ICB ECONOMICS 2 MEMO

PREPARED BY BRILLIANT

1) D
2) B/C
3) B
4) D
5) D
6) B
7) C
8) D
9) A
10) C
11) D
12) B
13) A
14) C
15) D
16) B
17) A
18) A
19) D
20) C
21) A
22) A
23) C
24) B
25) B

SECTION B

1.1 Cost-push inflation (10)

Results from general increases in the costs of the factors of production. These factorswhich
include capital, land, labour and entrepreneurshipare the necessary inputs required to produce
goods and services. When the cost of these factors rise, producers wishing to retain their profit
margins must increase the price of their goods and services. When these production costs rise on an
economy-wide level, it can lead to increased consumer prices throughout the whole economy, as
producers systematically pass on their increased costs to consumers. Consumer prices, in effect, are
thus pushed up by production costs.

Demand-pull inflation

This occurs when AD increases at a faster rate than AS. Demand pull inflation will typically occur
when the economy is growing faster than the long run trend rate of growth. If demand exceeds
supply, firms will respond by pushing up prices.

1.2 increase interest rates. (6)

The Reserve rate is the rate at which banks borrow money from the government, but, in order to
make money, they must lend it at higher rates. So, when the Reserve Bank increases its interest rate,
banks have no choice but to increase their rates as well. When banks increase their rates, less people
want to borrow money because it costs more to do so if that money accrues interest. So, spending
drops, prices drop and inflation slows.

Increase the reserve requirement

The second method is to increase reserve requirements on the amount of money banks are legally
required to keep on hand to cover withdraws. The more money banks are required to hold back, the
less they have to lend to consumers. If they have less to lend, consumers will borrow less, which will
decrease spending.

Engage in Open Market Operations

Central banks affect the quantity of money in circulation by buying or selling government securities
through the process known as open market operations (OMO)

1.3 FISCAL POLICY AND MONETARY POLICY (2)

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor
and influence a nation's economy.

Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy used by the
government of a country to achieve macroeconomic objectives like inflation, consumption, growth
and liquidity.

1.4 Function of SARB (4)

Ensuring that the South African money, banking and financial system as a whole is sound,
meets the requirements of the community and keeps abreast of international
developments;

Assisting the South African government, as well as other members of the economic
community of southern Africa, with data relevant to the formulation and implementation of
macroeconomic policy; and

Informing the South African community and all stakeholders abroad about monetary policy
and the South African economic situation.

1.5 How government finance budget deficit (3)

The government borrows money

The government can also finance its budget deficit by creating new money

Tax increase.

QUESTION 2

2.1 EXPLAIN THE DIFFRENCE BETWEEN COMPARATIVE AND ABSOLUTE ADVANTAGE (8)
Comparative advantage refers to the ability of a party to produce a particular good or service at a
lower opportunity cost than another. Even if one country has an absolute advantage in producing all
goods, different countries could still have different comparative advantages.

Absolute advantage compares the productivity of different producers or economies. The producer
that requires a smaller quantity inputs to produce a good is said to have an absolute advantage in
producing that good.

2.2 EXPLAIN THE EXCHANGE CONTROLS (6)

Exchange controls are put in place by governments and central banks in order to ban or restrict the
amount of foreign currency or local currency that can be traded or purchased. These controls allow
countries a greater degree of economic stability by limiting the amount of exchange rate volatility
due to currency inflows/outflows.

Disadvantage

Obstructs economic co-operation internationally.

It leads to the contraction of foreign trade and the worlds welfare at large.

Deprives the country from the benefits of multi-lateral trade.

It vests extraordinary powers in the hands of government officials and there are chances of
corruption.

2.3.1 Depreciate

2.3.2 Appreciate

2.3.3 Appreciate

2.3.4 Depreciate

2.4 Three forms of economic integration. (6)

Preferential trading area

Free trade area

Customs union

Common market

Economic union

Economic and monetary union

Complete economic integration

2.5 FUNCTIONS OF WTO (5)

1. To implement rules and provisions related to trade policy review mechanism.

2. To provide a platform to member countries to decide future strategies related to trade and tariff.
3. To provide facilities for implementation, administration and operation of multilateral and bilateral
agreements of the world trade.

4. To administer the rules and processes related to dispute settlement.

5. To ensure the optimum use of world resources.

6. To assist international organizations such as, IMF and IBRD for establishing coherence in Universal
Economic Policy determination.