ECS1601 QUESTIONS AND ANSWERS Semesters 1 and 2 Department of Economics

LEARNING UNIT Welcome to the second part of your introduction to economics. We hope that you will find this module mentally stimulating and worthwhile. The purpose of the module is to gain insight into macroeconomic theory and variables such as total production and income of a country, economic growth, unemployment, inflation, and the balance of payments. After you have studied this module, you should be able to ■ explain the functioning of the economy as a whole ■ assess the performance of the economy As a student enrolled for a tertiary qualification, you will be exposed to a formative learning experience that should not only educate you in the chosen discipline but also form your character. The formative nature of the qualification is described in the critical cross-field outcomes that all tertiary qualifications aim to achieve. Critical cross-field outcomes refer to broad generic outcomes encompassing various areas, which all qualifications and standards should aim to promote. After you have completed this tertiary qualification, you should be able to ■ identify and solve problems in such a way that you display responsible decision making using critical and creative thinking ■ work effectively with others as a member of a team, group, organisation or community ■ organise and manage yourself and your activities responsibly and effectively ■ collect, analyse, organise and critically evaluate information ■ communicate effectively using visual, mathematical and/or language skills in the modes of oral and/or written persuasion ■ use science and technology effectively and critically, showing responsibility towards the environment and health of others ■ demonstrate an understanding of the world as a set of related systems by recognising that problem solving does not happen in isolation In order to contribute to your full personal development as a student (and to that of every other student) as well as the social and economic development of society as a whole, any programme of learning should have the underlying intention of making an individual aware of the importance of • reflecting on and exploring a variety of strategies to learn more effectively • participating as responsible citizens in the life of local, national and global communities • being culturally and aesthetically sensitive across a range of social contexts • exploring education and career opportunities • developing entrepreneurial opportunities NOTE: If you already have a copy of the 4th edition of the textbook, you may use it if you prefer not to buy the 5th edition. We shall provide a copy of the MO001 (i.e. this study guide) for the 4th edition under Additional Resources on MyUnisa. Note, however, that all other study material will only refer to the 5th edition of the textbook, and that section numbers will therefore not correspond to that of the 4th edition. The prescribed book can be obtained from the University's official booksellers (refer to the list of official booksellers and their addresses listed in the my Studies @ Unisa brochure). If you have difficulty in locating the book at these booksellers, please contact the Prescribed Book Section at telephone or e-mail The main requirements for the study of economics are a willingness to think and an active approach to learning. Economics is not a subject that can simply be memorised – it has to be understood. This means that you will always have to think about what you are studying and that you must try to understand the work. The solution is to study actively. Use a pen and paper to work out each argument by drawing diagrams, doing calculations, and writing down the logic of the argument. It is not sufficient simply to read the prescribed book and underline or highlight the key concepts. Do not omit any of the chapters prescribed. These chapters follow a logical pattern. If you skip some chapters, you will not be able to follow or understand the reasoning in the study guide as a whole. This study guide has three basic functions: • It outlines the contents of the module, in other words, it indicates which parts of the prescribed book are compulsory for the examination. • It indicates how you should approach each chapter and shows the most important topics and diagrams (figures) you will have to master. • It provides a series of questions you must answer to assess your progress and to prepare for the examination. It has been designed in such a way as to guide you through the prescribed book in a systematic and informative way and to help you get to know the economist's analytical toolkit. Therefore, you cannot study the prescribed book without consulting the study guidelines. You will be required to study only some parts of the prescribed book. The prescribed sections are clearly indicated in this study guide. Those sections of the prescribed book which are not referred to in this guide do not form part of the prescribed material. We will provide you with some guiding remarks or activities (questions) to ensure that you have grasped the content of the passages you have read. We may also provide you with additional material or explanations. This guide is divided into 11 learning units that cover the compulsory chapters of the prescribed book: Prescribed textbook Topic Chapter 3 Learning unit 1 Production, income and spending in the mixed economy Chapter 14 Learning unit 2 The monetary sector Chapter 15 Learning unit 3 The government sector Chapter 16 Learning unit 4 The foreign sector Chapter 13 Learning unit 5 Measuring the performance of the economy Chapter 17 Learning unit 6 A simple Keynesian model of the economy Chapter 18 Learning unit 7 Keynesian models including the government and the foreign sector Chapter 19 Learning unit 8 More on macroeconomic theory and policy Chapter 20 Learning unit 9 Inflation Chapter 21 Learning unit 10 Unemployment Chapter 22 Learning unit 11 Economic growth and business cycles Each learning unit comprises the following sections: ■ Outcomes Pay close attention to the outcomes of each learning unit. Remember one of the main functions of the examinations is to evaluate whether you have mastered the outcomes of the module. (Also see the Checklist bullet below). ■ Contents The contents section guides you through the study material. Each subsection has a heading and study instruction. If the study instruction tells you to study a section, you need to make sure that you know the particular section well because your knowledge and understanding of the topic covered in the subsection will be tested in the examination. Some of us learn by memorising definitions or formulas. However, only by actually doing something, you will realise that you can describe or define it. Therefore, after each section or subsection we will introduce you to activities to help you practice your newly acquired knowledge, skills and values. At the end of each learning unit we will provide answers to some of the questions (marked with an asterisk*) to guide you to the most appropriate answer. To be successful in economics, it is essential that you take responsibility for your learning and practice your newly acquired skills. ■ Solutions Take care to work through the solutions. You should then get an idea of whether you have mastered the particular sections. ■ Checklist The checklist is based on the learning unit outcomes listed in the study guide. In other words, it indicates the things you should be able to do. The outcomes are divided into different categories: Concepts, Explanations, Diagrams and Calculations. These should give you a good indication of the kind of questions you can expect from each learning unit. Next to the items in the checklist are a number of check boxes: "Well", "Satisfactory", "Must redo" and "Need help". If you think you are able to do something really well, for instance, explaining the monetary transmission mechanism, mark the "Well" box. If you think you are able to explain it but are unsure about certain aspects or find it a bit difficult, mark "Satisfactory". If you are a bit lost but know something about the topic and will benefit from spending more time on it, mark "Must redo". If you really do not know what is going on, mark the "Need help" box. In so doing you will get an indication of what you know well, what you are coping with, on which of the sections you need to spend more time, and with what you need help. Do not hesitate to contact one of the lecturers should you need help. See Tutorial Letter 101 for the contact details of the lecturers. (Do not leave this until the evening before the examination.) As a student you should know exactly what is expected when certain verbs are mentioned in an activity or examination question. The verbs generally used in economics are as follows: compare Identify the similarities or differences between facts, viewpoints, concepts or ideas contrast/distinguish/what is the difference between? Point out the differences between certain objects or concepts define Give a short and concise definition of a subject or topic describe Name the characteristics of an object or topic discuss Discuss a topic by examining its various aspects explain Explain and clarify to ensure that the reader clearly understands you explain with the aid of (a) diagram(s) Draw a fully annotated diagram. Make sure all the axes and curves are labelled. Then explain the diagram in such a manner that the reader can follow and understand it, in other words, tell the reader what is happening in the diagram give/identify/list/name Give only the facts without any discussion illustrate (Usually) explain your answer with the aid of a diagram (or figure) summarise State the main points in a brief account To be able to use a diagram (or figure) correctly you must learn to read, to draw and to explain a diagram: Read: This means you have to understand the determinants (or factors) of each curve and how they affect the specific curve. Draw: Each diagram, and all its axes and curves, must be labelled. The initial point of equilibrium must be indicated. If it changes, this must also be noted on the diagram. Explain: You should be able to explain the diagram in words. Production, income and spending in a mixed economy LEARNING UNIT In this learning unit, we use circular flow models to introduce the different participants in the economy. The major flows in the economy and the high degree of interdependence form the basis of our understanding of macroeconomics. After you have worked through this learning unit, you should be able to ■ identify the three major flows in the economy ■ distinguish between a flow and a stock ■ explain the interdependence of households and firms ■ explain the interaction of households and firms by means of the circular flow of goods and services and the circular flow of income and spending ■ identify the various economic participants ■ identify the various injections into and leakages from the circular flow of income and spending ■ explain the interaction of the different sectors in the economy by means of the circular flow of income and spending 1.1 Production, income and spending The three basic macroeconomic flows are introduced in this section. The magnitudes of these flows are discussed in learning unit 5 under the heading “Three methods to calculate the GDP”. The three methods to measure the GDP (spending, income and production) actually involve measuring the same flow, but they are calculated at different points in the circular flow. You should know what the difference between a stock and a flow is. Indicate whether the following statements are true (T) or false (F): Note: Answers are provided at the end of this learning unit. (1) The three major flows in the economy as a whole are total production, total income and total spending. (2) The two basic sets of participants in any economy are households and firms. (3) Production is a stock and income is a flow. (4) The balance on your savings account on a particular day is a stock variable. (5) Consumption is a flow variable. (6) Investment is a stock variable. (7) Capital is a stock variable. Short questions (a) What is the difference between production and income? (4) (b) Name the three major flows in the economy as a whole and explain how they are related. (6) (c) What is the difference between a stock variable and a flow variable? Give one example of each. (4) 1.2 Sources of production: the factors of production In this section we revisit the four factors of production which were introduced in the Economics 1A module. Indicate whether the following statements are true (T) or false (F): Note: Answers are provided at the end of this learning unit. (1) The four factors of production are natural resources, labour, entrepreneurship and money. (2) There is an unlimited supply of