Sacred Heart Canossian College

S5 Second Term Common Test 2016-2017

Economics

Name:______________________ ( ) Class:S5_______ Block: ________ Mark: /55

Total: 55 marks Time allowed: 60 minutes

INSTRUCTIONS
1. This paper consists of two sections, A and B.
2. Section A contains ten questions. Attempt ALL questions. The whole section carries 10 marks.
3. Section B contains four questions. Attempt ALL questions. The whole section carries 45 marks.
4. All answers should be put in the space provided. Do NOT write in the margins. Answers written in
the margins will not be marked.
5. Supplementary answer sheets will be supplied on request. Write your Name, Class, Class Number,
Block, and the question number on each sheet.

Section A: Multiple Choice questions (10 marks)

Choose the BEST answer for each question. Put a tick for each question to show your answer.
1 2 3 4 5 6 7 8 9 10
A
B
C
D
1. The following Milk
diagram shows a production chain. Yoghurt
The
Farmcontribution
in of the above production chain to Japan’s
($1,500) ($2,800)GDP Supermark
is __________.
Yoghurt Japanese
A.Japan$5,500 B. $5,900 C. $7,200
et in Japan D.
($3,400)
$8,300
consumers
Manufactur Yoghurt Wholesal
2. Under which of the following circumstances will er inthe per capita real GNP overstate the living standard?
er in Japan ($3,500)
A. The construction industry causes noise pollution. Dessert
Manufacturer J Café in Korean
B. There is an increase
Bottles
in population due to immigration.
inC.
ChinaThere is inflation. Yoghurt Korea ($3,800) customers
($400) ($2,500)
D. All of the above.
3. Which of the following items should NOT be included in Hong Kong’s GDP in 2017?
A. The remuneration to a professor from Germany who came to the University of Hong Kong for a
month to give lectures in March 2017.
B. The market value of jellewery produced in Hong Kong in 2016 which were sold in 2017.
C. The commission earned by a stockbroker in 2017.
D. Government expenditure on providing postal services in 2017.

4. The following table shows economic data for City X from 2014 to 2016.
Year % change in nominal GDP % change in GDP deflator
2014 4 3
2015 0 5
2016 1 2

Which of the following conclusions can be drawn from the above data?
(1) The real GDP of City X in 2015 was lower than that in 2014.
(2) There was deflation in 2016.
(3) The living standard in City X improved from 2014 to 2016.
(4) The cost of living increased from 2014 to 2016.
A. (1) and (2) only B. (1) and (4) only
C. (2) and (3) only D. (1), (3) and (4) only.

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5. In the diagram below, X is situated in a certain phase of business cycle. Which of the following is a
characteristic of this phase?

A. The real GDP has a zero growth rate.

B. The nominal GDP is higher than the real GDP.
C. The unemployment rate is high.
D. The inflation rate is high.

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6. Which of the following statements about inflation is correct?
A. Inflation can only be measured by the consumer price index.
B. After the government imposes a general sales tax, it results in inflation.
C. If the GDP deflator is higher than 100, there is inflation.
D. Disinflation is a type of inflation.

7. Many people in Hong Kong run their own businesses. Recently, due to the rapid increase in rents, some
businessmen have closed down their businesses. They are looking for jobs to earn a more stable income.
How will this affect Hong Kong’s labour market?
(1) The unemployment rate will increase.
(2) The effect on the unemployment rate depends on the percentage change in unemployed persons
and the percentage change in labour force.
(3) The labour force will increase.
(4) The labour force will remain unchanged.
A. (1) and (3) only B. (1) and (4) only C. (2) and (3) only D. (2) and (4) only

8. Which of the following CANNOT explain the downward sloping aggregate demand curve?
(1) When the domestic price level increases, foreign economies import less from the domestic
economy, holding price levels of foreign economies constant.
(2) When nominal interest rates increase, other things being equal, people will consume less and save
more.
(3) When people’s real wealth increases due to an economic boom, people will consume more and
their real private consumption expenditure increases.
A. (3) only B. (1) and (2) only C. (2) and (3) only D. None of the above

9. The following shows the AS-AD diagram of Country A. The country was initially at E0.
P LRAS
When there is a sudden
SRAS2 rise in energy prices, the country will be at Point _____. If the government
reduces profits
E3 taxes in response, the country will shift to Point _____.
A. E1 … E0 SRAS
B. 0 E1 … E3 C. E2 … E0 D. E2 … E4
E1
SRAS1
E0

E2 AD1

E4 AD0
AD2
0 Y

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10. Which of the following can increase the long run aggregate supply?
A. Import labour from other countries.
B. Provide more part-time training courses to workers.
C. Increase government expenditure on elderly services.
D. Both A and B are correct.

Secion B Questions (45 marks)

1. Below are the data of a country.
Population aged 15 or above 900 000
Employed population 500 000
Underemployed population 20 000
Unemployed population 45 000
(a) Calculate the unemployment rate of the country. (2 marks)
(b) Suggest TWO losses to the society caused by unemployment. (2 marks)
(c) Suppose the country is in the phase of recession. Apart from the increase in unemployment rate,
give TWO general economic phenomena during recession. (2 marks)
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2.

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The following shows the nominal and real wage indices of Hong Kong from 2004 to 2016. The real wage
index is obtained by deflating the nominal wage index with the CPI (A).

Source: Census and Statistics Department

(a) With reference to the diagram, describe and explain the general relationships between the nominal
wage index and the real wage index from 2004 to 2016. (4 marks)
(b) Explain why the real wage index would be relatively stable from 2004 to 2016. (1 mark)
(c) Irene did not expect any change in the price level from 2015 to 2016. Explain whether she would
gain or loss in each of the following situations. (4 marks)
(i) She invested in bond in 2015 with a fixed interest payment received in 2016.
(ii) She rented a flat on a two-year contract in 2015 with a fixed monthly rental payment of
$15,000.
(d) Explain ONE difference between using CPI and Gross Domestic Product (GDP) deflator to
measure the change in the price level. (2 marks)
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3. Consider the following Gross Domestic Product (GDP) data of Economy A in 2016.
GDP components Million ($)
Private consumption expenditure 500
Government consumption expenditure 350
Gross domestic fixed capital formation 400
Decrease in stock 50
Subsidies 30
Depreciation 40
Domestic exports of goods 180
Re-exports of goods 260
Imports of goods 150
Exports of services 210
Imports of services 130
Direct taxes 50
The GDP deflator in 2010 =100

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3. (a) Calculate the GDP at factor cost of Economy A in 2016. (3 marks)
(b) Apart from the above data, what other information is needed to calculate
(i) Economy A’s per capita GDP at current prices in 2016?
(ii) Economy A’s GDP at constant (2010) market prices in 2016? (2 marks)
(c) Under what situation will Economy A’s GDP be greater than its GNP? (1 mark)
(d) To prevent the spread of bird flu, all the chickens in the farms in Economy A were slaughtered in
November, 2016.
(i) Explain whether the value of these slaughtered chickens would be included in the calculation
of Economy A’s GDP in 2016. (2 marks)
(ii) To compensate for the loss of the chicken farmers, the government compensated $10 per
chicken killed to the farmers. Explain whether this amount of compensation would be
included in the calculation of Economy A’s GDP in 2016. (2 marks)
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4. In the 2017-18 Budget, the Financial Secretary has proposed the following measures concerning
Investing, Sharing and Caring.
 Reducing salaries tax and tax under personal assessment for 2016-17 by 75 per cent, subject to a
ceiling of $20,000.
 Waiving rates for four quarters of 2017-18, subject to a ceiling of $1,000 per quarter for each
rateable property.
 Providing an extra allowance to social security recipients, equal to one month of the standard rate
Comprehensive Social Security Assistance payments, Old Age Allowance (OAA), OALA or
Disability Allowance.
(a) Suppose Hong Kong is now at its long run equilibrium. With the aid of a diagram, explain how
these measures would affect the price and output levels of Hong Kong in the short run. (6 marks)
(b) With reference to the market adjustment mechanism from the short run equilibrium to the long run
equilibrium, explain the long run effects of these measures on the price and output levels in Hong
Kong with the aid of the diagram in part (a). (6 marks)
(c) Explain why the SRAS curve is upward sloping while the LRAS curve is vertical. (6 marks)

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Suggested answers
Section A
1 2 3 4 5 6 7 8 9 10
A x x
B x x x x
C x x
D x x

Section B
Remark:
No mark will be given to those who answer “Yes/No”, “Increase/decrease/remains unchanged” without
reasons.
No / Wrong position  No mark for the whole question
Without “$” deduct 1 mark for the final answers
For Diagram:
Missing label- P/Q/D/ S, deduct 1 mark, Missing label- both D and S, no mark for the diagram
Answer
1. (a) Unemployment rate = 45 000 / (500 000 + 45 000) x 100% (1) = 8.27% (1)
(b) Loss of output
Loss of human captial
Political unrest
Any Two @1
(c) - real GDP growth rate decreases
- aggregate demand decreases/ private consumption expenditure decreases/ investment decreases
- inflation rate decreases
- any relevant point
@1 x 2
2.
(a) The nominal wage index is higher than the real wage index from 2004 to 2016 (1) due to inflation
(1)
The difference between the nominal and real wage indices widened in this period (1), implying an
increase in the CPI(A). (1)
(b) When the percentage change in nominal wages is similar to the percentage change in the
consumer price index (1), the real wage index tends to be stable.
(c) (i) Irene would lose because the unexpected inflation lowers the purchasing power of her
interest received (1).
(ii) Irene would gain (1) because the unexpected inflation lowers the purchasing power of her
rent (1).
(d) Differences:
- CPI only includes consumer goods while GDP deflator includes both consumer goods and
producer goods.
- CPI calculates a fixed basket of goods and the weighting will be revised every 5 years while
GDP deflator has variable baskets of goods for each year.
[Mark the FIRST point only.] Any one; max:2

3. (a) GDP at factor cost = $[(500+400-50+350+180+260+210-150-130) + 30]million (2)

= $1600 million (1)
(b) (i) population of Economy A in 2016 (1)
(ii) price index in 2016 / GDP deflator in 2016 (1)
(c) The net factor income from abroad is negative. (1)
Or Factor income from abroad is less than factor income paid abroad (1)
(d) (i) No because (1)
- it is not sold to the market and thus not counted in production [Output Approach]
- it is neither counted in consumption nor investment [Expenditure Approach]
@1 max:1
(ii) No because (1)
- it does not involve production, it is just transfer payment (1)
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4. (a) Indicate on the diagram:
Rightward shift of aggregate demand curve (1)
increase in Price Level and Output Level (1)
Verbal explanation:
Increase in disposable income (1), so there is an increase in consumption expenditure (1)
AD increases (1), price level and output level increase (1)
(b) Indicate on the diagram:
Leftward shift of short run aggregate supply curve to the long run equilibrium (1)
Further increase in price level and output level remains in Yf (1)
Verbal explanation:
The resulting inflationary gap (1) will eventually raise production costs (1). The short run
aggregate supply curve will decrease (1) until the inflationary gap is closed. The price level will
further increase and the output level will decrease back to full employment output level (1).
(c) SR AS curve
When the price level increases, the adjustment of input prices is imperfect (due to the longer
contracts of inputs), so the cost of production in real terms has dropped. Quantities of output
supplied will increase. Therefore, higher price level would result in higher output level. (3)
LR AS curve
When the price level increases, the adjustment of input prices and output prices are perfect. It is
not profitable to increase the quantities of output supplied. Besides, due to the capacity constraints,
with the available quantity and quality of resources, the LRAS is positioned at Yf. Therefore,
higher price level would have no effect on the output level. (3)

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