ECS1601/204
Dear Student
In this tutorial letter we provide you with the answers to the multiple-choice questions in
Assignment 04, with brief explanations where necessary. In most cases, however, we merely refer
you to the prescribed textbook and/or the study guide. If you have any questions about the
answers that are provided, please discuss this with your fellow students and your e-tutor on the e-
tutor website.
1 DISCUSSION OF ASSIGNMENT 04/2018
All references, unless otherwise indicated, are to the prescribed textbook: Mohr, P and associates
2015. Economics for South African students, fifth edition. Van Schaik (Pretoria)
4.1 The correct statement is [4]. The AD-AS model deals with the general price level and the
total production of goods and services. Refer to section 19.1. Option [1] is incorrect
because aggregate supply (AS) curve illustrate the various level of output which will be
supplied at different price levels. Options [2] and [3] are incorrect. Refer to Box 19-1.
4.2 There is no correct answer. The question was, therefore, removed.
Expansionary fiscal policy involves increasing government expenditure, decreasing taxes or
both. A decrease in taxes lead to an increase in households disposal income. Higher
disposable income increases consumption. A contractionary policy is a form of monetary
policy that involves increasing interest rates. Therefore, statement a. and b. are incorrect. In
the AD-AS model, demand management policies (monetary and fiscal policy) are used to
influence aggregate demand, while incomes policy is used to influence aggregate supply.
Thus, statement c. is incorrect.
4.3 Option [3] is the only correct answer. A decrease in the prices of imported capital goods
reduce the domestic cost of production at each level of real output. Aggregate supply will
rise. This will be illustrated by a rightward shift of the AS curve. Real output will increase,
while the price level falls.
Option [1], [2], [4] and [5] are incorrect. If the labour cost increases or productivity
decreases, the aggregate supply will decrease. This will be illustrated by a leftward
(upwards) shift of the AS curve. Real output will decrease, while the price level rises. Refer
to Table 19-2.
4.4 The correct option is [4]. Refer to Table 19-1. A decrease in government spending is
illustrated by a leftward shift of the AD curve. Option [1] is incorrect as it is illustrated by the
movement along the curve. Option [2] is incorrect as it does not affect the AD curve. Option
[3] is incorrect. An increase in net export is illustrated by a rightward shift of the AD curve.
4.5 The correct option is [3]. Refer to Table 19-2. Option [1] is incorrect. It causes the
movement along the curve. Option [2] and [4] are incorrect. An increase in aggregate
spending or a decrease in interest rate will shift the aggregate demand curve to the right
and leave AS curve unchanged.
4.6 The correct option is [1]. Refer to page 370.
4.7 The correct option is [3]. An increase in the consumption spending is generally effective in
stimulating a depressed economy. A policy that decrease the government spending,
increase the tax rates, or interest rate will further depress the economy. Thus, options [1],
[2] and [4] are incorrect.
Dear Student
In this tutorial letter we provide you with the answers to the multiple-choice questions in
Assignment 04, with brief explanations where necessary. In most cases, however, we merely refer
you to the prescribed textbook and/or the study guide. If you have any questions about the
answers that are provided, please discuss this with your fellow students and your e-tutor on the e-
tutor website.
1 DISCUSSION OF ASSIGNMENT 04/2018
All references, unless otherwise indicated, are to the prescribed textbook: Mohr, P and associates
2015. Economics for South African students, fifth edition. Van Schaik (Pretoria)
4.1 The correct statement is [4]. The AD-AS model deals with the general price level and the
total production of goods and services. Refer to section 19.1. Option [1] is incorrect
because aggregate supply (AS) curve illustrate the various level of output which will be
supplied at different price levels. Options [2] and [3] are incorrect. Refer to Box 19-1.
4.2 There is no correct answer. The question was, therefore, removed.
Expansionary fiscal policy involves increasing government expenditure, decreasing taxes or
both. A decrease in taxes lead to an increase in households disposal income. Higher
disposable income increases consumption. A contractionary policy is a form of monetary
policy that involves increasing interest rates. Therefore, statement a. and b. are incorrect. In
the AD-AS model, demand management policies (monetary and fiscal policy) are used to
influence aggregate demand, while incomes policy is used to influence aggregate supply.
Thus, statement c. is incorrect.
4.3 Option [3] is the only correct answer. A decrease in the prices of imported capital goods
reduce the domestic cost of production at each level of real output. Aggregate supply will
rise. This will be illustrated by a rightward shift of the AS curve. Real output will increase,
while the price level falls.
Option [1], [2], [4] and [5] are incorrect. If the labour cost increases or productivity
decreases, the aggregate supply will decrease. This will be illustrated by a leftward
(upwards) shift of the AS curve. Real output will decrease, while the price level rises. Refer
to Table 19-2.
4.4 The correct option is [4]. Refer to Table 19-1. A decrease in government spending is
illustrated by a leftward shift of the AD curve. Option [1] is incorrect as it is illustrated by the
movement along the curve. Option [2] is incorrect as it does not affect the AD curve. Option
[3] is incorrect. An increase in net export is illustrated by a rightward shift of the AD curve.
4.5 The correct option is [3]. Refer to Table 19-2. Option [1] is incorrect. It causes the
movement along the curve. Option [2] and [4] are incorrect. An increase in aggregate
spending or a decrease in interest rate will shift the aggregate demand curve to the right
and leave AS curve unchanged.
4.6 The correct option is [1]. Refer to page 370.
4.7 The correct option is [3]. An increase in the consumption spending is generally effective in
stimulating a depressed economy. A policy that decrease the government spending,
increase the tax rates, or interest rate will further depress the economy. Thus, options [1],
[2] and [4] are incorrect.
