Tutorial Letter: Macroeconomics (MAC) / Economics 1 (ECO101) - imm
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Tutorial Letter: Macroeconomics (MAC) / Economics 1 (ECO101) Semester One 2012 Comments on the October 2011 examination session
General: The October 2011 examination paper tested the students’ insight into macroeconomics, including the ability to draw and interpret graphs/diagrams and not just their knowledge of the theory. Students, in general, did not answer the questions as instructed even though the questions were divided into subsections. The majority of students provided fair answers on the theoretical questions, but most students had difficulty answering the questions based on graphs/diagrams. The graphs/diagrams were incomplete and/or incorrect graphs/diagrams were drawn. Discussions on the graphs/diagrams also lacked depth and detail. QUESTION 1 1.1
Most students could draw a diagram of the circular flow of goods and services similar to Figure 3-2 on p. 47 of Mohr et al. (2007). Marks were awarded for the correct diagram indicating Firms (1), Households (1), Goods Market (1), Factor Market (1), Factors of Production (2) and Goods and Services (2). (Some students incorrectly drew the circular flow of income and spending as indicated by Figure 3.3 on p. 47 of Mohr et al. (2007)). However, students did not explain this flow and should have indicated the following: Households sell factors of production in the factor market to firms (1). Firms transform these into goods and services which are then sold to the households in the goods market (1).
1.2
This very basic question was answered poorly. Unfortunately a wrong answer in 1.2 had a negative effect on the answer of 1.3. The correct answer: Gold and foreign reserves (2) and the answer can be found on p. 387 of Mohr et al. (2007).
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
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1.3
The answer had to include the following (p. 387 of Mohr et al. (2007)): a) Reflects the overall balance of payments
(2)
b) It is required to ensure a smooth flow of international trade and finance
(2)
c) To prevent large fluctuations in exchange rates between the domestic and foreign currencies (2) d) It is an indicator of the authority’s scope to stimulate the economy
(2)
QUESTION 2 It seemed that students were familiar with this question, namely the Keynesian Model and the answers included the following: 2.1
p. 408 of Mohr et al. (2007) (2 marks): The idea is that the level of economic activity is determined by aggregate spending or demand.
2.2
p. 412 of Mohr et al. (2007) (1 mark for each of the 6 factors that affect consumption):
2.3
Households’ expectations Consumers’ wealth Income distribution Age distribution of the population Level of taxation Interest rates.
p. 408 of Mohr et al. (2007) (2 marks): The values are determined outside the model.
2.4
p. 409, Box 18-2 of Mohr et al. (2007) (2 marks for each of the 5 assumptions):
Economy consists of households and firms only There is no government There is no foreign sector Prices are given Money supply and interest rates are given.
QUESTION 3 This theoretical question attracted more quality answers than the other more practical questions. Some students however got confused with GDP and GDE. The answer had to include the following:
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
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3.1
3.2
Gross Domestic Product (GDP) a) It is the total value of goods produced within the borders of the country
(1)
b) Three ways to calculate: production, income and expenditure approach
(1)
c) = C + I + G + (X – Z)
(2)
d) Excludes imports
(2)
Gross Domestic Expenditure (GDE) a) Is always equal to GDP at market prices
(1)
b) Is the total value of spending on goods and services produced in the country
(1)
c) = C + I + G
(2)
d) Excludes exports
(1)
(pp. 65-66 of Mohr et al. (2007) 3.3
Monetary policy can be defined as the measures taken by the monetary authorities to influence the quantity of money or the interest rate with a view to achieving stable prices, full employment and economic growth (p. 329 of Mohr et al. (2007) for 2 marks).
3.4
p. 332 of Mohr et al. (2007): a) Accommodation policy
(2)
b) Open-market policy
(2)
c) Public debt management
(2)
d) Intervention in foreign exchange markets
(2)
QUESTION 4 Some students got confused with the different tax types in Questions 4.1 – 4.6. A good answer would include the following (2 marks each): 4.1
General tax: VAT is a general tax as it is payable on the majority of goods and services.
4.2
Selective tax: Tax payable on specific goods such as tobacco products.
4.3
Tax is proportional when the ratio between tax payable and taxable income is the same for all levels of income.
4.4
Tax is progressive when the tax payable increases as income increases. Personal tax in South Africa is progressive.
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
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4.5
Tax is regressive when the ratio between tax paid and income declines as taxable income increases or vise versa.
4.6
VAT is a general tax as it is payable on the majority of goods and services.
4.7
(a)
The consumption of wine in the country should decline.
(2)
(b)
Consumers of wine – they are paying more for the wine Suppliers – they are receiving less for the wine Employees of wine companies – fewer jobs available
(2) (2) (2)
(Refer to p. 359 of Mohr et al. (2007)) QUESTION 5 The instructions to the question were to draw a graph showing the original equilibrium position, and then on the same graph, show the effect of the decrease in the supply of eurodollars. Students then had to give a brief explanation of the effect on the graph. The answer had to include the following: 5.1 The correct figure. 5 marks were awarded for the correct graph, labelling of the axis, the indication of E, the S curve, as well as the D curve. 5.2
5 marks were awarded for the movement of the SS curve to the left (S1), the movement from E to E1, as well as an indication of the increase in price and decrease in quantity.
5.3
Explanation (10 marks) Original supply and demand is in equilibrium (E) €11 and 14 billion. Supply of dollars shifts to the left t S1S1 Equilibrium price goes up Equilibrium quantity falls New equilibrium at E1. (Figure 17-4 on p. 392 of Mohr et al. (2007))
QUESTION 6 6.1
Question 6.1 required students to draw a Philips curve which shows the relationship between inflation and unemployment (for 8 marks) similar to Figure 22-2 on p. 504 of Mohr et al. (2007). Marks were awarded for the correct graph, labelling of the axis, as well as indicating points A, B and C.
6.2
Definition of stagflation for 2 marks: Stagflation is when inflation and unemployment increase at the same time (p. 504 of Mohr et al. (2007)).
6.3
Question 6.3 required students to indicate the impact of ‘stagflation’ on the Philips curve (for 8 marks) similar to Figure 22-3 on p. 504 of Mohr et al. (2007). Marks were awarded for the correct graph, lines PP and PP1, points A and B, movement from A – B, 4 – 7 as well as 5 – 8.
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
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6.4
Give two (2) other factors which would cause the Philips curve to move in the same direction as the movement caused by ‘stagflation’. Any 2 of the following:
Prices of the factors of production increase Prices of imported capital and intermediate goods increase Productivity decreases Weather conditions deteriorate.
(p. 504 and 456 of Mohr et al. (2007)) Conclusion Students often try to memorise the graphs/concepts of macroeconomics. However, students should
study macroeconomics systematically as themes follow in a logical order, building on one another.
be able to explain and discuss the different economic concepts.
be able to draw and explain a variety of diagrams and graphs.
When writing the examination, students must ensure that they read the questions in detail and answer the questions as per the instructions.
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
Tutorial Letter: Macroeconomics (MAC) / Economics 1 (ECO101) Semester One 2012 Comments on the October 2011 examination session
General: The October 2011 examination paper tested the students’ insight into macroeconomics, including the ability to draw and interpret graphs/diagrams and not just their knowledge of the theory. Students, in general, did not answer the questions as instructed even though the questions were divided into subsections. The majority of students provided fair answers on the theoretical questions, but most students had difficulty answering the questions based on graphs/diagrams. The graphs/diagrams were incomplete and/or incorrect graphs/diagrams were drawn. Discussions on the graphs/diagrams also lacked depth and detail. QUESTION 1 1.1
Most students could draw a diagram of the circular flow of goods and services similar to Figure 3-2 on p. 47 of Mohr et al. (2007). Marks were awarded for the correct diagram indicating Firms (1), Households (1), Goods Market (1), Factor Market (1), Factors of Production (2) and Goods and Services (2). (Some students incorrectly drew the circular flow of income and spending as indicated by Figure 3.3 on p. 47 of Mohr et al. (2007)). However, students did not explain this flow and should have indicated the following: Households sell factors of production in the factor market to firms (1). Firms transform these into goods and services which are then sold to the households in the goods market (1).
1.2
This very basic question was answered poorly. Unfortunately a wrong answer in 1.2 had a negative effect on the answer of 1.3. The correct answer: Gold and foreign reserves (2) and the answer can be found on p. 387 of Mohr et al. (2007).
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
Page 2 of 5
1.3
The answer had to include the following (p. 387 of Mohr et al. (2007)): a) Reflects the overall balance of payments
(2)
b) It is required to ensure a smooth flow of international trade and finance
(2)
c) To prevent large fluctuations in exchange rates between the domestic and foreign currencies (2) d) It is an indicator of the authority’s scope to stimulate the economy
(2)
QUESTION 2 It seemed that students were familiar with this question, namely the Keynesian Model and the answers included the following: 2.1
p. 408 of Mohr et al. (2007) (2 marks): The idea is that the level of economic activity is determined by aggregate spending or demand.
2.2
p. 412 of Mohr et al. (2007) (1 mark for each of the 6 factors that affect consumption):
2.3
Households’ expectations Consumers’ wealth Income distribution Age distribution of the population Level of taxation Interest rates.
p. 408 of Mohr et al. (2007) (2 marks): The values are determined outside the model.
2.4
p. 409, Box 18-2 of Mohr et al. (2007) (2 marks for each of the 5 assumptions):
Economy consists of households and firms only There is no government There is no foreign sector Prices are given Money supply and interest rates are given.
QUESTION 3 This theoretical question attracted more quality answers than the other more practical questions. Some students however got confused with GDP and GDE. The answer had to include the following:
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
Page 3 of 5
3.1
3.2
Gross Domestic Product (GDP) a) It is the total value of goods produced within the borders of the country
(1)
b) Three ways to calculate: production, income and expenditure approach
(1)
c) = C + I + G + (X – Z)
(2)
d) Excludes imports
(2)
Gross Domestic Expenditure (GDE) a) Is always equal to GDP at market prices
(1)
b) Is the total value of spending on goods and services produced in the country
(1)
c) = C + I + G
(2)
d) Excludes exports
(1)
(pp. 65-66 of Mohr et al. (2007) 3.3
Monetary policy can be defined as the measures taken by the monetary authorities to influence the quantity of money or the interest rate with a view to achieving stable prices, full employment and economic growth (p. 329 of Mohr et al. (2007) for 2 marks).
3.4
p. 332 of Mohr et al. (2007): a) Accommodation policy
(2)
b) Open-market policy
(2)
c) Public debt management
(2)
d) Intervention in foreign exchange markets
(2)
QUESTION 4 Some students got confused with the different tax types in Questions 4.1 – 4.6. A good answer would include the following (2 marks each): 4.1
General tax: VAT is a general tax as it is payable on the majority of goods and services.
4.2
Selective tax: Tax payable on specific goods such as tobacco products.
4.3
Tax is proportional when the ratio between tax payable and taxable income is the same for all levels of income.
4.4
Tax is progressive when the tax payable increases as income increases. Personal tax in South Africa is progressive.
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
Page 4 of 5
4.5
Tax is regressive when the ratio between tax paid and income declines as taxable income increases or vise versa.
4.6
VAT is a general tax as it is payable on the majority of goods and services.
4.7
(a)
The consumption of wine in the country should decline.
(2)
(b)
Consumers of wine – they are paying more for the wine Suppliers – they are receiving less for the wine Employees of wine companies – fewer jobs available
(2) (2) (2)
(Refer to p. 359 of Mohr et al. (2007)) QUESTION 5 The instructions to the question were to draw a graph showing the original equilibrium position, and then on the same graph, show the effect of the decrease in the supply of eurodollars. Students then had to give a brief explanation of the effect on the graph. The answer had to include the following: 5.1 The correct figure. 5 marks were awarded for the correct graph, labelling of the axis, the indication of E, the S curve, as well as the D curve. 5.2
5 marks were awarded for the movement of the SS curve to the left (S1), the movement from E to E1, as well as an indication of the increase in price and decrease in quantity.
5.3
Explanation (10 marks) Original supply and demand is in equilibrium (E) €11 and 14 billion. Supply of dollars shifts to the left t S1S1 Equilibrium price goes up Equilibrium quantity falls New equilibrium at E1. (Figure 17-4 on p. 392 of Mohr et al. (2007))
QUESTION 6 6.1
Question 6.1 required students to draw a Philips curve which shows the relationship between inflation and unemployment (for 8 marks) similar to Figure 22-2 on p. 504 of Mohr et al. (2007). Marks were awarded for the correct graph, labelling of the axis, as well as indicating points A, B and C.
6.2
Definition of stagflation for 2 marks: Stagflation is when inflation and unemployment increase at the same time (p. 504 of Mohr et al. (2007)).
6.3
Question 6.3 required students to indicate the impact of ‘stagflation’ on the Philips curve (for 8 marks) similar to Figure 22-3 on p. 504 of Mohr et al. (2007). Marks were awarded for the correct graph, lines PP and PP1, points A and B, movement from A – B, 4 – 7 as well as 5 – 8.
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
Page 5 of 5
6.4
Give two (2) other factors which would cause the Philips curve to move in the same direction as the movement caused by ‘stagflation’. Any 2 of the following:
Prices of the factors of production increase Prices of imported capital and intermediate goods increase Productivity decreases Weather conditions deteriorate.
(p. 504 and 456 of Mohr et al. (2007)) Conclusion Students often try to memorise the graphs/concepts of macroeconomics. However, students should
study macroeconomics systematically as themes follow in a logical order, building on one another.
be able to explain and discuss the different economic concepts.
be able to draw and explain a variety of diagrams and graphs.
When writing the examination, students must ensure that they read the questions in detail and answer the questions as per the instructions.
_______________________________________________________________________________________________________________ © IMM Graduate School of Marketing October 2011 Examination report MAC/ECO101
