TEST CopE 02216020 FORM TP 2005193 MAY/JUNE 2005 CARIBBEAN EXAMINATIONS COUNCIL ADVANCED PROFICIENCY EXAMINATION ECONOMICS UNIT 2- PAPER 02 A hours READ LLY PRU! ‘TIONS 1, This paper consists of THREE sections. 4 ~ 2. Each section consists of TWO questions. Candidates MUST answer @& THREE questions, ONE from EACH section. 3. Answers for ALL questions must be written in the answer booklet provided. 4, Candidates may use silent non-programmable calculators. Copyright © 2004 Caribbean Examinations Council All rights reserved (02216020/CAPE 2005SECTION I Answer ONE question from this section, 1, The table below lists Econland’ transactions in 2003. ITEMS AMOUNT (8) Wages paid to labour 300000." | Consumption expenditure 600000 Taxes 250 000. Transfer payments 50000 Profits 200 000 Investment 250.000 Government purchases 200 000 Exports | 300.000 Imports, e 300.000. Savings 250.000 @ ) © @ Calculate Econland’s Gross Domestic Product using the Expenditure Method. [10 marks} (ii) Based on the information in the table above, state whether the income approach can be used to calculate the Gross Domestic Product. Explain your answer. [10 marks] State, with reasons, which of the transactions listed below wil NOTbe counted in the Gross. Domestic Product. (A meat processing company builds a new plant. (ii) A drug dealer sells $5 000 worth of illegal drugs. (ii) A clothing factory produces one million worth of dress shirts. (iv) Purchase of a used text book - (v) Company A launched a hostile takeover of Company B and purchased its stocks. (vi) A public utility company installed new turbines and cooling equipment. [21 marks] Explain what is meant by ‘double counting’. Illustrate your answer with the use of an example, [9 marks] Total 50 marks GO ON TO THE NEXT PAGE 02216020/CAPE 2005 (P252, (@)_Define the following terms: @ i) Gi) @) Marginal propensity to consume Multiplier ‘Actual investment Planned investment (b) Explain the relationship between the following: o Gi) Marginal propensity to consume and multiplier Actual investment and planned investment (©) Youare given the following information about Country Z. @ i) Gi) jw) w (02216020/CAPE 2005 Consumption function: C = 200 + 0.8 Investment function: 00, Aggregate expenditure (AE) Aggregate expenditure (AE) Consumption + Investment (C+ 1) ational income (y) Determine the following: a) Marginal propensity to consume b) Marginal propensity to save Using a 45° line diagram, plot the aggregate expenditure function, (Use the graph sheet provided to answer this question.) Indicate the equilibrium point on the graph drawn in (b)(ii) above. Calculate the level of national income at equlibrium, Calculate the multiplier. [8 marks] [8 marks] [4 marks} [4 marks] [12 marks] [4 marks] [6 marks} [4 marks} Total 50 marks GO ON TO THE NEXT PAGEaoe) b) 7g SECTION I Answer ONE question from this section. Explain the following terms (i) Broad money (ii) Monetary policy Gi) Moral suasion (iv) Transactions demand for money [20 marks] When the Central Bank adds new reserves to the banking system through the purchase of bonds, some of the new reserves end up in foreign bank accounts and in foreign investment funds. These ‘leakages’ interfere with the expansion of the money supply and sometimes make it very difficult for the Central Bank to control the money supply. Discuss, giving reasons, why the statement outlined above is TRUE. [10 marks] Explain, with the use of diagrams, how the equilibrium interest rate is determined in the money market. [10 marks} Explain how EACH of the transactions listed below affects the transactions demand for money and the equilibrium interest rate. (Shortening the pay periods for workers (ii) An increase in the nominal Gross Domestic Product [10 marks] Total 50 marks GO ON TO THE NEXT PAGE (02216020/CAPE 2005a (a) (b) ©) ) (Define the term ‘national debt’ [5 marks] Gi) Outline TWO ways of measuring the national debt. Use examples to illustrate your answer. [10 marks] Gi) Distinguish between debt forgiveness and debt retirement. [10 marks] Explain how government's borrowing to finance large budget deficits will affect the following. (@) Domestic interest rates (i) Domestic investment (ii) ‘The value of the country’s currency on the international market [15 marks] (Explain what is meant by the term “fiscal policy” (ii) Who determines the fiscal policy of a country? (ii) What are the aims of the fiscal policy of a country” [10 marks] ‘Total 50 marks SECTION IIL Answer ONE question from this section. Identify and discuss THREE sources of economic growth which may be present in any economy. [30 marks] @ Outline the MAJOR features of globalisation. [5 marks] Gi) Discuss THREE ways in which globalisation can affect Caribbean economies. [15 marks] Total 50 marks GO ON TO THE NEXT PAGE (02216020/CAPE 20056. @ (b) © Explain the following terms: @ Gi) @ Gi) (i) Currency appreciation and depreciation Flexible and fixed exchange rates Balance of payments accounts [18 marks] Balance of Payments of Country X, 2001 (All figures are in billions of dollars) Merchandise exports +40 Merchandise imports 30 Services exports +15 Services imports | =10 Investment income =5 Net transfers +10 Capital inflows +10 Capital outflows -40 Official reserves - +10 Use the information in the table above to calculate the following for Country X. (Show all working.) (a) The balance of trade [5 marks] (b) The current account balance [5 marks] (©) The capital account balance [5 marks] Does Country X have a balance of payments deficit OR surplus? (Show all working.) [5 marks] Explain the meaning of the plus (+) and minus (~) signs in the balance of payments account shown in (b) above. [9 marks] Suggest ONE measure a country can take to bridge a current account deficit. [3 marks] Total 50 marks END OF TI (02216020/CAPE 2005