ECS1601 EXAM REVISION PACK
SUGGESTED SOLUTION FOR 2016 May/June
Question 1
a) Money is anything that is generally accepted as payment for goods and services or that
is accepted in settlement of debt.
o Money is a generally acceptable means of payment
o This is because people believe it will b...
a) Money is anything that is generally accepted as payment for goods and services or that
is accepted in settlement of debt.
o Money is a generally acceptable means of payment
o This is because people believe it will be accepted as payment by other people
b) Three broad functions of government.
o the allocative function, which refers to the role of government in correcting
market failure and achieving a more efficient allocation of resources
o the distribution function, which refers to the steps government takes to achieve a
more equitable or socially acceptable distribution of income than that generated
by market forces
o the stabilisation function, which refers to the measures government takes to
promote macroeconomic stability (for example, full employment, price stability
and balance-of-payments stability)
c) The balance of payments is a summary record of a country's transactions with the rest of
the world during a particular period.
d) Nominal prices, sometimes called current rand prices, measure the rand value of a
product at the time it was produced. And also are calculated using prices of the current
year (including inflation in prices)
Real prices are adjusted for general price level changes over time, i.e., inflation or
deflation. These adjustments give us a picture of prices for various years as if the value
of the dollar were constant.
e) Four problems associated with GDP as a measure of total production in the economy
Non-market production
Goods and services not sold in the market such as goods and services produced
by government, farmer’s consumption, DIY work and volunteer work.
Unrecorded activity
These refer to smuggling, drug trafficking, prostitution, hawking, flea market
trading etc. If unrecorded activity remains the same changes in GDP will reflect in
the aggregate level of economic activity.
Data revisions
Unavoidable revision of certain data after they were originally published.
GDP as a measure of wellbeing or welfare
, A larger physical flow of good of services does not necessarily increase
wellbeing of residents. Unwanted by products of production such as pollution,
congestion, noise and stress are not measured.
Distribution of income
National accounting data say nothing about the distribution of total income within
the country.
Question 2
a) Increase in taxes reduces the disposable income of households, which results in decline
in the consumption spending C by households. Taxes constitute a leakage or withdrawal
from circular flow and affect the aggregate spending and income via consumption route.
Subsequently a decline in consumption spending will lead to decrease in the level of
aggregate spending and income in the economy as shown below.
AE = Y
AE
Aggregate spending
A0
A1
A*
45°
0 Y0 Y1
b) Imports are a leakage from the domestic flow of income and spending. When
households, firms and the government spend on imported goods and services, they
reduce aggregate spending on domestically produced goods and services, ceteris
paribus. Imports reduces aggregate spending A and total income Y, ceteris paribus.
Take note we are working on the assumption that export amount is zero. When imports
increase, the unemployment rate goes down since there will be a decline in domestic
production.
, AE = Y
Aggregate spending AE
A0 = C + I + G
A1 = C + I + G + (0 – M)
A0
A1
45°
0 Y0 Y1
c)
Price AS
AD
AD1
P0
P1
45°
0 Y1 Y0 Aggregate Income
An increase in the interest rate (r) means that borrowing is less attractive hence it
decreases consumer spending and investment at any level of income. This
impact will lead to a fall in the Aggregate Demand (AD) and level of income in an
economy
d) The holders of dollars wish to convert dollars into rands arise in this cases when tourists
wish to visit and spending money in SA. This causes the reduce the supply of dollars.
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