Macro 88

88.1. Investment depends on the rate of interest. The rate of interest depends on investment.
Reconcile these two statements with reference to the IS-LM framework.
(8 marks)
88.2. The developed countries are more productive in all goods than developing countries.
There is no basis for trade between the two. Comment in terms of the principle of
comparative advantage.
(8 marks)
88.3

.
88.4

Suppose that under a fractional reserve system, an individual deposits his pocket-money
with a bank. Assuming that no bank keeps excess reserves, explain how this affects
(a)
total deposits, and
(4 marks)
(b)
the money supply.
(4 marks)
GNP = C + I + G + X - M

(a)
(b)

where

GNP
C
I
G
X
M

:
:
:
:
:
:

gross national product

consumption expenditure
investment expenditure
government expenditure
expenditure on exports
expenditure on imports

Although GNP is supposed to be measured at market value, there is one

component which is not. What is that component? Name one item within that
component.
(4 marks)
Why is M deducted?
(4 marks)

88.5

The simple multiplier is usually expressed as the reciprocal of the marginal propensity to
save. Explain how the multiplier would be affected if
(a)
there are imports.
(4 marks)
(b)
there is full employment.
(4 marks)

88.6

The following are hypothetical figures about the population of Hong Kong at a certain
date (in thousands):
(a)
(b)

Calculate the unemployment rate.

(2 marks)
Explain how the unemployment rate in Hong Kong would be affected by the
following:
(i)
Some young workers give up their jobs to become full-time students.
(3 marks)
(ii)
Independent private provident funds are replaced by a central provident
fund.
(3 marks)

88.7.
(a) Generally, it is the interaction between the money market and the product market which
determines the equilibrium level of income. However, there are instances in which one
market alone is sufficient to determine the equilibrium level of income. Discuss.
(15 marks)
(b)
In the light of (a), discuss the effectiveness of fiscal and monetary policies in regulating
the income level of an economy.
(9 marks)
88.8.
(a)
(b)

Explain briefly three methods by which a government can control the money supply.
(9 marks)
Discuss how the methods you mentioned in (a) may not give the government complete
control over the money supply.
(15 marks)

88.9.
(a)
Show, with a diagram, how a tariff can bring a net welfare loss to an economy.
(15 marks)
(b)
Despite (a), explain why tariffs are still imposed.
(9 marks)
88.10.
(a)
Explain, with diagrams, the role of a government in maintaining the official rate under a
fixed exchange rate system.
(12 marks)
(b)
In what way can private speculation endanger the above system ?
(6 marks)
(c)
Explain how interest rates can be used to offset part of the pressure created by
speculation on the Hong Kong dollar under the linked exchange rate system.
(6 marks)