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PACIFIC TECHNICAL AND FURTHER

EDUCATION

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ECF04: FOUNDATION ECONOMICS

FINAL EXAMINATION SOLUTIONS

SEMESTER I, 2019
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Blended/Print Mode
Time Allowed: 3 hours plus 10 minutes reading

Total Marks: 100 marks (50% of final grade)

INSTRUCTIONS:
1. This examination has three sections:
Section A: 20 marks
Section B: 70 marks
Section C: 10 marks
2. Answer all questions in Sections A and B.
3. For Section C answer any one question from the two questions provided.
4. Write your answers in the answer booklet provided
5. For questions in Sections B and C, begin answering each question on a new page.
6. You are allowed to use a calculator
7. This examination is worth 50% of your overall mark.
SECTION A: MULTIPLE CHOICE (20 MARKS)
Write the letter of the best answer in the answer booklet provided. Answer all questions. Each
question is worth 1 mark.

1. A
2. C
3. A
4. D
5. D

6. A
7. A
8. B
9. B
10. B

11. C
12. D
13. C
14. A
15. B

16. B
17. C
18. A
19. C
20. D

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SECTION B: SHORT ANSWERS, CALCULATIONS AND GRAPHICAL
ANALYSIS (70 MARKS)

Question 1 Markets and Elasticity (14 marks)

A. Given below is hypothetical data for Tuvalu.

The Production Possibilities for Tuvalu

Output Fish Units Dalo Units

A 50 0
B 47 10
C 42 20
D 33 30
E 18 40
F 0 50

i. Draw the Production Possibility Curve (PPC) for Tuvalu. (2 marks)

PPC for Tuvalu

60
A
50 B
C
40
D
30
Fish

E
20

10
F
0
0 10 20 30 40 50 60
Dalo

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ii. State one assumptions of the PPC. (1 marks)
any one assumption stated

iii. On the PPC drawn in part (i) above, mark the following points.
a. Point Y- showing unattainable point
b. Point X-showing underutilization of resources (2 marks)

iv. Calculate the opportunity cost of moving from point D to point B. ` (1 mark)

20 dalo units

B. Consider the following supply and demand information for Fiji Sevens Rugby Jersey in
Suva.

i. Identify the equilibrium price and quantity? (2 marks)

$90
20

ii. Using a demand and supply model, explain what would happen in the market if the
Rugby sevens world cup is to be held in Suva this year in July? (2
marks)

The demand for Rugby jersey will increase shifting the demand graph to the right. This
will result in increase in price and quantity. 1m

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 S

P2

P1

D1 D2
1m

Q1 Q2

iii. Calculate the Price Elasticity of demand (PED) if price changes from $90 to $120. Show
all working. (2 marks)

PED = (20-16) / (20+16)2 / (90-120) / (90+120)/2

= 4/ 18 / 30/105

= 0.22 / 0.29

= 0.76

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C. The following graph shows incidence of sales tax on gasoline.

Calculate and/or state the amount that represents the following?

1. Per unit tax. $0.30

2. Change in price. $0.25
3. Burden of the tax per unit on the consumer. $0.25
4. Total government revenue from the tax. $270
(2 marks)

Question 2 Market Structures and Cost of Production (14 marks)

A. Consider the following information.

Variable Total Cost Marginal Average

Quantity Fixed Cost
cost Cost Cost
0 180 0 180 - -
1 180 50 230 50 230
2 180 90 270 40 135
3 180 140 320 50 106.67
4 180 300 480 160 120

(8 marks)
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B. Examine the graph given below and answer the questions that follow.

i) Identify, what market structure is illustrated above. (1 mark)

Perfect competition

ii) What is the equilibrium price and output of the firm? (1 mark)

$10 and 30

iii) Calculate the profit or loss of the firm. Show all working. (2 marks)

(30x10) - (50x30)

300-1500 = $1200 loss or -$1200

iv) Identify the two curves that will give the profit maximising level of output. (1 mark)

MR and MC, also accept AR=MC or D=MC or P=MC

v) Give one feature of this market structure that differentiates it from monopoly.(1mark)

Any one feature of PC

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Question 3 Money and Financial Markets (14 marks)

A. i. Explain the difference between a primary expansion and a secondary expansion of the
money supply? (2 marks)
Primary expansion is the initial deposit received from outside the banking system while
secondary expansion is the credit created by banks.

ii. Explain how a government budget deficit will lead to an increase in the reserves of the
registered banks? (2 marks)

Budget deficit means more government spending in the economy which will result in
more deposits coming into banks. This will lead to an increase in reserves or excess
reserves.

B. True or False. Identify which of the following statements are true or false.

i. Money must be kept relatively scarce in order to maintain its value True
ii. The transaction demand for money generally increases as income increases. True
iii. Land is an example of near money. False
iv. An asset is considered to be more liquid than another when it can be exchanged for
currency faster and with less expense. True (4 marks)

C. Use the information given below to answer the questions that follow.

Demand Deposits $600m

Reserves $150m
Loans ?

i. Calculate the reserve ratio? 0.25 (1 mark)

ii. Calculate the value of loans in the above table. $450m (1 mark)

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 iii. What is the size of the credit multiplier? 4 (1 mark)

iv. If there was an injection of $12m into the economy, what would be the overall
increase in the money supply? $48m (1 mark)
v. Calculate the total credit created from the injection in part (iv) above. (1 mark)
48-12= $36m

vi. Explain why public deposits are a liability for a commercial bank. (1 mark)

It’s the public’s money and not the banks. The bank will have to pay it back to the
people when they come back for withdrawals.

Question 4 Measuring GDP and Macroeconomic Environment (14 marks)

A. Assume in Port Vila in Vanuatu, there are only 4 goods that households consume: food,
clothes, kava and water. To calculate the CPI, the Vanuatu government uses a basket of
goods consisting of 10 units of water, 4 units of food, 15 units of clothes and 12 units of
kava. You are also given the following additional information (note that in the table the
prices are in Vatu).

Water Food Clothes kava

Year Pric Pric
Price Quantity Quantity Quantity Price Quantity
e e
Base
400 10 100 4 50 15 200 12
Year
Current
500 10 120 6 70 15 220 15
Year

i. Find the CPI in the current year using a 100-point scale. Show all working.
(2
marks)
CPI = (500x10)+(120x4)+(70x15)+(220x12)
(400x10)+(100x4)+(50x15)+(200x12)

= 5000+480+1050+2640
4000+400+750+2400

= 9170 x 100
7550

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 = 121.46

ii. Calculate the inflation rate between the base year and the current year? Show all
working. (2 marks)

Inflation rate = (121.46-100)/100*100

= 21.46%

B. Consider a hypothetical economy that produces only three items: Sausages, Cheese and
Bread. The base year is arbitrarily chosen as 2014.

Good Quantity Price (2014) Quantity Price (2015)

(2014) (2015)
Sausages 1,000 $0.85 1,100 $1.40
Cheese 1650 $3.00 1,800 $3.60
Bread 600 $5.00 500 $6.00

i. Calculate nominal GDP in the current year (2015) and in the base year (2014)?
Show all working. (2 marks)

GDP (2014) = (1000 x.0.85) + (1650 x 3) + (600 x 5) = $8800

GDP (2015) = (1100 x.1.40) + (1800 x 3.6) + (500 x 6) = $11020

ii. What is the percentage change in nominal GDP from 2014 to 2015? Show all
working. (1 mark)

(11020-8800)/8800 *100

=25.23%

iii. Calculate the real GDP in the current year (2015)? Show all working.
(2
marks)

Real GDP (2015) = (1100 x.0.85) + (1800 x 3) + (500 x 5)

= $8835

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C. Use the information given below to answer the questions that follow.

The following table summarizes some macroeconomic quantities of a hypothetical

economy in the Pacific. All values are in millions of dollars.

C = 120 + 0.6Y
I = $70
G = $85
X = $36
M = 68 + 0.1Y

Calculate the:

i. Equilibrium level of income; using (C+I+G +X-M) (2 marks)

Y=120+0.6Y +70 +85 +36-(68 + 0.1Y)

Y= 120+0.6Y+70+85+36-68-0.1Y
Y=243+0.5Y
0.5Y=243
Y=$486m

ii. Value of total imports at the equilibrium level (1 mark)

Imports = 68+0.1(486)
= $116.6m

iii. New equilibrium level of income if Investments increase by $5 million. (2 marks)

Continuing from part (i)

0.5Y=243+5
0.5Y=248
Y=$496m

OR

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 Valid Alternative approach is to use the multiplier. In this case the multiplier is 2, hence
increase is $5m x 2 =$10m.
New GDP is 486 + 10 = $496m

Question 5 International Trade and Exchange Rates (14 marks)

A. i). Discuss two advantages of free trade as opposed to protectionism. (2 marks)

1. Free trade leads to greater specialization and increase in output

2. Cheaper goods

3. Greater efficiency globally

ii). Discuss two advantages of protectionism as opposed to free trade. (2 marks)

1. Protects local employment

2. Protects infant industries

3. Prevents dumping

4. Prevents establishment of foreign monopoly

iii) Explain what is meant by an infant industry? (1 mark)

A firm or industry that is relatively new and needs government support to compete
particularly against foreign firms.

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B. Use the Balance of Payments information given below for Economy Y to answer the
question that follows. All values are in $000

Export of goods 75000

Net capital inflows 42000

Imports of services 25000

Export of services 37500

Import of goods 59000

Calculate the following.

i. Balance of Trade. (1 mark)

BOT = 75000-59000 = $16 000 000

ii. Balance of Current Account. (2 marks)

Current Account balance = 16 000 000 + (37 500 000-25 000 000)
= 16 000 000 + 12 500
= $28 500 000

C. Calculate the value of the following items in USD$ or FJD$ using the exchange rate
given. Show all working. Exchange rate: FJD$1 = USD$0.568

i. Item 1: Fiji Tabua FJD$300 in USD$? $US170.40

ii. Item 2: 1 litre Fiji Water bottle FJD$5.00 in USD$? $US2.84

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 iii. Item 3: 1 leather jacket USD$360 in FJD$? $FJ633.80

(3 marks)

D. Use the table below to answer the questions that follow. Assume that the production
combinations are the output per worker for each product.

Output per day of work

Food Clothing
Marshall
12 6
Islands
Niue 2 4

i. Using an example from the table, define the economic concept of absolute advantage.

Absolute advantage is when a country can produce a good more cheaply than another
country with the same amount of resources. Example, Marshall Islands can produce
more food than Niue.

ii. Which country has comparative advantage in food production? (1 mark)

Marshalls

iii. Which country has comparative advantage in clothing production? (1 mark)

Niue

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SECTION C ESSAY WRITING (10 marks)

Choose any one question from the two questions given below and write an essay on it. The
length of the essay should be between 250 to 300 words. Each question is worth 10 marks.

Note: You are required to answer only one question in this section. Do not write more than one
essay.

1. Discuss what Fiscal policy is? Explain the difference between an expansionary and a
contractionary fiscal policy. Explain how the following two tools are used by the
government to execute fiscal policies.
i. Tax rates.
ii. Government Expenditure.

Fiscal Policy explained 2m

Difference between expansionary and contractionary 2m
How tax rates are used 3m
How government expenditure is used 3m

2. Pacific Island economies are not yet ready for Trade liberalisation (Free trade). Evaluate this
statement. Explain to what extent you agree or disagree with the statement with reference to
some specific examples from the Pacific.

Free trade OR protectionism discussed in Pacific context 2m

Agree or disagree with the statement 1m
Evaluation is attempted. Student shows both sides of the argument. 1m
This can be done if student gives both advantages and disadvantages of either free trade or
protectionism.
Provides reasons and arguments in support of either trade liberalisation or against it. This
depends on the students own opinion but needs to be well supported by reasons and
examples.
5 marks for arguments and 1 m for examples 6m

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END OF PAPER!

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