Economics: Mock Exam Paper 2 (Set 9)
ECONOMICS PAPER 2
(MOCK EXAM PAPER) (Set 9)
Duration: 2 hours and 15 minutes
The paper must be answered in English
INSTRUCTIONS
(1)
This paper consists of three sections, A, B and C.
(2)
Section A contains nine questions. Attempt ALL questions. The whole section carries 50 marks.
(3)
Section B contains four questions. Attempt ALL questions. The whole section carries 54 marks.
(4)
Attempt all questions from any ONE of the two electives in Section C. Each elective carries 16
marks.
(5)
Supplementary answer sheets will be supplied on request.
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ECON-MOCK09-2
© 2014 Hong Kong Educational Publishing Co.
Economics: Mock Exam Paper 2 (Set 9)
Section A (50 marks)
1.
Some tutorial centres provide several free lessons to new students. Are these free lessons regarded as
free goods in Economics?
(3 marks)
2. The following table shows the input-output relationship of a firm.
Labour (units)
Machinery (units)
Total product (units)
10
5
100
11
6
200
12
7
380
13
8
440
14
9
460
State the law of diminishing marginal returns and explain whether the above table could illustrate the
law.
(5 marks)
3. The sales of automobiles are affected by various factors.
(a) WITHOUT using a diagram, explain how an increase in the interest rate of car loans would affect
the price of automobiles.
(3 marks)
(b) WITHOUT using a diagram, explain how a reduction in the price of gasoline would affect the
price of automobiles.
4.
(3 marks)
What is a divergence between private and social costs? Suggest ONE example to illustrate your answer.
(4 marks)
5.
6.
7.
Explain whether the income below should be included in Hong Kong’s GDP.
(a) Mr Wong, a local resident, receives his wages from a company located overseas.
(2 marks)
(b) Mr Lee receives $4,000 of transfer payments from the government.
(2 marks)
(a) Besides carrying out monetary policy, state TWO functions of a central bank.
(2 marks)
(b) What is a monetary policy?
(2 marks)
(c) Explain how an open market purchase would affect the monetary base.
(3 marks)
The real output of Economy A decreases. At the same time, its price level increases. State the
macroeconomic problem that Economy A faces and give ONE possible reason that may lead to this
problem.
(3 marks)
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ECON-MOCK09-2
© 2014 Hong Kong Educational Publishing Co.
Economics: Mock Exam Paper 2 (Set 9)
8.
Refer to the following balance sheet of a banking system. Suppose there are no excess reserves and the
cash in circulation is always constant at $20 million.
Assets ($ million)
Liabilities ($ million)
Reserves
400 Deposits
Loans
400
800
(a) Calculate the money supply and the monetary base.
(2 marks)
(b) Suppose the central bank issues $10 million in new currency and deposits the money into the
banking system. Calculate the maximum possible amount of money supply.
(3 marks)
(c) With reference to the process of deposit creation, explain why depositing $1 into the banking
system will lead to a multiple increase in total deposits.
9.
(4 marks)
Country A and Country B use ALL their resources in production. Their maximum output is shown
below.
Rice (units)
Machines (units)
Country A
48
OR
12
Country B
100
OR
50
(a) Explain which country has an absolute advantage in producing rice.
(3 marks)
(b) Explain which country has a comparative advantage in producing rice.
(3 marks)
(c) Explain whether mutually beneficial trade is possible between Country A and Country B.
(3 marks)
END OF SECTION A
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ECON-MOCK09-2
© 2014 Hong Kong Educational Publishing Co.
Economics: Mock Exam Paper 2 (Set 9)
Section B (54 marks)
10. Read the following information about the concessionary fare scheme.
The government has implemented a concessionary fare scheme. Under the scheme, the
elderly and eligible persons with disabilities can travel on designated public transport, such as
the MTR and public buses at $2 per trip. If the fare of the designated transport service is
above $2, the Government will pay for the difference between the regular fare and $2.
(a) The fares of the Mass Transit Railway Corporation (MTRC) are regulated by the government. The
MTR has now reached maximum capacity and trains are usually overcrowded during rush hours.
(i) Why is the MTR overcrowded during the rush hours?
(3 marks)
(ii) How would the concessionary fare scheme affect the over crowdedness of the MTR?
(3 marks)
Explain your answer to (a)(i) and (a)(ii) with the aid of a diagram.
(b) What is the rationing function of price? Explain whether the concessionary fare scheme interferes
with the rationing function of price.
(4 marks)
(c) The concessionary fare scheme aims at equalising income. However, some politicians argue that
giving cash allowances to the needy is preferable to subsidising their transport expenses. Evaluate
the above proposal.
(4 marks)
(d) The MTRC plans to develop several new routes. Name this type of expansion and give TWO
reasons to explain why this expansion may lower its average cost.
11.
(5 marks)
Suppose the government imposes a price ceiling on rental housing units.
(a) Explain your answers to (i), (ii) and (iii) with the aid of a demand-supply diagram.
(i) How will the rental price and the quantity transacted of housing units change?
(3 marks)
(ii) How will the consumer and the producer surplus change?
(4 marks)
(iii) Will the policy improve efficiency?
(2 marks)
(b) Give TWO reasons why tenants may not benefit from such a policy.
(4 marks)
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ECON-MOCK09-2
© 2014 Hong Kong Educational Publishing Co.
Economics: Mock Exam Paper 2 (Set 9)
12.
Cutting income tax has supply-side effects. Consider both the demand-side effects and supply-side
effects when answering the following questions.
Price level
Aggregate output
0
(a) Is an income tax cut a monetary policy or a fiscal policy?
(1 mark)
(b) Aside from cutting income tax, list TWO measures that have supply-side effects.
(2 marks)
(c) With the aid of the above diagram, explain how an income tax cut would affect aggregate output
in the long run. With the aid of the same diagram, explain under what condition the price level
would increase.
13.
(11 marks)
Read the table below and answer the questions.
Year
Implicit price deflator of GDP
CPI
2010
112
110
2011
101.2
102.5
(a) What is inflation?
(2 marks)
(b) Calculate the inflation rate in 2011 using the implicit price deflator of GDP.
(1 mark)
(c) Explain why the implicit price deflator of GDP is a better measure of inflation compared to the
CPI.
(2 marks)
(d) Peter’s nominal wages decreased by 5% from 2010 to 2011. With reference to the table above,
explain how Peter’s real wages changed from 2010 to 2011.
(3 marks)
END OF SECTION B
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ECON-MOCK09-2
© 2014 Hong Kong Educational Publishing Co.
Economics: Mock Exam Paper 2 (Set 9)
Section C (16 marks) Answer any ONE question.
Elective 1
14.
(a) Suppose the average cost and marginal cost of a monopolist are the same. With the aid of a
diagram, explain why uniform pricing would lead to a deadweight loss.
(8 marks)
(b) In Hong Kong, the red mini-buses that run on the same route generally charge the same fare,
though each mini-bus operator can set their own fares. Suppose different mini-bus operators
charge the same fare for the same route.
(i) Name the anti-competitive behaviour that the above case may constitute. Explain under what
condition this could be anti-competitive.
(3 marks)
(ii) Explain why the above case may not constitute anti-competitive behaviour.
(2 marks)
(c) Each red mini-bus operator can set the fares, which may rise during peak hours or due to poor
weather conditions. Explain whether the above fare adjustment practice constitutes price
discrimination.
(3 marks)
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ECON-MOCK09-2
© 2014 Hong Kong Educational Publishing Co.
Economics: Mock Exam Paper 2 (Set 9)
Elective 2
15. Line BB’ is the production possibilities frontier of Country A and it produces at P 0 under autarky.
Assume that the slope of point P0 along line BB’ (in absolute value) is 1.5.
Good Y
B
P0
0
Good X
B’
Suppose Country A is now open to trade and the terms of trade are 1X = 1Y.
(a) What is the marginal cost of producing Good Y in Country A under autarky?
(2 marks)
(b) Which good will Country A specialize in and export? Explain.
(3 marks)
(c) Draw the consumption possibilities frontier (CPF) of Country A on the above diagram and
explain why it can gain from trade.
(4 marks)
(d) Explain whether Country A will produce at point B after specialization.
(3 marks)
(e) There is a trend for factories from developed countries to move to developing countries. Explain
why there is such a trend. Suggest ONE negative impact on developed countries and ONE
negative impact on developing countries because of this trend.
(4 marks)
END OF PAPER
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ECON-MOCK09-2
© 2014 Hong Kong Educational Publishing Co.