1992

Suppose Bank As balance statements is as follows:

Assets ($000)
Reserves
Loans
Investment

Liabilities ($000)
40 Demand deposits
45 Capital
90

130
45

Assuming a legal reserve ratio of 20%, how much excess reserves would this
bank have after a cheque for $10 000 was drawn and cleared against it? [92.1]
A.
$6 000
B.
$14 000
C.
$16 000
D.
$24 000
2

Which of the following will have a greater impact upon equilibrium income
when there is a change in the money supply?
[92.2]
A.
the flatter the money demand curve; the steeper the investment demand
curve; and the larger the MPC
B.
the steeper the money demand and investment demand curves; and the
smaller the MPC
C.
the flatter the money demand and investment demand curves; and the
larger the MPC
D.
the steeper the money demand curve; the flatter the investment demand
curve; and the larger the MPC

Discretionary fiscal policy which increases the budgetary surplus has the same
effect upon the equilibrium income as does
[92.3]
A.
an increase in saving.
B.
an increase in investment.
C.
an increase in private consumption.
D.
a decrease in imports.

If the demand for money increases and the monetary authorities want the
interest rate to remain unchanged, which of the following policies should be
recommended?
[92.4]
A.
raising the discount rate
B.
buying bonds in the open market
C.
raising the legal minimum reserve ratio
D.
None of the above

The total demand for money curve, other things being equal, will shift to the
left as a result of
(1)
an increase in the interest rate.
(2)
an increase in the thrift of households.
(3)
a decrease in the risk of holding bonds.
(4)
a decrease in the stock of liquid assets.
[92.5]
A.
(1), (2) and (3) only
B.
(1), (2) and (4) only
C.
(1), (3) and (4) only
D.
(2), (3) and (4) only

Financing government spending by increasing taxation is the preferred method

when
[92.6]
A.
the interest rate is low.
B.
corporate profits are low.
C.
the economy is experiencing inflation.
D.
the economy is experiencing a recession.

Suppose a countrys exchange rates are managed by the government. The

nations balance of payments will always show total debits equal to total
credits because
[92.7]
A.
fluctuations in exchange rates will bring debits and credits into
balance.
B.
official transactions will offset any deficit or surplus in the current and
capital accounts.
C.
the capital account will always offset any deficit in the current account.
D.
the current account is always in balance.

A bank loan is repaid by a borrower. What would be the immediate effect on

the money supply?
[92.8]
A.
It would decrease.
B.
It would increase.
C.
It may either increase or decrease.
D.
It would be constant, but its composition would change.

The real burden of an increase in the public debt.

[92.9]
A.
is equal to the dollar increase in the size of the debt.
B.
can be shifted to future generations if the proceeds from the public debt
are used in financing public investment projects.
C.
will be smaller in times of full employment than in times of
unemployment.
D.
may be very small when the economy is experiencing a severe
depression.

10

The marginal propensity to consume out of disposable income of an economy

is 0.8 and there is a proportional tax of 15% on income. What is the value of
the tax multiplier in this economy?
[92.10]
A.
-2.5
B.
-2.86
2

C.
D.
11

-3.125
-5

Given
C = $30
I = $50
G = $20

C
= consumption expenditure
Yd = disposable income
I
= investment expenditure
G
= government expenditure
If the government collects a lump-sum tax of $15 and gives an unemployment
benefit of $10, what will be the equilibrium level of income?
[92.11]
A.
$400
B.
$440
C.
$480
D.
$500
12

+ 0.8Yd

where

If the marginal propensity to consume rises,

A.
the IS curve will shift to the right.
B.
the IS curve will shift to the left
C
the IS curve will be steeper.
D.
the IS curve will be flatter.

[92.12]

13
AE=Y

Expenditure
R

C+I

P
S

Q
45

Income
Y2
Y1
In the above diagram, PQ is the amount of
and RS is the amount of
.
[92.13]
A.
dissaving; inventories piled up in the current year
B.
dissaving; saving
C.
past inventories sold; saving
D.
past inventories sold; inventories piled up in the current year

14.

Below are the national income statistics of an economy in a certain year:

$ million
Wages
60
Rent
50
Depreciation
30
Interest
25
Expenditure taxes
20
Dividend
15
Subsidies
11
Retained profits
10
Profits tax
8
The amount of national income at factor cost is
A.
$159 million.
B.
$160 million.
C.
$168 million.
D.
$177 million.

15

The steeper the IS curve is,

(1)
the more effective the fiscal policy will be.
(2)
the less effective the fiscal policy will be.
(3)
the more effective the monetary policy will be.
(4)
the less effective the monetary policy will be.
A.
(1) and (3) only
B.
(1) and (4) only
C.
(2) and (3) only
D.
(2) and (4) only
(Deleted)

[92.14]

[92.15]

16

Other things being equal, which of the following will cause the velocity of the
circulation of money to rise?
[92.16]
A.
an increase in the supply of money
B.
a decrease in the rate of interest
C.
a fall in the general price level
D.
a switch from a monthly to a weekly payroll

17

Refer to the following table which shows the costs of production of two goods
in two countries:
TV Sets
Cars
Japan
80
160
USA
$10
$30
Which of the following are true?
(1)
Japan has a comparative advantage in the production of cars.
(2)
A terms of trade ratio of 1 car: 2.5 TV sets would make the trade
(3)
USA has an absolute advantage in the production of TV sets. [92.17]
A.
(1) and (2) only
B.
(1) and (3) only
C.
(2) and (3) only
D.
(1), (2) and (3)
4

18

Other things being equal, which of the following events would make the terms
of trade less favourable to Hong Kong?
[92.18]
A.
a decrease in the labour productivity in Hong Kong
B.
a rise in the price of petroleum
C.
a rise in the exchange value of the Hong Kong dollar
D.
a drop in the supply price of foreign goods

19

If an economy is characterised by a higher marginal propensity to import, then

its expenditure multiplier would be
, and an expansionary fiscal
policy
would be
, other things being equal.
[92.19]
A.
smaller; more effective
B.
smaller; less effective
C.
larger; more effective
D.
larger; less effective

20

The equation of exchange

(1)
is an identity which cannot be refuted.
(2)
is valid only when the economy is at full employment.
(3)
predicts that money affects both the price level and real output in the
short run and only real output in the long run.
(4state that total expenditure is always equal to total output value. [92.20]
A.
(1) and (3) only
B.
(1) and (4) only
C.
(2) and (3) only
D.
(2) and (4) only

21

If the nominal rate of interest is 10% but the real rate of interest is only 6%,
the real return on holding cash will be
[92.21]
A.
0%
B.
-4%
C.
-6%
D.
-10%

22

A higher natural rate of unemployment will result when

(1)
more information on the job market is provided.
(2)
the composition of the aggregate demand changes more frequently.
(3)
the aggregate demand fluctuates more frequently.
[92.22]
A.
(1) and (2) only
B.
(1) and (3) only
C.
(2) and (3) only
D.
(1), (2) and (3) only

23

The consumer price index tends to overstate the inflation rate because
(1)
it uses a fixed basket of goods.
(2)
it assumes the quality of goods remains unchanged.
(3)
it only includes final goods.
[92.23]
A.
(1) and (2) only
B.
(1) and (3) only
C.
(2) and (3) only
D.
(1), (2) and (3) only

24

The Hong Kong dollar is linked to the US dollar. One result of this is that
[92.24]
A.
the Hong Kong government has strengthened its control over the
money supply in Hong Kong.
B.
the Hong Kong government can keep less foreign exchange reserves.
C.
the Hong Kong public can exchange the HK dollar with the US dollar
at the linked rate form the Hong Kong government.
D.
None of the above.

25

Suppose
C = $60
+ 0.8Y
I
= $90
- 200r
Mt = 0.25y
Ma = $100 - 100r
Ms = $200

C = consumption
Y = national income
I
= investment
r
= interest rate
Mt = transaction demand for money
Ma = asset demand for money
Ms = money stock
If the full employment income is $600, the deflationary income gap will be
[92.25]
A.
$20.
B.
$50.
C.
$100.
D.
$500.
26

In the
a/an
rate.
A.
B.
C.
D.

IS-LM model, a deficit budget pursued by the government will lead to

in equilibrium income and a/an
in the equilibrium interest
[92.26]
increase; increase
decrease; decrease
increase; decrease
decrease; increase

27

According to the purchasing power parity doctrine, changes in exchange rates

among countries would reflect the differences in
[92.27]
A.
the amount of foreign exchange reserves.
B.
the rates of economic growth.
C.
the growth rates of government expenditure.
D.
None of the above.

28

Japan is noted for its high productivity and efficiency in production. However,
it is still impossible for a country like Japan to undersell other countries in all
lines of products because
[92.28]
A.
it is impossible for Japan to have an absolute advantage in everything.
B.
it is possible for Japan to have a comparative advantage in everything
but impossible for it to have an absolute advantage in everything.
C.
it is impossible for Japan to have both an absolute advantage and a
comparative advantage in a product at the same time.
D.
None of the above.

29
B

Country
Y0

Car

X0
Country X

Wheat

Refer to the above diagram. BC and CE are the production possibility frontiers
of Country X and Country Y respectively. Which of the following statements
is FALSE?
[92.29]
A.
Country X has a comparative advantage in the production of wheat.
B.
Country Y has a higher opportunity cost in the production of wheat.
C.
If CG represents the terms of trade, country X gains through importing
cars from country Y.
D.
if CF represents the terms of trade, country X gains through importing
cars from country Y.
30

Assume the presence of a natural rate of unemployment.

[92.30]
A.
this indicates there is a loss in economic efficiency.
B.
there will be a downward pressure on nominal wages.
C.
this indicates the presence of search activities in the labour market.
D.
This indicates there is insufficient aggregate demand.

SECTION B
92.1. As measure of welfare, GNP tends to overstate that of the newly
industrialized countries and understate that of the less developed countries.
Explain.
(12 marks)
92.2.

Consider the elementary Keynesian closed economy with consumption,

autonomous investment and government expenditure so that in equilibrium Y
= C + I + G. Suppose consumers of this economy are of two groups, half of
them having consumption functions C1 = 0.8Y1 and the other half having
consumption functions C2 = 0.9Y2.
(a)

Find the aggregate consumption function if each group earns half of

the aggregate income. Show your steps.
(4 marks)

(b)

Assume some income is transferred from those with a low MPC to

those with a high MPC.
(i)
What will be the effect on equilibrium aggregate income?
Explain briefly.
(4 marks)
(ii)

Suppose investment is dependent on the interest rate. Briefly

explain what kind of investment function will lead to results
similar to that in (i).
(4 marks)

92.3.

If the money raised by public debt issues is used to finance public investment
projects, then internal public debt represents a burden. Do you agree? Explain
Your answer.
(12 marks)

92.4.

Interpret the set of figures below using any accepted theory/ theories of
inflation and the Quantity Theory.
Time period
Price index
Unemployment Money supply
0
100
4%
100
1
100
4%
100
2
105
3%
106
3
110
4%
110
(12 marks)

92.5.

Suppose labour is the only input and the unit labour requirements for
producing goods X, Y, and Z for countries A and B are as follows:

A
B

X
1
1

Y
1.5
3

Z
3
4

(a)

Assuming zero transport costs and the wage rates in countries A and B
are 3 and 2 units of a certain currency respectively, determine and
explain the pattern of trade by first determining the absolute costs of
production.
(3 marks)

(b)

Now assume good X is bulky so that international transportation

requires 2 units of labour (the two countries have a common transport
technology), while goods Y and Z have negligible transport costs. One
of the goods is a non-traded good. Without knowing wages, determine
the pattern of trade.
(3 marks)
Explain why one of the goods is a non-traded good.

(6 marks)

SECTION C
92.6. A decrease in US interest rates will be followed by a decrease in Hong
Kongs interest rates.
(a)

Explain the above relationship with reference to Hong Kongs present

linked exchange rate system.
(9 marks)

(b)

Would the mechanism work similarly as that in (a) if both Hong Kong
and the USA adopted the classical gold standard? Explain. (6 marks)

92.7. (a)

What are the principal factors of the demand for money? Explain how
these factors affect this demand.
(9 marks)

(b)

In Hong Kong, the asset demand for foreign currencies has increased
steadily during the past decade. Now, foreign currency denominated
deposits account for about 60% of total bank deposits. What are the
reasons for this?
(6 marks)

92.8.

In 1991, Hong Kongs annual inflation rate, as measured by the Consumer

Price Index, rose sharply to about 12%. Many people have blamed the
government for raising indirect taxes on tobacco, alcohol, and other dutiable
commodities. Do you think that this is a major factor for Hong Kongs
accelerating inflation? Explain why.
(15 marks)

92.9.

Suppose the Hong Kong government decides to impose a sales tax at the
wholesale level of 2% on the value of goods, with exemption for basic
necessities such as food and clothing. Assess the likely effects of this tax.
(15 marks)
9

92.10. Suppose, as a result of a fall in exports, there is a large balance of payments

deficit for a small open economy which adopts a fixed exchange rate system.
Use the IS-LM model to
(a)
(b)

show how the deficit arises, and (5 marks)

analyse the likely effect of this deficit on the economy.

(10 marks)

10

Solution
SECTION A
1A

16 D

2D

17 A
18 B

3A
4B
5D
6C
7B
8A
9D
10 A
11 C
12 D
13 C
14 C
15 X

19 B
20 B
21 B
22 C
23 A
24 D
25 C
26 A
27 D
28 D
29 C
30 C

11