S5 Economics Paper: National Income, Prices And Unemployment (100 Marks)

S5 Economics Paper: National Income, Prices and Unemployment (100 marks)

2026-11-11

S5 Economics – national income, prices and unemployment

S5 Economics paper: 6 questions, 24 parts, 100 marks, 75 minutes. Covers GDP and real growth, the CPI and purchasing power, unemployment, the multiplier and exchange rates.

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Paper details　S5 Economics practice paper on national income, inflation and unemployment with full solutions

Question 1 Gross domestic product and economic growth (18 marks)

An economy produces only three final goods. In 2024: good A 100 units at 20 dollars each, good B 50 units at 40 dollars each, good C 200 units at 5 dollars each. In 2025: good A 120 units at 22 dollars each, good B 55 units at 45 dollars each, good C 210 units at 6 dollars each.

#	Question	Answer and marking notes
1	Using 2024 as the base year, calculate nominal GDP in both years.	Answer: nominal GDP in 2024 is 100 times 20 plus 50 times 40 plus 200 times 5, which gives 2000 plus 2000 plus 1000, that is 5000 dollars. In 2025 it is 120 times 22 plus 55 times 45 plus 210 times 6, which gives 2640 plus 2475 plus 1260, that is 6375 dollars. (Marking: 1 for each year of working, 1.5 for each value.)
2	Calculate real GDP in 2025 at 2024 prices.	Answer: real GDP is 120 times 20 plus 55 times 40 plus 210 times 5, which gives 2400 plus 2200 plus 1050, that is 5650 dollars. (Marking: 2 for using base year prices, 1 for the working, 1 for the value.)
3	Calculate the GDP deflator for 2025.	Answer: the deflator is 6375 divided by 5650, multiplied by 100, which gives 112.8. (Marking: 2 for the formula, 2 for the value.)
4	Calculate the real growth rate in 2025 and explain why the nominal growth rate should not be used directly to measure an improvement in living standards.	Answer: real growth is 5650 minus 5000, divided by 5000, multiplied by 100, which gives 13.0 per cent; nominal growth is 27.5 per cent. Nominal figures include price increases, and the price part does not mean more output, so real figures are the right measure of living standards. (Marking: 2 for the real rate, 2 for identifying the price effect, 1 for the conclusion.)

Question 2 Consumer price index and purchasing power (18 marks)

In an economy the consumer price index basket has food at 40 per cent, housing at 30 per cent, transport at 20 per cent and other items at 10 per cent. The base year 2024 has an index of 100. In 2025 the component indices are food 110, housing 106, transport 95 and others 102.

#	Question	Answer and marking notes
5	Calculate the overall consumer price index for 2025.	Answer: the overall index is 0.4 times 110 plus 0.3 times 106 plus 0.2 times 95 plus 0.1 times 102, which gives 44 plus 31.8 plus 19 plus 10.2, that is 105.0. (Marking: 3 for the weighting, 2 for the value.)
6	Calculate the inflation rate for 2025.	Answer: the inflation rate is 105.0 minus 100, divided by 100, multiplied by 100 per cent, which gives 5.0 per cent. (Marking: 2 for the formula, 2 for the value and unit.)
7	A person earned 21000 dollars a month in 2024. If nominal income stays the same, what is the 2025 real income in 2024 prices?	Answer: real income is 21000 divided by 1.05, which gives 20000 dollars, so purchasing power falls by 1000 dollars. (Marking: 2 for dividing by the index, 1 for the value, 1 for the explanation.)
8	If the person receives a pay rise to 22050 dollars in 2025, how does real income change? Explain the effect of a pay rise smaller than the inflation rate.	Answer: real income is 22050 divided by 1.05, which gives 21000 dollars, so real income is unchanged because the 5.0 per cent rise equals the inflation rate. If the rise is smaller than inflation, nominal income still rises but real purchasing power falls, so living standards drop. (Marking: 2 for the value, 1 for the judgement, 2 for the consequence.)

Question 3 Unemployment and the labour force (16 marks)

In a region the population aged 15 and over is 6.4 million, the labour force is 3.9 million and employment is 3.705 million.

#	Question	Answer and marking notes
9	Calculate the number of unemployed people.	Answer: unemployment is 3.9 million minus 3.705 million, which gives 195000 people. (Marking: 2 for using the definition, 2 for the value.)
10	Calculate the unemployment rate.	Answer: the rate is 195000 divided by 3900000, multiplied by 100 per cent, which gives 5.0 per cent. (Marking: 2 for the numerator and denominator, 2 for the value.)
11	Calculate the labour force participation rate.	Answer: the rate is 3.9 million divided by 6.4 million, multiplied by 100 per cent, which gives 60.9 per cent. (Marking: 2 for the formula, 2 for the value.)
12	If 45000 discouraged job seekers leave the labour force while the number of unemployed stays the same, what is the new unemployment rate? State one limitation of the rate as an indicator.	Answer: the new labour force is 3.9 million minus 45000, that is 3.855 million, and the rate is 195000 divided by 3855000 times 100 per cent, which gives 5.1 per cent, higher than before. The limitation is that discouraged workers are no longer counted, so the rate understates underemployment and hidden unemployment. (Marking: 2 for the new rate, 2 for the limitation.)

Question 4 The multiplier and fiscal policy (16 marks)

In an economy the marginal propensity to consume is 0.75 and real output is 60 billion dollars below potential output. The government considers raising spending to close this deflationary gap, ignoring taxes and imports at first.

#	Question	Answer and marking notes
13	Calculate the simple multiplier.	Answer: the multiplier is 1 divided by the quantity 1 minus 0.75, which gives 4. (Marking: 2 for the formula, 2 for the value.)
14	Calculate how much extra government spending is needed to close the gap.	Answer: the required spending is 600 divided by 4, which gives 15 billion dollars. (Marking: 2 for dividing the gap by the multiplier, 2 for the value and unit.)
15	With a 20 per cent tax rate and a marginal propensity to import of 0.1, calculate the new multiplier.	Answer: the multiplier is 1 divided by the quantity 1 minus 0.75 times 0.8 plus 0.1, which gives 1 divided by 0.5, that is 2. (Marking: 1 for the after-tax propensity, 1 for the import leakage, 2 for the value.)
16	In this case calculate the extra spending needed and explain why it is larger than in the previous part.	Answer: the required spending is 600 divided by 2, which gives 30 billion dollars. Taxes and imports are leakages, so a smaller share of each round of income is spent locally, the multiplier is weaker, and a larger initial injection is needed. (Marking: 2 for the value, 2 for the leakage explanation.)

Question 5 Banking system and deposit creation (16 marks)

In a banking system the required reserve ratio is 20 per cent, banks hold no excess reserves and the public holds no extra cash. A person deposits 10000 dollars in cash into bank A.

#	Question	Answer and marking notes
17	Calculate the deposit multiplier.	Answer: the deposit multiplier is 1 divided by 0.2, which gives 5. (Marking: 2 for the formula, 2 for the value.)
18	Calculate the total deposits the banking system can create.	Answer: total deposits are 10000 times 5, which gives 50000 dollars. (Marking: 2 for using the multiplier, 2 for the value.)
19	Calculate the total new loans, that is the money created.	Answer: new loans are 50000 minus 10000, which gives 40000 dollars. (Marking: 2 for deducting the original deposit, 2 for the value.)
20	If the reserve ratio rises to 25 per cent, what are total deposits and new loans? State one reason why actual creation is usually lower than the theoretical value.	Answer: with a 25 per cent ratio the multiplier is 4, so total deposits are 40000 dollars and new loans are 30000 dollars. Actual creation is lower because the public holds cash, banks keep excess reserves, or borrowers demand too little. (Marking: 2 for both values, 2 for the reason.)

Question 6 Exchange rates and international trade (16 marks)

The Hong Kong dollar is linked to the US dollar, and the rate moves from 7.8 Hong Kong dollars to 7.5 Hong Kong dollars per US dollar. A local exporter prices a good at 390 Hong Kong dollars, and an imported good is priced at 20 US dollars.

#	Question	Answer and marking notes
21	In this change, has the Hong Kong dollar appreciated or depreciated?	Answer: the Hong Kong dollar has appreciated, because the Hong Kong dollar price of one US dollar falls from 7.8 to 7.5, so each Hong Kong dollar buys more US dollars. (Marking: 2 for the judgement, 2 for the reason.)
22	Calculate the percentage change in the US dollar price of the exported good abroad.	Answer: the price was 390 divided by 7.8, that is 50 US dollars; it becomes 390 divided by 7.5, that is 52 US dollars, a rise of 2 dollars or 4.0 per cent. (Marking: 2 for both prices, 2 for the percentage.)
23	Calculate the change in the Hong Kong dollar price of the imported good.	Answer: the price was 20 times 7.8, that is 156 dollars; it becomes 20 times 7.5, that is 150 dollars, a fall of 6 dollars or 3.8 per cent. (Marking: 2 for both prices, 2 for the change.)
24	Using the two parts above, explain the effect of the appreciation on the trade balance and on local prices in Hong Kong.	Answer: exports become dearer abroad and imports become cheaper locally, so export competitiveness falls while imports rise and the trade balance may worsen; cheaper imports help hold down local prices and ease inflation. (Marking: 1 for the export effect, 1 for the import effect, 1 for the trade balance, 1 for prices.)

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