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DSE Economics Practice Paper: Macro Indicators, Money and Trade
DSE Economics: Macro and Trade
DSE Economics practice paper on macroeconomic indicators, money and trade: 12 questions, 100 marks, 75 minutes, with full answers and marking points.
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Paper details Level: S6 | Subject: Economics | Time: 75 minutes | Marks: 100 | Questions: 12
Section A: Macroeconomic indicators and money data (Questions 1-4, 24 marks)
Answer all questions. In calculations, write the formula, substitute the values and state the units.
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | A country’s nominal GDP rises from 80 billion to 88 billion while the consumer price index rises from 100 to 110. (a) Calculate real GDP in the second year at first-year prices. (b) Calculate the growth rates of nominal and real GDP. (c) Explain why the two rates differ. (6 marks) | Real GDP = 88 ÷ 110 × 100 = 80 billion (3 marks). Nominal growth = (88 − 80) ÷ 80 × 100% = 10%; real growth = (80 − 80) ÷ 80 × 100% = 0% (2 marks). Prices rose by 10 per cent, exactly offsetting the nominal increase, so real output was unchanged and the nominal rise reflects price changes only (1 mark). |
| 2 | The weights of a CPI basket are food 40 per cent, housing 30 per cent, transport 20 per cent and others 10 per cent. All item indices equal 100 in year one and are 110, 105, 100 and 120 in year two. (a) Calculate the CPI in year two. (b) Calculate the inflation rate. (c) Give two reasons why the CPI may overstate the rise in the cost of living. (6 marks) | CPI = 0.4 × 110 + 0.3 × 105 + 0.2 × 100 + 0.1 × 120 = 44 + 31.5 + 20 + 12 = 107.5 (3 marks). Inflation = 107.5 − 100 = 7.5 per cent (2 marks). The index fixes the basket, so it ignores substitution towards cheaper goods and does not fully capture quality improvement or new products (1 mark). |
| 3 | A banking system has no excess reserves and a required reserve ratio of 20 per cent. A customer deposits 500 dollars in cash. (a) Calculate the deposit multiplier. (b) Calculate the final total deposits and the new deposits created. (c) Explain two factors that make actual deposit creation smaller than the theoretical value. (6 marks) | Multiplier = 1 ÷ 0.2 = 5 (2 marks). Total deposits = 500 × 5 = 2 500 dollars and new deposits = 2 000 dollars (2 marks). Actual creation is smaller because of cash leakage to the public, excess reserves held by banks and insufficient demand for loans (2 marks). |
| 4 | The exchange rate changes from 7.8 to 7.5 Hong Kong dollars per US dollar. A Hong Kong manufacturer sells a product at 780 dollars. (a) Calculate the US dollar price before and after the change. (b) Calculate the percentage change in the US dollar price. (c) Explain the effect on the competitiveness of Hong Kong exports. (6 marks) | At 7.8: 780 ÷ 7.8 = 100 US dollars; at 7.5: 780 ÷ 7.5 = 104 US dollars (3 marks). The US dollar price rises by 4 per cent (1 mark). The stronger Hong Kong dollar raises the foreign currency price of exports, so foreign buyers pay more and export competitiveness falls (2 marks). |
Section B: Labour market, multiplier, trade and balance of payments (Questions 5-8, 32 marks)
Write explanations in complete sentences and name the relevant economic concept or policy.
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | The labour force of an economy is 3.8 million and employment is 3.6 million. (a) Calculate the number of unemployed and the unemployment rate. (b) If 100 000 unemployed workers stop looking for work, calculate the new unemployment rate, other things being equal. (c) Explain why the unemployment rate may understate the seriousness of unemployment. (8 marks) | Unemployed = 3.8 − 3.6 = 0.2 million (1 mark). Unemployment rate = 0.2 ÷ 3.8 × 100% = 5.26 per cent (3 marks). After 100 000 leave the labour force, it is 3.7 million with 0.1 million unemployed, giving 2.70 per cent (3 marks). The rate excludes discouraged workers and underemployment, so it understates the problem (1 mark). |
| 6 | Marginal propensity to consume is 0.8, autonomous investment rises by 20 billion dollars and the economy has spare capacity. (a) Calculate the multiplier. (b) Calculate the change in equilibrium income. (c) Calculate the induced change in consumption. (d) Explain the importance of the spare capacity assumption. (8 marks) | Multiplier = 1 ÷ (1 − 0.8) = 5 (2 marks). Change in income = 20 × 5 = 100 billion dollars (3 marks). Induced consumption = 100 × 0.8 = 80 billion (2 marks). With spare capacity firms can raise output without raising prices, so the multiplier shows up as real output; at full employment the expansion would mainly raise prices (1 mark). |
| 7 | Country A needs 2 hours to produce a unit of cloth and 4 hours for a unit of electronics; country B needs 4 hours for cloth and 1 hour for electronics. (a) Calculate the opportunity cost of each good in both countries. (b) State the comparative advantage of each country. (c) With 8 hours available in each country, compare total output when each splits its time equally with output under specialisation. (8 marks) | Country A: 1 cloth = 0.5 electronics and 1 electronics = 2 cloth; country B: 1 cloth = 4 electronics and 1 electronics = 0.25 cloth (4 marks). Country A has the lower opportunity cost in cloth and country B in electronics (2 marks). With 8 hours each, splitting time equally gives 3 cloth and 5 electronics in total, while specialisation gives 4 cloth from A and 8 electronics from B, so both outputs rise (2 marks). |
| 8 | In an economy the goods balance is a deficit of 120 billion dollars, the services balance a surplus of 80 billion, net income inflow 30 billion and net current transfers an outflow of 10 billion. (a) Calculate the current account balance. (b) Explain its relationship with the capital and financial account. (c) Suggest two policies that could improve the current account balance. (8 marks) | Current account = −120 + 80 + 30 − 10 = −20 billion dollars (3 marks). The deficit must be financed by a net inflow of 20 billion in the capital and financial account, so the overall balance of payments is zero (3 marks). Policies: expand service exports such as tourism and financial services, raise productivity to improve competitiveness, or allow the exchange rate to adjust (2 marks). |
Section C: Inflation, policy tools and essays (Questions 9-12, 44 marks)
Answer essay questions in points and support each argument with data, theory or Hong Kong examples.
| # | Question | Answer and marking notes |
|---|---|---|
| 9 | Compare the causes of demand-pull inflation and cost-push inflation, explain their different effects on the price level and real output, and suggest one policy for each. (11 marks) | Demand-pull inflation comes from a rightward shift of aggregate demand: prices rise while real output and employment also rise (4 marks). Cost-push inflation comes from a leftward shift of short run aggregate supply: prices rise while real output falls, producing stagflation (4 marks). Demand-pull inflation can be met with contractionary fiscal or monetary policy, while cost-push inflation is better addressed by raising productivity and reducing imported cost pressures (3 marks). |
| 10 | The government cuts taxes by 30 billion dollars, the marginal propensity to consume is 0.75 and actual output is 90 billion below potential output. (a) Calculate the multiplier and the expected change in income. (b) Assess whether the tax cut can close the output gap. (c) Explain two factors that may limit the effectiveness of the policy. (11 marks) | Multiplier = 1 ÷ (1 − 0.75) = 4 (2 marks). Expected change in income = 30 × 4 = 120 billion (2 marks). In theory 120 billion exceeds the 90 billion gap, so the gap can be closed, but the stimulus may be excessive and cause overheating (2 marks). Limits: recognition and implementation lags, households saving the tax cut or spending on imports, crowding out through higher interest rates, and supply bottlenecks (5 marks). |
| 11 | Explain the three main tools a central bank uses to control the money supply, and discuss the limitations of these tools when the interest rate is close to zero, together with the effects and risks of quantitative easing. (11 marks) | The three tools are open market operations in government bonds, changes in the required reserve ratio and changes in the discount rate or central bank lending rate (6 marks). Near zero interest rates, further cuts are impossible and the opportunity cost of holding cash is very low, so these tools cannot revive lending and investment (2 marks). Quantitative easing buys large quantities of assets, pushing down long term interest rates and adding liquidity to the banking system (2 marks). Risks include asset bubbles, rising inflation expectations and difficulty in unwinding the positions later (1 mark). |
| 12 | “In the long run free trade brings more benefits than harm to the Hong Kong economy.” Discuss this statement with reference to comparative advantage, arguments for protection and the characteristics of Hong Kong as a small open economy. (11 marks) | For free trade: specialisation by comparative advantage raises total world output, and consumers gain from economies of scale, technology diffusion and wider choice (4 marks). Protectionist arguments include infant industry protection, anti-dumping, temporary employment adjustment and strategic industries, but consumers pay higher prices (4 marks). Hong Kong is a small open economy dominated by services and highly dependent on external demand and imports, so barriers would be costly and invite retaliation; in the long run free trade brings net benefits, provided retraining and social protection help those who lose out (3 marks). |
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