oe. rest cope 004075 FORM TP 22264 PILOT MAY/TUNE 2002 "CARIBBEAN, EXAMINATIONS COUNCIL “1+; .. ADVANCED. PROFICIENCY EXAMINATION ECONOMICS UNIT 2- PAPER 02 2 hours READ INSTRUCTIONS CAREFULLY 1. This paper consists of THREE sections. 2. EACH section consists of TWO questions. Candidates must answer THREE questions, one from EACH section. 3. Answers for ALL questions MUST be written in the answer booklet provided. 4. Candidates may use silent non-programmable calculators. yitight © 2001 Caribbean Examinations Councilaa SECTION 1 Answer ONE question from this section 1, The table below shows the year, price per unit, and units produced for the nation CARICOMLAND which produces only one good, viz cars. Year| Priceper | Output | Nominal | Price | Real GDP ae (units) | GDP Index a eerie ieee] tee ; po 2 10800 120 eee) asy5 | ¢32°5 ia : & 1400 2 Cc J549 800 | P 4 11800 | 1600 co | yayg-S | yo ove 5 12.000 1800" wae oA) \4X99Od (@) Draw the table above in your answer booklet and complete it by calculating the following | for Caricomland for years 1 to 5: | @ Nominal GDP [10 marks] (ii) The Price Index, using year 3 as the base year [10 marks] Gi) Real GDP (10 marks} (b) State whether EACH of the following, causes GDP, as a measure of economic well being, to be understated or overstated. ‘GDP excludes MOST non-market goods." [ 2marks] GDP excludes the value of leisure. VV [ 2 marks] ‘The environmenta] damage that results from production is NOT accounted for in GDP. [ 2marks] GDP-excludes-the value of goods and services produced by the ‘underground economy’. Us { 2marks}3 ©) (a) ) © ‘The following are national income and product accounts for Country X for a givdn year. National Income and Product Accounts for Country X ~ Government puichases of goods and services 540 Indirect business taxes 240 “Personal consumption expenditures 1540 | ‘Capital consumption allowances 340 Proprietor’s incoine { 145 Employer contributions to public and private pension plans ads Net interest ds Gross private domestic investment — 410 7} Rental income 45 > Exports 460 Imports _} “260 Corporate profits 225 Wages and salaries ; 1302 Social security payroll taxes 235 Government transfer payments to individuals 300 Personal interest, dividends and business transfers to individuals 340 Personal taxes ~ 325 (Calculate the Gross Domestic Product using the expenditure approach. [ 3 marks} Gi) Calculate the Gross Domestic Product using the income approach. [3 marks} Calculate net exports and national income. eee. [ 6 marks} (&-4) GOP + dean t saowdrer = GORE. - ee ee Total 50 marks and discuss FOUR advantages and FOUR disadvantages of direct foreign investment in Caribbean economies. [50 marks] SECTION 2 Answer ONE question from this section Outline TWO major roles that a Central Bank performs in any economy. _[ 8 marks] ‘Name THREE MAIN tools of monetary control used by a Central Bank, and explain how they can be used to control the money supply. [20 shake] Discuss why monetary policy may NOT be efiective in a recession. [12 marks} Total 50 marks GO ON TO THE NEXT PAGE 004075/CAPE 20026. @ &) '@ (b) rae ()—_Weerstify the time lags that affect fiscal policy. [15 marks} (i) Explain how TWO of the time lags that you have identified in (a)(i) above can reduce the effectiveness of discretionary fiscal policy, [20 marks} @® Define the term ‘auitomatic stabilizers’ [ Smarks] Gi) How can ihe presence of antomatic stabilizers overcotie the problems caused by time lags? [10 marks] Total 50 marks SECTION3 Answer ONE question from this section @ List THREE advantages of international trade. [ 6marks} (i) Show hew the advantages fisted in (a)(i) above contribute to the economic growth anid developrient of a country. [24 marks} What do you understand by the term ‘globalization’? [ 4 marks] Discuss whether globalization is a help or a hindrance to the international trading process. [16 marks] ‘Total 50 marks Discuss the MAJOR functions of BACH of the following international institutions (i) The International Monetary Fund (IMF). [10 marks] (The World Bank (IBRD). {10 marks] (iii) The World Trade Organiization (WTO) [10 marks] @ Identify FOUR measures that have been recommended by the International ‘Monetary Fund (IMF) for the reform and stabilization of developing countries. [ 8 marks) Discuss the effects of ONE of the measures identified in (b)(i) above on the econonties of developing countries. [12 marks} Total 50 markstest cope 004075 @ FORM TP 23196 a MAY/SUNE 2003 e CARIBBEAN EXAMINATIONS COUNCIL = --ADVANCED PROFICIENCY EXAMINATION ECONOMICS UNIT 2- PAPER 02 LIBRARY 24 hours ST. JOSEPH’s Convent : ST. JOSER Nor Fe OR Lowy READ INSTRUCTIONS CAREFULLY 1. This paper consists of THREE sections. 2. Each section consists of TWO questions. Candidates MUST answer THREE questions, one from EACH section. 3, Answers for ALL questions must be written in the answer booklet provided. 4, Candidates may use silent non-programmable calculators. Copyright © 2002 Caribbean Examinations All rights reserved.MODULE 1 { @ (i) Define the term ‘consumption function’, [5 marks e (i) Identify and explain FOUR factois, apart from income, which influence consumption. [24 marks} (0) With reference to the permanent income and life-cycle hypotheses, explain: (The meaning of the variables they seek to explain (ii) The assumption they make . (ii) The major pleat of the assumption [21 marks} ‘Total 50 marks GO ON TO THE NEXT PAGEeo. Country P Country Q Expenditure @ Expenditure © cre C+I+G | | I i \ m0 | | | 200-250 Income (¥) xe yy ‘The diagrams above show the following macroeconomic conditions for Country P and Country Q (Country P and Country Q both have FULL employment incomes (Y,) equal to $200, (ii) Country P and Country Q both have a marginal propensity to consume (MPC) equal to 0.6. (2) Describe the macroeconomic conditions in Country P and Country Q. [10 marks] (®), If Country P and Country Q wantto achieve FULL employment without inflation, discuss the changes in government expenditure you will recommend in EACH country. [20 marks} (©) IfEACH country was forced to maintain a balanced budget, by how much would government expenditures have to rise OR fall in order to achieve FULL employment with NO inflation? : [20 marks} Total 50 marks GO ON TO THE NEXT PAGE 004075/CAPE 2003,EO} () ©) @ (b) © @ MODULE 2 Gold, diamonds, cigarettes and cattle have all been used as money. Discuss FOUR @ characteristics that money MUST have to perform ALL of its functions. [20 marks} Discuss the disadvantages of EACH of the items used as money in (a) above. [15 marks} @ Explain the term ‘fractional reserve banking system” ii) What advantages do banks have under the fractional reserve banking system? [10 marks} When banks lend money, (i) what kind of money do they create, and (ii) why is it called money? . [5 marks | Total 50 marks Explain the following terms: @ Narrow money Gi) Broad money [6 marks | ‘What effect does inflation have on money as a @ medium of exchange? (i) unit of account? ii) standard of deferred payment? (iv) store of value? (20 marks] Which is larger, the monetary base OR the monetary supply? Give reasons for your answer. [4 marks] How does the Central Bank use (i) changes in the reserve requirement to regulate the money supply; and (fi) changes in the discount rate? {20 marks} Total $0 marks GO ON TO THE NEXT PAGE (004075/CAPE 2003Bas MODULE 3 Price |- Price ) World Price plus tax (P,, +t) ‘World Price P, " ‘Demand (Dec) ' 1 1 1 \ s ee Quantity Demand and Supply of Milk in Country X Dee and Sce in the diagram above represent the demand and supply of milk in Country X. (a) __Atthe world price of milk (Pw), what will be the local levels of (i) consumption, (ji) production, and (iii) importation of milk in Country X? {6 marks | (6) _Ifatax on imported milk increases the price from Pw to Pw+t, what will be the local levels of i) consumption, (ii) production, and (iii) importation of milk? [6 marks | (©) fan additional tax raises the price of milk from Pw#t, reproduce the diagram above in your booklet to show what areas represent (i) net consumer losses, (ji) producer’s gain, and (iii) government revenues. [18 marks] (4) @_Define the term ‘protectionism’ [4 marks | (ii) Discuss TWO econonfic arguments for and TWO economic arguments against protectionism. [16 marks] Total 50 marks GO ON TO THE NEXT PAGE Ke 004075/c APE 2003*S 6 (@_ Explain what you understand by the following: & (A fixed exchange rate Gi) A freely floating rate (ii) A managed float [12 marks} (b) With the use of diagrams show how, under a fixed exchange rate, the United States’ monetary authorities will maintain the price of the United States” dollar (i) if its value begins to rise against the value of the British pound; and (i) if'ts value begins to fall against the value of the British pound [38'marks) ‘Total 50 marks END OF TEST= i : as TEST CODE 027 “3920 FORM TP 2004193 MAY/SUNE 2004 » CARIBBEAN EXAMINATIONS COUNCIL ADVANCED PROFICIENCY EXAMINATION ECONOMICS UNIT 2 - PAPER 02 24 hours 27 MAY 2004 (a.m.) READ INSTRUCTIONS CAREFULLY 1. This paper consists of THREE sections. 2. Bach section consists of TWO questions. Candidates MUST answer THREE questions, one from EACH section. 3. Answers for ALL questions must be written in the answer booklet provided. 4. Candidates may use silent non-programmable calculators, Copyright © 2003 Caribbean Examinations Council Allrights reserved 02216020/CAPE 2004uth Ser) Roa, Bed C - sae SECTION I Answer ONE question from this section, ~ 4. The data below refer to the Gross Domestic Product (GDP) of Country X. /All values in the table are in billions of dollars. oa ica Year | Nominal GDP| Real GDP | Real Potential | Output Gap/ Growth in| Growth in 4 1997 | GDP1997 | )-c., | Nominal | Real GDP $ dollars $ | dollars $ GDP (%) | (%) ey 316 Yol a+ 5%e 1990 | _2708.0-7_|_3776. a9 igo e | 12 j 4S 2 ofa [eg 1992} ~3149.6.3_|~3760: 4090.9 Saas Baar G 1994 | 3777.27 | 4148. 4267.9 sugep | Sra sek FT? 1996 | 4268, 4404.55 | 4499.8 ae | Neen tae 1998 | 4900. ans, 4658.4 | see ae 2000 | 5513. 4884; 4966.0 1o-s¢qo [OS 2002 | 56724) | asas. 5092.7 = eeahie-or (@) What was the percentage increase, to one decimal place, in EACH of the following for the period 1990 to 2002? . (@ 5 Nominal Gross Domestic Product’ 40 3: Ye ae Bae ee eee pr oraes Gi.» Real Gross Domestic Product a eeRene DePEa ee a 5 ys [8 marks] TT z Reprodite the table ibove in your answer booklet and calculate, for EACH two-year period, the percentage growth in (@ Nominal Gross Domestic Product S672-6—gQ70t 9 (i) Real Gross Domestic Product ane Record your answers in the respective columns in the table you have drawn. ok Car (24 marks] , So Calculate the size of the output gap for EACH year stated and record your —eaiC4 ckuet \ answers in the respective columns in the table you have drawn. [ Tmarks] ‘| x 1 J erage eee Go L phat era) = Gi) State the years in which a oes nary gap and an inflationary gap existed. = oS oe sea (fmarks} ef ? (iii) _ In what year/period was there an inflationary gap? [mark]! (@) Sometimes an estimate of potential Gross Domestic Product is NOT available and the performance of an economy will have to he judged by-other-measures.Based.on.the change in real Gross Domestic Product, state the stage of the business cycle represented by the period 2000-2002. , [4 marks] 4 ‘Total 50 marks GO ON TO THE NEXT PAGE 02216020/CAPE 2004SB. 2 Real Income Consumption Savings (¥) $ Millions (C)$ Millions (5) $ Millions ) ° 800 2500 2800 5000 4300 7500 6 800 aS 10.000 8800 @ — @_ Reproduce the table above in your answer booklet and complete it. (5 marks] (i) What is the marginal propensity to consume? > : [2 marks} *s Gil) Cateulat the multiplier, var : [4 marks} (iv) What is the equilibrium level of real income if ‘investment spending is $500 nillion and Government spending is $200 million? [6 marks} (¥) State whether this economy is ‘open’ or ‘closed’. Give ONE reason for ‘your, answer. : .° [4marks] (6) Agaregate demands the sum of the amount spent by individuals, business and Govern- ‘ment, plus the net exports of goods and services, Cicrete | @ Explain why aggregate demand increases or decreases as price levels increase or decrease. pe a (enaNield tates es {10 marks] * To aera cuas Fe ee RAI aTas (ii) List THREE variables other than the price level which can affect aggregate demand. tacews, tm : [3 marks} Git) State how the THREE variables listed in (ii) above can affect aggregate demand, {6 marks} &) Whats the difference between a Keynesian aggregate supply curve and aclass- ical aggregate supply curve? Use graphs to illustrate your answer, [10 marks} Total $0 marks GO ON TO 7 022 1AN2NIOAPR 2004SECTION It Answer ONE question from this section. 3. (@)_—@)_ Define the term ‘money’, {2 marks] Gi) Name TWO types of money. z [4marks] ii) Keynesian economists have identified vatious inotives for holding money. List THREE of those motives. + [9 marks] (iv) Using TWO of the motives listed in iii) above, explain why there is that type of demand for money. [10 marks] (6) @)_ The process of credit creation is central to any modem banking system. Show (a) how a bank can create credit if it receives a cash deposit of $100 and the reserve ratio is 10 per cent, and (b) the total amount of deposit created. ; ; * — [2marks} Gi) Explain why the demand for money increases or decreases as the rate of interest increases or decreases. He {6 marks} Gii) With the use of a diagram, explain what happens to the interest rate when there is an increase in the supply of money. [7 marks} ‘Total SO marks 4. (@)__@_ Whatis the relationship between the national debt and the budget deficit? eae ae [4 marks} Gi) List THREE fiscal measures that may be used to stimulate employmentin your country. * : [6 marks] (iii) Discuss how EACH of the measures listed in ({i) above can be used to stimulate employment. [15 marks} (&) Discuss the effects of the following events on the equilibrium level of output of a country. & — Anincrease in lump-sum taxes, alll other variables.being constant. {S marks] (ii) An increase in government spending, all other variables being constant. ; {5 marks} (ii) _An equal increase in government spending.and lump-sum taxes, all other vai ables being constant. [5 marks] (©) Explain how a large public debt can place a burden on future generations. [10marks] Total $0 marks GO ON TO THE NEXT PAGE 02216020/CAPE 2004SECTION III Answer ONE question from this section. 5 (@)_~—@_—_ Outline TWO differences between ‘growth’ and ‘development’. [4 marks] Gi) List THREE factors which can allow economic growth to take place. Give an example for EACH. [6 marks] (ii) Discuss TWO benefits and TWO costs of growth. {12 miarks} Income Groups| Number of | Gross Domestic | Population | Gross Domestic| World World Gross byGDP per) | Countries | Product | (millions)] Product [Population] Domestic capita (1999) (US Smiltion) Per Capita % Product % 1 2 3 4 5 6 fi _|Low ($675 or less) Rid 1139000 3215 350 59.1 “$5.0 " Lower-middle : ~ | $676-$2695 69 1614000 949 1700 17.4 WwW 4. | Upper-middle r+ | (2696-8355) 43 1837 000 457 4070 83 80 _|High shames] $8356 or more | 38 18 297 000 828 22.100 152 79.9 World 207__| 22887000 54a 4200 100 100 @ Gil) dy) (wy) (®) The table above shows data on income and population differences among groups of countries for 1999. Use the information to answer the following questions. Which TWO columns show the unequal distribution of world incbme? [2 marks] ‘What do the data in columns 1, 6, and 7 indicate? [6 marks} In which income grouping will MOST CARICOM countries fall? Give ONE reason for your answer. [5 marks] List and discuss TWO consequences for citizens in countries with low income Jevel: = [6 marks} List and discuss THREE constraints to the economic development of low in- come countries. [9 marks] ‘Total $0 marks GO ON TO THE NEXT PAGE(2) @_ Define the term ‘exchange rate’ and state how itis expressed. (4 marks) Gi) Identify TWO types of exchange rate systems, [4 marks} Gi) State how the exchange rate is determined under the TWO systems you identi- fied in (ii) above. [10 marks} (b) Changes in demand for and supply of a particular currency in the foreign exchange market cause exchange rates to move. Study the situations outlined below with respect to the economies of Britain and United States of America and, with the aid of diagrams, use demand and supply analysis to show what will happen to (j) the exchange rate, and the value of the British pound relative to the United States dollar. @ British consumers have an elastic demand for US produced videos and the US dollar price of videos rises sharply. [8 marks] +, Gi) British consumers have inelastic demand for US produced videos and the US p dollar price of videos rises sharply. [8 marks] (iii) There is inflation in the British economy, (8 marks} (iv) British citizens have an increased desire to invest in assets in the United States. [8 marks} Total 50 marks * END OF TEST 02216020/CAPE 2004TEST cope 02216020 FORM TP 2005193 ‘MAY/UNE 2005 CARIBBEAN EXAMINATIONS COUNCIL ADVANCED PROFICIENCY EXAMINATION ECONOMICS UNIT 2- PAPER 02 24 hours READ INSTRUCTIONS CAREFULLY 1. This paper consists of THREE sections. 2. Bach section consists of TWO questions. Candidates MUST answer THREE questions, ONE from EACH section. 3. Answers for ALL questions must be written in the answer booklet provided. Candidates may use silent non-programmable calculators. Copyright © 2004 Caribbean Examinations Council All rights reserved (02216020/C APE 2005SECTION I Answer ONE question from this section, ‘The table below lists Econland’s transactions in 2003, ae ea ‘Wages paid to labour ‘Consumption expenditure Taxes Transfer payments Profits Investment Government purchases Exports Imports Savings Calculate Econland’s Gross Domestic Product using the Expenditure Method. [10 marks} (Gi) Based on the information in the table above, state wh can be used to calculate the Gross Domestic Product, tether the income approach } Explain your answer. (10 marks} ©) State, with reasons, whic! Domestic Product. of the transactions listed below will NOT be counted inthe Gross {0 A meat processing company builds a new plant. Gi) A drug dealer sells $5 000 worth of illegal drugs, Gi A clothing factory produces one million worth of dress shirts, (iv) Purchase of a used text book. () Company A launched a hostile takeover of Comp (vi) A public utitity company installed new turbines a any B and purchased its stocks, nd cooling equipment, [21 marks} (©) Explain what is meant by “double counting’, example. Mlustrate your answer with the use of an 19 marks} Total 50 marks GO ON TO THE NEXT PAGE 02216020/CAPE 2005Define the following terms: (i) Marginal propensity to consume (i) Multiplier Gi) Actual investment (iv) Planned investment [8 marks} Explain the relationship between the following: (0) Marginal propensity to consume and multiplier (ii) Actual investment and planned investment [8 marks] (©) You are given the following information about Country Z. + Consumption function: C = 200 + 0.87 + Investment function: 100 { Asstegate expenditure (AB) = Consumption + Investment (C +1) * Aggregate expenditure (AE) = National income (j) (i) Determine the following: 3) Marginal propensity to consume [4 marks] b) Marginal propensity to save [4 marks] Gi) Using a 45° line diagram, plot the ageregate expenditure function. (Use the graph sheet provided to answer this question.) [12 marks} (5) Indicate the equilibrium point on the graph drawn in (b)(i) above, [4 marks] (iv) Calculate the level of national income at equlibrium, {6 marks} () — Calcutate the multiplier [4 marks] Total 50 marks GO ON TO THE NEXT PAGE=e SECTION I Answer ONE question from this section. Explain the following terms: @ Broad money (i) Monetary policy (i) Moral suasion (iv) Transactions demand for money [20 marks] When the Central Bank adds new reserves to the banking system through the purchase of bonds, some of the new reserves end up in foreign bank accounts and in foreign investment funds. These ‘leakages’ interfere with the expansion of the money supply and sometimes make it very difficult for the Central Bank to control the money supply. Discuss, giving reasons, why the statement outlined above is TRUE, [10 marks} Explain, with the use of diagrams, how the equilibrium interest rate is determined in the money market. [10 marks} Explain how EACH of the transactions listed below affects the transactions demand for money and the equilibrium interest rate (@ Shortening the pay periods for workers Gi) An increase in the nominal Gross Domestic Product (10 marks} ‘Total 50 marks GO ON TO THE NEXT PAGE 02216020/CAPE 2005fa) a8 (i) Define the term ‘national debt’ [5 marks] Gi) Outline TWO ways of measuring the national debt. Use examples to illustrate your answer. [10 marks} Gil) Distinguish between debt forgiveness and debt retirement. [10 marks] Explain how government's borrowing to finance large budget deficits will affect the following. (Domestic interest rates Gi) Domestic investment Gil) The value of the country’s curreney on the international market [15 marks] (@ Explain what is meant by the term “fiscal policy’. Who determines the fiscal policy of a country? ii) What are the aims of the fiscal policy of a country? [10 marks} Total 50 marks SECTION II Answer ONE question from this section. Identify and discuss THREE sources of economic growth which may be present in any economy. (30 marks] (Outline the MAJOR features of globalisation, [5 marks] (i) Discuss THREE ways in which globalisation can affect Caribbean economies. [15 marks} Total 50 marks GO ON TO THE NEXT PAGE (02216020/CAPE 2005(a) Explain the following terms: @ Currency appreciation and depreciation Flexible and fixed exchange rates Balance of payments accounts [18 marks} Balance of Payments of Courtry X, 2001 (All figures are in billions of dollars) Merchandise exports +40 Merchandise imports -30 Services exports +15 Services imports -10 Investment income -5 Net transfers +10 Capital inflows +10 Capital outflows -40 Official reserves +10 Use the information in the table above to calculate the following for Country X. (Show all working.) (@) The balance of trade [5 marks] (&) The current account balance [5 marks] (©) The capital account balance [5 marks} Does Country X have a balance of payments deficit OR surplus? (Show all working.) {5 marks] Explain the meaning of the plus (+) and minus (~) signs in the balance of payments account shown in (b) above. 19 marks} ‘Suggest ONE measure a country can take to bridge a current account deficit. (3 marks} Total 50 marks END OF TEST (02216020/CAPE 2005e Test cope 02216020 FORM TP 2006199 MAY/UNE 2006 CARIBBEAN EXAMINATIONS COUNCIL ADVANCED PROFICIENCY EXAMINATION ECONOMICS UNIT 2- PAPER 02 2% hours INSTRUCTIONS 7 DATE: 1. This paper consists of THREE sections. 2. Each section consists of TWO questions. Candidates MUST answer THREE questions, ONE from EACH section. 3. Answers for ALL questions must be written the answer booklet provided. 4. Candidates may use silent non-programmable calculators. Copyright © 2005 Caribbean Examinations Council ® All rights reserved. 02216020/CAPE 2006(a) ) © @ © (02216020/CAPE 2006 pe SECTION I Answer ONE question from this section. The ‘government purchases’ component of GDP does not include spending on transfer Payments such as social security benefits. Using the definition of GDP, explain why transfer Payments are excluded when computing GDP. [4 marks] State the formula for converting nominal GDP to real GDP, (1 mark } Use the information in the table below to answer (e) (i) and (c) (i). Price of | Quantity of | Price of | Quantity of Year Milk Milk Honey Honey Ss) Gitres) Sy (quarts) 2001 1 100 2 50 2002 2 150 3 100 2003 3 200 4 150 @ Using 2001 as the base year, compute for each year a) Nominal GDP b) Real GDP ©) GDP deflator. Gi) Compute the percentage change from 2001 to 2002 and from 2002 to 2003 for a) Nominal GDP b) Real GDP ©) GDP deflator. [30 marks] Explain why economists use real GDP rather than nominal GDP to measure economic well-being. [5 marks} (On Fridays, Barry, the Barber Inc., collects $400 for haircuts. During the day, his equipment depreciates in value by $50. OF the remaining $350, Barry sends $30 to the government for sales tax, takes home $220 in wages and retains $100 in his business to add new ‘equipment in the future. From the $220 that Barry takes home, he pays $70 as income taxes. GO ON TO THE NEXT PAGE2 @) ) © Based on the information given on page 2, compute Barry's contribution to the following ‘measures of income in the economy: (Gross domestic product Gi) Net national product (ii) National income (iv) Personal income (v)__ Disposable personal income (10 marks] ‘Total 50 marks Explain the meaning of the following terms: (i) Aggregate demand (i) Aggregate demand curve Aggregate supply (iv) Aggregate supply curve (%) Equilibrium price level 115 marks} Using aggregate demand and aggregate supply curves to illustrate your points, discuss the impacts of the following events on the price level (P) and equilibrium GDP (Y) in the short run. (A tax cut holding government purchases constant, with the economy operating at near full capacity (ii) An increase in the money supply during a period of high unemployment and excess industrial capacity Gil) An increase in the price of oil caused by war in the Middle East, assuming that the government attempts to keep interest rates constant by accommodating inflation [27 marks] Investment is usually regarded as the most unstable component of aggregate spending. ‘Several factors contribute to such instability. Explain how the variability of profits and expectations contribute to the instability of investment. [8 marks] Total 50 marks GO ON TO THE NEXT PAGE, 02216020/CAPE 2006SECTION II Answer ONE question from this section. Fiscal policy is one of two policy channels through which the government can affect the macro- economy. Discretionary fiscal policy and automatic stabilizers are two important fiscal policy measures. (@) — @_ Differentiate between ‘discretionary fiscal policy’ and ‘automatic stabilizers’ i) Using examples, explain how discretionary fiscal policy and automatic stabilizers work during periods of recession or inflation in an economy. [12 marks} (b) Suppose that as Chief Economic Adviser, the Minister of Finance calls you into his office and says the following: “Unemployment is too high. We need to lower it by increasing both output and income. Right now the equilibrium level of income/output is $900 billion, but perhaps an acceptable unemployment rate could be achieved if aggregate output increases to say, $1100 billion. Note however that the marginal propensity to consume is 0.75, and taxes must remain at the present levels. So, adjusting taxes (1) is out of the question.” (Under the circumstances outlined above, explain how the government can use fiscal policy ~ taxing and spending ~ to increase the equilibrium level of output from ‘$900 billion to $1100 billion. ii) Using a 45° line diagram, graph the original situation and the solution you gave in (©) Gi) above. [18 marks} (© Suppose that instead of keeping taxes (T) constant, the Minister of Finance decided to finance the increase in government spending with an equal increase in taxes $0 as to maintain a balanced budget. Explain what happens to aggregate spending as a result of arise in both taxes and government spending, [10 marks} (® How much a balanced-budget increase in goverment spending (G) and taxes (T) will raise output depends on the balanced budget multiplier. (What is the balanced budget multiplier? Gi) Referring to the solution given in (c) above, how large is the balanced budget multiplier? Explain your answer. [10 marks} ‘Total 50 marks GO ON TO THE NEXT PAGE 02216020/CAPE 2006 tina |Discuss the following: (i) TWO advantages of paper money (i) TWO advantages of cheques as compared to commodity money (iii) TWO disadvantages of commodity money (18 marks] Currency and chequable deposits have no intrinsic value and they are not backed by gold or other precious metals, yet they are regarded as money. uss the role of acceptability and fiat or law in determining the value of money. 112 marks} (® Discuss the basic determinant of the transactions demand for money and the speculative demand for money. Assume that the money market siitially in equilibrium and thatthe money supply is increased. With the use ofa diagram, explain the adjustments toward a new equilibrium interest rate, 120 marks] ‘Total 50 marks GO ON TO THE NEXT PAGE, 02216020/CAPE 2006-6 SECTION UT ‘Answer ONE question from this section. 5, The table below shows the hypothetical domesti¢ ‘demand and supply schedules for shirts. Use the jnformation presented to answer the questions that follow: Price Quantity Demanded | Quantity Supplied @ (units) (units) 6 800 1100 5 1000 1000 4 1200 900 a 1400 800 2 1600 700 (@) _@ _ Using the graph paper supplied, plot the demand and supply curves. Gi) Whatare the equilibrium price, P, and equilibrium quantity, Q.? [Assume that the world price for shirts is S3. gram you have drawn. i ‘onsumption and domestic (17 marks] (ii) Show this as Pon the dia (iv) On your diagram, indicate the levels of domestic © production. (b) In order to preserve employment, theirs is an infant industry that shoul the price of shirts to $4. Jocal manufacturers of shirts argue successfully = jabe protected. As such, a tariff is imposed thats 5 (@ Show the tariff as P, om the diagram you have dravin. Gi) Following the imposition of the tariff, by how much will domestic prodaesa= increase? ii) Whatis the new level of domestic consumption? if, how many shirts will be imported? (13 marks Gv) Following the imposition of the tar (%)_Interms of tax revenues, how much will the tariff yield? GO ON T0 THE NEXT PAG 7 (02216020/CAPE 2006ae (On your diagram, shade inthe area representing the net welfare loss (deadweight loss) caused by the tariff. Calculate how much is the loss in welfare. (10 marks} Explain who gains and who loses when a country allows trade and becomes an exporter. Baplain who gains and who loses when a country allows trade and becomes an importer. Considering the circumstances in (4) (i) and (4) (ii) above, do the gains from trade exceed the losses? (10 marks} Total 50 marks (a) Using appropriate examples, explain EACH of the following terms: @ — Free-trade area (i) Customs union Gi) Common market (Describe, briefly, EACH of the following: a) CARICOM b) CSME © FIAA : (9 marks] Outline THREE objectives of Caribbean integration. [9 marks] (© Discuss FOUR advantages to CARICOM member states arising from the free movement of factors of production — goods, services, capital and People — under the CSME. [20 marks] Total 50 marksce. Test cove 02216020 FORM TP 2007187 ‘MAY/JUNE 2007 CARIBBEAN EXAMINATIONS COUNCIL ADVANCED PROFICIENCY EXAMINATION ECONOMICS UNIT 2- PAPER 02 24 hours 14 JUNE 2007 (a.m) INSTRUCTIONS TO CANDIDATES, ‘This paper consists of THREE sections. ‘There are TWO questions in each section. Candidates MUST answer THREE. questions, ONE from EACH section. Answers for ALL questions must be written in the answer booklet provided. Candidates may use silent non-programmable calculators. Copyright © 2006 Caribbean Examinations Council , All rights reserved. 02216020/CAPE 2007L @ (b) © @ © oO @) ) ©) (dd) @ SECTIONT Answer ONE question from this section. Explain the difference between Gross Domestic Product (GDP) and Gross National Product (GNP). [6 marks] Explain why EACH of the following is NOT counted in GDP calculations: (Purely financial transactions (ii) Second-hand sales [4 marks} ‘Outline the MAIN difference between the expenditure approach and the income approach to the determination of GDP. [12 marks} Briefly describe how EACH of the following terms is calculated @ Net Domestic Product (ii) National Income ii) Personal Income (iv) Disposable Income [8 marks} Define the term “Consumer Price Index” [3 marks] Explain what is meant by the GDP deflator. [3 marks] Discuss FOUR reasons why GDP is NOT always a true measure of well-being of an ‘economy [14 marks} Total 50 marks State FOUR major determinants of aggregate demand. [8 marks] State FOUR major determinants of aggregate supply. ~ - [8 marks] Discuss THREE factors that account for the volatility of investment. [9 marks} Explain the relationship between “saving” and “investment”, [5 marks} Using the standard Keynesian 45° diagram, explain the difference between inflationary and recessionary gaps. [20marks} ‘Total 50 marks GO ON TO THE NEXT PAGE 02216020/CAPE 2007@ (b) © @ @ (b) SECTION III Answer ONE question from this section. Explain what is meant by economic integration, [5 marks] Discuss THREE benefits and TWO costs of economic integration. [15 marks] Describe the various stages of economic integration of Caribbean countries up to the level of the Caribbean Single Market and Economy. [15 marks] Discuss the forces driving the worldwide tend towards greater economic integration known as “globalisation”. (15 marks] ‘Total 50 marks Discuss FIVE arguments that may be used by Caribbean countries in order to keep out imports from foreign countries. [25 marks} (Explain how the exchange rate is determined in a fixed exchange rate system. [7 marks} Gi) State THREE advantages and THREE disadvantages of a fixed exchange rate system. [6 marks} (ii) Explain how the exchange rate is determined in a free-floating exchange rate system. [ 6 marks] (iv) State THREE advantages and THREE disadvantages of a free-floating exchange rate system. [6 marks} Total SO marks END OF TEST 02216020/CAPE 2007