts as a signal to producers to cut back on their production.
A decrease in inventories acts as a signal to producers to expand their production.
37. Which one of the following is not an assumption of the simple Keynesian model?
a.
b.
c.
d.
e.
Prices are given.
Interest rates are given.
Wages are given.
The money stock is given.
Production (supply) is the driving force that determines the level of economic activity.
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38. Which one of the following statements is incorrect? In a simple Keynesian model without a
government and a foreign sector:
a.
b.
c.
d.
e.
aggregate spending A consists of consumption spending C and investment spending I.
C depends largely on total income.
I represents spending on capital goods.
I depends largely on total production and income Y.
there is equilibrium when A = Y.
39. In the Keynesian model, government expenditure:
a. is undertaken solely to regulate the level of spending.
b. increases with investment because investment increases the size of the tax base.
c. is taken to be autonomous because it is subject to government policy.
d. can be ignored because investment is taken to be the key determinant of income.
e. is determined by the level of tax revenue.
40. In the Keynesian model, tax revenue:
a. does not appear in the aggregate expenditure function because it is always equal to
government expenditure.
b. is taken into account through its effect on consumption.
c. reduces equilibrium income because it reduces autonomous spending.
d. increases aggregate expenditure because government invariably increases its spending
when taxes rise.
e. is taken to be fixed because government expenditure is taken to be fixed.
41. At the equilibrium level of income in the economy:
a.
b.
c.
d.
e.
there is an unplanned decrease in inventories.
there is an unplanned increase in inventories.
there is no unplanned change in inventories.
aggregate spending is greater than aggregate income.
aggregate spending is less than aggregate income.
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42. If the tax rate is increased:
a.
b.
c.
d.
e.
autonomous spending increases.
disposable income increases
the multiplier decreases.
the equilibrium level of income increases.
government spending increases
43. In an industry, if wages increase more than the productivity of workers, we would expect:
a.
b.
c.
d.
e.
an upward pressure on prices.
a decrease in unemployment.
investment in the industry to increase.
costs of production to fall.
the demand for labour to rise.
44. During an economic downturn, sales fall and some workers lose their jobs. This
unemployment is referred to as:
a.
b.
c.
d.
e.
seasonal unemployment.
frictional unemployment.
cyclical unemployment.
structural unemployment.
technological unemployment.
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Consider the following diagram, which depicts the Keynesian model of an open
economy with government, and answer Questions (45) and (46).
45. Y0 represents:
a.
b.
c.
d.
e.
the equilibrium level of income if the economy were closed.
the full employment level of income.
the equilibrium level of income if exports equal imports.
a level of income less than aggregate expenditure.
the level of income where exports equal imports.
46. The diagram depicts a situation where at equilibrium (Y1):
a.
b.
c.
d.
e.
domestic demand exceeds output.
exports exceed imports.
domestic demand is less than output.
aggregate expenditure is less than output.
aggregate expenditure exceeds output.
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47. Which one of the following statements is incorrect? The introduction of government
spending into the simple Keynesian model:
A.
B.
C.
D.
E.
increases the level of aggregate spending.
increases the multiplier.
increases the equilibrium level of income.
leaves the slope of the aggregate spending function unchanged.
creates scope for fiscal policy.
48. A rightward shift of the Phillips curve:
a.
b.
c.
d.
e.
indicates that the trade-off between inflation and unemployment has become less severe.
is associated with deflation.
might be the result of a decrease in the price of imported capital goods.
indicates an expansion in economic output.
indicates that every level of inflation is associated with more unemployment than
before.
49. If a country’s rate of unemployment increases then we can conclude that:
a.
b.
c.
d.
e.
the country is experiencing jobless growth.
no new jobs are being created.
GDP growth must be falling.
the proportion of people of working age who want employment and who cannot find
employment is increasing.
all of the above are true.
50. In the Keynesian model, exports are taken to:
a.
b.
c.
d.
e.
be dependent on disposable income.
increase when output increases.
increase when imports increase.
be independent of local conditions.
decrease when imports increase.
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SECTION B (NB: Question 2 is compulsory)
Question 2: (25marks)
A. Illustrate and explain the Phillips curve (7marks)
B. Discuss ANY four macroeconomic objectives (12marks)
C. Identify the main injections into and withdrawals (or leakages) from the circular flow of
income and spending in the economy. (6 marks)
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SECTION C (Choose one of the two following questions)
Questions 3: (25marks)
A. Discuss the trade-off between unemployment and inflation by using an appropriate
diagram or diagrams. (7marks)
B. Explain the difference between income and disposable income. (4marks)
C. Use diagrams to illustrate how goods and services, income and spending flow between
households and firms. (14marks)
OR
Question 4: (25marks)
A. Briefly discuss the three different approaches to estimating total production and income
in the economy. (9marks)
B. Illustrate and explain the relationship between investment and the interest rate. (7marks)
C. Briefly discuss ANY THREE types of unemployment. (9marks)
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FORMULA SHEET
MPC (c) =
∆𝐶
∆𝑌
Multiplier (𝛼) =
1
1−𝑚𝑝𝑐
OR 𝛼 =
∆𝑌
∆𝐶
0R 𝛼 =
∆𝑌
∆𝐴
C = A + cYd
Real GDP = (nominal GDP/GDP deflator) x 100
MPS 
Change in Saving
Change in Disposable Income
MPC + MPS = 1
𝑌=
1
1−𝑐(1−𝑡)+𝑚
Economics 112L/F
(𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑍)
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SECTION A: MULTIPLE CHOICE ANSWER SHEET
NAME…………………………..STUDENTNO:...……………………… COURSE………….
Indicate your choice by making a CROSS in the choice block:
Question
Options: choose only one
number
USE an ‘X’ to select your answer
1
a
b
c
d
e
2
a
b
c
d
e
3
a
b
c
d
e
4
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5
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6
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24
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25
a
b
c
d
26
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d
27
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28
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45
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48
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49
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50
a
b
c
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e
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