TOPIC 1: CIRCULAR FLOW

1.1 Choose one of the following options. Indicate the number and the
letter only.
1.1.1 An open economy is best described as a … sector economy.
A one
B two
C three
D four (2)

1.1.2 Labour can be bought and sold in the … market.

A goods
B factor
C financial
D consumer (2)

1.1.3 Investment is an example of a/an ... in the circular flow model.

A leakage
B injection
C withdrawal
D loss (2)

1.1.4 Production by the citizens of a country, locally and abroad, is called

the … product.
A gross national
B gross domestic
C net national
D net domestic (2)

The Multiplier
1.2 Calculate the change in aggregate income if there is an injection of
R20 billion into the economy with a marginal propensity to save of 0,3.
Show how the multiplier effect could influence the government to
create more jobs. Show ALL calculations. (8)

Calculation:
• Injection = 20 bn
• mps = 0.3
• Multiplier = 1/mps
• 1/0.3
• 3.3
• Change in National Income = R20bn x 3.3
• = R66bn / R66,6 / R67 (Max 4)
Jobs created there will result in more income and spending in the economy
which will lead to even more jobs being created – knock-on effect
Government can also decrease taxation, putting more money in the pockets of
the consumer. The extra money will be spent by the consumer, leading to
increased employment Government can decrease company taxes that might
lead to increased investment by businesses focussing on labour intensive
production methods
(Max 4)
(Accept any other correct relevant higher order response)

National Account Aggregates

1.3 Study the table below and answer the questions that follow.

1.3.1 Identify the factor of production in the table above that receives
the biggest portion of the national income. (1)

Labour

1.3.2 Which method was used to calculate the figures above? (1)

Income

1.3.3 Briefly describe the term basic prices. (2)

Basic prices is the cost to the producer adding taxes on

production and subtracting subsidies on production
(Accept any other correct relevant response)

1.3.4 Briefly explain how subsidies can influence production. (2)

Subsidies on products are payable by government

to suppliers to: reduce their costs of production /
encourages them to increase output
1.3.5 Calculate the gross domestic product at market prices (A).
Show ALL calculations. (4)

Gross value added at basic prices 3 871 214

PLUS: Taxes on products 484 059
MIN: Subsidies on products 16 415
GDP at Market Prices 4 338 858

OR

3 871 214 + 484 059 – 16 415 = R4 338 858bn

TOPIC 2: Business Cycles

2.1 Choose one of the following options. Indicate the number and
the letter only.

2.1.1 The peak of a business cycle is characterised by a …

A high demand for credit.
B stable inflation rate.
C high unemployment rate.
D low output. (2)

2.2.1 Name any TWO monetary policy instruments used by the

South African Reserve Bank. (2 x 1) (2)

• Interest rates
• Cash reserve requirements
• Open market transactions (government bonds)
• Moral suasion
• Foreign exchange control

2.2.2 What is the purpose of a trend line in a business cycle? (1 x 2) (2)

The trend indicates the general direction in which

indexes move, that were used in the business cycle
(Accept any other correct relevant response)

2.2.3 Name any TWO types of business cycles. (2 x 1) (2)

Kitchen cycles
Jugler cycles
Kuznets cycles
Kondratieff cycles
TOPIC 3: Public Sector

3.1 Choose one of the following options. Indicate the number and the
letter only.

3.1.1 Fiscal policy is an action taken by government in respect of taxation and

... to influence economic activity
A exchange control
B expenditure
C credit control
D exchange control (2)

3.1.2 The medium-term expenditure framework (MTEF) is a …-year

government expenditure and revenue projection.
A three
B one
C two
D four (2)

3.2 Study the table below and answer the questions that follow.

3.2.1 Which ministry (department) is responsible for the presentation of the

National budget speech to the parliament? (1)

Department of finance

3.2.2 Name ONE form of direct tax payable to the state. (1)

Income tax (PAYE) / capital tax / property tax / company tax

(Accept any other correct relevant response)

3.2.3 Briefly describe the term budget. (2)

 A budget is a document showing anticipated revenue and
estimated expenditure for a specific period
(Accept any other correct relevant response)

3.2.4 How will the increase in carbon tax on plastic bags benefit the
economy? (2)

• It will reduce environmental pollution

• It will increase government revenue
(Accept any other correct relevant response)

3.2.5 Briefly describe the extent to which the government addresses

Economic equity. (2 x 2) (4)

The budget addressed economic equity by:

• redistributing wealth through a progressive tax system, making
higher income earners paying more taxes
• providing most required free social services e.g. education, primary
health care, free tertiary education, provision of housing and
utilities to the poorest part of the community
• providing a platform for all gender and racial boundaries to be
Crossed
The budget failed to address economic equity:
• increasing VAT by 1%, affecting the poor in a more serious way
compared to other income groups
• introducing the carbon tax reduced the individuals’ disposable
income and company profits
(Accept any other correct relevant response)

3.3 Study the graph below and answer the questions that follow.
3.3.1 Identify the curve in the graph above. (1)

Laffer

3.3.2 At what tax rate will government revenue be maximized? (1)

45%

3.3.3 How much revenue will the government receive if the tax rate is 100%? (2)

No revenue / zero

3.3.4 What effect will a decrease in the tax rate from 65% to 45% have on
Tax revenue? (2)

A decrease in the tax rate will lead to an increase in tax revenue (from
R175 to R200) by encouraging people to work
(Accept any other correct relevant response)

3.3.5 What consequences could a 1% VAT increase have on the different

role players in the South African economy? (2 x 2) (4)

The increase of VAT by 1% could affect role-players by:

• increasing the revenue to the government if the same/more is
 spending by businesses and households
• resulting in a fall in output (production) because fewer consumers will
be able to afford to buy the same goods and services as before
• leading to a decline in the satisfaction of wants of consumers, mainly
poor consumers in buying luxury goods
• causing an increase in tax - especially the high-income earners
(luxury goods) where they are responsible for 85% of VAT income
• 19 basic food items are excluded from VAT that benefit most lower
income earners
• leading to a decrease in sales that will reduce profits
(Accept any other correct relevant response)

3.4 How does the government use fiscal policy to restrict the economy?
(8)

Government uses fiscal policy by: Decreasing government expenditure

to limit aggregate demand Reducing production, as fewer goods and
services be needed, few factors of production will be employed and
disposable income as well as expenditure will decrease Increasing
taxes, which will lead to a decrease in disposable income and will lead
to a decrease in aggregate demand. Reducing government spending
and simultaneously increasing taxes: this will have a double effect
Government spending decreases and consumers and producers also
have less spending . Demand drops substantially, inflation decreases
(Accept any other correct relevant response) Max. 8
(A maximum of 2 marks may be allocated for mere listing of facts/
examples.)

3.5 How successful has government been to reduce public sector failure? (10)

The government has reduced public sector failure by:

Providing leadership and training to management and employees.
Implementing different strategies to ensure service delivery e.g. set
targets
Eliminating corruption through regular monitoring e.g. auditing
Recognising employee worker performance through incentives e.g.
rewards on excellent service.
Administering flexible business processes to accommodate individual
differences

Government has not been successful in reducing public sector failure

by: Wasting the allocation of resources more than the private sector
Not reaching the goals
 Inadequate and unable to bring about the desired effects in the economy
Tends to be less productive
(Accept any other correct relevant response) Max. 10

3.6 Why are state owned enterprises (SOEs) seen as a problem in

public sector provisioning? (8)

The costs of maintaining and managing SOEs are very high

These costs result in higher taxes and larger public debt
Private enterprises are more cost-efficient than public enterprises
SOEs are seen as bureaucratic, inefficient and unresponsive to
consumer needs
SOEs do not operate according to the profit motive-they sometimes
incur large losses, which must be funded by tax money
SOEs are seen as the exact cause of huge unemployment and a
shortage of funds for other developments
(Accept any other correct relevant response.) (Max. 8)

3.7 Evaluate taxation as part of the government’s strategy to grow the

economy. (8)

Government is stimulating economic activities through taxation by:

• providing tax incentives to export-driven producers
• increasing the number of zero-rated products to enhance increased
consumption
• keeping company tax (corporate tax) at a lower levels
• reducing the import duties on capital goods that eventually would not
impact negatively on domestic prices
• reducing the tax rate for the foreign investors as an incentive inward
investment

Taxation is hampering economic activities by an increase in the:

• VAT rate that would definitely limit expenditure on necessary goods
needed by lower income groups and impact negatively on production
• increasing individual personal income taxes that will discourage
workers in higher income groups to work extended hours
• fuel levies that eventually will lead to higher production costs and have
a negative effect on the aggregate demand of economic goods and
services
• excise duties which hamper agricultural production because of lower
demand for imports
(Accept any other correct relevant response)
(Allocate maximum of 2 marks for examples or mere listing of facts) (8)
3.8 Suggest solutions on how efficiency of state-owned enterprises can
be improved. (10)

Efficiency of state-owned enterprises (SOEs) can be improved by:

• Having proper and clear guidelines to fight corruption
• Forming Private Public Partnerships to enable a faster, more efficient
delivery of goods and service.
• Setting clear costing and development mandates with financial
implications clearly set out.
• Developing a framework for the appointment and remuneration of
members to the Board of State-owned companies.
• Ensuring efficient management.
• Focusing on scarce resources for highest financial impact, ✓✓ e.g. encouraging
a competitive work culture by hiring and retaining talented individuals through
competitive compensation packages.
(Accept any other correct relevant response) (10)

3.9 Why is price stability important in preventing extreme fluctuations in

business cycles? (10)

Price stability is important in preventing extreme fluctuations in

business cycles because it:
-contributes to high levels of economic activity and employment
-improves the transparency of the price mechanism so that people can -
recognise changes in relative prices without being confused by changes
in the overall price
-allows people to make well-informed consumption decisions
-encourages foreign investment to promote growth
-helps to allocate resources more efficiently
-avoids unproductive activities that are sometimes used to protect one
against the impact of high inflation
-avoids the risk of deflation which makes it more difficult implement
policies guarding against it
-implements inflation targeting, by reducing distortion of inflation or
deflation which exacerbate the distortionary impact on the economic
behaviour of tax and social security
-prevents an arbitrary redistribution of wealth and income as a result of
unexpected fluctuations
-keeps interest rates unchanged to ensure continued growth in the
economy without big fluctuations
-adapts the cash reserve requirements which will compel banks to limit
credit/money in circulation
(Accept any other correct relevant higher order response) (Max.10)
Candidates can express the above answer in a negative way, when
 arguing if price stability is not achieved, e.g. there will be low levels of
economic activity and employment

3.10 How successful is the government in reaching its macroeconomic

Objectives? (10)

The government is successful in reaching these goals by:

− reducing unemployment through the EPWP. If it was not for the programme,
the unemployment rate would have been even higher
− managing to keep inflation within the 3–6% target
− improving economic equity (BEE through affirmative action, gender equity)
− operating on a free floating exchange rate system in line with international
benchmarks

The government is not successful in reaching its goals through:

− a decreasing economic growth rate; in the last 5 years the average real gross
domestic product growth has been below 2%
− increasing unemployment rates
- unemployment rate have increased to 27.7 in 2017 which was the
highest since 2009
− fluctuating value of the rand - in the past 5 years the value of the rand
fluctuated against the major trading partners' currencies
− BEE only benefitting a few individuals due to corruption and
misrepresentations such as fronting
(Accept any other correct relevant response) (Any 5 x 2) (Max.10)

TOPIC 4: International Trade

4.1 Choose one of the following options. Indicate the number and the
letter only.

4.1.1 The comparison of a country's export prices with import prices

by means of indexes is referred to as the …
A exchange rate
B condition trade.
C terms of trade.
D inflation rate. (2)
4.1.2 Comparative cost advantage shows that world output can increase
if countries ... in what they do best.
A impose tariffs
B limit the use of technology
C specialise
D protect workers (2)

4.2 Refer to the graph below and then answer the questions that follow.

4.2.1 Identify the exchange rate system in the graph above. (1)

Free floating

4.2.2 What was the original rand/dollar exchange rate before the
demand for US dollars increased? (1)
R13,00 = $1

4.2.3 Briefly describe the term exchange rate. (2)

The rate at which one currency is exchanged for another / the

value of one country's currency in terms of another country's
currency

4.2.4 How has the increased demand for US dollars affected the
value of the rand? (2)

The value of the rand depreciated from R13,00 to

 R14,00 against the dollar / depreciated by R1 / rand has
Weakened

4.2.5 What could the South African Reserve bank do to strengthen

the value of the rand against the dollar? (2 x 2) (4)

The Reserve Bank could strengthen the value of the rand by:
• selling US dollars in reserve in the foreign exchange market to
create an oversupply
• selling gold reserves on the international market to create an
oversupply obtaining assistance (financial support) from the
International Monetary Fund to increase the inflow of foreign
Exchange
• increasing the repo rate to stimulate investment by foreigners in
the South African economy

4.3 Briefly discuss income levels and preferences and taste as demand
Reasons for international trade. (2 x 4) (8)
Income levels:
• Changes in income cause a change in the demand for goods and
services
• Consumable income for example may increase due to a
decrease in tax, or increased employment of factors of production
which may lead to increased consumption expenditure
• Higher income creates more needs, wants, and subsequently
greater demand for a greater variety of goods even if it necessary
to get the goods from abroad
• An increase in the per capita income of people results in more
disposable income that can be spent on local goods and services,
some of which may then have to be imported.

4.4 WIth the aid of a graph explain the impact of an increase in

mass production on international trade. (10)

Impact of the increase of mass production on international trade:

 An increase in production as a result of mass production
would lead to an increase in the supply of goods and services on
foreign markets shifting the supply to the right from S to S1
An increase in exports will lead to an inflow of foreign exchange
which will push the supply curve to the right
This will lead to an appreciation in the value of the rand
Create more employment that will lead to an increased demand
for foreign goods that might facilitate international trade and lead
to an access to a greater variety of goods and services
Most manufactured products require large-scale production in
order to be affordable and profitable
(Accept any other correct relevant response) Max (10)

4.5 Explain direct and portfolio investments in the financial account. (8)

Direct investments
- Refers to investments in real estate (fixed property).
- Obtaining a meaningful share or control of such a business.
- e.g. USA’ s takeover of the local chain Massmart was a foreign
direct investment.
(Any 2 x 2)
Portfolio investments
- Refers to the buying of financial assets such as shares in
companies on the stock exchange of another country.
- These investments are highly liquid and their flow can be
reversed at any time.
- Portfolio investment money is also known as hot money.
(Any 2 x 2)
4.6 How does an improvement in the terms of trade influence the
balance on the current account? (8)

• The terms of trade indicates the ratio of the index of export

prices to import prices
• An increase in export prices / A decrease in import prices
will improve the terms of trade.
• This will result in an improvement of exports compared to
imports affecting the current account positively.
• This can lead to a reduction in the deficit or an increase in
the surplus on the current account which will reduce the
pressure on the reserves
• might however - over the long term - result in a decrease in
sales volumes, depending on the price elasticity of demand
in the foreign countries
• less income being generated by exports leading to a
welfare loss
(Accept any other correct relevant response)
(Allocate a maximum of 2 marks for mere listing of facts or
examples) (4 x 2)

4.7 How will an increase in export prices and import prices affect the
South African economy? (8)

An increase in export prices will:

• Result in terms of trade improving.
• Increase economic welfare because more revenue is earned
with the same expenditure.
• However, over the long-term result in a decrease in sales volume
depending on the price elasticity of demand.
• Result in welfare loss eventually.

An increase in import prices will:

• Result in terms of trade deteriorating.
• Decrease welfare because more resources were used to produce
more units to finance the higher cost of imports.
(Accept any other correct relevant response) (8)

4.8 Evaluate the effects of a currency depreciation in an economy. (8)

 Positives Currency depreciation:
• Can be used as an expansionary monetary policy to counter
cyclical measures to stimulate demand, profits, output and jobs
when an economy is in recession.
• Brings an improvement in the balance trade through higher
export sales.
• Provides a competitive boost to an economy through increasing
the value of profits and income for a country’s businesses with
investments overseas.
• Leads to a positive multiplier within the circular flow of income
and spending.

Negatives Currency depreciation:

• Makes it harder for the government to finance a budget deficit if
foreign investors lose confidence.
• Increases the cost of imports e.g. rising prices for essential
foodstuffs, raw materials, which affects long-run productive
potential of an economy.
• Makes it hard to pay for a trade deficit that is owed to overseas
creditors.
(Accept any other correct relevant response) (8)

TOPIC 5: Free Trade vs Protectionism

5.1 Why should South Africa follow a policy of free trade? (8)

A policy of free trade should be followed by:

• allowing specialisation which reduces the cost per unit of a
product (economies of scale)
• improving sales locally and abroad leading to increased profits
• ensuring a variety of goods which increases the choices of
consumers
• accelerating economic growth which promotes greater savings
and investment
• allowing developing countries to take advantage of foreign
expertise which may be unavailable domestically
• promoting increased efficiencies, product improvement and
technological advancement
 • promoting competition and improving resource allocation
(Allocate a maximum of 2 marks for the mere listing of
facts/examples)
(Accept any other correct relevant response)

5.2 Why should free trade be favoured over protectionism? (10)

Free trade should be favoured over protectionism because free

trade:
• would be benefiting the country that specialises in the
production of certain products or services to make use of
resources as efficiently as is possible compared to protectionism
where it is difficult to design a policy of protection and decide
whether a particular industry is beneficial to the whole country or
not
• is opening up markets and enhances more competition in the
international markets compared to protectionism which
encourages import substitution, not the export of goods
• is making available a variety of goods and services into the local
markets and spoils consumers with more choices compared to
protectionism which can activate the inflation spiral, because the
costs involved in protection leads to more expensive locally
produced goods
• assists businesses or enterprises finding better ways to improve
their economies of scale while at the same time producing quality
outputs compared to protectionism where the disadvantages of
higher prices against the advantages of lower imported prices is
difficult to weigh up in the long term
• is bringing new technology and innovations in the way of doing
business the most cost- effective manner possible compared to
protectionism where economic growth (increase in production)
and job creation is dampened
• is contributing to the movement of people and goods between
nations with ease compared to the more rigid approach of
protectionism where it is difficult to identify infant industries that
maybe granted temporary protectionism
• reducing the knowledge and expertise gaps amongst nations
due to ease and simple way of interaction amongst nations
compared to protectionism where industries that have been
granted protection, tend to become dependent on it and cannot
survive without it
(Accept any other correct relevant higher order response)