Download ECONOMIC ENVIRO NMENT MAY 2012

ECONOMIC ENVIRONMENT
SOLUTIONS
SECTION A: MULTIPLE CHOICE
Question
Solution
Question
Solution
Question
Solution
1
B
11
B
21
C
2
C
12
C
22
D
3
B
13
D
23
C
4
A
14
B
24
D
5
A
15
A
25
C
6
A
16
C
26
C
7
C
17
D
27
D
8
B
18
C
28
A
9
C
19
C
29
A
10
B
20
A
30
B
SECTION B
Question 1
a) Three ways to fund a current account
i) Borrowing from nationals
ii) Borrowing from International bodies
iii) Aid/donations
Any other points may be considered for 2 Mark each
b) 2 ways in which a current account deficit can be adjusted
i) Reducing spending in relation(C+I +G) relative to income (Y) made
ii) Reducing aggregate demand by reducing C or G or I
c) Effects of declining exports
From the graph below, the initial export earning schedule was at NX0. When there is a
decline in exports the schedule will shift to NX1. The foreign demand for domestic
goods
is thus assumed to have declined. In the absence of any government or any other policy
intervention, the short run reaction would be a decline in output and eventually income.
The IS curve will move to the left as a result of the fall in exports and the resultant
income declining at point E1 lowering imports but not enough to make up for the loss in
export revenue. The net effect will therefore be a trade deficit 6 Marks
d) Devaluation is the loss in value of a currency relative to other currencies in a fixed
exchange rate regime 2 Marks
Question 2
a) Economic Growth is the increase in value of goods and services produced by an
economy. It is generally a factor in an increase in income and it is conventionally
measured as a percentage increase of GDP 2 Marks
b) Disadvantages:
i) Inflation increase if growth is experienced in a short period of time
ii) Environmental degradation due to negative externalities
iii) The gap between the rich and the poor may rise
iv) Sustaining growth is not an easy task for most economies
Each explanation carries 3 Marks and other points may be considered
c) Distinguishing economic growth and Increase in output:
Economic growth can result from either an increase in economic resources or from
efficient use of existing resources whilst increase in output results from utilization (full
utelization0 of economic capacity thus output of one product will be increased if the
output of another is reduced. 6 Marks for any clear explanation.
Question 3
a) Economic Factors
Land- Rent
Labour -Wages
Capital- Profit
b) Free market and Command Economy: Any 4 points may be considered for 1 mark
each
c) (i) Specialisation is the act of dividing labour in a way whereby workers concentrate
on
performing a few tasks and then exchange their production for other goods and services
2 Marks
(ii) Advantages:
. Specialist workers become quicker at producing goods
. Production becomes cheaper per good
. Production levels are increased
. Each worker can concentrate on what they are good at and build up their
expertise
. Higher pay for specialised work
. Improved skills at that job.
Disadvantages:
. Greater cost of training
. Boredom to the trained employees due to lack of variety
Any other points may be considered and each point carries 2 marks.
Question 4
a) 3 Major Macro economic objectives
. To get full employment or low unemployment
. To have stable prices
. To achieve a high and sustainable economic growth
. To have balance of payments in equilibrium
Any 3, each explanation for 2 Marks
b) Philip’s curve:
The graph shows that there is an “inverse relationship” between inflation and
unemployment. When unemployment levels are high, inflation is therefore low and
vice versa. It is not possible to have a zero unemployment situation. Therefore, the
higher the existing level of capacity utilization, the greater will be the rate of increase
in prices for a given increase in capacity. 6 Marks
c) Advise against inflation
Monetary policies like: Controlling interest rates, credit control, demonetizations of
currency of higher denomination
Fiscal policies like: Reducing unnecessary expenditure, raising taxes, encouraging
consumer saving
Any other points may be considered and each point carries 2 marks