MINISTRY OF EDUCATION

FIJI YEAR 13 CERTIFICATE EXAMINATION 2019

ECONOMICS

DETAILED SOLUTIONS

COPYRIGHT: MINISTRY OF EDUCATION, FIJI, 2019.

 2.
SECTION A INTRODUCTION TO ECONOMICS (8 marks)

QUESTION 1 MULTIPLE CHOICE QUESTIONS (2 marks)

Circle the letter which represents the best answer.

1 A
A B C D

2 A B CC D

QUESTION 2 SHORT ANSWER QUESTIONS (6 marks)

a. (i) Economic reforms refers to deregulation, or at times to reduction in the size of

government, to remove distortions caused by regulations or the presence of government,
rather than new or increased regulations or government programs to reduce distortions
caused by market failure. (1 mark)

(ii) Adequate regulatory framework that allows to shift from far reaching price controls
to enhancing competition; and improving the ease of doing business. (1 mark)

(iii) Reforms are needed as it should result in successfully strengthening the ability of
governments to do what they need to do by helping to generate higher growth, higher
revenue, and higher productivity. (2 marks)

(i) Macroeconomics (1 mark)

(ii) The inflation rate in Fiji. The unemployment level in the economy. (1 mark)

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SECTION B MICROECONOMICS (26 marks)

QUESTION 1 MULTIPLE CHOICE QUESTIONS (7 marks)

1 A B C D

2 A B C D

3 A B C D

4 AA B C D

5 A B C D

6 A B C D
D

7 A B C D

QUESTION 2 SHORT ANSWER QUESTIONS (19 marks)

(a) (i) Law of diminishing marginal utility

The Law of Diminishing Marginal Utility states that all else equal as consumption
increases the marginal utility derived from each additional unit declines.
States that the marginal utility of a good or service declines as its available supply
increases. (1 mark)

(ii) I 84

II 12
(1/2 mk each)

III 105

IV 7 (2 marks)

Turn Over

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SECTION B (continued)

(iii) I. Number of Packets of Uto Chips Senirosi should buy 1 packet

II. Number of bottles of Bu Water Senirosi should buy 2 bottles (2 marks)

(iv)

½ mk for correct
title

½ mk for
correct plotting
and drawing of
demand curve

½ mk for
correct
interval of x-
½ mk for correct axis and
interval of Y-axis labelling
and labelling
(2 marks)

b. Supply

Qs at the Price of $2.00

QS = -100 + 300(2) = -100 + 600 = 500 bundles of cabbages. √
(Award 1 mark for correct answer with or without working. Award ½
mk for correct working but wrong answer)
(1 mark)

c. [Choose any one from the list for 1 mark]

The consumers act rationally so as to maximise satisfaction
There are two goods X and Y.
The consumer possesses complete information about the prices of the goods in the market.
The prices of the two goods are given.
The consumers’ tastes, habits and income remain the same throughout an indifference curve.
Turn Over

© MINISTRY OF EDUCATION, FY13CE 2019: ECONOMICS.

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SECTION B (continued)

d. (i) Price elasticity of supply – a measure used in economics to show the responsiveness,
or elasticity, of the quantity supplied of a good or service to a change in its price. (1 mark)

(ii) [Choose any one from the list for 2 marks]

- It helps firms to know how quickly and effectively it can respond to changing market
conditions, especially to price changes.
- It dictates how the price will change depending on the supply offered.
- It helps firms to make decisions, for example if supply is elastic (PES>1), then producers
can increase output without a rise in cost or a time delay. On the other hand, if supply is
inelastic (PES<1), then firms find it hard to change production in a given time period.
- It can tell the government something about what the incidence of taxes will be. For example,
if the government imposes an excise tax on goods, will the consumers pay more of that tax
or will the producers pay it.
- Housing supply- Inelastic supply of new housing in response to rising demand-pushes up
property prices with consequences for housing wealth, affordability etc.
- Trade- the ability of a nation’s export industries to respond to depreciation of the exchange
rate if export demand grows.
- Commodity prices – Very inelastic prices of many hard and soft commodities –making
prices more volatile-especially in markets where there is a strong speculative activity.
(2 marks)
(3
(iii)
ES = % Quantity Supplied = Q2 - Q1 ÷ P2 – P1 1. Correct answer without
% Price Q P working 2mks.
2. a) Incorrect answer then -
= 30-20 ÷ 1.50 – 1.00 b) Check working- if
formula is correct, award
25 1.25
½ Mk. If working is fully
= 0.4/0.4 correct then add another ½
=1 Mk.

(2 marks)

d. (i) Marginal productivity is the change in output resulting from employing one more
unit of a particular input. (1 mark)

(ii) -Perfect competition in the product market. (Any 1 for 1 mark)

o Perfect competition in the factor market
o Homogeneity of factors
o Substitutability of factors
o Divisible factors
o Maximum profit
o Full employment
o Variable input coefficient
o Same state of technology

© MINISTRY OF EDUCATION, FY13CE 2019: ECONOMICS.

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(iii) MRP= TR2 –TR1___

in Quantity (1 mark)

(iv) The marginal revenue product of a worker is equal to the product of the marginal
product of labour and the marginal revenue of output given by MR x MP = MRPL.
If successive units of labour are employed in combination with other factors of
production, the marginal physical product of labour (MPP) will eventually diminish.
In accordance to the law of diminishing returns, the productivity the productivity of
hiring extra units of labour will gradually decline. A firm cannot keep on hiring
extra labour, if t to be profitable. The demand for labour depends on its marginal
productivity. Therefore a firm will employ labour up to that point where the
marginal revenue product equals wages paid. (2 marks)

SECTION C MACROECONOMICS (21 marks)

QUESTION 1 MULTIPLE CHOICE QUESTIONS (5 marks)

1 A B C D
D

2 A B C D

3 A B C D

4 A B C D
D

5 AA B C D

QUESTION 2 SHORT ANSWER QUESTIONS (16 marks)

a. (i) autonomous consumption – is the consumption expenditure that occurs when
income levels are zero. Expenditure on these consumables does not vary with changes
in income. (1 mark)

(ii) C = 50 + 0.7(Y-50) (1 mark)

(iii) Equilibrium Expenditure

Y = C + I + G + (X – M) 1. Correct answer with or without
= (100 + 0.7(Y-T) + 200 + 250 + (500-450) working = 2mks.
= (100 + 0.7Y- 35) + 200 + 250 + (500-450) 2. a) Incorrect answer then -1/2 mk
b) Check working, if formula is
=65+0.7Y+450+50 correct ½ Mk. If working is fully
=565 + 0.7Y correct then add another ½ Mk.
0.3Y=565/0.3
Y=$1,883.333billion

(2 marks)
© MINISTRY OF EDUCATION, FY13CE 2019: ECONOMICS.
 7.

b. (i) Credit creation is a situation in which banks make more loans to consumers
and businesses, with the result that the amount of money in circulation (being passed
from one person to another) increases. (1 mark)

(ii) Banks lend out all their excess reserves and reserve asset ratio remains constant. (1 mark)

(iii) Reserve Asset Ratio

Reserves / Deposits = 10 / 100 = 10%/0.1 (1 mark)

c. (i) Paradox of thrift means that an increase in autonomous saving leads to a decrease
in aggregate demand and thus a decrease in gross output which will in turn lower
total saving. (1 mark)

(ii) Substitution effect of a change in interest rate – lower interest rates reduces the
incentive to save because of relatively poorer returns. There is a bigger incentive to
spend rather than keep savings. Income effect of a change in interest rates- lower
interest rates reduce the income received from saving, and so people may need to
save more in order to gain a reasonable return from your savings which is important
for retirement option.

d. (i) income effect (2 marks)

(ii) Higher wage means workers can achieve a target income by working fewer hours.
Therefore, if wages increase, it becomes easier to get enough income through
working fewer hours. (2 marks)

(iii) Macro-Economic Supply and Demand Curve of Labour

Real Wages
(i) Income effect
(w/p) (1 mk)
DD Full employment

 Income effect labeled

correctly = 1 mark
w/p1
 Axes labeled correctly =
1 mark
 Curve drawn correctly =
1 mark

(3 marks)
Labour

Turn Over
© MINISTRY OF EDUCATION, FY13CE 2019: ECONOMICS.
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SECTION C (continued)

SECTION D INTERNATIONAL ECONOMICS (14 marks)

QUESTION 1 MULTIPLE CHOICE QUESTIONS (3 marks)

1 AA B C D

2 A B C D

3 A B C DD

QUESTION 2 SHORT ANSWER QUESTIONS (11 marks)

a. nominal exchange rate
Is defined as the number of units of the domestic currency that can
purchase a unit of a given foreign currency. (1 mark)
b. Advantage (Any 1 for 1 mark)
 Avoids currency fluctuation
 Encourages firms to invest
 Incentive to keep inflation low
 Avoids devaluation

Disadvantage (Any 1 for 1 mark)

 Conflicts with other macro-objectives
 Less flexibility
 Current account imbalance
 May require higher interest rate (2 marks)

c. Managed float. (1 mark)

d. (i) revaluation

(ii) Our exports become expensive for overseas countries because our currency
becomes stronger. Hence it discourages exports. On the contrary, imports become
cheaper for Fijians because Fiji Dollars have become stronger. It will take less
quantity of Fiji to purchase the same amount of imports than before. Hence,
imports will be discouraged. (2 marks)

Turn Over
a. © MINISTRY OF EDUCATION, FY13CE 2019: ECONOMICS.
 10.

(iii)

Exchange Rate
(US Supply F$
currency
price
of F$1)$2.20
Fixed rate

$2.00

Demand F$

35 40 45 Quantity of F$ (billion)

- ½ mk for the plotting of price of $2.00

- ½ mk for the plotting of the price $2.20
- ½ mk for the demand curve and ½ mk for the supply curve. (2 marks)

(iii) Before the change After the change

$5,000 = $2,500FJD $5,000 = $2,272.73 FJD

$2.00 $2.50
(2 marks)
(1 mark for the correct answer of each of the problems above. Award
1/2mk for each if the answer is incorrect but the working is correct)

SECTION E DEVELOPMENT ECONOMICS (11 marks)

QUESTION 1 MULTIPLE CHOICE QUESTIONS (3 marks)

1 AA B C D

2 A BB C D

3 A BB C D

© MINISTRY OF EDUCATION, FY13CE 2019: ECONOMICS.

 11.

QUESTION 2 SHORT ANSWER QUESTIONS (8 marks)

a. Non – union members who benefit from a rise in pay after protests by union workers. (1 mark)

b. Deadweightloss is the area which does not accrue its benefit to anyone. It is lost in the society.
Deviating from the socially efficient price and quantity hence society has lost some values.
Negative externality :- MSC and Demand Curve intersection is where we were supposed to be. We
produced more than what we were supposed to produce. Th difference is the deadweight loss.

c. (i) In diagram A, it is assumed that everyone will benefit from the same supports. They are being
treated equally. In the second diagram, individuals are being given different supports to make it
possible for them to have equal access to the game. They are being treated equitably.(2 marks)
(ii) Age distribution, Older populations are less unequal than younger ones. Retirement from
productive endeavors. Greater GDP or GDP growth, percentage of population employed in the
agriculture sector.
d. (i) positive externality (1 mark)

i. Subsidise education. (2 marks)

QUESTION 3 ESSAY WRITING 10 MARKS

SECTION A
In light of the above statement, discuss and explain the following:
 any 3 fallacies in economics
 any 3 major schools of thought with their respective theorists
 three significances of the fallacies to the study of economics
 INTRODUCTION: Rephrase the question to include all points to be discussed in the essay.
(½ mark)
BODY:
 any 3 major schools of thought with their respective theorists (3 Mks)
 Classical (1/2 mark for each school of thought and ½ mark for each theory)
Is regarded as the first school of economic thought, is associated with the 18th
Century Scottish economist Adam Smith, and those British economists that followed,
such as Robert Malthus, J.B. Says, John Stewart Mills and David Ricardo.
The main idea of the Classical school was that markets work best when they are left
alone, and that there is nothing but the smallest role for government. The approach is
firmly one of laissez-faire and a strong belief in the efficiency of free markets
to generate economic development.
 Keynesian - Keynesian economists broadly follow the
main macro-economic ideas of British economist John Maynard Keynes. Keynes is
widely regarded as the most important economist of the 20th Century, despite falling
out of favour during the 1970s and 1980s following the rise of new classical economics.
 Keynes contribution is contained in the book in “The General Theory of Employment,
Interest and Money” published in 1930s. Aggregate demand is the major determinant
of the level of economic activity. Government intervention is essential for the smooth
operation of the market system. Capitalism is a self-regulating system and it cannot be
dependent upon to operate on its own.
 Welfare Economics
Is a school of thought with emphasis on improving the welfare of people. Uses
microeconomic techniques to evaluate well-being (welfare) at the aggregate
(economy-wide) level. The main welfare economist is Vilfredo Pareto. The field of welfare
economics is associated with two fundamental theorems. The first states that given certain
assumptions, competitive markets produce (Pareto) efficient outcomes.

 Monetarism This school of economic thought expressed the importance of money

in the economy. It has its roots on classical economic ideas. Monetarists’ ideas are
based mainly on the work of economists such as Milton Friedman and Irving Fisher.
Fluctuations in the level of economic activities arise from the changes in the level
of money supply.

 any 3 fallacies in economics (3 Marks )

 (1/2 mark foridentification of each fallacy and ½ mark for each explanation)
 three significances of the fallacies to the study of economics (3 Marks )
1. The fallacy of composition -to assume that what is true for the part is necessarily
true for whole. (A common error to assume that government finance operates same
principles as household finance. Simply because the prudent householder balances
the family budget ,it does not necessarily follow that government should do the same
e.g. The Paradox of thrift is a notable fallacy of composition that is central to
Keynesian economics.
2. The post hoc fallacy –the Latin phrase that means ‘after this, therefore because
of this’. The error lies in assuming that, because one event follows the other, the
second must be the result of the first. E.g. because inflation follows increased in
government spending, it is erroneous to conclude that government spending is the
cause of inflation; there may be many other factors that may be responsible.
3. Wishful thinking – is believing what we want to believe, and ignoring the
information or facts that conflicts with those beliefs. e.g. Economist Irving Fisher
said that "stock prices have reached what looks like a permanently high plateau" a
few weeks before the Stock Market Crash of 1929, which was followed by the Great
Depression.
4. Generalizations – generalizations or conclusions drawn based on limited or small
samples are misleading. For logical reasoning generalizations must be based on large
samples. e.g. all consumers are non-vegetarians
Being able to identify flaws in the economic research and address it in advance ,
understand and expect the fallacies and rectify it.

 CONCLUSION: Evaluate the statement. (1/2 Mark)

© MINISTRY OF EDUCATION, FY13CE 2019: ECONOMICS.

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SECTION B
Sustainable tourism is where the world is moving towards.
In light of the above, discuss the following:
 three reasons why sustainable tourism is important
 three ways it is implemented
 three challenges in the implementation of sustainable development

 INTRODUCTION: Rephrase the question to include all points to be discussed

in the essay. (½ mark)
 BODY: 1. Environment – Biodiversity maintenance
(1 mark each with explanation) (3 marks)
2. Future Generation – conserve for the future generation
3. International ratification – as part of the international bodies we need to
comply.
 Implementation: Lavena Walks, Sigatoka Sand dunes, Bouma National Heritage
Park. (1 mark each with explanation) (3 marks)
 Challenges- Costly- Capital, Exploitation of the atttraction hence the environment,
Lack of awareness and information. (1 mark each with explanation) (3 marks)
 CONCLUSION: Evaluate the statement (1/2 mark)

SECTION C:
Persistent deflationary and inflationary gaps are not healthy for an economy.
In light of the above statement, discuss the following:

 the definitions of inflationary gap and deflationary gap using its relevant
graphical analysis (3 marks)

 three impacts of either deflationary gap or inflationary gap in the economy (3 marks)

 three tools or actions of addressing the either of the gaps above. (3 marks)

 INTRODUCTION: Rephrase the question to include all points to be discussed in

the essay. (½ mark)
 BODY: Inflationary Gap: Macroeconomic concept that describes the difference
between the current level of real gross domestic product and the anticipated GDP that
would be experienced if an economy is at full employment. This is alos referred to as
potential employment.
 Deflationary Gap: If the equilibrium level of income is estimated to be below the full
employment level of income then emerges DG. If in the economy there arises insufficient
aggregate demand, equilibrium in the economy will occur to the left of the full
employment (Yf). (1 1/2 marks each with explanation) (3 marks)
 3 impacts of IG:- Price increases-inflation, reduce consumer purchasing power causing
AD to fall and the output gap to close. When the gap is finally closed or eliminated,
equilibrium is chieved, with actual GDP = Potential GDP but at a higher price level.
(1 mark each with explanation) (3 marks)
  Reducing the gap- Monetary policy or fiscal policy can be used to reduce the gap.
Money supply is reduced or interest rates are increased. This gap however, can be reduced
either by reducing money income through reduction in government expenditure, or by
increasing output of goods and services, or by increasing taxes. (3 marks)
(1 mark each with explanation)
 CONCLUSION: Evaluate the statement. (1/2 mark)

SECTION D
Question 3 Essay Writing (10 marks)
‘No devaluation is good as it makes everyone poor overnight and the poor become
poorer.’ (Arif Ali – Governor of Reserve Bank of Fiji)

In light of the above statement, discuss the following:

 The definition of currency devaluation with one factor determining the demand for a
country’s currency and the supply for a country’s currency (3 marks)
 Any three reasons why a country chooses to devalue its currency (3 marks)
 Any three effects of devaluation in the economy. (3 marks)

 INTRODUCTION: Devaluation definition. Rephrase the question to include all

points to be discussed in the essay. (½ mark)
 BODY:
 Factor determining country’ s currency: Derived from the demand for a country’s
exports, and from speculators looking to make a profit onchanges in currency values.
Eg. The demand for Fiji $ is expressed by those who have overseas currencies in
foreign exchange market. (1 mark each with explanation and examples) (3 marks)

 Supply for a country’s currency: The supply of a currency is determined by

the domestic demand for imports from abroad. For example, when the Fiji
imports cars from Japan it must pay in yen (¥), and to buy yen it must sell
(supply) Fiji dollars. (1 mark each with explanation and examples) (3 marks)

 3 # reasons for devaluing currency: To boost exports, To reduce trade deficits,

To reduce sovereign debt burdens, To achieve economic policy. (3 marks)
(1 mark each with explanation)
 3 effects of devaluation: Cheaper exports, Expensive imports, BOP Current
Account Surplus, Increase foreign reserves. (3 marks)
(1 mark each with explanation)
 CONCLUSION: Evaluate the question statement.

SECTION E
Question 3 Essay Writing (10 marks)

Inequality has economic costs implications which need to be addressed in a country.

In light of the above statement, discuss the following:

 three causes of inequality (3 marks)
 Any three tools of redistribution of income (3 marks)
  Any three attempts the government tries to get equity at the cost of inefficiency. (3 marks)

 INTRODUCTION: Rephrase the question to include all points to be discussed in

the essay. (½ mark)
BODY: (3 marks for each question)
 Three causes of inequality: -The market- market favors those resources high in
demand thus different level of income distribution in economy due to supply and
demand for labour in each industry.
-Life cycle- example a child will get pocket income, young adults such a professional
couple will get good income and retired couple maybe on pension.
-Wealth-Those with more wealth will generate more income and vice versa. (3 marks)
(1 mark each with explanation)

 Three tools of redistribution of income: Taxes –government can use progressive

taxes to tax rich more than the poor so the income equalities can reduce.
-Transfers-welfare benefit is transfers the government can provide the poor who cannot
provide for themselves
-Public Provisions- provide goods which are free of charge such as hospital, schools
etc.
-Subsidies-can subsidize range of goods and services such as medicines, agricultural
equipment. Regulations- such as minimum wage rate, affirmative action and
equality of opportunities such no discrimination gender, age or ethnicity.
(1 mark each with explanation)

 Three attempts the government tries to get equity at the cost of inefficiency:
- Increase progressive taxation can result in high income earners with less incentive to
work longer hours.
- Welfare system can result in reduced incentive to work and people can become risk
averse and enjoy using welfare benefits only.
- Tax and subsidy results in loss of allocative efficiency (deadweight loss). (3 marks)
(1 mark each with explanation)

 CONCLUSION: Evaluate the question statement. ( ½ mark)