GAUTENG DEPARTMENT OF EDUCATION

MARKING GUIDELINES
4-7 FEBRUARY
GRADE 12

ECONOMICS

BUSINESS CYCLES TEST

TIME: 1.5 hours

MARKS: 100

9 pages

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 ECONOMICS BUSINESS CYCLES 2
(CHAPTER2 TEST) FEBRUARY
2022

SECTION A (COMPULSORY)

QUESTION 1 20 MARKS – 20 MINUTES

1.1. MULTPLE CHOICE

1.1.1. C – Prosperity ✓✓
1.1.2. A – high amplitude ✓✓
1.1.3. B – inflation and unemployment are as low as possible ✓✓
1.1.4. D – volume of manufacturing production ✓✓
1.1.5. A – free floating ✓✓

1.2. MATCH ITEMS

1.2.1. D – The lowest point of a depression and a turning point in a business cycle ✓
1.2.2. E – A decrease in unemployment and an increase in income✓
1.2.3. A – It is used to influence both expansion and contraction of GDP as a measure of
economic growth. ✓
1.2.4. B – claims that with economic growth comes inflation, which in turn should lead to more
jobs and less unemployment. ✓
1.2.5. F – A change in the basic assumptions within the ruling theory✓
1.2.6. C - Used to measure trends in the economy✓

1.3. GIVE WORD

1.3.1. Indicators ✓
1.3.2. Quantity theory of money ✓
1.3.3. New economic paradigm ✓
1.3.4. Juggler cycles ✓

TOTAL SECTION A: 20

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SECTION B

Answer ALL questions from this section in the ANSWER BOOK.

QUESTION 2: MACROECONOMICS (COMPULSORY)

2.1 Answer the following questions

2.1.1 Name any TWO supply side policies to smoothing cycles
(2 x 1) (2)
• Reduction costs✓
• Improving efficiency in inputs✓
• Improving efficiency in markets✓
Accept any other correct relevant response

2.1.2 How does structural change affect the economy of south

Africa? (1x2) (2)
• Patterns and changes in sectoral employment drive demand
shifts through the income elasticity. ✓✓
• Shifting demand for both locally sourced goods and for
imported products is a fundamental part of
development. ✓✓
Accept any other correct relevant response

2.2 Study the following diagram and answer the questions that follow

INTEREST RATES GOES UP IN SOUTH AFRICA

Date Key rates

11/19/2021 3.75%
07/24/2020 3.50%
05/22/2020 3.75
04/15/2020 4.25%
03/20/2020 5.25%
01/17/2020 6.25%
Source: https://countryeconomy.com/key-rates/south-africa

2.2.1 Name the type of business cycles associated with the (1)
information above
• Kitchin cycle✓
2.2.1 Give any other instrument that SARB can use to stimulate the (1)
economy
• Cash reserves requirements✓
• Open market transactions✓
• Moral persuasion✓
• Exchange rate policy ✓

2.2.3 Briefly describe the term monetary policy (2)

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• The SARB uses monetary policy to influence the economy

through changes in interest rate rates and the supply of
money. ✓✓
Accept any other correct relevant response
2.2.4 Explain the use of interest rate in the new economic paradigm (2)
• An increase in interest rates is used to slow down inflation
and protect the currency. ✓✓
Accept any other correct relevant response
2.2.5 How can the supply-side be stimulated by the government?
(2 x 2) (4)
• Supply infrastructure services such as transport,
communication, and energy✓✓
• Reduce administrative costs such as inspections and
unnecessary regulations
• It can also reduce taxes and give advisory services to
business✓✓
• Give subsidies and incentives to businesses
• Develop the factors of production I. it can improve education
and promote capital formation✓✓
Accept any other correct relevant response

2.3 Study the following information and answer the questions that follow

EXOGENOUS VS ENDOGENOUS
Weather Money Technological
condtions supply innovations

Consumer Investment
spending spending Production

These factors change regularly

Source: examiner

2.3.1 Which economic sector is mainly affected by structural (1)

changes in the economy
• Primary sector✓
• Secondary sector✓
• Tertiary sector ✓

2.3.2 Name any one feature of a business cycles why government (1)
must intervene in the market(economy)
• Peak ✓

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• Troughs ✓

2.3.3 Briefly describe the term economic fluctuations (2)

• Changes in business conditions✓✓

2.3.4 Explain reasons for the existence of the Kondratieff cycle (2)
• This cycle is caused by technological innovations, wars or
the discovery of new natural resources such as new
oilfields✓✓
• The gas discoveries off South Africa’s coast they have the
potential to expedite the government’s much touted energy
transformation✓✓

2.3.5 Discuss government’s responsibility in exogenous and

endogenous explanation (2 x 2) (4)
• Economic fluctuations are exacerbated by government
intervention in the market and thus government should
refrain from intervention in the market✓✓
• Government has a duty to use monetary and fiscal policy to
intervene in the market in order to stabilise the economy✓✓
• Government policy should encourage entrepreneurship as a
means of creating new businesses and ultimately as an
important source of new jobs, investment, and further
innovation. ✓✓

2.4 Broadly outline the real business cycle (4 x 2) (8)

• A real business cycle occurs when the effects of irregular events /
seasonal / long-term growth trends are removed from the time series
data✓✓
• Real business cycle models suggest that government intervention to
influence demand in the economy is generally counterproductive and
the optimal policy is to concentrate on supply-side reforms which help
the economy to be more efficient and flexible✓✓
• the natural and efficient response of the economy to changes in the
available production technology. ✓✓
• Real business cycle models either completely reject or play down the
role of aggregate demand in influencing the economic cycle✓✓
• A basis for real business cycle theory is a simple neo-classical model
of capital accumulation where individuals seek to invest in capital, and
the price of labour will be determined by market forces✓✓
• Real business cycles generally assume that shocks to productivity lead
to fluctuations in the economy that are Pareto optimal. ( The fall in
output is a way for the economy to adjust to this new equilibrium and
enable resources to find more productive uses.) ✓✓
• Real business cycle theories assume flexible markets and output is
always at its real output. However, this ignores the role price and wage
rigidity. ✓✓

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2.5 Why does unemployment rise during the recession phase of the (8)
business cycle?
• Unemployment rises during the recession phase of the recession [40]
phase of the business cycle because the aggregate supply is typically
more than the aggregate demand so there is less of a need for
employees, less goods and services are being produced. ✓✓
• Cyclical unemployment increases because business began laying off
workers in the need to save money because of low demand for their
products. ✓✓
• The unemployed workers face difficulty in finding new jobs, and the
result is a surplus of labor of many kinds that can persist for many
months✓✓
• Business activities will drop due to lack of investors, and which will
force business to temporarily closing ✓✓

TOTAL SECTION B: 80

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SECTION C

Answer ONE of the two question from this section in the ANSWER BOOK.

Your answer will be assessed as follows:

QUESTION 5 MACROECONOMICS 40 MARKS 40 MINUTES

• Discuss in detail with reference to non-economic indicators the features

underpinning forecasting (26 marks) 40
• Why is inflation targeting important to prevent extreme fluctuation in
business cycles? (10 marks)

INTRODUCTION
The process of making predictions about changing conditions of future events that may
significantly affect the economy✓✓
A business cycle can be described as successive periods of contraction and expansion
of economic activities✓✓
Main part:

Extrapolation ✓
• Past data is used, where predictions are made about the future based on
assumptions related to trends ✓✓
• Extrapolation means to estimate something unknown from the facts and
information that is known ✓✓
• Extending a trend into the future may provide information on what is likely to
happen ✓✓
• If a business cycle has passed through a trough and entered into a boom
phase, forecasters may predict that the economy will grow in the months to
follow ✓✓
• Extrapolation techniques are sometimes used to predict future share prices ✓✓
• The trend of the curve must be followed to complement the completed section.
Take a calculated decision to continue beyond the level of a resistance point
✓✓

Amplitude ✓
• It is the difference between the value of total output between peak and trough
measured from the trend line to the peak and trough ✓✓
• Amplitude reflects the intensity of the upswing and downswing in economic
activity ✓✓
• The amplitude shows two things: - The power of the underlying forces, e.g.
interest rates, exports or consumer spending ✓✓
• A large amplitude during the upswing signifies strong underlying forces – which
result in longer cycles ✓✓
• The extent of change: the larger the amplitude, the more extreme the changes
that may occur ✓✓
• During an upswing, unemployment may decrease from 20% to 10% (a
decrease of 50%) / inflation may increase from 3% to 6% (i.e. 100%) / a surplus
on the current account (BOP) can change from a surplus to a deficit ✓✓

END
 Trend ✓
• The trend indicates the general direction in which the indexes that were used in
the business cycle, moves ✓✓
• When the economy is growing, there is an upward trend, but when the economy
is decreasing, there is a downward trend ✓✓
• The trend will change when the time series data change their behaviour patterns
of the past ✓✓
• Resistance points indicates forces in the economy preventing it from repeating
the performance – unfavourable forces need to change or be removed for
growth to exceed previous tendencies ✓✓
• It normally has a positive slope because the production capacity of the economy
increases over time ✓✓
• Channels are formed when output growth reaches successive higher turning
points (upward channel) ✓✓

Length ✓
• Length is measured from peak to peak or from trough to trough ✓✓
• Longer cycles show strength and shorter cycles show weakness with regard to
economic activities ✓✓
• Cycles may overshoot with the effect that some composite indicators increase to
beyond its normal level ✓✓

Moving averages ✓

• This method is repeatedly calculating a series of different average values along

a time series to produce a smooth curve ✓✓
• It is used to analyse the changes in a series of data over a certain period of
time✓✓
• To eliminate the effect of sharp fluctuations in the business cycle, economists
use moving averages to smooth out the business cycle so that it looks more like
a straight of slightly curved line ✓✓

The five year moving average for above table would be:
- (5 + 8 + 9 + 11 + 4) / 5 = 7.4 ✓✓
- (8 + 9 + 11 + 4 + 6) / 5 = 7.6 ✓✓
- (9 + 11 + 4 + 6 + 10) / 5 = 8 ✓✓
• By calculating the moving average, economists or businesses will be able to
analyse economic trends (by 7 to 8%) ✓✓

Additional part

Why is inflation targeting important to prevent economic fluctuations?

• the reduction in inflation may increase future profits and reduce interest rates -
which is good for the market✓✓
• Inflation targeting primarily focuses on maintaining price stability, but is also
believed by its proponents to support economic growth and stability✓✓
• Stable inflation reduces investor uncertainty, allows investors to predict changes
in interest rates, and anchors inflation expectations. ✓✓

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 • Keeping inflation low is one of the SARB dual mandate objectives, along with
stable, low unemployment levels ✓✓
• exchange rate targeting or nominal GDP targeting would create more economic
stability✓✓
• The benchmark used for inflation targeting is typically a price index of a basket
of consumer goods✓✓
• Monetarists place emphasis on controlling the money supply as they see a
direct link between the growth of money supply and inflation✓✓
CONCLUSION
Policy makers should closely watch all these indicators because external factors are
very significant for South African business cycles ✓✓
Different methods can be used in forecasting like the quantitative method that is based
on mathematical models or qualitative methods being used in long term forecasting
✓✓

TOTAL SECTION C: 40

TOTAL: 100

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