Grade 12 Economics Exam
June 2012
MEMO
Name: ______Teacher: OFH / SH / WHS
A / B / C / D / 1.3.1 / M1.1.1 / X / 1.3.2 / J
1.1.2 / X / 1.3.3 / N
1.1.3 / X / 1.3.4 / I
1.1.4 / X / 1.3.5 / G
1.1.5 / X / 1.3.6 / B
1.1.6 / X / 1.3.7 / D
1.1.7 / X / 1.3.8 / F
1.1.8 / X
1.1.9 / X
1.1.10 / X
1.1.11 / X
1.1.12 / X
1.2.1 / rise
1.2.2 / deregulation
1.2.3 / depreciation
1.2.4 / horizontally
1.2.5 / limited
SECTION B: Answer ALLTHREE questions from this section.
QUESTION 2 (LO1: Macroeconomics)
Start this question on a NEW and SEPARATE SHEET OF PAPER.
2.1. Determine which of the following statements are true or false. Write only True or False next to the number (2.1.1 – 2.1.4).
2.1.1. Failure by the public sector to provide public goods results in the market providing them at high prices. TRUE
2.1.2 To convert GDP at factor prices to GDP at basic prices, taxes on products must be added. FALSE
2.1.3 The trade-off between unemployment and inflation is explained by the Lorenz curve. FALSE
2.1.4 Restrictive monetary policy entails the lowering of interest rates. FALSE (4 x 2 = 8)
2.2 List THREE reasons why international trade takes place. (3 x 2 = 6)
ABSOLUTE ADVANTAGE ......
COMPARATIVE ADVANTAGE......
RELATIVE ADVANTAGE ......
2.3 Suppose in an economy, the marginal propensity to save (MPS) is 0.4 and autonomous consumption spending is R30 billion. Showing your working where relevant:
2.3.1 Derive the consumption function. (2)
C = c + mpcY or C = 30 + 0.6Y
2.3.2 Determine the size of the multiplier in this economy. (2)
k = 1/mps = 1/0.4 = 2½
2.3.3 Calculate the value of equilibrium income in this economy. (4)
C = 30 + 0.6Y
Y = C
Y = 30 + 0.6Y
Y – 0.6Y = 30
Y = 30/0.4 = 75
2.3.4 Calculate the eventual change in aggregate income, if there was an injection of R10 billion into the economy. (2)
k = (change Y) / (change E) = 2½ x 10 = 25
2.4 Study the information below on the South African balance of payments and answer the questions that follow.
Source: Quarterly Bulletin, SARB, March 2011
2.4.1 Why is ‘net gold exports’ listed as a separate entry? (2)
SA’s BIGGEST EXPORT
GOLD USE TO PLAY IMPORTANT ROLE IN MONETARY SYSTEMS
2.4.2 Calculate the balance on the “Trade account” for 2010. (2)
NET MERCHANDISE (566760 – 598151) + NET GOLD (59499) = 28 108
2.4.3 Explain why you think the deficit on the current account fell from 2008 to 2010. (4)
ANYTHING REASONABLE ANSWER FROM TABLE, EG.
DECREASE IN MERCHANDISE IMPORTS (739852 – 598151)
DECREASE IN INCOME PAYMENTS (122129 – 87022)
2.4.4 The “Change in net gold and other foreign reserves owing to balance of payments transactions” is a balancing amount. Explain.
ACCEPT ANY REASONABLE ANSWER, EG.
CURRENT ACC. + CAPITAL TRANSFER ACC. + BALANCE ON FINANCIAL ACC + UNRECORDED TRANSACTIONS = “Change in net gold and other foreign reserves owing to balance of payments transactions” (2)
2.6 The public sector is an institution that does not automatically act in the interest of society and may therefore fail. Three groups of people contribute to such failure. Discuss.
POLITICIANS + EXPLAIN WHY
BUREAUCRATS (PUBLIC SERVANTS) + EXPLAIN WHY
ENTERPRISES, UNIONS, INDIVIDUALS + “RENT SEEKERS” (8)
2.7 Discuss how the Income Approach can be used to calculating the Gross Domestic Product (GDP) at market prices.
COMPENSATION TO EMPLOYEES
+ NET OPERATING SURPLUS
+ CONSUMPTION OF FIXED CAPITAL
= GDP @ FC
+ TAXES ON PRODUCTION
- SUBSIDIES ON PRODUCTION
= GDP @ BP
+ TAXES ON PRODUCTS
- SUBSIDIES ON PRODUCTS
= GDP @ MP (8)
[50]
QUESTION 3 (LO2: Microeconomics)
Start this question on a NEW and SEPARATE SHEET OF PAPER.
3.1. Determine which of the following statements are true or false. Write only True or False next to the number (3.1.1 – 3.1.4).
3.1.1. False
3.1.2 False
3.1.3 True
3.1.4 True (4 x 2 = 8)
3.2 List THREE characteristics of an oligopoly.
Type of product – homogenous (pure oligopoly), differentiated (differentiated oligopoly).
Entry – varies from free to restricted.
Control over prices – considerable, but less than with a monopoly.
Number of businesses – So few that each business must take the actions of the others into account.
Information – incomplete. (3 x 2 = 6)
3.3 Study the table below and answer the questions that follow.
Quantity of containers / Total revenue / Marginal revenue / Total cost / Marginal cost / Average cost0 / 0 / - / 15 / - / 0
1 / 20 / 20 / 23 / 8 / 23
2 / 40 / 20 / B / 12 / 17.5
3 / 60 / 20 / 51 / 16 / D
4 / A / 20 / 71 / 20 / 17.75
5 / 100 / 20 / 95 / C / 19
6 / 120 / 20 / 123 / 28 / 20.5
3.3.1 Calculate the missing figures A – D
A – 80
B – 35
C – 24
D – 17 (4)
3.3.2 What is the price of the product?
R20 (2)
3.3.3 What is the profit maximisation output for this firm?
4 units (2)
3.3.4 Calculate the profit of the firm at the profit maximisation point.
TΠ = TR - TC = 80 – 71 = R9 (2)
3.4 Study the graph below of a firm in short run equilibrium and answer the questions that follow:
3.4.1 Label the curves marked A to C.
A – MC
B – AC
C – AR/ MR/ D (4)
3.4.2 What type of market structure is illustrated? How do you know? (4)
PERFECT MARKET – AR = MR = D
3.4.3 What sort of profit is this firm earning? (2)
NORMAL PROFIT – THE AC = AR
3.5 Describe the rationale of cost-benefit analysis. (8)
· CBA helps to make better decisions on how scarce resources are allocated to satisfy wants PP
· Involves making decisions based on comparing economic benefits with economic costs of a project PP
· The feasibility of the project is determined by subtracting costs from benefits PP
· If the difference is positive (benefits > costs) then the project will be undertaken PP
· Besides efficient use of resources, CBA also ensures the right combination of goods is produced PP
· It also provides us with deciding alternate solutions to specific problems. PP
· Thus a project that maximizes benefits compared to costs should be chosen. PP
· There is a need to consider the time value of money because the project will only occur in the future PP
· Therefore future benefits and costs are discounted to present values PP
· In the market economy, resources are allocated through interaction of demand and supply in the market PP
· Decisions by people, businesses and governments are important for the society – involves allocation of scarce resources PP
· The right combination of goods and services produced to satisfy needs and wants PP
· Brings objectivity to decision-making – identify relevant benefits and costs of project and quantify them in money terms to make informed decisions PP (Any 4 x 2)
3.6 ‘Monopolistic competition and monopoly are virtually the same market form.’ Do you agree with this statement? Outline your answer fully. (8)
Learner can agree or disagree referring to some of the following reasons:
Characteristic / Monopolistic competition / MonopolyNumber of businesses / A very large number / One business
Nature of product / Differentiated / Unique product without any close substitutes
Entry / Free / Blocked
The control of businesses over the price of the product / Few / Considerable
Information / Incomplete / Complete
Any other relevant answer that pertains to similarities or differences.
(any 4 x 2)
[50]
QUESTION 4 (LO4: Inflation)
Start this question on a NEW and SEPARATE SHEET OF PAPER.
4.1 Determine which of the following statements are true or false. Write only True or False next to the number (4.1.1 – 4.1.4).
4.1.1 True.
4.1.2 False
4.1.3 True
4.1.4 False.
4.3 Study the following newspaper article and answer the questions that follow:
Inflation opens rate cut window
1 Johannesburg - Inflation delivered yet another surprise on the downside on Wednesday, with the July rate of change in the consumer price index (CPI) coming in at 3.7% from 4.2% in June, immediately reigniting speculation that an interest rate cut may be on the cards next month.
2 A factor helping to pull inflation down was the fall in the petrol price, with the transport index decreasing by 0.4% between June and July. The extent to which the petrol price is helping to keep inflation low is clear from the annual rate of change in the transport index, which slipped to only 1.1% from 2.2% in June 2010.
3 Food, a major disinflationary factor in the past, showed some signs of a price revival in July. The food and non-alcoholic beverages index increased by 0.3% between June and July and the annual rate of change again surpassed 1%.
4 This is still exceedingly low, and it's clear that food disinflation has been one of the major reasons why inflation has fallen so sharply in the recent past. Excluding food, inflation would be 4.2%.
Source: Greta Steyn. Fin24.com Aug 25 2010
4.3.1 Define “consumer price index”.
Consumer price index is an index of a representative basket of consumer goods and services. (2)
4.3.2 In your own words, explain the sentence “the July rate of change in the consumer price index (CPI) coming in at 3.7% from 4.2% in June” (paragraph 1). (4)
The annual inflation rate has fallen from 4.2% in June to 3.7% in July. Prices continue to rise but at a slower rate.
4.3.3 Explain why the petrol price and food prices (paragraphs 3-5) would be major drivers in the fall in the inflation rate. (4)
Constitute a large component of consumers’ expenditure and therefore are heavily weighted in the CPI
4.4 Study the graph below which shows the inflation rate in South Africa 2001 – 2010 and answer the questions that follow:
4.4.1 What is the SARB’s target inflation range?
3% 6% (2)
4.4.2 Do you think the SARB has been successful in achieving this over the last ten years? Justify your answer.
Yes or No plus justification. SARB achieved it for 5/10 years. Average in the range. (4)
4.4.3 What do you think caused the increase in the inflation rate in the years 2004 to 2008?
Economic growth, increasing oil prices, other acceptable answers. (4)
4.5 Identify and briefly discuss FOUR negative consequences of inflation (8)
Distributional effects: inflation affects the distribution of income and wealth among the various participants in the economy
inflation benefits debtors at the expense of creditors. Inflation can also cause a reduction in the real value of savings - especially if real interest rates are negative. This means the rate of interest does not fully compensate for the increase in the general price level. In contrast, borrowers see the real value of their debt diminish.
redistributes income from the elderly to the young. Consumers and businesses on fixed incomes will lose out. Many pensioners are on fixed pensions so inflation reduces the real value of their income year on year.
redistributes income from the private sector to the government (via bracket creep – the so-called Fiscal dividend).
Economic effects: inflation may result in lower economic growth and higher unemployment than would otherwise occur because:
entrepreneurs / decision makers attempt to anticipate inflation rather than concentrating on output decisions. Inflation can also cause a disruption of business planning – uncertainty about the future makes planning difficult and this may have an adverse effect on the level of planned capital investment. Budgeting becomes a problem as firms become unsure about what will happen to their costs. If inflation is high and volatile, firms may demand a higher nominal rate of return on planned investment projects before they will go ahead with the capital spending. These hurdle rates may cause projects to be cancelled or postponed until economic conditions improve. A low rate of new capital investment clearly damages long-run economic growth and productivity
inflation reduces South Africa’s competitiveness. If South Africa has higher inflation than the rest of the world it will lose price competitiveness in international markets. This assumes a given exchange rate. Ultimately, this will lead to a fall in the rate of economic growth and the level of employment. If the exchange rate depreciates, this may help to restore some of the lost competitiveness.
it leads to higher nominal interest rates that should have a deflationary effect on GDP.
it distorts the operation of the price mechanism and can result in an inefficient allocation of resources. When inflation is volatile, consumers and firms are unlikely to have sufficient information on relative price levels to make informed choices about which products to supply and purchase.
it leads to an increase in search times to discover more about prices. Inflation increases the opportunity cost of holding money, so people make more visits to their banks and building societies (known as “shoe leather costs”).
it results in extra costs to firms of changing price information (known as menu costs). This can be important for companies who rely on bulky catalogues to send price information to customers.
it can lead to higher wage demands as workers try to maintain their real standard of living (the wage-price spiral). Higher wages over and above any gains in labour productivity causes an increase in unit labour costs. To maintain their profit margins they increase prices. The process could start all over again and inflation may get out of control. Higher inflation causes an upward spike in inflationary expectations that are then incorporated into wage bargaining. It can take some time for these expectations to be controlled.