1. Which of the following statements is/are correct?
a. In this module we only study the demand side of the economy which includes the goods market and the financial
market. The labour market forms part of supply side analysis and is therefore excluded from this module.
b. The two most important accounts of the balance of payments are the current account and the financial account.
c. If total output increases with 3% during a specific year and the general price level increases with 5% the real GDP
will decrease and the nominal GDP will increase.
d. Fiscal policy deals with government spending and taxes while monetary policy deals with money supply.
1. a, b, c and d
2. Only a, b and d
3. Only b, c and d
4. Only b and d
5. None of the options 1 to 4
The correct option is 3. Statement a is incorrect. In this module we study both the demand and supply side of the macro
economy. Statement b is correct. Statement c is correct. If the rise in the general price level is more that the rise in nominal
production (or output) then the real production (GDP) declines while the nominal production (GDP) increases. Statement d is
correct.
2. Consider the consumption functions of country A and country B.
Country A: C = 1 500 + 0.6YD
Country B: C = 1 000 + 0.9YD
Which of the following statements are correct?
a. In country A autonomous consumption is higher than in country B.
b. In country B induced consumption is definitely higher than in country A.
c. In country B total consumption is definitely higher than in country A.
d. In country A 60 cents out of each rand is spent by the consumers while in country B 90 cents out of each rand is
spent.
1. a, b and d
2. Only a and b
3. a and c
4. Only a and d
5. b, c and d
QUESTIONS 2 TO 20 ARE BASED ON LEARNLING UNIT 2 OF THE STUDY GUIDE
The correct option is 4. Statement a is correct. In country A autonomous consumption is 1 500 while in country B it is 1 000. It
is therefore higher in country A. Statement b is incorrect. Induced consumption is that part of consumption that depends on
income. To know what the induced consumption is we need not only to know what the marginal propensity to consume is but
also what the disposable income is. We can therefore not conclude that it is definitely higher in country B. Statement c is
incorrect. What total consumption is will depend on what the level of disposable income is. Since we do not know what the
level of disposable income is, we do not know what the total consumption is. Statement d is correct since c = 0.6.
3. Which of the following events chain(s) is/are correct regarding the goods market model?
a. Y↑ → G↑
b. Y↑ → I↑
c. Y↓ → T↓
d. Y↓ → C↓
1. Only a
2. Only b
3. Only c
4. Only d
5. b and d
Page 1 of 76
, The correct option is 4. All the chain of events are incorrect except d.
For a to be correct in the goods market model it should have been as follows: G↑ → Z↑ → Y↑
For b to be correct in the goods market model it should have been as follows: I↑ → Z↑ → Y↑
Investment is exogenous (autonomous) in the goods market model, it only has an endogenous part (the part that increases if
Y increases) in the IS-LM model.
For c to be correct in the goods market model it should have been as follows: T↓ → YD↑ → C↑
4. In the goods market model a decrease in taxes will result in …
a. an increase in autonomous consumption.
b. an increase in disposable income.
c. an increase in income.
d. an increase in induced consumption.
1. a, b and c
2. a, b and d
3. b, c and d
4. a, c and d
5. None of the options 1 to 4
The correct option is 3. A decrease in taxes increases disposable income and consequently induced consumption spending
increases. As consumption spending increases producers increase production and consequently income increases. The
multiplier effect is in operation. Therefore statements b, c and d are correct. Statement a is incorrect. A decrease in taxes does
not impact on autonomous consumption.
5. Goods market equilibrium exists …
a. in a situation that will maintain if existing forces do not change.
b. only in a situation where the level of output and income is equal to the supply of goods.
c. in a situation where the money supply equals the demand for liquid balances.
d. where quantity demanded is equal to quantity supplied.
1. a and c
2. Only a
3. Only b
4. Only c
5. Only d
The correct option is 3. A decrease in taxes increases disposable income and consequently induced consumption spending
increases. As consumption spending increases producers increase production and consequently income increases. The
multiplier effect is in operation. Therefore statements b, c and d are correct. Statement a is incorrect. A decrease in taxes does
not impact on autonomous consumption.
6. Which of the following statements is/are correct regarding the goods market model?
a. An increase in autonomous consumption of 200 will cause an increase in output and income of 200.
b. An increase in investment of 500 will cause an increase in output and income of more than 500.
c. An increase in government spending of 800 will cause an increase in output and income of more than 800.
1. a, b and c
2. Only a and b
3. Only a and c
4. Only b and c
5. None of the options 1 to 4
The correct option is 4. Because of the multiplier effect an increase in autonomous spending (autonomous consumption or
autonomous investment or autonomous government spending) will cause an increase in output and income of more than the
initial increase in autonomous spending. Therefore statement a is incorrect and statements b and c are correct.
7. Assuming a multiplier of 20, which of the following statements is/are correct?
a. An increase in government spending of R10 million and an increase in taxation of R10 million will increase output
and income with R10 million and will result in an increase in the budget deficit of R9 million.
b. An increase in government spending of R20 million and an increase in taxation of R20 million will increase output
and income with R20 million and will result in an increase in the budget deficit of R9 million.
c. An increase in government spending of R9 million and an increase in taxation of R9 million will increase output and
income with R9 million and will not change the budget deficit.
Page 2 of 76
, 1. a, b and c
2. Only a and b
3. Only b and c
4. Only c
5. None of the options 1 to 4
The correct option is 4. Only statement c is correct. Statement a is incorrect. Remember that a budget deficit refers to a
situation where government spending is more than government income (taxes) or G > T.
An increase of R10 million in government spending increases output by R10 million x multiplier = R10 million x 20 = R200
million.
An increase in taxes of R10 million decreases output by 0.95(R10 million) x multiplier = 0.95(R10 million) x 20 = R190 million.
The total increase in income is therefore R200 million – R190 million = R10 million. The budget deficit remains unchanged:
+R10 million – R10 million = 0.
Statement b is incorrect. An increase of R20 million in government spending increases output by R20 million x 20 = R400
million.
An increase in taxes of R20 million decreases output by 0.95(R20 million) x 20 = R380 million.
The total increase in income is therefore R400 million – R380 million = R20 million.
The change in the budget deficit is: + R20 million – R20 million = 0. The budget deficit is unchanged.
Statement c is correct. An increase of R9 million in government spending increases output by R9 million x 20 = R180 million.
An increase in taxes of R9 million decreases output by 0.95(R9 million) x 20 = R171 million. The total increase in income
is therefore R180 million – R171 million = R9 million.
But there is an easier way to calculate this because we are dealing with a balanced budget because G increases by R9
million and taxes increase by R9 million. The balanced budget is equal to one, therefore the increase in total output and
income is equal to R9 million x 1 = R9 million. The budget deficit is: + R9 million – R9 million = 0.
8. Which of the following statements is/are correct?
a. An increase in the marginal propensity to consume will cause an increase in the multiplier.
b. An increase in the marginal propensity to consume will cause an increase in aggregate demand.
c. An increase in the marginal propensity to consume will cause an increase in output and income.
d. If the tax revenue of government is larger than government spending, a budget deficit exists.
1. a, b and c
2. a, b and d
3. b, c and d
4. a, c and d
5. None of the options 1 to 4
The correct option is 1. Statement a is correct. The formula for the multiplier is 1/1-c. If the marginal propensity to consume is
for example 0.5, the multiplier will be 2. If the marginal propensity to consume increases for example to a value of 0.8, the
multiplier will be 5. Statement b is correct. An increase in the marginal propensity to consume will cause an increase in
consumption spending and since consumption spending (C) is a component of the demand for goods and services (Z), it will
increase aggregate demand. Statement c is correct. An increase in the marginal propensity to consume will cause an increase
in the multiplier as explained above. An increase in the multiplier will cause an increase in the level of output and income. Say
for instance that autonomous spending equals R500 million and the multiplier is 2 (when c = 0.5). Thus Y = 2 x 500 = 1 000.
Now, if the value of the marginal propensity to consume increases to 0.8, the multiplier increases to 5 and Y = 5 x 500 = 2 500.
Statement d is incorrect. If the tax revenue of government is larger than government spending
(T > G), then a budget surplus exists (and not a budget deficit).
9. Which of the following chain of events’ are correct in terms of the goods market model?
a. G↑ → Z↑ → Y↑ → YD↑ → C↑
b. I↑ → Z↑ → Y↑ → YD↑ → C↑
c. T↓ → Z↑ → Y↑ → YD↑ → C↑
d. c0↑ → Z↑ → Y↑ → YD↑ → C↑
1. Only a, b and c
2. Only a, b and d
3. Only b, c and d
4. Only a, c and d
5. a, b, c and d
Page 3 of 76
, The correct option is 2. All the chains of events, except c, are correct. For c to be correct it should have been as follows:
T↓ → YD↑ → C↑ → Z↑ → Y↑
Because a change in taxes first operates through disposable income (YD) and then on consumption spending (C) before it has
an effect on the demand for goods and services (Z).
The correct option is 2. All the chains of events, except c, are correct. For c to be correct it should have been as follows:
T↓ → YD↑ → C↑ → Z↑ → Y↑
Because a change in taxes first operates through disposable income (YD) and then on consumption spending (C) before it has
an effect on the demand for goods and services (Z).
Questions 10 to 20 are based on the following approximate figures for South Africa in 2014
Investment expenditure = R408 000 million
Government expenditure = R424 000 million
Real GDP = R1 993 000 million
Estimated population = 50 million
Labour force = 20 million
Unemployment rate = 25%
Budget deficit = R179 000 million
Government debt = R1 137 000 million
Marginal propensity to consume = 0.33
Multiplier = 1.5
10. Given the structural constraints of the South African economy the South African Reserve Bank and the World
Bank estimated that the potential growth rate for South Africa is 3.5%. Given a real GDP for South Africa of R1 993 000
million in 2014 by how much should real GDP have to increase to achieve an economic growth rate of 3.5%?
1. R64 225 000 million.
2. R69 755 million.
3. R1 993 000 million.
4. R524 285 million
5. R64 225 million.
The correct option is 2. Given the current level of output and income as measured by the real GDP of R1 993 000 million a
3.5% economic growth rate implies the real GDP must increase by 3.5%. By how much real GDP should increase is calculated
as follows: 3.5/100 x R1 993 000 million = R69 755 million.
11. Assuming a multiplier of 1.5 by how much should autonomous spending in the South African economy increase to achieve a
growth rate of 3.5%?
1. R64 225 million.
2. R69 755 million.
3. R46 503 million.
4. R42 817 million.
5. R1 993 000 million.
The correct option is 3. A multiplier of 1.5 indicates that for every R1 increase in autonomous spending the level of output and
income increases with R1.50.
If the increases needed in output and income is R69 755 million then the increase in autonomous spending must be R69 755
million/1.5 = R46 503 million.
12. If this growth rate of 3.5% is to be achieved through an increase in government spending by how much should government
spending increase?
1. R64 225 million.
2. R69 755 million.
3. R46 503 million.
4. R42 817 million.
5. R1 993 000 million.
The correct option is 3. Remember that government spending is one of the autonomous spending components. The increase
in government spending should be equal to the increase in the needed autonomous spending of R46 503 million.
Page 4 of 76
a. In this module we only study the demand side of the economy which includes the goods market and the financial
market. The labour market forms part of supply side analysis and is therefore excluded from this module.
b. The two most important accounts of the balance of payments are the current account and the financial account.
c. If total output increases with 3% during a specific year and the general price level increases with 5% the real GDP
will decrease and the nominal GDP will increase.
d. Fiscal policy deals with government spending and taxes while monetary policy deals with money supply.
1. a, b, c and d
2. Only a, b and d
3. Only b, c and d
4. Only b and d
5. None of the options 1 to 4
The correct option is 3. Statement a is incorrect. In this module we study both the demand and supply side of the macro
economy. Statement b is correct. Statement c is correct. If the rise in the general price level is more that the rise in nominal
production (or output) then the real production (GDP) declines while the nominal production (GDP) increases. Statement d is
correct.
2. Consider the consumption functions of country A and country B.
Country A: C = 1 500 + 0.6YD
Country B: C = 1 000 + 0.9YD
Which of the following statements are correct?
a. In country A autonomous consumption is higher than in country B.
b. In country B induced consumption is definitely higher than in country A.
c. In country B total consumption is definitely higher than in country A.
d. In country A 60 cents out of each rand is spent by the consumers while in country B 90 cents out of each rand is
spent.
1. a, b and d
2. Only a and b
3. a and c
4. Only a and d
5. b, c and d
QUESTIONS 2 TO 20 ARE BASED ON LEARNLING UNIT 2 OF THE STUDY GUIDE
The correct option is 4. Statement a is correct. In country A autonomous consumption is 1 500 while in country B it is 1 000. It
is therefore higher in country A. Statement b is incorrect. Induced consumption is that part of consumption that depends on
income. To know what the induced consumption is we need not only to know what the marginal propensity to consume is but
also what the disposable income is. We can therefore not conclude that it is definitely higher in country B. Statement c is
incorrect. What total consumption is will depend on what the level of disposable income is. Since we do not know what the
level of disposable income is, we do not know what the total consumption is. Statement d is correct since c = 0.6.
3. Which of the following events chain(s) is/are correct regarding the goods market model?
a. Y↑ → G↑
b. Y↑ → I↑
c. Y↓ → T↓
d. Y↓ → C↓
1. Only a
2. Only b
3. Only c
4. Only d
5. b and d
Page 1 of 76
, The correct option is 4. All the chain of events are incorrect except d.
For a to be correct in the goods market model it should have been as follows: G↑ → Z↑ → Y↑
For b to be correct in the goods market model it should have been as follows: I↑ → Z↑ → Y↑
Investment is exogenous (autonomous) in the goods market model, it only has an endogenous part (the part that increases if
Y increases) in the IS-LM model.
For c to be correct in the goods market model it should have been as follows: T↓ → YD↑ → C↑
4. In the goods market model a decrease in taxes will result in …
a. an increase in autonomous consumption.
b. an increase in disposable income.
c. an increase in income.
d. an increase in induced consumption.
1. a, b and c
2. a, b and d
3. b, c and d
4. a, c and d
5. None of the options 1 to 4
The correct option is 3. A decrease in taxes increases disposable income and consequently induced consumption spending
increases. As consumption spending increases producers increase production and consequently income increases. The
multiplier effect is in operation. Therefore statements b, c and d are correct. Statement a is incorrect. A decrease in taxes does
not impact on autonomous consumption.
5. Goods market equilibrium exists …
a. in a situation that will maintain if existing forces do not change.
b. only in a situation where the level of output and income is equal to the supply of goods.
c. in a situation where the money supply equals the demand for liquid balances.
d. where quantity demanded is equal to quantity supplied.
1. a and c
2. Only a
3. Only b
4. Only c
5. Only d
The correct option is 3. A decrease in taxes increases disposable income and consequently induced consumption spending
increases. As consumption spending increases producers increase production and consequently income increases. The
multiplier effect is in operation. Therefore statements b, c and d are correct. Statement a is incorrect. A decrease in taxes does
not impact on autonomous consumption.
6. Which of the following statements is/are correct regarding the goods market model?
a. An increase in autonomous consumption of 200 will cause an increase in output and income of 200.
b. An increase in investment of 500 will cause an increase in output and income of more than 500.
c. An increase in government spending of 800 will cause an increase in output and income of more than 800.
1. a, b and c
2. Only a and b
3. Only a and c
4. Only b and c
5. None of the options 1 to 4
The correct option is 4. Because of the multiplier effect an increase in autonomous spending (autonomous consumption or
autonomous investment or autonomous government spending) will cause an increase in output and income of more than the
initial increase in autonomous spending. Therefore statement a is incorrect and statements b and c are correct.
7. Assuming a multiplier of 20, which of the following statements is/are correct?
a. An increase in government spending of R10 million and an increase in taxation of R10 million will increase output
and income with R10 million and will result in an increase in the budget deficit of R9 million.
b. An increase in government spending of R20 million and an increase in taxation of R20 million will increase output
and income with R20 million and will result in an increase in the budget deficit of R9 million.
c. An increase in government spending of R9 million and an increase in taxation of R9 million will increase output and
income with R9 million and will not change the budget deficit.
Page 2 of 76
, 1. a, b and c
2. Only a and b
3. Only b and c
4. Only c
5. None of the options 1 to 4
The correct option is 4. Only statement c is correct. Statement a is incorrect. Remember that a budget deficit refers to a
situation where government spending is more than government income (taxes) or G > T.
An increase of R10 million in government spending increases output by R10 million x multiplier = R10 million x 20 = R200
million.
An increase in taxes of R10 million decreases output by 0.95(R10 million) x multiplier = 0.95(R10 million) x 20 = R190 million.
The total increase in income is therefore R200 million – R190 million = R10 million. The budget deficit remains unchanged:
+R10 million – R10 million = 0.
Statement b is incorrect. An increase of R20 million in government spending increases output by R20 million x 20 = R400
million.
An increase in taxes of R20 million decreases output by 0.95(R20 million) x 20 = R380 million.
The total increase in income is therefore R400 million – R380 million = R20 million.
The change in the budget deficit is: + R20 million – R20 million = 0. The budget deficit is unchanged.
Statement c is correct. An increase of R9 million in government spending increases output by R9 million x 20 = R180 million.
An increase in taxes of R9 million decreases output by 0.95(R9 million) x 20 = R171 million. The total increase in income
is therefore R180 million – R171 million = R9 million.
But there is an easier way to calculate this because we are dealing with a balanced budget because G increases by R9
million and taxes increase by R9 million. The balanced budget is equal to one, therefore the increase in total output and
income is equal to R9 million x 1 = R9 million. The budget deficit is: + R9 million – R9 million = 0.
8. Which of the following statements is/are correct?
a. An increase in the marginal propensity to consume will cause an increase in the multiplier.
b. An increase in the marginal propensity to consume will cause an increase in aggregate demand.
c. An increase in the marginal propensity to consume will cause an increase in output and income.
d. If the tax revenue of government is larger than government spending, a budget deficit exists.
1. a, b and c
2. a, b and d
3. b, c and d
4. a, c and d
5. None of the options 1 to 4
The correct option is 1. Statement a is correct. The formula for the multiplier is 1/1-c. If the marginal propensity to consume is
for example 0.5, the multiplier will be 2. If the marginal propensity to consume increases for example to a value of 0.8, the
multiplier will be 5. Statement b is correct. An increase in the marginal propensity to consume will cause an increase in
consumption spending and since consumption spending (C) is a component of the demand for goods and services (Z), it will
increase aggregate demand. Statement c is correct. An increase in the marginal propensity to consume will cause an increase
in the multiplier as explained above. An increase in the multiplier will cause an increase in the level of output and income. Say
for instance that autonomous spending equals R500 million and the multiplier is 2 (when c = 0.5). Thus Y = 2 x 500 = 1 000.
Now, if the value of the marginal propensity to consume increases to 0.8, the multiplier increases to 5 and Y = 5 x 500 = 2 500.
Statement d is incorrect. If the tax revenue of government is larger than government spending
(T > G), then a budget surplus exists (and not a budget deficit).
9. Which of the following chain of events’ are correct in terms of the goods market model?
a. G↑ → Z↑ → Y↑ → YD↑ → C↑
b. I↑ → Z↑ → Y↑ → YD↑ → C↑
c. T↓ → Z↑ → Y↑ → YD↑ → C↑
d. c0↑ → Z↑ → Y↑ → YD↑ → C↑
1. Only a, b and c
2. Only a, b and d
3. Only b, c and d
4. Only a, c and d
5. a, b, c and d
Page 3 of 76
, The correct option is 2. All the chains of events, except c, are correct. For c to be correct it should have been as follows:
T↓ → YD↑ → C↑ → Z↑ → Y↑
Because a change in taxes first operates through disposable income (YD) and then on consumption spending (C) before it has
an effect on the demand for goods and services (Z).
The correct option is 2. All the chains of events, except c, are correct. For c to be correct it should have been as follows:
T↓ → YD↑ → C↑ → Z↑ → Y↑
Because a change in taxes first operates through disposable income (YD) and then on consumption spending (C) before it has
an effect on the demand for goods and services (Z).
Questions 10 to 20 are based on the following approximate figures for South Africa in 2014
Investment expenditure = R408 000 million
Government expenditure = R424 000 million
Real GDP = R1 993 000 million
Estimated population = 50 million
Labour force = 20 million
Unemployment rate = 25%
Budget deficit = R179 000 million
Government debt = R1 137 000 million
Marginal propensity to consume = 0.33
Multiplier = 1.5
10. Given the structural constraints of the South African economy the South African Reserve Bank and the World
Bank estimated that the potential growth rate for South Africa is 3.5%. Given a real GDP for South Africa of R1 993 000
million in 2014 by how much should real GDP have to increase to achieve an economic growth rate of 3.5%?
1. R64 225 000 million.
2. R69 755 million.
3. R1 993 000 million.
4. R524 285 million
5. R64 225 million.
The correct option is 2. Given the current level of output and income as measured by the real GDP of R1 993 000 million a
3.5% economic growth rate implies the real GDP must increase by 3.5%. By how much real GDP should increase is calculated
as follows: 3.5/100 x R1 993 000 million = R69 755 million.
11. Assuming a multiplier of 1.5 by how much should autonomous spending in the South African economy increase to achieve a
growth rate of 3.5%?
1. R64 225 million.
2. R69 755 million.
3. R46 503 million.
4. R42 817 million.
5. R1 993 000 million.
The correct option is 3. A multiplier of 1.5 indicates that for every R1 increase in autonomous spending the level of output and
income increases with R1.50.
If the increases needed in output and income is R69 755 million then the increase in autonomous spending must be R69 755
million/1.5 = R46 503 million.
12. If this growth rate of 3.5% is to be achieved through an increase in government spending by how much should government
spending increase?
1. R64 225 million.
2. R69 755 million.
3. R46 503 million.
4. R42 817 million.
5. R1 993 000 million.
The correct option is 3. Remember that government spending is one of the autonomous spending components. The increase
in government spending should be equal to the increase in the needed autonomous spending of R46 503 million.
Page 4 of 76
