The correct alternative is [5].
Explanation: In the goods market of the circular flow model, consumers receive income in the
form of salaries and wages, interest, rent and profit and use this income to purchase finished
consumer goods and services.
Question 2
The correct alternative is [4].
E...
Explanation: In the goods market of the circular flow model, consumers receive income in the
form of salaries and wages, interest, rent and profit and use this income to purchase finished
consumer goods and services.
Question 2
The correct alternative is [4].
Explanation
A factor market is a market where factors of production such as labour, land and capital are
traded. Therefore, in this case only the sale of land (i.e. farmland) will occur in a factor market.
Question 3
The correct alternative is [4].
Explanation
In the circular flow of income and spending, savings, taxes and imports are called leakages or
withdrawals since they result in a decrease in the volume of the income flow, whereas investment
spending and government expenditure and exports are all injections into the circular flow since
they result to an increase in the volume of the income flow.
Question 4
The correct alternative is [4].
Explanation
In the circular flow of income and spending, households supply factors of production to firms and
in turn receive income which they spend on goods and services offered by firms (Flow 3). Their
spending represents the income to firms. Firms spend some of their income to pay wages to
households for their services, interest for the use of capital and rent for the use of their land (Flow
1).
Question 5
1
,The correct alternative is [2].
Explanation
Capital, wealth and gold reserves are stock variables since they have no time dimension and can
only be measured at a specific moment. Whereas investment, profit and loss are flows since they
have a time dimension and can only be measured over a period.
Question 6
The correct alternative is [2].
Explanation
Savings, taxes and imports are leakages in the circular flow of income.
Question 7
The correct alternative is [4].
Explanation
In a mixed economy the households, firms, government and the foreign sector all participate in the
production process. They all partake in production, income and spending since they contribute
towards production, earn an income and spend their income.
Question 8
The correct alternative is [2].
Explanation
A double coincidence of wants is present where two individuals have exactly the same products
available for exchange that the other person wants. In this case a car mechanic who needs a TV
finds an electronic store owner who needs a car repaired.
Question 9
The correct alternative is [1].
Explanation
Money overcomes the problem of double coincidence of wants through its function as a medium of
exchange – it lubricates the process of exchange.
Question 10
The correct alternative is [4].
Explanation
Demand for money curve is downward-sloping since individual households and firms earn little
interest on their money holdings when interest rates fall. At lower interest rates the opportunity
cost of holding money is lower.
Question 11
The correct alternative is [3].
Explanation
Overall M3 will remain unchanged since a reduction in coins and notes in circulation is offset by an
increase in deposits with monetary institutions.
Question 12
The correct alternative is [3].
Explanation
When the central bank undertakes open market operations, selling bonds to banks, households
and firms, the interest rate will go up and the quantity of money will decrease.
Question 13
The correct alternative is [3].
Explanation
2
,Original excess
reserves R 800
(New deposit less the reserve ratio of
plus new reserves R 800 20%:
R1
Total excess reserves 600 R1 000 – 200 = 800)
less loan to Mary R 600
R1
New excess reserves 000
Question 14
The correct alternative is [2].
Explanation
The reserve ratio (rr) can be calculated as follows:
(300−25)
rr = 300 x 100
= 0, 15 x 100 = 15%
Question 16
The correct alternative is [2].
Explanation
The transactions motive of holding money arises out of its function as a medium of exchange and
since the amount of money an individual must hold depends on the value of transactions
concerned, the demand for money depends on the individual’s level of income. At an aggregate
level, the transactions demand for money is a function of national income.
Question 17
The correct alternative is [1].
Explanation
When the central bank wishes to lift the economy from a recession, it will conduct an expansionary
monetary policy by lowering interest rates. In South Africa the SARB make changes to the market
interest rates through changes in the repo rate.
Question 20
The correct alternative is [4].
Explanation
The main instrument used by the SARB to control inflation is the repo rate, which is the interest
rate at which SARB accommodates the financing needs of banks. Therefore, in order to institute a
policy to reduce inflation, the SARB will make adjustments to the interest rates.
Question 1
The correct alternative is [3]
Explanation
Government’s involvement in economic activity is often measured by the share of government
spending in total spending in the economy.
Question 2
The correct alternative is [5]
Explanation
3
, When the government plans to simulate economic activity it can increase its spending or reduce
taxes.
Question 3
The correct alternative is [5]
Explanation
Inflationary financing occurs when government borrows from the central bank.
Question 4
The correct alternative is [1]
Explanation
A tax is neutral if it has minimum distortion effects on prices.
Question 5
The correct alternative is [2]
Explanation
Value-added tax takes a smaller proportion of income from the high-income groups than from the
low-income groups.
Question 6
The correct alternative is [4]
The tax burden depends on the relative price elasticities of the demand curve and the supply
curve.
Question 7
The correct alternative is [2]
According to Adam Smith, international trade mainly arises because of differences in factor
endowment.
Question 8
The correct alternative is [2]
Country A has an absolute advantage in the production of both products. It produces 90 tons of
cocoa compared to the 20 tons in Country B or 60 tons of tea compared to 40 tons. Remember,
with absolute advantage the question is simply "who can produce more?”
With comparative (or relative) advantage one wants to establish what is the opportunity cost of
specialising in the production of a particular product.
To produce 1 ton of cocoa, Country A has to sacrifice 2/3 tons of tea, whereas Country B sacrifices
2 tons of tea. Country A can produce cocoa "cheaper". Country A has a comparative advantage in
the production of cocoa.
To produce 1 ton of tea Country A must sacrifice 1½ tons of cocoa, while country B must sacrifice
½ ton. Country B can produce tea "cheaper"; it has a comparative advantage in the production of
tea.
Question 9
The correct alternative is [2]
Since Country A has a comparative advantage in the production of cocoa, it would be more
efficient for them to export cocoa.
Question 10
The correct alternative is [3]
4
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