2000 Economics (AL)Paper 2 B&C

7/27/2019 2000 Economics (AL)Paper 2 B&C

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Hong Kong Examinations AuthorityAll Rights Reserved 2000

2000-AL-ECON 2B&C1

HONG KONG EXAMINATIONS AUTHORITY

HONG KONG ADVANCED LEVEL EXAMINATION 2000

ECONOMICS A-LEVEL PAPER 2

Question-Answer Book for Section B and Section C

This paper must be answered in English

Candidate Number

Centre Number

Seat Number

INSTRUCTIONS FOR CANDIDATES

1. Write your Candidate Number, Centre Number and Seat Number in the spaces provided on this cover.

2. Write your Candidate Number in the spaces provided on EACH answer sheet in this book.

3. Answer each question on the TWO pages provided for that particular question. NO marks will be givenfor answers written on the wrong page.

4. There are FIVE questions in Section B and THREE questions in Section C. Attempt ALL questionsand keep your answers SHORT.

5. If you have used any supplementary answer sheets, you should write your Candidate Number on everysupplementary answer sheet and fasten it with a white string to the page in this book where the relevantquestion is.

2000-ALECON

PAPER 2B & C


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2000-AL-ECON 2B&C2

This is a blank page.

All Rights Reserved 2000


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2000-AL-ECON 2B&C3 1 Go on to the next page

Marker No. Candidate No.

Examiner No. Paper/Section 2B

Checkers Initial Question No. 1

Consider an elementary closed Keynesian model. The only tax in the model is a lump sum tax.

(a) Suppose both government expenditure and tax increase by the same amount. Explain the impact of suchchanges on the equilibrium level of income. (4 marks)

(b) Suppose government expenditure increases by an amount smaller than the increase in tax. Explain the impactof such changes on the equilibrium level of income. Under what condition will the impact be zero ?

(4 marks)

[NOTE : Dontuse a supplementary answer sheet unless you have fully utilized this page and the next page.]

Marks



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Paper/Section 2B

Question No. 1 (Continued)



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An economy has an excess demand in its product market while its money market is in equilibrium. Suppose thenational income is 100.

Explain the situation of the economy using an IS-LM diagram. Is the equilibrium income more than, less than, orequal to 100 ? (8 marks)


Marks



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Paper/Section 2B




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(a) Explain how open market operation can be used to stimulate an economy. (4 marks)

(b) Explain whether open market operation is a suitable policy to stimulate an economy that has a balance ofpayments deficit. (4 marks)


Marks



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Paper/Section 2B




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(a) Country A adopts a flexible exchange rate system. Explain how foreign investment in the shares and stocksof country A affects the exchange rate (price of domestic currency in terms of foreign currency) and thebalance of payments of country A. (5 marks)

(b) Suppose a country is recovering from recession. Use the answer in (a) to explain how foreign investment inits shares and stocks can slow down its speed of recovery. (3 marks)


Marks



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Paper/Section 2B




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Consider an elementary Keynesian model with a trade deficit.

(a) Indicate on a diagram the equilibrium level of income and the trade deficit. (3 marks)

(b) With the aid of the diagram in (a), explain how an increase in investment affects equilibrium income andtrade deficit. (5 marks)


Marks



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2000-AL-ECON 2B&C12 10

Paper/Section 2B


END OF SECTION B



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Examiner No. Paper/Section 2C


Use the IS-LM model to answer this question.

(a) Show how an increase in investment affects equilibrium income and interest rate. (3 marks)

(b) Fluctuations in investment will lead to fluctuations in equilibrium income and interest rate. If thegovernment changes the money supply so that fluctuations in investment will not lead to a change in theinterest rate, then the fluctuations in equilibrium income will be larger. Discuss with the aid of a diagram.

(11 marks)


Marks



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Paper/Section 2C




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Consider the following Keynesian model :

C = A + 0.8Y where Y = national incomeI = 200 C = consumptionlabour supply = 500 I = investment

A is a constant

Each unit of labour can produce 3 units of goods. Suppose A is 100.

(a) What is the value of the investment multiplier ? (1 mark)

(b) Describe the employment situation of the economy. (3 marks)

(c) Suppose both A and the labour supply increase by 10 units.

(i) Describe the employment situation of the economy. (3 marks)

(ii) By how much must the labour productivity increase in order to solve the problem faced by theeconomy ? (2 marks)

(iii) Suppose the labour productivity increases by 10%. Describe the employment situation of theeconomy. (2 marks)

(d) Based on the result in (c), explain what problems the economy may face if the aggregate demand, the laboursupply and the labour productivity increase simultaneously. (2 marks)


Marks



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Paper/Section 2C




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(a) If the velocity of circulation of money is constant, we can predict the impact of changes in money supply onnominal income. However, to know the impact of changes in money supply on price level, we need anadditional assumption on the behaviour of real income. Discuss. (6 marks)

(b) Consider the following table.

Year 1 2 3

Money Supply $100 $110 $121

Suppose the velocity of circulation of money is constant.

(i) Find the growth rate of nominal income in year 2 and year 3. (3 marks)

(ii) Suppose the growth rates of real income in year 2 and year 3 are 0% and 3% respectively. Find the

inflation rates in year 2 and year 3. (2 marks)

(c) Based on the above answers, explain the rationale behind the policy of setting the growth rate of moneysupply at a specific level. (2 marks)


Marks



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2000-AL-ECON 2B&C18 16

Paper/Section 2C


END OF SECTION C



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2000 AL Economics Paper 2

Numerical Answers

2. YE>

100

7. (a) 5

(c) (ii) 1.3%

8. (b) (i) Year 2 : 10%

Year 3 : 10%

(ii) Year 2 : 10%

Year 3 : 7%


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2000 Economics (AL)Paper 2 B&C