Initial Test 2 - Paper

Qualification: Bachelor of Commerce (Year 1)

Module code: C_COEC121 Module name: Economics 1B
Semester: 2 Time allocation: 1 hour 30 minutes
Test: 2 Total mark allocation: 60 marks
Date of test: 22 September 2014 Student name:
Time of test: Student number:

Instructions to students:
 Make sure that you are writing the correct test.
 You have 1 hour and 30 minutes to complete this test.
 Ten minutes are allocated prior to the 1 hour and 30 minutes start, for the Invigilator to
discuss the Test Rules.
 Ensure that your name, surname, student number and the test details appear on all
submitted papers, including rough notes if applicable.
 Submit all test work, including rough notes if applicable.
 No sharing of stationery or calculators will be permitted in the test venue.
 Only blue and black pens are allowed. No Tipp-ex may be used. Answers in pencil will
not be accepted, unless stipulated otherwise.
 The pass mark is 30 out of 60 (50%).

Sections:
This test paper consists of three compulsory sections.
 Section A:
o Question 1: True/False = 5 marks
o Question 2: Multiple Choice = 5 marks
Section Total = 10 marks
 Section B:
o Question 3 = 10 marks
o Question 4 = 10 marks
Section Total = 20 marks
 Section C:
o Question 5 = 15 marks
o Question 6 = 15 marks
Section Total = 30 marks
Test rules:
 Please turn off all cellphones and electronic devices. The use of these devices in the test
venue is prohibited.
 You will be supplied with all the test material required. If you need additional paper,
please ask the invigilator.
 Students are not allowed to take any unauthorised notes, books or papers into the test
area.
 All bags have to be placed in the designated storage area prior to writing.
 Students are not allowed to talk to other students, nor may you refer to any test material
or written notes.
 Students are not allowed to walk around or leave the test venue before the allocated
time has lapsed.
 If you need the bathroom in an emergency, please call the test invigilator.
 Do not copy test questions and/or answers.
 Do not attempt to share any information with other candidates or take any test material
out of the test venue.
 If you have any questions, please address them to your invigilator.
Section A
Answer ALL the questions

Question 1 5 marks

Read through the following statements and decide whether they are True OR False. Mark the
correct option by using one of the following methods:

 Correct option
⊗ Correct option

1.1 Compared to its peer countries, South Africa has major problems in terms of inequality
and unemployment.
o True
o False

1.2 External relations measured in terms of Balance of Payment stability is one of the
standard objectives of macro-economic policy.
o True
o False

1.3 Aggregate Demand is the sum of the real consumptions expenditure (C), investment (I),
government expenditure (G), exports (X), plus imports (M).
o True
o False

1.4 The credit multiplier provides us with an important yardstick to determine how much
money demand will increase in response to a change in bank deposits.
o True
o False

1.5 Expansionary monetary policy aims to decrease the level of money supply in the
economy.
o True
o False

C_COEC121 – Initial Test 2 – Paper|V1.0 Page 2 of 10

 Question 2 5 marks

Various options are given for each of the following questions/statements. Read through the
questions/statements and decide on the correct answer. Mark the correct option by using one
of the following methods:

 Correct option
⊗ Correct option

2.1 Which one of the following statements regarding the current state of the South African
economy is false?
o External debt is a major ground for celebration. While a number of countries are
experiencing some form of sovereign debt crisis, SA’s debt remains at a sustainable
level.
o Most analysts believe SA’s long-run growth performance under present constraints
could not exceed 3.5% at best.
o Wage inflation exceeds that of consumer inflation.
o None of the above.

2.2 Charles resigns his job as an economist in Bloemfontein and moves to Cape Town to be
closer to his parents. It takes Charles three months to find new employment as an
economist in Cape Town. During these three months, Charles was __________.
o structurally unemployed
o frictionally unemployed
o seasonally unemployed
o cyclically unemployed

2.3 To obtain Gross National Product (GNP) from Gross Domestic Product (GDP), we must
__________.
o add net property income from abroad
o subtract net property income from abroad
o add net national property income
o subtract net national property income

2.4 Considering AD/AS analysis, the immediate effect of a decrease in government

expenditure (G) will be to __________.
o move the AD curve to the left
o move the AD curve to the right
o move the AS curve to the left
o move the AS curve to the right

2.5 Money demand is determined by __________

o the level of national income only
o the interest rate only
o both the level of national income and the interest rate
o None of the above

C_COEC121 – Initial Test 2 – Paper|V1.0 Page 3 of 10

Section B
Answer ALL the questions

Question 3 10 marks

3.1 Illustrate the possible injections and withdrawals of an open economy using the circular
flow of income and spending diagram.
(7 marks)

3.2 The circular flow of income and spending, as illustrated in 3.1 above, is in equilibrium
when total injections equal total withdrawals.

Identify three injections and three withdrawals.

(3 marks)

Question 4 10 marks

4. By using the Transmission Mechanism and Keynesian cross model, illustrate and explain
the impact of decreasing interest rates on both the monetary and real sectors of the
economy.
(10 marks)

C_COEC121 – Initial Test 2 – Paper|V1.0 Page 4 of 10

Section C
Answer ALL the questions

Question 5 15 marks

Read the scenario below and answer the questions that follow:

Petrol, food behind inflation surge.

19 February 2014

Cape Town - Economists say the steep increase in petrol and food prices as the main reasons
for the surprise latest Consumer Price Index (CPI) increase of 5.8%

This is 0.4 of a percentage point higher than the corresponding annual rate in December 2013,
Statistics SA said on Wednesday. On average, prices increased by 0.7% between December
2013 and January 2014.

The latest CPI shows that the transport index increased by 1.2% between December and
January, mainly due to a 38c/litre increase in the price of petrol.

According to Merina Willemse, an economist with the Efficient Group, the latest higher inflation
figure reflected more pressure on the food and transport price categories of the basket.

"The pass-through of the rand seems more prominent at this stage and poses a higher risk to
inflation, consistently breaching the upper limit of the SA Reserve Bank's 3%-6% inflation
target band," she said.

"This spells more interest rate hikes later on. For now we are forecasting another 100 basis
points increase in interest rates for 2014."

Source: http://www.fin24.com/Economy/Petrol-food-behind-inflation-surge-20140219

5.1 In the article, reference is made to the Consumer Price Index (CPI).

Explain what this index entails and the use thereof.

(2 marks)
5.2 Differentiate between CPI and CPIX.
(1 mark)

5.3 Provide a definition for inflation.

(3 marks)

5.4 In the article above, it is reported that the steep increase in petrol and food prices is the
main reason for the latest increase of the inflation rate. Causes of inflation can be
classified as either demand-pull inflation or cost-push inflation.

a. Classify the reported increasing petrol prices, as either demand-pull or cost push
inflation.
(1 mark)
b. Illustrate and explain this cause of inflation using AD/AS analysis.
(8 marks)

C_COEC121 – Initial Test 2 – Paper|V1.0 Page 5 of 10

 Question 6 15 marks

Read the scenario below and answer the questions that follow:

Nene takes over from Gordhan.

25 May 2014

Cape Town - Nhlanhla Nene, the former deputy finance minister, has been promoted to
replacing Pravin Gordhan as Finance Minister, President Jacob Zuma announced on Sunday.

Gordhan is now responsible for the local government ministry.

Zuma said at his inauguration on Saturday that economic transformation will take centre-stage
as the new government put the economy on an inclusive growth path.

"As the National Development Plan outlines, the structure of the economy will be transformed
through industrialisation, broad-based black economic empowerment and through
strengthening and expanding the role of the state in the economy.

"State owned enterprises and development finance institutions will become engines of
development, complementing the State in promoting inclusive economic growth.

"We have made some progress in changing the ownership and control of the economy, but
much more work must still be done," Zuma said.

In this regard, he said the government will improve the implementation of the employment
equity and black economic empowerment laws during this term.

"Land restitution and redistribution and other forms of empowerment will also be better
executed in the new term of government," he said.

Zuma said the government's economic transformation programme also reaffirms the country's
commitment to promoting local companies, entrepreneurs and cooperatives through local
procurement by the state and its agencies.

Source: http://www.fin24.com/Economy/Nene-takes-over-from-Gordhan-20140525

6.1 Provide a definition for the concept ‘fiscal policy’.

(3 marks)

6.2 Who is responsible for implementing fiscal policy?

(2 marks)

6.3 As reported in the article, President Zuma aims to position the economy on an inclusive
growth path.

Illustrate and explain the effect of expansionary fiscal policy on an economy using AD/AS
analysis.
(5 marks)

6.4 In the article reference is made to the National Development Plan (NDP) as an important
roadmap for achieving government objectives.

Discuss any five central themes as identified in the NDP.

(5 marks)

C_COEC121 – Initial Test 2 – Paper|V1.0 Page 6 of 10

C_COEC121 – Initial Test 2 – Paper|V1.0 Page 7 of 10
C_COEC121 – Initial Test 2 – Paper|V1.0 Page 8 of 10
C_COEC121 – Initial Test 2 – Paper|V1.0 Page 9 of 10
C_COEC121 – Initial Test 2 – Paper|V1.0 Page 10 of 10