ECS1601 Assignment 2 Complete
Solutions for 7 July 2025
University of South Africa, Economics IB (Macroeconomics I) Semester
2, 2025
, Contents
1 Introduction 3
2 Assignment Overview 3
3 Assignment 2 Questions and Solutions 3
3.1 Circular Flow of Income (Questions 110) . . . . . . . . . . . . . . . . . . . 4
3.1.1 Question 1: Which is NOT a purpose of economic theory? . . . . 4
3.1.2 Question 2: What are leakages in the circular flow? . . . . . . . . 4
3.1.3 Question 3: What are injections in the circular flow? . . . . . . . . 4
3.1.4 Question 4: How does purchasing a foreign good affect the cir-
cular flow? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1.5 Question 5: What increases demand for US dollars in SAs foreign
exchange market? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1.6 Question 6: What happens to SAs circular flow if tourism de-
creases? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1.7 Question 7: Why is tax a leakage? . . . . . . . . . . . . . . . . . . . 5
3.1.8 Question 8: How does investment act as an injection? . . . . . . . 5
3.1.9 Question 9: What is the role of financial institutions in the circu-
lar flow? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1.10 Question 10: How does a recession affect the circular flow? . . . . 5
3.2 National Income Accounting (Questions 1120) . . . . . . . . . . . . . . . 5
3.2.1 Question 11: How is nominal GDP calculated? . . . . . . . . . . . 5
3.2.2 Question 12: What is the difference between nominal and real
GDP? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2.3 Question 13: Calculate equilibrium income with a multiplier.
Given: C = 100 + 0.8Y, I = 50, G = 50. . . . . . . . . . . . . . . . . . 6
3.2.4 Question 14: What is the multiplier effect? . . . . . . . . . . . . . . 6
3.2.5 Question 15: How is GNI different from GDP? . . . . . . . . . . . 6
3.2.6 Question 16: What is the expenditure approach to GDP? . . . . . 6
3.2.7 Question 17: What is the income approach to GDP? . . . . . . . . 6
3.2.8 Question 18: How does inflation affect nominal GDP? . . . . . . . 6
3.2.9 Question 19: What is the GDP deflator? . . . . . . . . . . . . . . . 6
3.2.10 Question 20: Calculate real GDP. Given: Nominal GDP = $1,200M,
Deflator = 120. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.3 Money Market Dynamics (Questions 2130) . . . . . . . . . . . . . . . . . 7
3.3.1 Question 21: What increases money demand? . . . . . . . . . . . 7
3.3.2 Question 22: What is the money market equilibrium? . . . . . . . 7
3.3.3 Question 23: How does the central bank influence money supply? 7
1
Solutions for 7 July 2025
University of South Africa, Economics IB (Macroeconomics I) Semester
2, 2025
, Contents
1 Introduction 3
2 Assignment Overview 3
3 Assignment 2 Questions and Solutions 3
3.1 Circular Flow of Income (Questions 110) . . . . . . . . . . . . . . . . . . . 4
3.1.1 Question 1: Which is NOT a purpose of economic theory? . . . . 4
3.1.2 Question 2: What are leakages in the circular flow? . . . . . . . . 4
3.1.3 Question 3: What are injections in the circular flow? . . . . . . . . 4
3.1.4 Question 4: How does purchasing a foreign good affect the cir-
cular flow? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1.5 Question 5: What increases demand for US dollars in SAs foreign
exchange market? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1.6 Question 6: What happens to SAs circular flow if tourism de-
creases? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1.7 Question 7: Why is tax a leakage? . . . . . . . . . . . . . . . . . . . 5
3.1.8 Question 8: How does investment act as an injection? . . . . . . . 5
3.1.9 Question 9: What is the role of financial institutions in the circu-
lar flow? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1.10 Question 10: How does a recession affect the circular flow? . . . . 5
3.2 National Income Accounting (Questions 1120) . . . . . . . . . . . . . . . 5
3.2.1 Question 11: How is nominal GDP calculated? . . . . . . . . . . . 5
3.2.2 Question 12: What is the difference between nominal and real
GDP? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2.3 Question 13: Calculate equilibrium income with a multiplier.
Given: C = 100 + 0.8Y, I = 50, G = 50. . . . . . . . . . . . . . . . . . 6
3.2.4 Question 14: What is the multiplier effect? . . . . . . . . . . . . . . 6
3.2.5 Question 15: How is GNI different from GDP? . . . . . . . . . . . 6
3.2.6 Question 16: What is the expenditure approach to GDP? . . . . . 6
3.2.7 Question 17: What is the income approach to GDP? . . . . . . . . 6
3.2.8 Question 18: How does inflation affect nominal GDP? . . . . . . . 6
3.2.9 Question 19: What is the GDP deflator? . . . . . . . . . . . . . . . 6
3.2.10 Question 20: Calculate real GDP. Given: Nominal GDP = $1,200M,
Deflator = 120. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.3 Money Market Dynamics (Questions 2130) . . . . . . . . . . . . . . . . . 7
3.3.1 Question 21: What increases money demand? . . . . . . . . . . . 7
3.3.2 Question 22: What is the money market equilibrium? . . . . . . . 7
3.3.3 Question 23: How does the central bank influence money supply? 7
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