2000 Economics (AL) Paper 2 B&C

2000-AL ECON
PAPER 2 B&C
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. 2. 3. Write your Candidate Number, Centre Number and Seat Number in the spaces provided on this cover. Write your Candidate Number in the spaces provided on EACH answer sheet in this book. Answer each question on the TWO pages provided for that particular question. NO marks will be given for answers written on the wrong page. There are FIVE questions in Section B and THREE questions in Section C. Attempt ALL questions and keep your answers SHORT. If you have used any supplementary answer sheets, you should write your Candidate Number on every supplementary answer sheet and fasten it with a white string to the page in this book where the relevant question is.
4.
5.

Hong Kong Examinations Authority All Rights Reserved 2000
2000-AL-ECON 2B&C1
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2000-AL-ECON 2B&C2
All Rights Reserved 2000
Marks Marker No. Examiner No. Checkers Initial Candidate No. Paper/Section Question No.
2B 1
Consider an elementary closed Keynesian model. The only tax in the model is a lump sum tax. (a) (b) Suppose both government expenditure and tax increase by the same amount. Explain the impact of such changes on the equilibrium level of income. (4 marks) Suppose government expenditure increases by an amount smaller than the increase in tax. Explain the impact of such changes on the equilibrium level of income. Under what condition will the impact be zero ? (4 marks)
[NOTE : Dont use a supplementary answer sheet unless you have fully utilized this page and the next page.] 2000-AL-ECON 2B&C3
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Paper/Section Question No.
2B 1 (Continued)
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2B 2
An economy has an excess demand in its product market while its money market is in equilibrium. Suppose the national income is 100. Explain the situation of the economy using an IS-LM diagram. Is the equilibrium income more than, less than, or equal to 100 ? (8 marks)
2B 2 (Continued)
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2B 3
(4 marks)
(a) (b)
Explain how open market operation can be used to stimulate an economy.
Explain whether open market operation is a suitable policy to stimulate an economy that has a balance of payments deficit. (4 marks)
2B 3 (Continued)
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2B 4
(a)
Country A adopts a flexible exchange rate system. Explain how foreign investment in the shares and stocks of country A affects the exchange rate (price of domestic currency in terms of foreign currency) and the balance of payments of country A. (5 marks) Suppose a country is recovering from recession. Use the answer in (a) to explain how foreign investment in its shares and stocks can slow down its speed of recovery. (3 marks)
(b)
2B 4 (Continued)
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2B 5
Consider an elementary Keynesian model with a trade deficit. (a) (b) Indicate on a diagram the equilibrium level of income and the trade deficit. (3 marks)
With the aid of the diagram in (a), explain how an increase in investment affects equilibrium income and trade deficit. (5 marks)
2B 5 (Continued)
END OF SECTION B
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2C 6
Use the IS-LM model to answer this question. (a) (b) Show how an increase in investment affects equilibrium income and interest rate. (3 marks)
Fluctuations in investment will lead to fluctuations in equilibrium income and interest rate. If the government changes the money supply so that fluctuations in investment will not lead to a change in the interest rate, then the fluctuations in equilibrium income will be larger. Discuss with the aid of a diagram. (11 marks)
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2C 6 (Continued)
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2C 7
Consider the following Keynesian model : C = A + 0.8Y I = 200 labour supply = 500 where Y = national income C = consumption I = investment A is a constant
Each unit of labour can produce 3 units of goods. Suppose A is 100. (a) (b) (c) What is the value of the investment multiplier ? Describe the employment situation of the economy. Suppose both A and the labour supply increase by 10 units. (i) (ii) (iii) (d) Describe the employment situation of the economy. (3 marks) (1 mark) (3 marks)
By how much must the labour productivity increase in order to solve the problem faced by the economy ? (2 marks) Suppose the labour productivity increases by 10%. economy. Describe the employment situation of the (2 marks)
Based on the result in (c), explain what problems the economy may face if the aggregate demand, the labour supply and the labour productivity increase simultaneously. (2 marks)
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2C 7 (Continued)
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2C 8
(a)
If the velocity of circulation of money is constant, we can predict the impact of changes in money supply on nominal income. However, to know the impact of changes in money supply on price level, we need an additional assumption on the behaviour of real income. Discuss. (6 marks) Consider the following table. Year Money Supply 1 $100 2 $110 3 $121
(b)
Suppose the velocity of circulation of money is constant. (i) (ii) (c) Find the growth rate of nominal income in year 2 and year 3. (3 marks)
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)
Based on the above answers, explain the rationale behind the policy of setting the growth rate of money supply at a specific level. (2 marks)
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2C 8 (Continued)
END OF SECTION C
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2000 AL Economics Paper 2 Numerical Answers
2. 7.
YE > 100 (a) (c) 5 (ii) (i) 1.3% Year 2 : 10% Year 3 : 10% (ii) Year 2 : 10% Year 3 : 7%
8.
(b)

2000 Economics (AL) Paper 2 B&C

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2000-AL ECON

ECONOMICS A-LEVEL PAPER 2 Question-Answer Book for Section B and Section C

Candidate Number Centre Number Seat Number

INSTRUCTIONS FOR CANDIDATES

This is a blank page.

Go on to the next page

Paper/Section Question No.

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Paper/Section Question No.

Explain how open market operation can be used to stimulate an economy.

Go on to the next page

Paper/Section Question No.

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Paper/Section Question No.

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Paper/Section Question No.

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Paper/Section Question No.

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Paper/Section Question No.

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Paper/Section Question No.

2000 AL Economics Paper 2 Numerical Answers

All Rights Reserved 2000

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