Form 6 Economics Practice Paper: National Income, Money And Banking, And International Trade

Form 6 Economics Practice Paper: National Income, Money and Banking, and International Trade

2026-11-05

Form 6 Economics – 12 questions – 100 marks – 75 minutes

Form 6 Economics practice paper: 12 questions, 100 marks in 75 minutes on GDP, inflation, unemployment, money, banking, policy and trade, with full answers.

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Paper details　Form 6 Economics paper: 12 questions, 100 marks in 75 minutes on national income, money and banking, policy and trade, with full answers.

Section A: National Income and Macroeconomic Indicators

Answer all parts and show working with units in calculations.

#	Question	Answer and marking notes
1	For an economy in a year (in billion dollars): private consumption 600, investment 150, government spending 120, exports 400, imports 380, net factor income from abroad -15. (a) Calculate GDP. (b) Calculate GNP. (c) Explain why imports are deducted when calculating GDP.	(a) GDP = 600 + 150 + 120 + (400 – 380) = 890 billion dollars (4 marks). (b) GNP = 890 + (-15) = 875 billion dollars (2 marks). (c) Imported goods are not produced locally, so including them would double count (2 marks).
2	Nominal GDP this year is 1,200 billion and real GDP at base-year prices is 1,000 billion. (a) Calculate the GDP deflator. (b) Explain what the figure shows. (c) If last year deflator was 100, calculate the percentage change in the price level.	(a) 1,200 / 1,000 x 100 = 120 (3 marks). (b) It shows the general price level relative to the base year, that is prices are 20% above the base year (3 marks). (c) A rise from 100 to 120 is a 20% rise in prices (2 marks).
3	Unemployment includes frictional, structural and cyclical unemployment. (a) Give one Hong Kong example of each. (b) Which type is best tackled by retraining? Explain. (c) Why does a fall in the unemployment rate not always mean a higher standard of living?	(a) Frictional: graduates searching for their first job; structural: factory workers losing jobs as production moves away; cyclical: layoffs during a financial crisis (3 marks). (b) Structural, because skills no longer match job requirements and retraining gives workers new skills (3 marks). (c) The rate can fall because the labour force shrinks through ageing or emigration rather than because employment rises (3 marks).
4	(a) Distinguish demand-pull from cost-push inflation. (b) How does inflation affect a person on a fixed pension and a borrower differently? (c) Name one indicator commonly used to measure inflation in Hong Kong.	(a) Demand-pull inflation is driven by a rise in aggregate demand; cost-push inflation is driven by rising production costs such as wages and raw materials (4 marks). (b) A fixed pension buys less as purchasing power falls; a borrower repays debt whose real value has fallen and gains (3 marks). (c) The Composite Consumer Price Index (2 marks).

Section B: Money, Banking and Policy

Answer all parts; explain each point stated.

#	Question	Answer and marking notes
5	(a) State four functions of money. (b) Which institutions issue Hong Kong banknotes? (c) Why are coins and notes legal tender?	(a) Medium of exchange, unit of account, store of value and standard of deferred payment (4 marks). (b) Three note-issuing banks authorised by the government (2 marks). (c) The law requires them to be accepted in settlement of debt (2 marks).
6	The required reserve ratio of the banking system is 20%. A customer deposits 1,000 dollars. (a) Calculate the maximum total deposits the system can create. (b) Calculate the new deposits created. (c) If the ratio rises to 25%, state the change in total deposits.	(a) 1,000 / 0.2 = 5,000 dollars (4 marks). (b) 5,000 – 1,000 = 4,000 dollars (2 marks). (c) 1,000 / 0.25 = 4,000 dollars, so total deposits fall from 5,000 to 4,000 dollars (3 marks).
7	(a) State two expansionary fiscal policy measures. (b) Explain how higher government spending raises output through the multiplier effect in a recession. (c) State one factor limiting the effectiveness of fiscal policy.	(a) Increase government spending and cut taxes (2 marks). (b) Higher spending raises aggregate demand directly and becomes income for others who then spend more, so the final rise in output exceeds the initial spending (4 marks). (c) Policy lags, public debt limits, or crowding out of private investment (any one, 2 marks).
8	Hong Kong operates a linked exchange rate system. (a) Describe its key features. (b) Why do Hong Kong interest rates broadly follow US rates? (c) State one cost of maintaining the system.	(a) The dollar is linked to the US dollar within a convertibility range of about 7.75 to 7.85 under a currency board mechanism (4 marks). (b) Interest arbitrage keeps the exchange rate within the band, so local rates move towards US rates (3 marks). (c) The economy loses the freedom to set interest rates for domestic purposes (2 marks).

Section C: International Trade and Development

Answer all parts; in evaluation questions argue both sides.

#	Question	Answer and marking notes
9	Output per unit of labour in two countries (kg): Country A rice 10, cloth 5; Country B rice 4, cloth 4. (a) Calculate the opportunity cost of one kg of rice in each country. (b) State what each country should specialise in. (c) Explain how trade benefits both.	(a) In A, one kg of rice costs 0.5 kg of cloth; in B, one kg of rice costs 1 kg of cloth (3 marks). (b) A should specialise in rice and B in cloth (3 marks). (c) Each produces what it gives up least to make and they exchange, so total output rises and each can consume beyond its own production possibility curve (2 marks).
10	A country imposes a tariff on imported rice. (a) State two effects on local consumers. (b) State two effects on local producers. (c) Where does the government revenue come from? (d) State one difference between a tariff and a quota.	(a) The price of rice rises and the quantity consumed falls (2 marks). (b) Local price and output rise and producer surplus increases (3 marks). (c) Tariff revenue collected on imports (1 mark). (d) A tariff raises government revenue while quota rents may go to importers or foreign exporters (2 marks).
11	Balance of payments. (a) State two components of the current account. (b) Where is an increase in Hong Kong service exports recorded? (c) Does a current account surplus always mean a healthy economy? Explain.	(a) Trade in goods, trade in services, income and transfers (any two, 2 marks). (b) Under trade in services in the current account, as a credit (2 marks). (c) Not necessarily; a surplus may reflect weak domestic demand, falling imports, or high saving with low investment (4 marks).
12	Economic growth and economic development. (a) Distinguish the two. (b) State two environmental costs of economic growth. (c) Name one indicator that supplements GDP in reflecting quality of life.	(a) Growth is a rise in real GDP, while development also covers improvement in living standards, education, health and income distribution (4 marks). (b) More pollution and depletion of natural resources (2 marks). (c) The Human Development Index, or the Gini coefficient for income distribution (2 marks).

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