PMAC

PRACTICE EXAM

Question 1 (40 marks)

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, 78cents 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.

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 (c) Business cycle.
(d) Business cycle indicators.

Question 2 (10 marks)

Q.2.1 Define expansionary fiscal policy. (2)

Q.2.2 Explain why credit cards are not considered to be money. (2)

Q.2.3 Name and explain three broad functions of government. (6)

Question 3 (20 marks)

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)

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

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

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

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

Question 4 (20 marks)

Q4.1 Name the four important injections into the circular flow of income and spending. (4)

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%

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

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

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)

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

Questions 5 (30 marks)

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)

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

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)

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)