ECS1601 TEST BANK
Question 1
In the goods market of the circular flow model, ….
1) firms buy factors of production from consumers
2) firms buy finished products from households
3) consumers buy factors of production from firms
4) firms sell factors of production to the government
5) consumers buy finished products from firms.
Explanation
In the goods market of the circular flow model, consumers receive income in the
form of salaries and wages, interest, rent and profit and use this income to purchase
finished consumer goods and services.
Question 2
In the factor market, … .
1) a student buys lunch at a local university cafeteria.
2) the South African Defence Force buys machine guns from a weapons
manufacturer
3) a retirement fund buys shares in a major company
4) a farmer buys farmland from a retiring farmer
5) a welder buys a personal computer from an electronics store
Explanation
A factor market is a market where factors of production such as labour, land and
capital are traded. Therefore, in this case only the sale of land (i.e. farmland) will
occur in a factor market.
Question 3
In the circular flow of income and spending, … .
1) investment results in a decrease in the volume of the income flow
2) taxes result in an increase in the volume of the income flow
3) imports result in an increase in the volume of the income flow
4) savings result in a decrease in the volume of the income flow
Explanation
In the circular flow of income and spending, savings, taxes and imports are called
leakages or withdrawals since they result in a decrease in the volume of the income
flow, whereas investment spending and government expenditure and exports are all
injections into the circular flow since they result to an increase in the volume of the
income flow.
1
,Question 4
Which one of the following statements is correct?
1) Flows (2) and (3) represent income.
2) Flows (2) and (4) represent spending.
3) Flows (1) and (2) represent spending.
4) Flows (1) and (3) represent spending.
Explanation
In the circular flow of income and spending, households supply factors of production
to firms and in turn receive income which they spend on goods and services offered
by firms (Flow 3). Their spending represents the income to firms. Firms spend some
of their income to pay wages to households for their services, interest for the use of
capital and rent for the use of their land (Flow 1).
Question 5
1) capital, wealth and income are stock variables, whereas investment and profit
are flow variables
2) capital, wealth and gold reserves are stock variables, whereas investment,
profit and loss are flow variables
3) investment, income and profit are stock variables, whereas capital, wealth and
natural resources are flow variables
4) capital, wealth and population size are stock variables, as are investment,
profit and savings
Explanation
Capital, wealth and gold reserves are stock variables since they have no time
dimension and can only be measured at a specific moment. Whereas investment,
profit and loss are flows since they have a time dimension and can only be
measured over a period.
Question 6
2
,In the circular flow of income and spending, the main leakages are:
a) the foreign sector, the financial sector and taxes
b) imports, investments, bank withdrawals, off-shore shares and securities
c) imports, savings and taxes
1) a
2) c
3) a and b
4) b and c
5) None of the above.
Explanation
Savings, taxes and imports are leakages in the circular flow of income.
Question 7
In a mixed economy, the economic decisions of what to produce, how to produce it,
and who will receive it are made by … .
1) the government
2) consumers and firms
3) banks and stock markets
4) household, firms, government and the foreign sector
5) banks and the government
Explanation
In a mixed economy the households, firms, government and the foreign sector all
participate in the production process. They all partake in production, income and
spending since they contribute towards production, earn an income and spend their
income.
Question 8
An example of a double coincidence of wants is … .
1) a car dealer who wants a TV finding an electronics store owner who wants
money
2) a car mechanic who wants a TV finding an electronics store owner who wants
a car repaired
3) an electronics store owner who wants car repairs finding a car mechanic who
wants money
4) All of the above.
Explanation
A double coincidence of wants is present where two individuals have exactly the
same products available for exchange that the other person wants. In this case a car
mechanic who needs a TV finds an electronic store owner who needs a car repaired.
Question 9
Money overcomes the problem of a double coincidence of wants through its function
as a …
1) medium of exchange
2) unit of account
3) standard of deferred payment
3
, 4) store of value
Explanation
Money overcomes the problem of double coincidence of wants through its function
as a medium of exchange – it lubricates the process of exchange.
Question 10
The demand for money curve is … because a lower interest rate ... .
1) upward-sloping; increases the opportunity cost of holding money
2) downward-sloping; increases the opportunity cost of holding money
3) upward-sloping; decreases the opportunity cost of holding money
4) downward-sloping; decreases the opportunity cost of holding money
Explanation
Demand for money curve is downward-sloping since individual households and firms
earn little interest on their money holdings when interest rates fall. At lower interest
rates the opportunity cost of holding money is lower.
Question 11
A car-guard deposits his cash tips into his savings account. As a result of only this
transaction, … .
1) M2 increases
2) M2 decreases
3) M3 remains constant
4) None of the above.
Explanation
Overall M3 will remain unchanged since a reduction in coins and notes in circulation
is offset by an increase in deposits with monetary institutions.
Question 12
Assuming the economy is in equilibrium, the central bank sells bonds by means of
open-market transactions. How would this affect the equilibrium quantity of money
and interest rates in the short run?
1) Quantity of money will go up and interest rates will go up.
2) Quantity of money will go up and interest rates will go down.
3) Quantity of money will go down and interest rates will go up
4) Quantity of money will go down and interest rates will go down.
Explanation
When the central bank undertakes open market operations, selling bonds to banks,
households and firms, the interest rate will go up and the quantity of money will
decrease.
Question 13
Suppose that Sandton Bank has excess reserves of R800 and the reserve ratio is
20%. If Tshepo deposits R1 000 into his cheque account with Sandton Bank, and in
turn Sandton Bank lends R600 to Mary, what is the maximum that the bank can lend
to Karabo?
1) R200
2) R800
4
