Secondary 5 Second Term Examination – Paper 1 (2018/19)

Name: Class: ( ) Date:

Time allowed: 1 hour Marks: / 45

There are 45 questions in this paper. Choose the BEST answer for each question. Write the
answers in the table below.

1 6 11 16 21 26 31 36 41
2 7 12 17 22 27 32 37 42
3 8 13 18 23 28 33 38 43
4 9 14 19 24 29 34 39 44
5 10 15 20 25 30 35 40 45

1. Suppose newly printed banknotes worth $30 000 are deposited into a bank. This causes the total
amount of deposits of the banking system to increase by $120 000 eventually. Which of the
following conclusions can we make?
(1) The actual banking multiplier of the above banking system is 4.
(2) The legal reserve ratio is 0.25.
(3) The maximum possible increase in money supply is $120 000.
(4) The monetary base increases by $30 000.
A. (1) and (3) only
B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only

2. Refer to the following balance sheet of a banking system.

Assets ($) Liabilities ($)

Reserves 3 000 Deposits 8 000

Loans 5 000

Suppose the legal reserve ratio is 25%. If all banks loan out excess reserves, which of the
following statements about the above banking system after deposit creation is correct?
A. Since banks loan out excess reserves, the reserves held by the banking system will decrease.

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 B. The maximum banking multiplier will increase.
C. Money supply increases by $4 000 at most but monetary base remains unchanged.
D. The maximum possible increase in loans is smaller than the maximum possible increase in
deposits.
3. Refer to the following balance sheet of a banking system. Suppose the legal reserve ratio is 25%
and non-bank public does not hold any cash.

Assets ($) Liabilities ($)

Reserves 4 000 Deposits 12 000

Loans 8 000

If the government lowers the legal reserve ratio by 15% and all banks loan out excess reserves.
After deposit creation, which of the following statements about the banking system is correct?
A. The reserves will decrease to $1 200.
B. The actual banking multiplier increases.
C. Money supply increases to $28 000 at most and monetary base remains unchanged.
D. The maximum possible increase in deposits is larger than the maximum possible increase in
loans.

4. The following table shows the balance sheet of a banking system and the excess reserves are
$1 500.

Assets ($) Liabilities ($)

Reserves 4 000 Deposits 10 000

Loan 6 000

Suppose the public withdraws $1 000 from banks and remits $200 of the amount to overseas.
Banks do not hold excess reserves. After deposit creation, which of the following are correct?
(1) Bank deposits increase by $3 000 at most.
(2) Bank loans increase by $3 000 at most.
(3) Money supply increases by $2 800 at most.
(4) Monetary base increases by $800 at most.
A. (1) and (2) only

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B. (1) and (4) only
C. (2) and (3) only
D. (3) and (4) only

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5. The following table shows the balance sheet of a banking system in an economy.

Assets ($ million) Liabilities ($ million)

Reserves 700 Deposits 6 000

Loans 5 300

Suppose the public does not hold cash and the banking system is short in $500 million of
reserves. Which of the following statements are correct?
(1) If banks need to satisfy the minimum requirement of legal reserves, the maximum possible
amount of loans is $2 800 million.
(2) When the central bank injects newly printed banknotes worth $500 million into the banking
system and banks loan out all excess reserves, the money supply of the economy will
increase by $6 000 million at most.
(3) If $500 million is remitted overseas to the banking system of the economy, the monetary
base will be $1 200 million.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

6. The economic data of a country is as follows:

Actual banking multiplier 5

Money supply $130 billion

Deposits $100 billion

According to the above table, which of the following statements about the above country is
correct?
A. The cash held by non-bank public is $20 billion.
B. The legal reserve ratio is 20%.
C. The monetary base is $50 billion.
D. The amount of loans of the banking system is $70 billion.

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7. Suppose the public makes withdrawal from banks and remits the amount to overseas. Which of
the following must decrease?
(1) Monetary base
(2) Money supply
(3) Maximum banking multiplier
(4) Maximum possible amount of deposits of the banking system
A. (1) and (3) only
B. (1) and (4) only
C. (1), (2) and (4) only
D. (2), (3) and (4) only
8. Refer to the following diagram.
Nominal interest rate (%)

MD2
MD1
0 Quantity of money

Which of the following will lead to the above change in money demand curve?
A. People’s incentive to consume increases.
B. Nominal interest rate decreases.
C. The use of electronic money becomes more common.
D. The central bank buys bonds from the open market.

9. The following diagram shows the money demand and money supply curves of an economy. The
initial equilibrium point is A.

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 Interest rate
Ms2 Ms0 Ms1

E1

A E3
E2

Md1
E4
Md0
Md2 Quantity
0 of money

Suppose the real income of residents increases and the government raises the legal reserve ratio.
The new equilibrium point will be .
A. E1
B. E2
C. E3
D. E4

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10. Since there is security loophole in electronic payment system, people hold more cash for carrying
out transactions. Which of the following measures can the central bank adopt to reduce the
impact of the above situation on interest rate?
(1) Buy government bonds from the open market.
(2) Raise discount rate.
(3) Lower legal reserve ratio.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

11. Which of the following can offset the effect of an increase in asset demand for money on the
aggregate demand of an economy?
A. The trading partners of the economy have economic recovery.
B. The central bank of the economy sells government bonds in the open market.
C. The government of the economy increases the salaries tax rate.
D. The government of the economy increases the production subsidy for firms.

12. Suppose investors are optimistic about the financial market. Which of the following can offset the
effects of the above situation on real output?
(1) The government increases welfare transfer.
(2) The government reduces personal tax allowance.
(3) The central bank issues more banknotes.
(4) People’s preference towards liquidity of assets increases.
A. (1) and (3) only
B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only

13. Suppose more and more companies in a country change from paying salary monthly to weekly.
Which of the following helps offset the effect of the above situation on price level?
A. The currency of the country depreciates.
B. Firms in the country expect rice level to increase.
C. The trading partners of the country have economic recession.
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D. The central bank lowers the discount rate.

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14. Suppose the nominal interest rate is 8% and people expect deflation rate to be 5%. However, the
actual deflation rate is 7%. The opportunity cost of holding cash is , the actual real rate of
return of holding cash is ______________ and the expected real interest rate is ___________.
A. 3% … -7% … 15%
B. 3% … 7% … 13%
C. 8% … -7% … 15%
D. 8% … 7% … 13%

15. Suppose the expected interest rate is 8% and people expect inflation rate to be 5%. However, the
actual inflation rate is 7%. The opportunity cost of holding cash is and the actual real
interest rate is ___________.
A. 13% … 5%
B. 13% … 6%
C. 15% … 5%
D. 15% … 6%

16. Suppose people can only choose to hold bonds or cash. Which of the following is correct?
A. The cost of holding cash is expected real interest rate.
B. The cost of holding cash is nominal interest rate.
C. Only when inflation rate can be predicted accurately, will the cost of holding cash be
expected real interest rate.
D. Only when inflation rate can be predicted accurately, will the cost of holding cash be
nominal interest rate.

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17. Refer to the following diagram.

Year-on-year growth rate of CPI (%)

0 Year
2015 2016 2017 2018 2019
1

Between 2015 and 2019, which of the following are INCORRECT?

(1) Nominal interest rate is lower than expected real interest rate.
(2) Nominal interest rate is lower than actual real interest rate.
(3) The actual real rate of return of holding cash is smaller than zero.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

18. Which of the following are indirect taxes of Hong Kong?

(1) General sales tax
(2) Betting duty
(3) Property tax
(4) Stamp duty
(5) Air passenger departure tax
A. (1), (2) and (3) only
B. (1), (3) and (4) only
C. (2), (4) and (5) only
D. (1), (2), (4) and (5) only

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19. Which of the following tax systems will cause Lorenz curve to be closer to the line of perfect
equality?
A. B.
Tax rate Tax rate
(%)

0 0
Taxable income Taxable income

C. D.
Tax payment Tax payment

0 0
Taxable income Taxable iincome

20. During economic recovery, which of the following statements are correct?
(1) More people fall in to the tax net.
(2) The ratio of direct tax revenue of the government to indirect tax revenue may increase.
(3) The government will have fiscal surplus.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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21. If in a fiscal year, the income of Hong Kong residents increases by 10%.
(1) More people will fall into the tax net.
(2) The salaries tax revenue of the government will increase by more than 10%.
(3) The tax band of salaries tax will be widened.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

22. Suppose the salaries tax rate of a country has the following changes:

Marginal tax rate (%)

Marginal tax band ($)
Old tax system New tax system

The initial taxable income of 1

2
$40 000

Next $40 000 4 2

Next $40 000 8 5

Remaining 14 9

Under the new tax system,

(1) employment population will increase.
(2) salaries tax revenue will increase.
(3) Gini coefficient (calculated in income after tax) will increase.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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23. The following shows the nominal government expenditure and nominal GDP of Country A:

Year-on-year percentage
Year-on-year percentage
Year change in nominal
change in nominal GDP
government expenditure

2018 -6% -4%

2019 -1% -3%

According to the above information, which of the following statements is correct?

A. The ratio of nominal government expenditure to nominal GDP in 2019 increased.
B. Both nominal GDP and nominal government expenditure in 2019 increased.
C. The scale of public sector of the country in 2019 increased.
D. The government had fiscal surplus in 2019.

24. The following diagram shows the percentage changes in direct tax revenue and nominal GDP of
Country A.
Year-on-year percentage change (%)
Direct tax revenue
Nominal GDP

0 Year
2015 2016 2017 2018 2019
1

Which of the following statements about the economy of Country A are correct?
(1) Between 2015 and 2017, direct tax revenue and nominal GDP increased.
(2) Between 2015 and 2017, the ratio of direct tax revenue to nominal GDP decreased.
(3) Between 2017 and 2019, the ratio of direct tax revenue to nominal GDP increased.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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25. Refer to the following diagram.
Price level

Short run aggregate supply

0 Real income

Which of the following is a possible reason for the short run equilibrium to change from A to B?
A. The central bank lowers the discount rate.
B. The interest rate rises.
C. The government provides cash consumption subsidy for residents.
D. The government provides production subsidy to firms.

26. The Hong Kong government reducing transfer payment will cause in GDP to fall. This
will cause aggregate demand curve to shift .
A. government consumption expenditure … rightwards
B. government consumption expenditure … leftwards
C. private consumption expenditure … rightwards
D. private consumption expenditure … lefttwards

27. Which of the following will narrow the inflationary (output) gap and trade deficit of an economy?
A. There is a strike in the economy.
B. There is an improvement in the production technique of the economy.
C. Households expect the performance of the economy in the future to be better.
D. The central bank buys government bonds.

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28. The government of Country A has conflicts with other countries. As a result, the government of
Country A cancels the talent importation scheme and other countries ban the imports of goods
from Country A. Which of the following diagrams can best explain the effects of the above
change on the price and output levels of Country A?
A. B.
Price level Price level
(%)

SRAS1

0 0
Aggregate output Aggregate output

C. D.
Price level Price level

SRAS2

AD2

0 0
Aggregate output Aggregate output

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29. The following diagram shows an economy’s aggregate demand (AD) curve, short run aggregate
supply (SRAS) curve and long run aggregate supply (LRAS) curve.
Price level
LRAS
SRAS

E1

AD
Aggregate
0 output

Suppose the economy initially operates at point E1 and government expenditure equals
government revenue. If the price of assets of the economy increases, in the short run, inflationary
(output) gap will and there is .
A. narrow … fiscal deficit
B. widen … fiscal deficit
C. narrow … fiscal surplus
D. widen … fiscal surplus

30. The following diagram shows an economy’s aggregate demand (AD) curve, short run aggregate
supply (SRAS) curve and long run aggregate supply (LRAS) curve.
Price level
LRAS
SRAS2
SRAS1
C
SRAS3

A B

AD2
AD1 Aggregate
0 output

If the initial equilibrium point of the economy is point A, when oil price increases, the short run
equilibrium will be at point and long run equilibrium will be at point .
A. B…A
B. B…C

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 C. D…A
D. D…C

31. Which of the following government policies will increase price level and unemployment level at
the same time.
A. Implement a contractionary monetary policy.
B. Lower the unit subsidy on firms’ production.
C. Cancel all the production subsidy for all resident producing units.
D. Increase the allowance under the salaries tax system.

32. Suppose there is a deflationary gap in an open economy and the value of exports is larger than the
value of imports. If people’s incentive to consume increases, deflationary gap will ,
and trade .
A. widen … the government’s fiscal balance increases … deficit will appear
B. narrow … the government’s fiscal balance increases … balance will decrease
C. widen … the government will have fiscal surplus … deficit will appear
D. narrow … the government will have fiscal surplus … balance will decrease

33. Initially, the government’s expenditure equals its revenue and total value of exports equals total
value of imports. Which of the following will cause fiscal deficit and trade surplus to appear at
the same time?
(1) Interest rate increases.
(2) The market is pessimistic about investment environment.
(3) The market is optimistic about the financial market.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

34. Suppose the HKSAR government increases its investment in innovation and technology. In the
long run, price level will and real output will .
A. increase … increase
B. increase … remain unchanged
C. increase, decrease or remain unchanged … increase

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D. increase, decrease or remain unchanged … remain unchanged

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35. Which of the following must cause the short run real output of a country to decrease?
A. The central bank increases the discount rate and the firms of the country expect price level
to increase.
B. The government of the country increases production subsidy and the central bank sells
government bonds.
C. The price of raw materials increases and the government increases transfer payment.
D. The trading partners of the country have economic recession and the central bank reduces
legal reserve ratio.

36. Suppose a country is initially at long run equilibrium. If investors are optimistic about investment
environment. In the short run, will increase and in the long run,
.
A. short run aggregate supply … aggregate demand will increase until the full employment
level decreases to real output level
B. short run aggregate supply … short run aggregate supply will decrease until the real output
returns to the full employment level
C. aggregate demand … aggregate demand will increase until the full employment level
decreases to real output level
D. short run aggregate supply … short run aggregate supply will decrease until the real output
returns to the full employment level

37. There is a deflationary (output) gap in an economy. If local currency appreciates, which of the
following statements are correct?
(1) Potential national income will decrease.
(2) Real national income will decrease.
(3) Nominal national income will decrease.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

38. Which of the following situations are classified as expansionary monetary policies?
(1) The government distributes cash subsidy to residents to encourage consumption.
(2) The government provides cash subsidy to green producers to encourage consumption.

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(3) The central bank buys government bonds.
(4) The central bank lowers the discount rate.
A. (2) and (3) only
B. (3) and (4) only
C. (1), (2) and (4) only
D. (1), (3) and (4) only

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39. can offset the effect of expansionary monetary policies on price level.
(1) The government increases the production subsidy to firms.
(2) The government increases the living subsidy to low-income people.
(3) Oil price decreases.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

40. Refer the following information of Country A and answer the question:

Implicit GDP Money supply

Year
deflator ($ million)

2018 50 1 000

2019 75 1 100

According to the short run quantity theory of money, which of the following can explain the
difference between the growth rates of money supply and price level in 2019?
A. Real national income decreases.
B. Real national income increases.
C. Nominal national income decreases.
D. Nominal national income increases.

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41. According to classical quantity theory of money, when the annual percentage increase in money
supply decreases, which of the following diagrams can correctly describe the above situation?
A. B.
Price level Growth rate of nominal output

(%)

0 0
Year Year

C. D.
Inflation rate Inflation rate

0 0
Year Year

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42. Refer to the following diagram.
Year-on-year growth rate (%)

Nominal money
supply

Real GDP

0 Year
2015 2016 2017 2018 2019

According to the short run quantity theory of money, from 2015 to 2019, price level
and the growth rate of nominal GDP is than the growth rate of real GDP.
A. decreases … higher
B. decreases … lower
C. increases … higher
D. increases … lower

43. According to the short run quantity theory of money, when money supply decreases, which of the
following are correct?
(1) Price level may increase.
(2) Potential output will decrease.
(3) Real output will decrease in the same percentage.
(4) Nominal output will decrease in the same percentage.
A. (1) and (2) only
B. (1) and (4) only
C. (2) and (3) only
D. (3) and (4) only

44. According to the long run quantity theory of money, when money supply decreases,
.
A. price level may increase
B. potential output will decrease
C. real output will decrease in the same percentage.
D. nominal output will decrease in the same percentage
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45. According to the short run quantity theory of money, when the percentage decrease in money
supply is larger than the percentage decrease in price level, this implies that
(1) nominal output will decrease.
(2) real output will increase.
(3) velocity of circulation of money will increase.
A. (1) only
B. (2) only
C. (1) and (3) only
D. (2) and (3) only

End of Paper

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