HKUGA College

Mock Examination
(2022/2023) TOTAL MARKS: 120

Economics
Paper 2
Question-Answer Book
Time allowed: 2 hours 30 minutes Form: 6

Name: Class (No.): ( )

INSTRUCTIONS

(1) This paper consists of 23 pages including this cover page. The words ‘END OF PAPER’ should appear
on the last page.

(2) Do not open this examination paper until instructed to do so.

(3) Answer ALL questions.

(4) Write your answers in the spaces provided in this Question-Answer Book. Do not write in the margins.
Answers written in the margins will not be marked.

(5) Supplementary answer sheets will be supplied on request.

Paper (Section) Score Full Score Score (%) Weighting

1 45 30%

2 (A) 44 30%

2 (B) 76 40%

Overall - - 100%
 Section A (44 marks)

1. The following table shows the input-output relationship of a firm which employs labour and capital
only.

Capital (units) Labour (units) Average product (units)

5 3 8
5 4 11
5 5 14
5 6 16
5 7 17

State the law of diminishing marginal returns. Explain whether the above data illustrate the law.
(6 marks)

Answers written in the margins will not be marked.

P. 2 of 23
 2. The following table shows the economic data of Country X.

Year Consumer price index

2021 80
2022 86

(a) Calculate the inflation rate of Country X in 2022. (1 mark)

(b) Explain whether an employer who paid fixed monthly salaries would gain or loss if people of
Country X expected a 5% inflation in 2022. (3 marks)

Answers written in the margins will not be marked.

P. 3 of 23
 3. Municipal solid waste collection, treatment, and disposal are social issues in Hong Kong.

(a) Explain what type of production waste collection, treatment, and disposal belong to. (2 marks)

(b) Billions of plastic bags were disposed every year in Hong Kong. Explain, in terms of externality,
why the disposal of plastic bags may be economic inefficient. (4 marks)

Answers written in the margins will not be marked.

P. 4 of 23
 4. In recent months, the mortgage interest rate keeps increasing. At the same time, property developers
expect price of the first-hand residential property to decrease in the future.

With the aid of a diagram, explain under what condition the quantity of first-hand residential property
transacted would increase. (6 marks)

Answers written in the margins will not be marked.

P. 5 of 23
 5. The following table show the balance sheet of the banking system which holds $50 billion excess
reserves. The public holds $100 billion cash.

Assets ($ billion) Liabilities ($ billion)

Reserves 450 Deposits 2 000
Loans 1 550

(a) Calculate the required reserve ratio. (1 mark)

The central bank raises the required reserve ratio by 5 percentage points. Suppose the banking system
no longer holds any excess reserves and the public no longer holds any cash.

(b) Explain the change in the monetary base. (2 marks)

(c) Calculate the maximum possible money supply. (3 marks)

Answers written in the margins will not be marked.

P. 6 of 23
 6. The following table shows the amounts of food and computers Country X and Country Y can produce
with all their resources.

Food (units) Computers (units)

Country X 25 OR 50
Country Y 40 OR 60

(a) Explain whether Country Y has an absolute advantage in producing food. (2 marks)

(b) State the principle of comparative advantage. According to the principle, explain which country
will export food. (4 marks)

The international price of 10 units of food is 18 units of computers.

(c) Suppose the food-exporting country has to bear the transportation cost of 0.1 units computer for
each unit of export. Calculate the gain to the food-exporting country from exporting 20 units of
food. (3 marks)

Answers written in the margins will not be marked.

P. 7 of 23
 7. The following table shows the change in the exchange rate of Australian dollars against Hong Kong
dollars.

Date Exchange rate

30 September 2021 A$1 = HK$5.58921
30 September 2022 A$1 = HK$5.08383

Suppose the price of Australian lobsters (in terms of A$) remains unchanged. With the aid of a diagram,
explain why the above change in exchange rate would raise the total export value (in terms of A$) of
Australian lobsters to Hong Kong. (7 marks)

END OF SECTION A

Answers written in the margins will not be marked.

P. 8 of 23
 Section B (76 marks)

8. Country X is a large open economy. Recently, its government has imposed a unit import tariff on rare-
earth metals (稀土金屬).

With the aid of Figure 1,

(a) explain under what condition Country X’s total expenditure on imported rare-earth metals would
increase. (7 marks)

(b) explain whether the tariff could improve the economic efficiency of the market of imported rare-
earth metals. (4 marks)

Answers written in the margins will not be marked.

P. 9 of 23
Answers written in the margins will not be marked.
P. 10 of 23
 9. PCCW (stock code: 0008) acquired the exclusive rights to broadcast the FIFA World Cup 2022 in Hong
Kong. ViuTV, a free-to-air TV channels operated by PCCW, live broadcasted only 19 matches out of
a total of 64 matches of the FIFA World Cup 2022.

(a) Explain whether the live broadcast of the FIFA World Cup 2022 by ViuTV is

(i) a free good to society. (2 marks)

(ii) a public good. (3 marks)

(b) What is the form of business ownership of PCCW? Suggest TWO features of such a form of
business ownership. (3 marks)

(c) A lawmaker suggested that the Hong Kong government should purchase the broadcasting rights
of major international sports events, and broadcast the events on RTHK, a government-run free-
to-air TV channel.

Explain ONE advantage and ONE disadvantage of the lawmaker’s suggestion. (4 marks)

Answers written in the margins will not be marked.

P. 11 of 23
Answers written in the margins will not be marked.
P. 12 of 23
 10. The following table shows the global market share of video game console in 2021.

Company (console) Market share

Sony (PlayStation) 46%
Nintendo (Switch) 29%
Microsoft (Xbox) 25%

(a) What is the market structure of the video game console market? Give TWO features of such a
market structure. (3 marks)

Electronic Arts, an American video game developer, acquired Codemasters, a British video game
developer for US$1.2 billion in 2021.

(b) Explain which type of expansion this was. State TWO possible motives for such a type of
expansion. (4 marks)

(c) Explain whether the $1.2 billion paid by Electronic Arts should be included in the gross domestic
product (GDP) of the US for 2021. (2 marks)

(d) Senior game designers are often paid a monthly salary with a proportion of the sales revenue of
the games they design. From the viewpoint of the employers, suggest TWO advantages of such
a payment method over a time rate. (2 marks)

Answers written in the margins will not be marked.

P. 13 of 23
Answers written in the margins will not be marked.
P. 14 of 23
 11. The following diagram shows the economy of the UK, which relies heavily on imported energy sources
for production. Suppose the economy initially operates at E0.

The energy prices have soared since Russia invaded Ukraine in 2022.

(a) With the aid of the above diagram, explain how the 2022 Russian invasion of Ukraine would
affect the price and output levels of the UK economy in the short run. (5 marks)

(b) To stablise the price level of the UK, an economist urged the Bank of England, the central bank
of the UK, to carry out an open market operation.

WITHOUT the aid of a diagram, explain how an open market operation could help stablise the
price level of the UK. (4 marks)

(c) To solve the macroeconomic problems with the UK, a politician suggested the UK government
to lower the rate of value-added tax, which is the general sales tax in the UK, instead of carrying
out an open market operation.

Discuss ONE reason for the politician’s suggestion. (2 marks)

Answers written in the margins will not be marked.

P. 15 of 23
Answers written in the margins will not be marked.
P. 16 of 23
Answers written in the margins will not be marked.
P. 17 of 23
 12. The government concerns about the competitiveness of Hong Kong.

Source A: 3-month moving average of Hong Kong’s labour force between Q2 2019 and Q2 2022

Source B: an extract of the 2022 Policy Address

To allow eligible overseas talents to apply for a refund of the extra stamp duty paid for purchasing
local residential property upon becoming permanent residents.

Source C: some views on leaving, working and investing in Hong Kong

We are moving to the UK. Like many families leaving Hong Kong, we
a family leaving Hong first sold one of our two residential flats in Hong Kong. Then, we remitted
Kong the sum of money to our offshore bank account in the UK. Finally, we have
leased the remaining residential flat to a local tenant.

an employee of an
Hong Kong is an attractive city with a wide variety of entertainment.
innovation and
However, the current anti-epidemic policy for restaurants, bars and other
technology (I&T)
entertainment venues discourages me to move to work in Hong Kong.
enterprise in Europe

We always have a plan to set up operations in Hong Kong. The workforce

the CEO of an
of Hong Kong is highly skilled. The tax system of Hong Kong is simple.
American corporation
Most importantly, we face a minimal exchange rate risk.

Answers written in the margins will not be marked.

P. 18 of 23
 (a) Refer to Source A.

(i) Describe the trend of the labour force of Hong Kong over the period. (1 mark)

(ii) Explain whether the unemployment rate of Hong Kong would necessarily increase over the
period. (3 marks)

(b) Refer to Source B. Explain whether the refund of the extra stamp duty would necessarily lower
the potential tax revenue from stamp duty. (4 marks)

(c) Refer to Source C.

(i) Explain how a relaxation of Hong Kong’s anti-epidemic policy would affect the opportunity
cost for foreigners to work in Hong Kong. (2 marks)

(ii) Explain how families leaving Hong Kong would affect the balance of payments of Hong
Kong. (5 marks)

(iii) Explain why American corporations would face a minimal exchange rate risk of setting up
operations in Hong Kong. (2 marks)

For part (d), candidates are required to present their answers in essay form. Criteria for marking will
include use of sources and economic theories, relevant content, logical presentation and clarity of
expression.

(d) Suppose the government propose the following two policies to raise the competitiveness of Hong
Kong.

Policy I: increasing the number of public-funded university places by establishing new

universities

Policy II: launching a new scheme to attract highly-paid talents and graduates from the
world’s top universities to pursue careers in Hong Kong

With reference to Sources A-C and your own knowledge in Economics, discuss the effects of
each policy on the following variables to evaluate the two policies. (14 marks)
- aggregate output
- fiscal balance
- income distribution
(Hint: One of the policies may have different short-term and long-term effects on some of the
above variables.)

Answers written in the margins will not be marked.

P. 19 of 23
Answers written in the margins will not be marked.
P. 20 of 23
Answers written in the margins will not be marked.
P. 21 of 23
Answers written in the margins will not be marked.
P. 22 of 23
 END OF PAPER

Answers written in the margins will not be marked.

P. 23 of 23