Exam (elaborations)

ECS1601 ASSESSMENT 5 SEM 2 OF 2024 EXPECTED QUESTIONS AND ANSWERS

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Course
Economics IB (ECS1601)

Institution
University Of South Africa (Unisa)

THIS DOCUMENT CONTAINS ECS1601 ASSESSMENT 5 SEM 2 OF 2024 EXPECTED QUESTIONS AND ANSWERS.USE IT CORRECTLY AS A GUIDE TO SCORE ABOVE 75%

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Contains Questions & answers

ecs1601 assessment 5

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Question 1 Which of the following is correct about taxes in the economy?
Correct
Mark 1.00 out a. A tax rate of 0.15 means that 15 per cent of income is consumed on goods and services.
of 1.00
b. Taxes are a function of income.
Flag
question c. Taxes increase income available to spend on goods and services.
d. The introduction of taxes in the economy increases the slope of the consumption function.

Taxes are a function of income because a portion of income goes to tax. There is a negative
relationship between taxes and disposable income. As the tax rate increases, disposable income falls,
vice versa.
Firstly, A tax rate of 0.15 implies that 15 per cent of income is paid to tax. Secondly, since 15 per cent
goes to tax, only 85 per cent will be available to spend and save. Therefore, income available for
spending and saving has decreased. Thirdly, introduction of taxes reduces the slope of the
consumption function. Please see discussion in number 8 above.

Question 2 When the tax rate decreases, the size of the multiplier___________. As a result, the equilibrium level of
Correct income will_____________.
Mark 1.00 out
of 1.00 a. decreases; increase
Flag
question b. increases; remain unchanged
c. decreases; decrease

d. increases; increase

Your answer is correct.
When the tax rate is added, it reduces the consumption function, the size of the multiplier decreases,
and as a result, the equilibrium level of income also decreases. When the tax rate decreases, the
disposable income increases, and the size of the multiplier also increases. As a result, the equilibrium
level of income increases.

Question 3 When government spending is increased, the aggregate spending curve_______.
Correct
Mark 1.00 out a. swivels down
of 1.00
b. shifts downward
Flag
question c. shifts upward
d. swivels upward

A change in government spending causes a shift of the aggregate spending curve either upwards or
downwards. When government spending is increased, the aggregate spending curve shifts upwards and
as a result, aggregate expenditure increases. Please see page 141 in the prescribed book. A swivel of
the aggregate spending curve either up or down is caused by a change in the tax rate.

Question 4 Which of the following has/have a major impact on the level of net exports (X – Z)?
Correct
Mark 1.00 out
a) the growth rate of GDP in South Africa relative to the growth rates of GDP in other countries
of 1.00
b) the price level in South Africa relative to the price levels in other countries
Flag
question
c) the exchange rate between the rand and other currencies.

, a. c
b. a and b
c. a and c
d. b and c
e. a, b and c

The growth rate of South Africa relative to other countries will affect the level of imports that South
Africa receives, relative to the exports that it sends abroad. The differences in growth will have an
impact on net exports. The relative prices of South Africa affect the competitiveness of South African
goods relative to other countries; thus has an impact on net exports, similarly the exchange rate
affects the competitiveness of South African goods to other countries.

Question 5 Use the following diagram to answer the question:
Correct
Mark 1.00 out
of 1.00

Flag
question

Which event must happen for the aggregate spending curve to shift downwards as shown in the
diagram?

a. An increase in interest rate
b. A decrease in interest rate
c. A decrease in tax rate
d. An increase in government spending

An increase in interest rate causes a fall in investment spending (due to the high borrowing cost).
Thus, a fall in investment spending reduces aggregate spending, thereby shifting the aggregate
spending curve down.

Question 6 In the Keynesian model, tax revenue…
Correct
Mark 1.00 out a. does not appear in the aggregate expenditure function because it is always equal to
of 1.00
government expenditure.
Flag b. is taken into account through its effect on consumption.
question
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.

, The tax rate influences the level of disposable income, and therefore the level of induced
consumption. A higher tax rate will decrease the level of induced consumption and vice versa. Tax
revenue is not equal to government spending because governments also borrow funds to finance
government expenditure. Also, it does appear in the aggregate expenditure function because the
aggregate expenditure function included consumption and the function for consumption is C=C ̅+c(Y-
tY).

Question 7 The introduction of taxes to the Keynesian model…
Correct
Mark 1.00 out a. Increases investment spending at each positive level of income.
of 1.00
b. Cause the slope of the consumption curve to become steeper.
Flag
question c. Flattens the consumption curve.
d. Causes the consumption function to shift parallel upwards.
e. Causes the consumption function to shift parallel downwards.

When the proportional income tax is introduced to finance part of the government spending,
households have to pay a certain portion 𝑡 of their income in the form of taxes. This reduces their
disposable income and therefore also their consumption spending at each level of income. The
consumption (and aggregate) spending curve becomes flatter since a smaller portion of any increase
in income is spent on consumer goods and services

Question 8 Suppose sanctions are imposed on a small open economy which leads to a decrease in autonomous
Correct imports. What will happen to the aggregate expenditure curve if exports remain unchanged?
Mark 1.00 out
of 1.00
a. It will stay the same.
Flag
question
b. It will shift upwards.
c. It will shift downwards.
d. The slope becomes flatter

If imposed sanctions would imply that there will be less autonomous imports (Z) into the country, this
will increase net exports (X-Z) at every income level, and therefore aggregate spending will increase at
every income level. This will be illustrated by a parallel upward shift of the aggregate expenditure
curve. If imposed sanctions would imply that there will be less autonomous imports (Z) into the
country, this will increase net exports (X-Z) at every income level, and therefore aggregate spending
will increase at every income level. This will be illustrated by a parallel upward shift of the aggregate
expenditure curve.

Question 9 Assuming an open economy with both government and foreign sector, use the following information
Correct to answer the question.
Mark 1.00 out
of 1.00 Consumption spending increased from R3 750 to R5 700, and income increased from R5 000 to R7 600
in normal terms.
Flag
question
t = 0.20
m = 0.12

His marginal propensity to consume is….. (round to 2 decimals)

a. 0.75
b. 0.80
c. 0.25
d. 0.52

Please see pages 115 and 116 of the prescribed book. The marginal propensity to consume (c) is the
ratio between a change in consumption spending and the change in income. It shows the proportion of
additional income that will be spent on goods and services. It is calculated as follows: c = ∆C/∆Y =
(5700-3750)/(7600-5000) = 1950/2600 = 0.75

, Question 10 Use the following information to calculate consumption spending (C).
Correct
Mark 1.00 out
Autonomous consumption = 1 000
of 1.00 Y = 10 500
c = 0.60
Flag
question t = 0.25

Select the correct answer

a. 7 875
b. 5 725
c. 2 625
d. 4 725

The consumption spending consists of autonomous consumption that depends on non-income
determinants C ̅ and induced consumption (cYd) that depend on disposable income (Yd). Consumption
is calculated as follows: C = C ̅ + cYd = 1 000 + 0.60(Y-T) = 1 000+ 0.60 (10 500-(10 500*0.25)) = 1 000
+ 0.60 (10 500-2 625) = 1 000 + 0.60 (7 875) = 1 000 + 4 725 = 5 725

Question 11 Use the following information to solve the question:
Correct Total income = 40 000
Mark 1.00 out
Autonomous consumption = 10 000
of 1.00 c = 0.7
Tax rate = 0.35
Flag
question

Total consumption is…

a. 28 000
b. 18 400
c. 12 000
d. 28 200

Total consumption includes both autonomous consumption and induced consumption. Given by the
following formula: C = C ̅ + cYd = 10 000 + 0.60(Y-T) = 10 000 + 0.70 (40 000-(40 000*0.35) = 10 000 +
0.70 (40 000-14 000) = 10 000 + 0.70 (26 000) = 10 000 + 18 200 = 28 200

Question 12 In Transvania, which uses the roumel as currency, the following data is available:
Correct
Mark 1.00 out
Autonomous consumption 20 million roumel
of 1.00 Capital goods bought 30 million roumel
Flag
question
Household spend 60 out of every 100 centivos (100 centivos in a roumel)
Government spends 20 million roumel per year
No taxes are collected

Equilibrium income is…

a. 110 million roumel.
b. 80 million roumel.
c. 175 million roumel.
d. 20 million roumel.

𝐶̅=20; 𝐼̅=30; 𝐺̅=20;𝑐=60/100;𝑡=0
𝑌0=1/1−𝑐(1−𝑡) (𝐶̅+𝐼̅+𝐺̅)
𝑌0=1/1−0.6(1−0) (20+30+20)
=2.5 (70) =175

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Exam (elaborations)

ECS1601 ASSESSMENT 5 SEM 2 OF 2024 EXPECTED QUESTIONS AND ANSWERS

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