Download SUGGESTED ANSWE RS NOV 2012 PAP ER INTRODUCTION TO

INTRODUCTION TO ECONOMICS S
SUGGESTED ANSWERS FOR NOV 2012
Q1 (a)
Q2 (b)
Q3 (d)
Q4 (c)
Q5 (a)
Q6 (c)
Q7 (b)
Q8 (a)
Q9 (d)
Q10 (b)
Q11 (a)
Q12 (d)
Q13 (c)
Q14 (b)
Q15 (b)
Q16 (a)
Q17 (a)
Q18 (b)
Q19 (d)
Q20 (b)
31. (a) (i) a PPF demonstrates efficiency. It describes efficient combinations of
outputs that are possible given the economy’s resources and technology (ii) a PPF
demonstrates the concept of scarcity. Given the stock of resources and technology,
the economy can only produce a limited amount of output (iii) a PPF demonstrates
the concept of opportunity cost. As the economy produces more of one good, it must
produce less of the other. The bowed-out shape of the PPF reflects the law of
increasing opportunity costs – it arises because not all resources are perfectly
adaptable to the production of each good. NOTE: Other factors can be stated eg. The
concept of choice
(b) Points inside the PPF are considered in efficient because they represent large scale
unemployment of resources i.e. underutilization of resources, because it is possible to
for the economy to produce more of both goods using the same amount of resources.
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(c) Diagram to be done manually, but a student should be able to state/explain the
following: (1) label the key players in the flow of income diagram (households, firms,
govt and producers); (2) state the injections and withdrawals
32. (a) An Indifference curve is a curve that shows points/set of consumption bundles
of commodities among which the individual in indifferent or for which the level of
satisfaction is the same.
(b) Indifference curves cannot intersect because if that was the case, it would have
been possible for to have points below and above the indifference curve as deriving
the same utility. This would be irrational, since individuals, by nature prefer higher
utility than lower
(c) (i) Purchasing economies – where the firm benefits from bulk buying of materials
through long term contracts; (ii) Managerial economies – where the firm benefits
from specialization; (iii) financial economies – where the firm benefits from
obtaining lower cost of borrowing and have access to greater range of financial
instruments; (iv) Marketing economies – where a firm benefits from spreading the
cost of advertising over a greater range of output in media markets
33 (a) Fiat money is money that enjoys legal tender status derived from a declaratory
fiat or an authoritative order of government.
(b) (i) Money must be divisible into smaller units without destroying its value; (ii) It
should be fungible i.e. one unit or piece must be exactly equal to another; and (iii) It
must be of a specific weight, or measure or size to be verifiably countable
(c) (i) Real GDP: An increase in real GDP increases income throughout the economy.
The demand for money in the economy is therefore likely to greater when real GDP is
higher; (ii) Price level: The higher the price, the more money is required to purchase a
quantity of goods and services, hence the higher the demand for money; and (iii)
Expectations: If people expect bond prices to fall, they will increase their demand for
money. Expectations that bond prices are about to change, actually causes bond prices
to change. Expectations about future prices also affect demand for money.
Expectation of higher prices means that people expect the money they are holding to
fall in value – they are thus likely to hold less in anticipation of a jump in prices
34 (a) Hyperinflation- is when the value of money becomes worthless and people lose
all the confidence in money, both, as a store of value and medium of exchange. It is
an inflation that is out of control, in which prices increase rapidly as currency loses its
value. A good example is the Zimbabwe case in 2007-2008.
(b) Trade barriers refer to any government policy or regulation that restricts
international trade. The barriers can take several forms such as: tarrifs, import quotas,
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embargoes, etc. All trade barriers work on the same principle- imposition of some
sort of cost on trade that raises the price of the traded products
(c) Expansionary fiscal policy: refers to an increase in govt purchases of goods and
services; a decrease in net taxes or some combination of the two for purposes of
increasing aggregate demand and expanding real output. Expansionary fiscal is often
used to stimulate the economy from a recession
(d) Fractional reserve system: A system of banking in which banks hold reserves
whose value is less than the sum of those of those reserves. Banks take deposits in the
form of money, but they do not let all of the deposited money just sit in their vaults.
They keep just a fraction of their deposits as reserve. Fractional reserve banking is not
only a technique to increase bank lending, but also critical to the creation of money
within the banking system.
QUESTION TAKEN FORM MAY 2010 PAPER
QUESTION 35
8.0 (a) A general increase in price level. 2 Marks
(b) Demand pull inflation occurs when demand for goods and services exceed supply.
This happens when there has been excessive growth in aggregate demand.
Cost push inflation occurs when firms increase prices to maintain or protect margins
after experiencing a rise in their costs of production. Source is increase in cost of
production. 8 Marks
(c) See ink graph: Higher levels of unemployment are associated with high inflation
and vice versa. Graph to be drawn in ink. 10 marks
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