Possible Essays
Economics
Compiled by CARDEN MADZOKERE
Grade 12
SURNAME: _________________________ NAME: _______________________________
TEACHER: ___________________________ YEAR: ___________________________________
SCHOOL: _____________________________________________________________________
Page 0 of 58
, TOPIC:
CIRCULAR FLOW
1. Discuss in detail the markets within the FOUR-SECTOR model:
Factor markets: (labour, resource, capital) - Product markets: (consumer and capital goods, durable,
semi-durable and non-durable) - Financial (monetary and capital) - Foreign exchange market - Link
the operation of financial and foreign exchange markets to the participants of the circular flow
MEMORANDUM:
QUESTION ONE:
Product / goods market
Goods and services are traded on the product market. Households, government and the foreign
sector purchase these goods and services from firms on this market.
Goods are tangible items and they include consumer goods, capital goods, durable, semi-durable
and non-durable goods. Examples include computers, paper, bread, etc.
Services are non-tangible actions that satisfy people’s needs and wants.
Examples are services offered by accountants, teachers, doctors, drivers, etc.
The forces of supply and demand determine the equilibrium price and quantity.
Households purchase consumer goods for consumption and businesses purchase capital goods for
use in the production process.
Non-durable goods are goods that cannot be re-used, e.g. an apple.
Semi-durable goods only last for a short period of time but can be used more than once, e.g. chalk.
Durable goods can last for more than a year because they do not wear out easily, e.g. a chalk-board.
Factor / Resources Market
The four factors of production (land, labour, capital and entrepreneurship) are traded for income in
form of wages/salaries, interest, economic rent and profit on this market.
The price and quantity traded is also determined by the interaction of demand and supply.
Money market
This is used by participants as a means for borrowing and lending in short term, from a few days to
just less than a 3 years.
In short, it is a market for short-term savings and loans.
Kinds of securities that change hands in this market are:
Treasury bills
Reserve bank debentures
Banker’s acceptances
Short-term government bonds
Short-term company debenture
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,Financial market
The financial market consists of banks, pension funds, insurance companies, and the JSE.
Funds from surplus units are channelled to deficit units in the economy.
Surplus units are those firms and households in the economy that do not spend all their income.
They are called the savers in the economy.
Savers deposit their surplus funds into financial institutions. The institutions then use this money
to lend to deficit units (borrowers).
Deficit units are those households, firms and government in an economy that are looking for
more funds. They are called the borrowers in an economy.
The SARB is a key institution in the money market.
Capital market
It is a financial market in which individuals and institutions trade financial securities in the long-
term, which is 3 years and above.
In short, it is long-term deposits and borrowings (e.g. mortgage bonds)
The Johannesburg Securities (Stock) Exchange (JSE) is a key institution in the capital market.
The foreign exchange market
In an open economy, foreign currency is needed to facilitate transactions between countries.
It is on this market that one currency can be exchanged into another (e.g. Rand for Pound)
The amount that is received on exchange depends on the exchange rate.
The exchange rate is usually determined by the interaction of demand and supply. At times the
central bank influences exchange rates directly or indirectly.
You can get hold of foreign currency through any commercial bank in South Africa e.g. FNB,
ABSA, Nedbank and Standard bank.
Page 2 of 58
, TOPIC:
BUSINESS CYCLES
2. Discuss in detail 'The new economic paradigm'/Explain the 'smoothing of cycles'
Explain demand-side policies. [Explain clearly how monetary and fiscal policies (expansionary and
contractionary) can be used in smoothing out business cycles - Relate to inflation (peak) and unemployment (trough)
by using the Phillips curve] Explain supply-side policies and how aggregate supply can be
stimulated through: [Reduction in costs - Improving efficiency in inputs - Improving efficiency in markets]
3. Discuss in detail the features underpinning forecasting:
Indicators [Leading - Coincidence - Lagging - Composite] Length of a cycle - Amplitude - The trend line
- Extrapolation - Moving averages
MEMORANDUM:
QUESTION 2:
The new economic paradigm
In the new economic paradigm (way of thinking), government focuses less on
fine-tuning and more on eliminating uncertainties with regard to fiscal and monetary
policies.
The government can increase output by combining demand-side and supply-side policies.
Demand-side policies
Demand side policies aim to increase
Price level
aggregate demand. AS
This needs to be done during a recession
or a period of below trend growth.
If there is spare capacity (negative output gap)
then demand side policies can play a role in P
increasing the rate of economic growth.
However, if the economy is already close to full P1
capacity (trend rate of growth) a further increase
in AD will mainly cause inflation.
These monetary and fiscal policies are AD1
implemented with the aim of increasing aggregate AD
demand on the output produced by domestic firms
in order to stimulate economic growth. Y Y1
National income (Real GDP)
Monetary policy (executed by the SARB Governor)
The central bank can decrease interest rates (to make credit cheaper) and increase the
money supply.
This will increase consumer spending.
These two activities by the Reserve Bank will increase demand for goods and services.
Fiscal policy (executed by the Minister of Finance)
The Minister of finance can increase spending (which leads to the multiplier effect) and
decrease taxes (which increases disposable income).
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