ECS 1601
MAY / JUNE 2017
QUESTION 1
(i) List two important injections and two leakages from the circular flow of income
and spending
INJECTIONS LEAKAGE
1.Consumer spending Savings
2.Investment Taxed
3.Export Imports
4.Government spending
(ii) Briefly explain the relationship between the demand for money and the
interest rate.
1. A decrease in interest rate will induce an increase in the quantity of money demanded.
2. There is a negative relationship between demand for money and interest rate.
(iii) Briefly describe an expansionary fiscal policy.
1. The government expenditure increase.
2. The taxation decreases.
3. The budget deficit increases.
4. The AD-Curve shift to the right.
5. The budget surplus decreases.
(iii) Identify and briefly describe one macroeconomic objective
1.Economic growth
In the growing economy total production of goods and services. If the production
population grows and there is no economic growth average living standard cannot
increase.
(iv) Briefly explain why the link between the interest rate and investment spending
. is important in the monetary transmission mechanism.
If changes in the interest rate do not affect investment spending, the chain breaks down.
. In other words, if investment demand is completely interest inelastic (illustrated by a
. vertical investment demand curve) a change in the interest rate will not have any impact
. on investment spending.
QUESTION 2
, Question 2 is base on the following diagram of the rand/dollar exchange market.
Use the above diagram to illustrate and explain the impact of the following events on the
rand/dollar exchange market
a An economic recession occurs in the economics of major trading partners of South Africa
b foreign investors sell South African financial assets
(a) Demand for dollars falls because a recession in South Africa causes a slump in
the demand for curve to the left US goods
• A shift of the demand to the left
• The rand appreciates
• The dollar depreciates
QUESTION 3
MAY / JUNE 2017
QUESTION 1
(i) List two important injections and two leakages from the circular flow of income
and spending
INJECTIONS LEAKAGE
1.Consumer spending Savings
2.Investment Taxed
3.Export Imports
4.Government spending
(ii) Briefly explain the relationship between the demand for money and the
interest rate.
1. A decrease in interest rate will induce an increase in the quantity of money demanded.
2. There is a negative relationship between demand for money and interest rate.
(iii) Briefly describe an expansionary fiscal policy.
1. The government expenditure increase.
2. The taxation decreases.
3. The budget deficit increases.
4. The AD-Curve shift to the right.
5. The budget surplus decreases.
(iii) Identify and briefly describe one macroeconomic objective
1.Economic growth
In the growing economy total production of goods and services. If the production
population grows and there is no economic growth average living standard cannot
increase.
(iv) Briefly explain why the link between the interest rate and investment spending
. is important in the monetary transmission mechanism.
If changes in the interest rate do not affect investment spending, the chain breaks down.
. In other words, if investment demand is completely interest inelastic (illustrated by a
. vertical investment demand curve) a change in the interest rate will not have any impact
. on investment spending.
QUESTION 2
, Question 2 is base on the following diagram of the rand/dollar exchange market.
Use the above diagram to illustrate and explain the impact of the following events on the
rand/dollar exchange market
a An economic recession occurs in the economics of major trading partners of South Africa
b foreign investors sell South African financial assets
(a) Demand for dollars falls because a recession in South Africa causes a slump in
the demand for curve to the left US goods
• A shift of the demand to the left
• The rand appreciates
• The dollar depreciates
QUESTION 3
