ECS1601 Assignment 05 Practice Semester 01 2023

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Question 1 (5 marks) Maximum word count: 100 words

Suppose that you are at a retail store with your family. You come across two T-shirts, one made in
South Africa and another made in the USA. With reference to the circular flow of income,
withdrawals and injection, provide an explanation as to why it is better to purchase the South African
manufactured T-shirt.

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This question tests your understanding of the circular flow of goods and services, as well as the
flow of income and spending between households, firms, and the foreign sectors. It asks you to
explain how spending on South African products will impact the country's production, income, and
spending. Additionally, it requires you to discuss the disadvantages of purchasing products that are
made in a foreign country, specifically the USA. Please refer to the material covered in Learning
Unit 1 for further guidance.

Question 2 (10 marks) Maximum word count: 100 words

Suppose Zimbabwe manage to turn around its economy which then results in an increase in
production, income and spending on local goods and services. This will likely lead to an increase in
the level of economic activities. What will be the impact on the demand for money in Zimbabwe?
Explain using a diagram (s)

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This question presents a scenario involving a change in the level of economic activities. It asks for
an explanation of how these improvements will impact the national income, the demand for
money (both active and passive balances), and the total demand for money. The answer should
include two diagrams that illustrate a change in demand and/or quantity demanded. Please refer
to the material covered in Learning Unit 2 for further guidance on this topic.
Question 3 (10 marks) Maximum word count: 200 words

Read the following news clip and answer the question.

Fuel prices and other transport costs continue to rise in South Africa.

Fuel prices increased by 7,2% between February and March, with inland 95-octane petrol rising by
R1,46 per litre to reach a record high of R21,60 per litre. Fuel prices rose by an eye-watering 33,2%
in the twelve months to March, with petrol prices climbing by 32,6% and diesel by 35,1%.

The transport index in March was also driven higher by increases in toll fees, air transport and bus
fares.

Source: Statistics South Africa

You're an economic adviser to the Central Bank and National Treasury and you're asked to advise
both on:

• the economic effects of fuel prices and transport cost increases

• the appropriate steps to address the economic effects you indicated above

Feedback:

This question focuses on the effects of inflation, particularly the economic effects listed on page
211 of the prescribed textbook.

First, you are required to identify the type of inflation that may result from high prices of goods
and services, such as fuel and transport, which are essential to the functioning of an economy.

Second, you should discuss some of the economic effects that arise from inflation.

Lastly, you need to state and justify a policy action that can address the identified inflation and its
economic effects.

Please refer to the material covered in Learning Unit 10 for further information and guidance on
this topic.
Question 4 (5 marks)

Have a look at the following diagram and answer the questions that follow:

Calculate the equilibrium level of income after the introduction of government spending.
Show all calculation steps.
✓ Y=A ✓
Feedback: ✓
Y = 180 + 0,5Y ✓
𝟏 𝟏 𝟏
𝜶= = = =𝟐 Y-0,5Y = 180 ✓
𝟏−𝒄 𝟏 − 𝟎, 𝟓 𝟎, 𝟓
0,5Y = 180

Y = 360
𝐴 = 𝐶 + 𝐼 + 𝐺 = 180 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 ✓ ✓
✓
✓ ✓
𝑌 = 𝛼 × 𝑌 = 2 x 180 = 360 million

Therefore:

Multiplier = 2

Autonomous Aggregate spending = 180 million

Equilibrium level of income = 360 million