ECS1601 EXAM PAPER MAY/JUNE 2018 SECTION A (50 MARKS)
ANSWER ALL THE FOLLOWING QUESTIONS
QUESTION 1
(i) Define the Gross Domestic Product (GDP) (3)
GDP is the total values of all the final goods and services produced within the
borders of a country within a specific period.
(ii) Name the four factors of production (4)
Land (Natural resources), Labour, Capitl and Entrepreneurship
QUESTION 2
(i) Use the following diagram to show the equilibrium in the money market
changes if the level of income in the economy increases. Remember to label
your diagram (3)
i
Lo L1
INTEREST RATE
io EO E1
L0 L1
M
Mo M1
QUANTITY OF MONEY
2
, (ii) Illustrate on the following diagram of the South African foreign
exchange market what will happen to the exchange rate between
the rand and the US dollar if South Africa implements export
promotion measures. Remember to label your graph. (3)
R/$
RAND/DOLLAR EXCHANGE RATE
D SO S1
R10 R10
R5 SO S1
D
S1 Q
100 200
QUANTITY OF DOLLARS PER DAY (BILLIONS)
(iii) Suppose the Minister of Finance has asked you to advise him on
the formulation of a tax policy. Write a paragraph that will
explain what your major consideration will be when you design
this tax policy (9)
Because tax is a particularly sensitive and political issue it is
important the there is a tax policy which includes a fair and
acceptable way to run the tax system that is accepted by all the
stakeholders. Adam Smith points out that that there should be
four cannons or criteria for taxation. A good tax should be
equitable, economical, convenient and certain. The text book
distinguishes between three slightly more modern criteria.
3
,(i) Neutrality: Taxation should have the minimum possible effect on relative prices.
There should be no disincentive to change the owners of the factors of production to
change their behaviour due to high taxes.
(ii) Equity: To determine what is equitable or fair or who should pay taxes, two
principles can be used:
1) Ability to pay principle: People should pay according to their ability (level
of income). There are two notions of equity horizontal equity (people in the
same position should pay the same tax) and vertical equity (people n
different positions should be taxed differently)
2) Benefit principle: The people who use the government products and services
should pay for this use. These are also called user charges, (toll roads,
hospital services, university educations and electricity and water)
3) Administrative simplicity: Taxes cost taxpayers. Compliance costs:
taxpayers have to fill out forms and pay accountants to do this for them.
Administrative costs: People have to be employed by government to write
up tax laws, design tax forms, and collect taxes and asses tax returns.
• Also note: tax avoidance: This is the practice of avoiding paying
taxes (it is legal but lowers the tax revenue for the government)
• Tax evasion: This occurs when people do not pay taxes when they
should (vendors at flea markets or people who run their businesses
from home e.g. hairdressers’ or dressmakers)
4
, QUESTION 3
Given the following information:
INCOME CONSUMPTION SAVINGS INVESTMENT
(RANDS) (RANDS) (RANDS) (RANDS)
0 10 -10 20
50 50 0 20
100 90 10 20
150 130 20 20
200 170 30 20
(a) Calculate (Show all your calculations)
(i) The marginal propensity to consume (2)
MPC = ∆C
∆Y
170 – 130
200 - 150
40
50
MPC = 0.80
(ii) The marginal propensity to save (2)
MPS = 0.20
(iii) The multiplier (2)
α = 1
1- c
α = 1
1 - 0.80
α = 1
0.20
α = 5
5
ANSWER ALL THE FOLLOWING QUESTIONS
QUESTION 1
(i) Define the Gross Domestic Product (GDP) (3)
GDP is the total values of all the final goods and services produced within the
borders of a country within a specific period.
(ii) Name the four factors of production (4)
Land (Natural resources), Labour, Capitl and Entrepreneurship
QUESTION 2
(i) Use the following diagram to show the equilibrium in the money market
changes if the level of income in the economy increases. Remember to label
your diagram (3)
i
Lo L1
INTEREST RATE
io EO E1
L0 L1
M
Mo M1
QUANTITY OF MONEY
2
, (ii) Illustrate on the following diagram of the South African foreign
exchange market what will happen to the exchange rate between
the rand and the US dollar if South Africa implements export
promotion measures. Remember to label your graph. (3)
R/$
RAND/DOLLAR EXCHANGE RATE
D SO S1
R10 R10
R5 SO S1
D
S1 Q
100 200
QUANTITY OF DOLLARS PER DAY (BILLIONS)
(iii) Suppose the Minister of Finance has asked you to advise him on
the formulation of a tax policy. Write a paragraph that will
explain what your major consideration will be when you design
this tax policy (9)
Because tax is a particularly sensitive and political issue it is
important the there is a tax policy which includes a fair and
acceptable way to run the tax system that is accepted by all the
stakeholders. Adam Smith points out that that there should be
four cannons or criteria for taxation. A good tax should be
equitable, economical, convenient and certain. The text book
distinguishes between three slightly more modern criteria.
3
,(i) Neutrality: Taxation should have the minimum possible effect on relative prices.
There should be no disincentive to change the owners of the factors of production to
change their behaviour due to high taxes.
(ii) Equity: To determine what is equitable or fair or who should pay taxes, two
principles can be used:
1) Ability to pay principle: People should pay according to their ability (level
of income). There are two notions of equity horizontal equity (people in the
same position should pay the same tax) and vertical equity (people n
different positions should be taxed differently)
2) Benefit principle: The people who use the government products and services
should pay for this use. These are also called user charges, (toll roads,
hospital services, university educations and electricity and water)
3) Administrative simplicity: Taxes cost taxpayers. Compliance costs:
taxpayers have to fill out forms and pay accountants to do this for them.
Administrative costs: People have to be employed by government to write
up tax laws, design tax forms, and collect taxes and asses tax returns.
• Also note: tax avoidance: This is the practice of avoiding paying
taxes (it is legal but lowers the tax revenue for the government)
• Tax evasion: This occurs when people do not pay taxes when they
should (vendors at flea markets or people who run their businesses
from home e.g. hairdressers’ or dressmakers)
4
, QUESTION 3
Given the following information:
INCOME CONSUMPTION SAVINGS INVESTMENT
(RANDS) (RANDS) (RANDS) (RANDS)
0 10 -10 20
50 50 0 20
100 90 10 20
150 130 20 20
200 170 30 20
(a) Calculate (Show all your calculations)
(i) The marginal propensity to consume (2)
MPC = ∆C
∆Y
170 – 130
200 - 150
40
50
MPC = 0.80
(ii) The marginal propensity to save (2)
MPS = 0.20
(iii) The multiplier (2)
α = 1
1- c
α = 1
1 - 0.80
α = 1
0.20
α = 5
5
