PP-DSE

ECON
PAPER 1
HONG KONG EXAMINATIONS AND ASSESSMENT AUTHORITY
HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION

PRACTICE PAPER
ECONOMICS PAPER 1

(1 hour)
This paper must be answered in English

INSTRUCTIONS

1. Read carefully the instructions on the Answer Sheet. After the announcement of the start of the
examination, you should first stick a barcode label and insert the information required in the spaces
provided. No extra time will be given for sticking on the barcode label after the ‘Time is up’
announcement.

2. When told to open this book, you should check that all the questions are there. Look for the words ‘END
OF PAPER’ after the last question.

3. All questions carry equal marks.

4. ANSWER ALL QUESTIONS. You are advised to use an HB pencil to mark all the answers on the
Answer Sheet, so that wrong marks can be completely erased with a clean rubber. You must mark the
answers clearly; otherwise you will lose marks if the answers cannot be captured.

5. You should mark only ONE answer for each question. If you mark more than one answer, you will
receive NO MARKS for that question.

6. No marks will be deducted for wrong answers.

 香港考試及評核局 保留版權 Not to be taken away before the

Hong Kong Examinations and Assessment Authority end of the examination session
All Rights Reserved 2012

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There are 40 questions in this paper. Choose the BEST answer for each question.

1. In the absence of scarcity,

(1) there will be no discrimination.

(2) there will be no market price.
(3) there will be no goods.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

2. Mr. Chan spent $5 000 on buying a new mobile phone which can be sold for $7 000 in the second-hand
market. Mr. Chan’s cost of keeping the mobile phone is __________.

A. $0
B. $2 000
C. $5 000
D. $7 000

3. Which of the following statements about interest are correct?

(1) Interest is a premium received for postponing current consumption.

(2) An interest rate does not exist in a barter economy.
(3) A fall in the interest rate increases present consumption.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

4. Which of the following descriptions about the relationship between the three types of production is correct?

A. Primary production provides raw materials for the other types of production.
B. Secondary production does not rely on tertiary production to produce finished goods.
C. Tertiary production relies only on primary production.
D. The three types of production are independent, and tertiary production is the most important.

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5. The following table shows the monthly production of a firm with two inputs, machines and labour.

Machines (Units) Labour (Units) Total product (Units)

2 5 10
3 5 20
4 5 32
5 5 42
6 5 X

If the law of diminishing marginal returns applies to the firm, X

A. must be smaller than 42.

B. must be greater than 42.
C. can be equal to 42.
D. is equal to 52.

6. A worker is paid by the quantity he produced instead of receiving a monthly salary. Which of the following
statements is INCORRECT?

A. The worker tends to produce more output.

B. The quality of the output tends to be lower.
C. The cost of monitoring the worker regarding shirking will be lower.
D. The income of the worker will increase.

7. Tommy and David have turned their firm from a partnership into a private limited company. Which of the
following statements is correct?

A. They have a higher incentive to work as the profits tax rate is lower.
B. The firm can still exist even if one of the owners goes bankrupt.
C. The size of the firm will increase.
D. The financial conditions of the firm have to be disclosed to the public.

8. An increase in tobacco duty will lead to

A. a rise in government tax revenue from cigarettes.

B. a rise in smokers’ total expenditure on cigarettes.
C. a fall in the total market value of cigarettes.
D. a fall in cigarette retailers’ total revenue net of tax.

9. Suppose there is political unrest in the countries exporting crude oil. As a result, there is a 30% increase in
the price of gasoline and a 15% change in the quantity transacted of gasoline. We can conclude that

A. the demand for gasoline is elastic.

B. the demand for gasoline is inelastic.
C. the supply of gasoline is elastic.
D. the supply of gasoline is inelastic.

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10. In the following diagram, E0 is the initial equilibrium of the market for printed books in Hong Kong.

Unit Price ($)

D2 S1
D0
Ed S0
D1
S2
Ec
E0 Ea

Eb

0 Quantity

Suppose there is a trend to read electronic books and there is a rise in the price of printing paper. The new
equilibrium point in the diagram will be __________.

A. Ea
B. Eb
C. Ec
D. Ed

11. Refer to the following demand and supply schedules of good X.

Unit price ($) 20 18 16 14 12 10

Quantity demanded (units) 500 550 600 650 700 750
Quantity supplied (units) 800 750 700 650 600 550

If the government lowers the quota from 700 units to 550 units,

A. the market price will drop by $2.

B. the market price will rise by $2.
C. the market price will rise by $4.
D. the market price will rise by $6.

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12. The following table shows the total cost schedule of a price-taking firm which has a fixed cost equal to $20.

Quantity Total cost

(units) ($)
1 40
2 65
3 95
4 130
5 170

Suppose the market price is $35. At the profit-maximizing output level, the firm’s profit and total producer
surplus are __________ and __________ respectively.

A. $10 … $10
B. $10 … $30
C. $30 … $10
D. $30 … $30

13. Which of the following is INCONSISTENT with the law of demand?

A. An imposition of an import quota on garments will lead to an improvement in the average

quality of imported garments.
B. People who live in remote areas tend to buy better seats at concerts held in the town centre.
C. An increase in unemployment allowance raises the unemployment rate.
D. If an additional lump-sum charge is imposed per taxi trip, the number of short-distance trips
will fall by a smaller percentage than the number of long-distance trips.

14. The following diagram shows the demand and supply curves of good X in a perfectly competitive market.
Price ($)
S

D2
D1
0
Quantity

There is a shift in the demand curve for good X from D1 to D2. As a result,

A. firms enjoy more producer surplus.

B. the marginal cost of producing the last unit decreases.
C. the supply of good X increases.
D. consumers enjoy less consumer surplus.

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15. The following diagram shows the demand and supply curves of good X in a perfectly competitive market.
Price ($)

A S
B
P1

Pe E
F

G
C
D
0
Quantity

Suppose a price floor is set at P1. As a result,

A. the deadweight loss is equal to area BEF.

B. the producer surplus is equal to area P1BC0.
C. the consumer surplus is equal to area AEPe.
D. the total social surplus is equal to area P1BCG.

16. Which of the following are features of a perfectly competitive market?

(1) The marginal revenue of each firm equals the market price.
(2) The sellers and buyers have perfect market information.
(3) The marginal cost schedule of a firm is the same as its supply schedule.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

17. Economic efficiency is attained when

(1) total benefits to consumers are maximized.

(2) all potential gains are fully captured.
(3) marginal social benefits are equal to marginal social costs.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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18. The following table shows the Gini coefficient of Economy A from Year 1 to Year 4.

Year Gini coefficient

1 0.534
2 0.563
3 0.609
4 0.614

Based on the above information, which of the following statements is/are correct?

(1) The income of high-income households increases while the income of low-income households
decreases.
(2) The income distribution becomes more uneven.
(3) The general living standard declines.

A. (1) only
B. (2) only
C. (3) only
D. (1), (2) and (3)

19. Which of the following is the most likely effect of an effective minimum wage law?

A. Income distribution will become more even.

B. Total wage earnings of workers will rise.
C. The employed population will increase.
D. Non-price competition will emerge.

20. The following table shows the statistical data of an economy.

Gross Domestic Product (GDP) components Million ($)

Private consumption expenditure 400
Government consumption expenditure 250
Net domestic fixed capital formation 300
Decrease in stock 70
Subsidies 120
Capital consumption allowance 50
Net exports 300
Net income from abroad 80
Direct tax 100

The GDP at factor cost is $___________ million.

A. 1 250
B. 1 270
C. 1 350
D. 1 490

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21. If the value of the net external factor income flow (i.e. the net income from abroad) of an economy is
negative, it implies that

A. the capital inflow to the economy is greater than the capital outflow from it.
B. the gross investment of the economy is smaller than the net investment.
C. the gross national product of the economy is less than the GDP.
D. the value of imports of the economy is greater than that of exports.

22. Over a given period, the GDP at current market prices of an economy increases by 15% and the rate of
inflation decreases from 10% to 5%.

Based on the above information, the real GDP __________ and the general price level __________.

A. increases … rises
B. increases … falls
C. decreases … rises
D. decreases … falls

23. Refer to the following diagram.

Price level

Aggregate demand

0 National income

Which of the following will cause a movement along the aggregate demand curve from point A to point B?

A. a drop in price level

B. a decrease in the interest rate
C. a reduction in salaries tax
D. a depreciation of domestic currency

24. A large number of oil fields have to be closed because of serious oil spill accidents. In the short run, the
aggregate supply of an oil-importing country will __________ and its price level will __________.

A. increase … rise
B. increase … fall
C. decrease …rise
D. decrease …fall

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25. Which of the following can explain a leftward shift of the money demand curve?

A. a rise in the interest rate

B. an increase in income of households
C. a more widespread use of Octopus cards
D. an increase in the required reserve ratio

26. The diagram below shows the money demand and money supply curves of an economy. The original
equilibrium point is at E.
Nominal interest rate

Ms2 Ms0 Ms1

D
E
A

B Md1
Md0
Md2
0
Quantity of money

Suppose national income increases and the government carries out an open market purchase of bonds. The
new equilibrium point will be at __________.

A. A
B. B
C. C
D. D

27. Suppose the balance sheet of a banking system is as follows.

Assets($) Liabilities($)
Reserves 150 Deposits 500
Loans 350

The amount of excess reserves in the banking system is $50. Now, a customer withdraws $50 from his bank
account. If the banking system is fully loaned up, the maximum amount of loans in the banking system is
__________.

A. $350
B. $400
C. $450
D. $500

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28. If Mr. Chan withdraws HK$500 000 from his account in a deposit-taking company and remits the sum to his
relatives in Canada, Hong Kong’s money supply M2 will __________ and M3 will _____________.

A. decrease … decrease
B. remain unchanged …remain unchanged
C. decrease …remain unchanged
D. remain unchanged …decrease

29. An asset which can be readily converted into cash at short notice without making a loss is regarded as a
_____________ asset.

A. portable
B. durable
C. divisible
D. liquid

30. The real value of money decreases when the __________ is rising.

A. deflation rate
B. general price level
C. money demand
D. nominal interest rate

31. Which of the following people will lose when unexpected inflation occurs?

A. an individual holding time deposits in a bank

B. a holder of government bonds with interest rates adjusted according to the inflation rate
C. a flat owner repaying a fixed-rate mortgage loan
D. a billionaire keeping all his wealth in the form of gold

32. Which of the following can help narrow a deflationary (output) gap?

A. an increase in the required reserve ratio

B. a sale of bonds by the central bank in the market
C. an increase in government expenditure
D. the abolishment of a tariff on imports

33. Which of the following statements about the classical quantity theory of money is INCORRECT?

A. Both the velocity of circulation of money and the real output are assumed to be constant.
B. Any change in money supply will lead to the same proportional change in nominal output.
C. Deflation will occur when there is a continuous fall in money supply.
D. Any change in price level will lead to the same proportional change in money supply.

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34. An increase in __________ may offset the effect of an expansionary monetary policy on national income.

(1) people’s desire to hold money as an asset

(2) people’s desire to save
(3) transfer payments

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

35. When the nominal interest rate is higher than the real interest rate, the expected inflation rate must be
_____________.

A. positive
B. negative
C. rising
D. falling

36. Which of the following is a direct and proportional tax in Hong Kong?

A. hotel accommodation tax

B. profits tax
C. salaries tax
D. general rates

37. The Inland Revenue Department will inform every salaries tax payer of the amount of tax payable either by
mail or by the etax account. This practice is in line with the ___________ principle of taxation put forward
by Adam Smith.

A. equity
B. certainty
C. convenience
D. economy

38. If a small open economy reduces the tariff on an imported good,

A. both domestic production and consumption of the good will increase.

B. both tariff revenue and import volume will decrease.
C. the consumer surplus will increase while the producer surplus will decrease.
D. the world price of the good will fall while the total social surplus will increase.

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39. Assume both Country A and Country B produce and consume Good X and Good Y only. If Country A can
produce a unit of Good X with less resources than Country B,

(1) Country A has an absolute advantage in producing Good X.

(2) Country A has a comparative advantage in producing Good X.
(3) Country B has an absolute advantage in producing Good Y.
(4) Country B has a comparative advantage in producing Good Y.

A. (1) only
B. (1) and (2) only
C. (2) and (4) only
D. (1) , (2), (3) and (4)

40. The following table shows the output per unit of resources in Country A and Country B.

Tablet computers (Units) Mobile phones (Units)

Country A 8 12
Country B 10 30

If Country A exports 10 units of tablet computers to Country B in exchange for 25 units of mobile phones,
the total gains from trade of Country A will be _____________unit(s) of mobile phones.

A. 1
B. 5
C. 6.667
D. 10

END OF PAPER

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