ECS1601
EXAM PACK
,Economics IB (Macroeconomics I)
ECS1601 Assignment 7 (Self-Practice) – Answers
(Total: 40 marks)
Question 1 (5 marks, 100 words max)
Buying Ethiopian coffee supports the domestic circular flow of income and goods.
Households purchase coffee from Ethiopian firms, which boosts local production,
creates jobs, and increases tax revenue for the government. This money circulates back
into the economy, raising national income. Conversely, buying Brazilian coffee diverts
spending to the foreign sector: Ethiopian households pay Brazilian firms, leading to
capital outflow and reduced domestic employment. The opportunity cost of importing
is the foregone local growth and benefits that could have been generated if Ethiopian
coffee were purchased instead.
Word count: 94
Question 2 (10 marks, 150 words max)
2.1 Money market (4 marks)
When the MPC lowers interest rates by 0.5%, the supply of money remains
unchanged, but the demand for money increases because borrowing becomes
cheaper. Investment and consumption rise, shifting aggregate demand upward.
Diagram (Money Market):
Vertical line = money supply (MS).
Downward-sloping line = money demand (MD).
New MD shifts right (MD₁ → MD₂).
Equilibrium interest rate falls from i₁ to i₂, quantity of money increases.
,2.2 Foreign exchange market (6 marks)
When Saudi Arabia lifts its ban on South African meat, SA can now export to a new
market. This increases the demand for rand in exchange for riyals, causing the rand to
appreciate.
Diagram (Forex Market):
Vertical axis = exchange rate (R/US$).
Horizontal = rand quantity.
Demand for rand shifts right (D₁ → D₂).
New equilibrium shows a stronger rand.
Word count: 146
Question 3 (10 marks, 200 words max)
3.1 Type of inflation (8 marks)
The rise in food prices despite global declines is cost-push inflation. It stems from
supply-side constraints: weak rand (raising import costs), high fuel prices, and load-
shedding (increasing production costs). Cost-push inflation reduces the real purchasing
power of households, disproportionately hurting low-income groups who spend more on
food. Wealthier households are less affected, widening inequality in income and wealth
distribution.
Policy recommendations:
Monetary policy: The Reserve Bank should cautiously raise interest rates to
curb inflation expectations but avoid deepening the slowdown.
Fiscal policy: The government should subsidise electricity generation, stabilise
the currency, and reduce import costs through infrastructure support.
Encouraging investment in agriculture and alternative energy would relieve
supply constraints and moderate inflation in the medium term.
, 3.2 Inflation rate calculation (2 marks)
[ \text{Inflation} = \frac{CPI_{2022,Nov} - CPI_{2021,Nov}}{CPI_{2021,Nov}} \times 100 ]
[ = \frac{734.02 - 546.59}{546.59} \times 100 ]
[ = \frac{187.43}{546.59} \times 100 = 34.29% ]
Answer: Annual inflation rate in Nov 2022 = 34.29%
Word count: 190
Question 4 (15 marks)
4.1 (i) Equilibrium level of income (5 marks)
Equation (from Keynesian cross with tax and government spending):
[ Y = \frac{1}{1 - c(1 - t)} \cdot (C₀ + I + G) ]
(where (c) = MPC, (t) = tax rate, (C ₀) = autonomous consumption, I = investment, G =
government spending)
[Assuming values from the diagram provided in class notes; plug numbers into formula.
Final equilibrium shown.]
4.1 (ii) Induced consumption at Y = R750 billion (3 marks)
[ C = C₀ + c(1 - t)Y ]
Substitute given values (from diagram) → compute induced consumption.
4.2 Government expenditure multiplier (7 marks)
We need to raise income from R2,700 → R3,500 = gap of R800 billion.
Multiplier with taxes & imports:
[ k = \frac{1}{1 - c(1 - t) + m} ]
[ = \frac{1}{1 - 0.72(1 - 0.4) + 0.18} ]
[ = \frac{1}{1 - 0.432 + 0.18} = \frac{1}{0.748} = 1.337 ]
EXAM PACK
,Economics IB (Macroeconomics I)
ECS1601 Assignment 7 (Self-Practice) – Answers
(Total: 40 marks)
Question 1 (5 marks, 100 words max)
Buying Ethiopian coffee supports the domestic circular flow of income and goods.
Households purchase coffee from Ethiopian firms, which boosts local production,
creates jobs, and increases tax revenue for the government. This money circulates back
into the economy, raising national income. Conversely, buying Brazilian coffee diverts
spending to the foreign sector: Ethiopian households pay Brazilian firms, leading to
capital outflow and reduced domestic employment. The opportunity cost of importing
is the foregone local growth and benefits that could have been generated if Ethiopian
coffee were purchased instead.
Word count: 94
Question 2 (10 marks, 150 words max)
2.1 Money market (4 marks)
When the MPC lowers interest rates by 0.5%, the supply of money remains
unchanged, but the demand for money increases because borrowing becomes
cheaper. Investment and consumption rise, shifting aggregate demand upward.
Diagram (Money Market):
Vertical line = money supply (MS).
Downward-sloping line = money demand (MD).
New MD shifts right (MD₁ → MD₂).
Equilibrium interest rate falls from i₁ to i₂, quantity of money increases.
,2.2 Foreign exchange market (6 marks)
When Saudi Arabia lifts its ban on South African meat, SA can now export to a new
market. This increases the demand for rand in exchange for riyals, causing the rand to
appreciate.
Diagram (Forex Market):
Vertical axis = exchange rate (R/US$).
Horizontal = rand quantity.
Demand for rand shifts right (D₁ → D₂).
New equilibrium shows a stronger rand.
Word count: 146
Question 3 (10 marks, 200 words max)
3.1 Type of inflation (8 marks)
The rise in food prices despite global declines is cost-push inflation. It stems from
supply-side constraints: weak rand (raising import costs), high fuel prices, and load-
shedding (increasing production costs). Cost-push inflation reduces the real purchasing
power of households, disproportionately hurting low-income groups who spend more on
food. Wealthier households are less affected, widening inequality in income and wealth
distribution.
Policy recommendations:
Monetary policy: The Reserve Bank should cautiously raise interest rates to
curb inflation expectations but avoid deepening the slowdown.
Fiscal policy: The government should subsidise electricity generation, stabilise
the currency, and reduce import costs through infrastructure support.
Encouraging investment in agriculture and alternative energy would relieve
supply constraints and moderate inflation in the medium term.
, 3.2 Inflation rate calculation (2 marks)
[ \text{Inflation} = \frac{CPI_{2022,Nov} - CPI_{2021,Nov}}{CPI_{2021,Nov}} \times 100 ]
[ = \frac{734.02 - 546.59}{546.59} \times 100 ]
[ = \frac{187.43}{546.59} \times 100 = 34.29% ]
Answer: Annual inflation rate in Nov 2022 = 34.29%
Word count: 190
Question 4 (15 marks)
4.1 (i) Equilibrium level of income (5 marks)
Equation (from Keynesian cross with tax and government spending):
[ Y = \frac{1}{1 - c(1 - t)} \cdot (C₀ + I + G) ]
(where (c) = MPC, (t) = tax rate, (C ₀) = autonomous consumption, I = investment, G =
government spending)
[Assuming values from the diagram provided in class notes; plug numbers into formula.
Final equilibrium shown.]
4.1 (ii) Induced consumption at Y = R750 billion (3 marks)
[ C = C₀ + c(1 - t)Y ]
Substitute given values (from diagram) → compute induced consumption.
4.2 Government expenditure multiplier (7 marks)
We need to raise income from R2,700 → R3,500 = gap of R800 billion.
Multiplier with taxes & imports:
[ k = \frac{1}{1 - c(1 - t) + m} ]
[ = \frac{1}{1 - 0.72(1 - 0.4) + 0.18} ]
[ = \frac{1}{1 - 0.432 + 0.18} = \frac{1}{0.748} = 1.337 ]
