PMAC

PRACTICE EXAM SUGGESTED SOLUTIONS

Question 1

Q1.1 Which of the following represent leakages from the circular flow of income and spending?
(a) Government spending and taxes;
(b) Taxes and savings;
(c) Exports and investment;
(d) Government spending and imports.

Q1.2 The function of money associated with passive balances is the

(a) Medium of exchange.
(b) Store of value.
(c) Unit of account.
(d) Standard of deferred payment.

Q1.3 The quantity of money demanded for speculative purposes will be

(a) High when the opportunity cost of holding money is high.
(b) Low when the opportunity cost of holding money is high.
(c) Low when the interest rate is low.
(d) Low when the opportunity cost of holding money is also low.

Q1.4 Openness of an economy is

(a) The extent to which a country is involved in international trade and finance.
(b) The degree to which a country generates its economic growth.
(c) The degree to which a country generates its income.
(d) The extent to which a country is involved in tourism.

Q1.5 If the mpc is 0.78, this means that

(a) for every rand earned, 78 cents is saved.
(b) goods in the economy are in very high demand.
(c) 78% of income is used for consumption.
(d) 22% of income is used for consumption.

Q1.6 Induced consumption is

(a) The part of consumption which is independent of the level of income.
(b) The minimum level of consumption that is financed from sources other than income.
(c) The maximum level of consumption that is financed from sources other than income.
(d) The part of consumption that shows the relationship between consumption and
income

Q1.7 A South African citizen’s gift for famine relief in Somalia would be considered a ___________
____________ in the Balance of Payments.
(a) Capital inflow.
(b) Capital outflow.
(c) Current account transaction.

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 (d) Financial transaction.
Q1.8 In the Keynesian model, an introduction of a proportional tax will
(a) Increase the slope of the consumption function.
(b) reduce the multiplier.
(c) Increase the equilibrium level of income.
(d) Increase the multiplier.

Q1.9 Which of the following are subtracted from gross domestic product when calculating gross
national income?
(a) All profits, dividends, interest and other income from investment abroad which accrue
to permanent residents.
(b) Profits, dividends, interest and other income from domestic investment which accrue
to residents of other countries.
(c) All wages and salaries earned by permanent residents outside South Africa.
(d) The dividends earned by South African owners of shares in foreign companies such as
Microsoft and Walmart.

Q1.10 The marginal propensity to import refers to

(a) The extent to which imports increase for a given increase in the price of imported
goods.
(b) The extent to which an economy has the ability to import.
(c) The level of imports in an economy.
(d) The extent to which imports increase for a given increase in income.

Q1.11 When taxes are decreased, disposable income _________ and hence, consumption _______
(a) increases; increases.
(b) decreases; decreases.
(c) increases; decreases.
(d) decreases; increases.

Q1.12 The table below shows the maximum output per worker per day in Portugal and England.

Wine Material
Portugal 80 90
England 120 100

Which of the following statements is correct?

(a) Portugal has an absolute advantage in the production of wine and material.
(b) For Portugal, one unit of wine costs 8/9 of a unit of material and one unit of material
costs 9/8 of a unit of wine.
(c) For England, one unit of wine costs 6/5 of a unit of material and one unit of material
costs 5/6 of a unit of wine.
(d) For Portugal, one unit of wine costs 9/8 of a unit of material and one unit of material
costs 8/9 of a unit of wine.

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Q1.13 The implementation lag for monetary policy is ____________ for fiscal policy.
(a) Shorter than.
(b) Longer than.
(c) The same as.
(d) Infinitely longer than.

Q1.14 Creditors tend to lose during an inflationary period since;

(a) The nominal interest rate on their credit tends to fall.
(b) The real value of their credit tends to decrease.
(c) Debtors pay more in real terms.
(d) The real interest rate on their credit remains constant.

Q1.15 Cost-push inflation may be caused by

(a) A decline in per unit production costs.
(b) A decrease in wage rates.
(c) A negative natural disaster.
(d) An increase in resource availability.

Q1.16 Which of the following is not considered a factor that contributes to economic growth?
(a) Research and development.
(b) Increased importation of manufactured goods.
(c) Government protection of property rights.
(d) Improved efficiencies through economies of scale.

Q1.17 The short-run Phillips curve shows the relationship between

(a) The inflation rate and the unemployment rate.
(b) The interest rate and the inflation rate.
(c) The inflation rate and the natural rate of unemployment.
(d) The expected inflation rate and the natural rate of unemployment.

Q1.18 An example of an indirect tax is

(a) Income tax.
(b) Secondary tax on dividends.
(c) Company tax.
(d) Value added tax.

Q1.19 A budget deficit occurs when

(a) There is an increase in taxation.
(b) Government spends less than is generated by taxation.
(c) Government spending is very high.
(d) Government spends more than is generated by taxation.

Q1.20 A pattern of expansion and downswings discerning economic activity over a number of years is
known as
(a) Cyclical instability.
(b) Economic growth.
(c) Business cycle.

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 (d) Business cycle indicators.
Question 2

Q2.1 Define expansionary fiscal policy. (2)

Expansionary fiscal policy refers to increasing government spending and/or decreasing taxes.

Q2.2 Explain why credit cards are not considered to be money. (2)
Demand deposits are not created when a person is issued with a credit card. The credit card
is simply a convenient way of making a purchase by ensuring that payment will be made.

Q2.3 Name and explain three broad functions of government. (6)

Allocative function: role of government in correcting market failure and achieving a more
efficient allocation of resources.

Distributive function: steps taken by government to achieve a more equitable or socially

acceptable distribution of income.

Stabilisation function: refers to measures taken by government to promote macroeconomic

stability.

Question 3
Q3.1 Use the given data to answer the questions below:

Consumer Price Index

Month 2019 2020
January 97.2 102.6
February 97.5 102.9
March 97.8 104.0
April 98.9 104.8
May 99.5 105.1

Q3.1.1 Define consumer price index (CPI). (2)

The CPI is an index of the prices of a representative “basket” of consumer goods and
services. OR
The CPI represents the cost of the “shopping basket” of goods and services of a typical
or average South African household.

Q3.1.2 Calculate the January 2020 inflation rate. (2)

102.6−97.2
January 2020 inflation rate: x 100 = 5.56%
97.2

Q3.2 Explain the four aspects of the inflation definition. (4)

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  It is a neutral definition which does not attempt to define inflation in terms of specific
causes.
 Another important element of the definition is that it describes inflation as a process, not
a one-off occurrence.
 Inflation is concerned with a considerable increase in prices.
 Inflation refers to an increase in prices in general.

Q3.3 Discuss the three demand-side sources of economic growth. (6)

Domestic demand: increase in investment; consumption; government spending would all lead
to an increase in demand and economic growth.

Exports: an increase in exports would raise the growth rate.

Import substitution: the reduction of imports by manufacturing products domestically that

were previously imports will lead to increased economic activity.

Q3.4 Discuss any three costs of unemployment to individuals. (6)

Loss of income: if unemployed, then the person does not earn an income.

Frustration: the longer a person is unemployed, the more frustrated they become

Hunger, cold, ill health and even death.

Psychological costs:
Criminal activity:
Loss of experience and human development

Question 4
Q4.1 Name the four important injections into the circular flow of income and spending. (4)
Consumer spending;
Investment spending
Government spending
Exports

Q4.2 Suppose the following information describes the economy of Mmabatho:

Consumption function: C = 110 + 0.6Y
Investment spending: I = 500
Government spending: G = 300
Exports of goods and services X = 400
Imports of goods and services Z = 300
Proportional tax rate: t = 25%

Q4.2.1 Calculate the total autonomous spending. (3)

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 Total autonomous spending: C + I + G + X – Z
= 110 + 500 + 300 + 400 – 300
= 1010

Q4.2.2 Calculate the equilibrium level of income. (7)

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Y = (C + I + G + X – Z)
1−c (1−t)
Y = α(A)
= 1.82 x (1010)
= 1838.20

Q4.3 The following table of values is given. Use the information in the table to answer Q4.3.1 and
Q4.3.2.

GDP at market prices R258bn

Net primary income payments to the rest of the R29bn
world
Indirect taxes R48bn
Subsidies R11bn
Consumption of fixed capital R43bn

Q4.3.1 Calculate the value of the gross national income (GNI) at market prices. (3)

GDP at market prices R258bn

Subtract Net primary income payments (R29bn)

Gross National Income at market prices R229bn

Q4.3.2 Calculate the value of GDP at factor cost. (3)

GDP at market prices R258bn

- Indirect taxes (R48bn)
+ Subsidies R11bn
_______
GDP at factor cost R221bn

Questions 5

Q5.1 Using the AD-AS model, illustrate the effects of the following events on the equilibrium price
level and income (explanation not required):

Q5.1.1 A decrease in the price of labour. (5)

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 Price level
AD
AS

AS1
E
P
P1 E1

Y Y1
Total production, income

Q5.1.2 An increase in autonomous consumption. (5)

Price level AD1

AD
AS
E1
P1
E
P

Y Y1
Total production, income

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Q5.2 Explain, with the aid of a diagram, what measures a government should take to deal with
demand-pull inflation and restore price stability. (10)

Price level AD1

AD AD2
AS

P1 E1
E
P

Y Y1
Total production, income

The government will apply contractionary fiscal policies in the form of lower
government spending and or increased taxes. Increase in taxes will reduce
consumption spending which in turn will decrease Aggregate demand and the general
price level, hence reducing inflationary pressure. A decrease in government spending
will reduce aggregate demand directly. This is illustrated by a leftward shift of the AD
curve to AD2. The new equilibrium is indicated at E1. The price level has decreased
but so has the level of output and income.

Q5.3 Explain, with the aid of a diagram, what will happen to the Rand/dollar exchange rate on the
foreign exchange market in South Africa if the United States of America imports fewer goods
from South Africa. Explain the impact this would have on the Current Account of the South
African Balance of Payments. (10)

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 SOUTH AFRICAN EXPORTS DECREASE

R/$
D
S1

S
R14
R13.50

Q1 Qo Quantity of Dollars

EXPLANATION:

If the USA imports fewer South African goods, there will be a decrease in the supply of
dollars coming into South Africa. The equilibrium price of the dollar in rands will
increase. This is a depreciation of the rand against the dollar and an appreciation of
the dollar against the rand.

In the short run, the immediate effect of the decrease in exports, assuming that
imports remain the same, would cause a worsening of the balance on the current
account (in the balance of payments). However, as the rand depreciates this could
cause imports to decrease. In addition, the depreciation will cause South African
goods to become cheaper on international markets and volumes of exports will again
increase, thus strengthen the current account.