ECS1601
SOME SUGGESTED SOLUTIONS
MAY/JUNE 2016
SECTION A
Question 1
1a Define money
Money is anything that is commonly accepted as payment for goods and services, or
that is accepted in settlement of debts. It is generally defined in terms of its function as
a medium of exchange.
1b Distinguish between the three broad functions of government.
The allocative function: the role of government in correcting market failure and
achieving a more efficient allocation of resources.
The distribution function: the steps government takes to achieve a more equitable or
socially acceptable distribution of income than that generated by market forces.
The stabilisation function: measures taken by government to promote macroeconomic
stability.
1c Define the South African balance of payments.
The Balance of Payments is an account that records the economic transactions between
the residents of one country and the rest of the world.
1d Differentiate between nominal and real prices.
Nominal refers to current prices which include all increases. In the case of real prices,
the prices from a base year are used to eliminate the effects price increases (inflation).
1e List four problems associated with GDP as a measure of total production in the
economy.
Non market production.
Some activities or transactions in the economy are never recorded in the informal
sector.
Data used is not always as accurate as it could be, so values are often revised and
adjusted.
GDP has no indicator of economic welfare.
Question 2
2a Use a diagram to explain how an increase in the tax rate will influence the income
level in the economy, given that the price level is fixed.
1
, Aggregate Spending A=Y
A
A1
A
0 Y1 Y Aggregate Income
Explanation: An increase in the tax rate will cause a decrease in disposable income. This
means that consumers will have less money to spend. Aggregate spending will
decrease and the aggregate spending line (A) will swivel downward to A1.
The decrease in expenditure will also impact negatively on the level of
production and income in the economy (Y to Y1). The equilibrium level of
income (Y) will decrease.
2b Due to a change in trade policy, there has been a substantial decrease in the
amount of steel produced in South Africa and an increase in the amount of steel
imported into South Africa. This has led to a substantial increase in total imports.
Explain how this will affect the economy by making use of the Keynesian model.
Also mention how this will affect employment in South Africa.
Aggregate Spending
A=Y A
A1
A
A1
Y1 Y
Explanation: If total imports have increased this will have a negative effect on the
aggregate spending, ceteris paribus the level of exports. As imports
increase, the trade balance worsens and the aggregate spennding line will
shift downwards. This will cause the equilibrium level of income to decrease
2
SOME SUGGESTED SOLUTIONS
MAY/JUNE 2016
SECTION A
Question 1
1a Define money
Money is anything that is commonly accepted as payment for goods and services, or
that is accepted in settlement of debts. It is generally defined in terms of its function as
a medium of exchange.
1b Distinguish between the three broad functions of government.
The allocative function: the role of government in correcting market failure and
achieving a more efficient allocation of resources.
The distribution function: the steps government takes to achieve a more equitable or
socially acceptable distribution of income than that generated by market forces.
The stabilisation function: measures taken by government to promote macroeconomic
stability.
1c Define the South African balance of payments.
The Balance of Payments is an account that records the economic transactions between
the residents of one country and the rest of the world.
1d Differentiate between nominal and real prices.
Nominal refers to current prices which include all increases. In the case of real prices,
the prices from a base year are used to eliminate the effects price increases (inflation).
1e List four problems associated with GDP as a measure of total production in the
economy.
Non market production.
Some activities or transactions in the economy are never recorded in the informal
sector.
Data used is not always as accurate as it could be, so values are often revised and
adjusted.
GDP has no indicator of economic welfare.
Question 2
2a Use a diagram to explain how an increase in the tax rate will influence the income
level in the economy, given that the price level is fixed.
1
, Aggregate Spending A=Y
A
A1
A
0 Y1 Y Aggregate Income
Explanation: An increase in the tax rate will cause a decrease in disposable income. This
means that consumers will have less money to spend. Aggregate spending will
decrease and the aggregate spending line (A) will swivel downward to A1.
The decrease in expenditure will also impact negatively on the level of
production and income in the economy (Y to Y1). The equilibrium level of
income (Y) will decrease.
2b Due to a change in trade policy, there has been a substantial decrease in the
amount of steel produced in South Africa and an increase in the amount of steel
imported into South Africa. This has led to a substantial increase in total imports.
Explain how this will affect the economy by making use of the Keynesian model.
Also mention how this will affect employment in South Africa.
Aggregate Spending
A=Y A
A1
A
A1
Y1 Y
Explanation: If total imports have increased this will have a negative effect on the
aggregate spending, ceteris paribus the level of exports. As imports
increase, the trade balance worsens and the aggregate spennding line will
shift downwards. This will cause the equilibrium level of income to decrease
2
