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```SECONDARY SCHOOL IMPROVEMENT PROGRAMME
(SSIP) 2021
SUBJECT:
ECONOMICS SATURDAY CLASSES
TERM 1
LEARNER SOLUTIONS
(Page 1 of 153)
1
SESSION
TOPIC
1
Macroeconomics: The Circular Flow
PAGE
3 - 43
2
44 - 65
3
66 - 109
4
Macroeconomics: The Public Sector
110 - 153
2
TOPIC 1:
MACROECONOMICS: THE CIRCULAR FLOW
SECTION A: TYPICAL EXAM QUESTIONS
THE CIRCULAR FLOW
QUESTION 1:
Section A – Short Questions
(Taken from various sources)
HINT: When answering Section A – short question, it is important not to rush
but to read the questions carefully and to make sure you understand what the
question is asking. Always remember one alternative is completely wrong, one
is nearly correct and one is totally correct. It is easy to eliminate the completely
wrong answer, but if you do not read the question carefully the nearly correct
answer will also appear correct. The answer will NEVER be two options. Only
ONE option is correct. Your answer will immediately be marked incorrect if you
write TWO options.
1.1
Various options are provided as possible answers to the following questions.
Choose the answer and write only the letter (A–D) next to the question
number.
goods markets from firms to households 
taxes are leakages from the circular flow.
its disposable income
autonomous spending 
goods market and factor market.
withdrawals government spending by providing it to firms and withdraws
taxes from households 
1.1.8 B
withdrawals taxes from firms and households 
1.1.9 D. income, expenditure and production methods.
1.1.10 D. R1200.
1.1.11 C. A change in equilibrium production or income resulting from a change in
spending. 
1.1.12 . D. 0.70.
1.1.13. C. 1/1-0.7. 
1.1.14. D. less foreign exchange flowing out of the country.
1.1.15 B. income.
1.1.16 B. injections.
1.1.17 B. money.
1.1.18 C. foreign exchange market. 
1.1.19 D. circular flow. 
1.1.20 D. 0.4.
1.1.21 C. remains constant unless saving also changes.
1.1.22 A. households will save R70 if their disposable income is zero and will
consume 0.65 of any increase in disposable income they receive.
1.1.23 B. households, firms, government and foreign sector.
1.1.1
1.1.2
1.1.3
1.1.4
1.1.5
1.1.7
1.1.7
D.
D.
A.
D.
D.
B.
D.
3
1.1.24
1.1.25
A. factor market.
A. Expenditure method. 
(25 x 2)
1.2
Choose a description from COLUMN B that matches the item in COLUMN A.
Write only the letter (A-I) next to the question number (1.2.1 – 1.2.8) in the
1.2(A)
1.2.1 (E)
1.2.2 (D)
1.2.3
1.2.4
1.2.5
1.2.6
1.2.7
1.2.8
(C)
(B)
(F)
(H)
(G)
(I)
The flow of goods and services 
The ratio between the eventual change in income and the initial
investment
The portion of an increase in income that is not consumed. 
The flow of money
Savings 
Economic growth 
Inputs into the production of goods and Services 
Where labour, entrepreneurship, land and capital are traded 
(8 x 1)
1.2 (B)
1.2.1 (I)
1.2.2 (H)
1.2.3 (G)
1.2.4 (F)
1.2.5 (E)
1.2.6 (D)
1.2.7 (C)
1.2.8 (B)
1.3
Government spending 
The portion of an increase in income that is consumed. 
A simplified representation of reality 
Pensions added to the national income figures 
The value of goods and services produced within the borders of a
country in a given year 
An economy that is open to foreign trade 
Forms part of open economic circular flow 
Flows from and to the foreign sector 



(8 x 1)
Provide the economic term/concept for each of the following descriptions. Write only the term/concept next to the question number.
NO ABBREVIATIONS WILL BE ACCEPTED.
1.3.1
Open economy 
1.3.2
Circular flow model
1.3.3
Closed economy
1.3.4
Investment 
1.3.5
Income 
1.3.6
Imports 
1.3.7
Real flow
1.3.8
Exports 
4
1.3.9
Money flow 
1.3.10
Tax
1.3.11
Savings 
1.3.12
Consumption spending 
1.3.13
Injection 
1.3.14
Government spending 
1.3.15
Leakage 
1.3.16
Product market 
1.3.17
Gross domestic product
1.3.18
Exchange rate 
1.3.19
Market 
1.3.20
Factor market
1.3.21
Money market
1.3.21
Foreign exchange market
1.3.22
Capital 
1.3.23
Market prices
1.3.24
Final goods and services
1.3.25
Basic prices
1.3.26
Marginal prosperity to consume 
1.3.27
Factor cost
1.3.28
Marginal prosperity to save
1.3.29
Nominal GDP
1.3.30
Autonomous consumption
1.3.31
Domestic production 
1.3.32
Real GDP

5
1.3.33
Net domestic production 
1.3.34
National production 
1.3.35
Multiplier 
1.3.36
Multiplier effect
(36 x 1)
SECTION B
QUESTION 2:
HINT: When the question requires you to “list” or “name”, you need not write a
sentence but merely one or two words. This MUST be done in bullet form. This
types of questions are applicable for 2.1.1, 3.1.1 and 4.1.1
2.1



2.2


2.3.


2.4



2.5



2.6



2.7



2.8


Name TWO major processes in the circular flow model
(2 x 1)
income 
spending
production
Name TWO types of income earned labour as a production factor
Rent 
Wages
Name TWO basic sets of markets in the economy
Factor market
Product market
List Any TWO injections from the basic circular flow of income and spending
Government spending
Investment 
Exports 
List any TWO leakages from the basic circular flow of income and spending
Savings 
Imports 
Taxation 
List any TWO components of the total spending on goods and services
produced in a domestic economy
Investment
Exports
Government spending
Name TWO leakages found in the multiplier four sector model
Marginal propensity to save
Marginal rate of taxation
Marginal propensity to import
Name TWO institutions found in the financial market
South African Reserve Bank
Johannesburg Securities Exchange 
6
2.9
List ANY two sub-markets within the factor market
Land market 
Labour market
Money market
Financial market
Name any TWO items that are considered when calculating GDP at market




2.10
prices
 Plus taxes on products
 Minus subsidies on products
2.11 Name any TWO items that are considered when calculating expenditure on
GDP at market price
 Exports of goods and non factor services
 Imports of goods and non-factor services
2.12 List any TWO basic assumption of the multiplier effect
 The economy starts off with unused resources
 There are unemployed workers
 Firms are producing at some level below their production capacity 
2.13. Name any TWO items that convert Gross Value Added at factor costs to Gross
 Plus taxes on production
 Minus subsidies on production
2.14. List any TWO symbols used in deriving the multiplier
 C
 K
 I
 L
 J
 S

2.15. List any TWO examples of primary sector in the production method
 Agriculture 
 Forestry 
 Mining 
 Quarrying 
QUESTION 3:
HINT: This types of questions are applicable for 2.1.2, 3.1.2 and 4.1.2
3.1
How does proportional income tax affect aggregate spending
(1 x 2)
 An increase in income tax rates will make the aggregate expenditures curve flatter
and reduce the multiplier. A higher income tax rate thus rotates the aggregate expenditures curve downward
3.2. Why exports are classified as part of autonomous spending
 Autonomous expenditures are related to autonomous consumption because they
are necessary to maintain a basic standard of living
3.3
Why is the Johannesburg Securities exchange important for south African
investors
(1 x 2)
7


3.4

3.5


3.6

3.7


3.8

Its main function is to facilitate the raising of primary capital by re-channelling cash
resources into productive economic activity, and building the economy while enhancing job opportunities and wealth creation. 
The JSE also provides an effective price determination facility and price risk management mechanism.
How do bonds impact mortgage rates?
(1 x 2)
Bond prices have an inverse relationship with mortgage interest rates. As bond
prices go up, mortgage interest rates go down and vice versa
What is the role of savings in the financial market?
(1 x 2)
Ideally, people save, deposit their savings in financial institutions, which in turn allocate those savings to productive investments in the economy that fuel overall
growth and development. 
Financial intermediaries are, therefore, the crucial link between savers and investors
Why is Gross national income useful to the economy
(1 x 2)
GNI is the total amount of money earned by a nation's people and businesses. It is
used to measure and track a nation's wealth from year to year.
What is the main purpose of subsidies on production?
A production subsidy encourages suppliers to increase the output of a particular
product by partially offsetting the production costs or losses. 
The objective of production subsidies is to expand production of a particular product more so that the market would promote but without raising the final price to
consumers
Why is the GDP at market prices normally higher than the GDP at factor
cost?
GDP at market prices takes into account the prices you actually pay for buying
goods and services from the market. Indirect taxes include taxes such as excise
duties, sales tax, import duties
Data Response
HINT: All section B questions have TWO data interpretation questions – each
total 10 marks. Section B consist of Questions 2-4 not as numbered in this document
QUESTION 4:
Study the table below and answer the questions that follow
4.1
Give the economic concept illustrated in the table above.
 Multiplier/Multiplier effect
(1)
4.2
Identify the autonomous consumption point from the table
above.
 Point A
(1)
8
4.3
Briefly describe the term injections.
 The introduction of additional money into the economy. 
(2)
(Accept any other relevant and correct response)
4.4
Explain how a decrease in savings patterns by the nation will
affect the marginal propensity to consume (mpc).
 A decrease in the savings patterns by the nation will result in
an increase in the marginal propensity to consume, due to
increased spending pattern. 
4.5
Suppose the other equilibrium income was R300, calculate the
multiplier using the formula ∆Y / ∆ J. Show ALL your calculations. (2x2)
k = ∆Y÷∆J
(2)
(4)
= (900-300) ÷ (900-300) 
= 600 ÷ 600 
=1
QUESTION 5:
Study the graph below and answer the questions that follow.
5.1
Identify the original consumption function on the graph.
 Eo = 20 + 0,5Y 
(1)
5.2
Identify the marginal propensity to consume (mpc) from the
above graph.
 0.5
(1)
5.3
Briefly describe the term induced consumption.
 The level of consumption depends on the consumers’ income/disposable income.
(2)
5.4
How do investors impact on the multiplier?
 The larger the investors’ spending, the larger the multiplier,
and vice versa.
(2)
5.5
Calculate the multiplier for the above scenario. (Show all calculations)
(4)
Multiplier (K) = Δ𝑌/Δ𝐽= 20/10  = 2 
9
QUESTION 6:
Study the table below and answer the questions that follow.
6.1
Which method was used in the calculation of the gross domestic product GDP above
 Production method / Value added / GDP(P)
(1)
6.2
Which year is currently used as the base year by the South African Reserve Bank(SARB)
 2017
(1)
6.3
Calculate Gross Value Added at ‘A’
 3 869 456 
(2)
6.4
Which sector has increased its contribution to the GDP steadily since 2017?
 Tertiary sector 
(2)
6.5
 The contribution of the primary sector declined from
R307 875 m in 2018 to R291 143 m in 2019
(4)
(Accept any other correct relevant motivation)
QUESTION 7
Study the extract below and answer the questions that follow
7.1
Which economic participant is referred to in the extract
 Foreign sector 
(1)
7.2
Name ONE other in the economy
 Government expenditure 
 Investment 
(1)
7.3
Briefly describe the concept injection
 The use of additional money in the economy through investments, government spending and exports. 
(Accept any other correct, relevant answer.)
(2)
7.4
Explain the impact of leakages in the economy
 It has a negative impact, because there is less money for
economic activities and can lead to lower economic growth,
e.g. savings, taxes and imports.
(Accept any other correct, relevant answer.)
(2)
10
7.5
How do injections influence employment in the economy?
 There will be more job opportunities in the tourism sector,
because there is more money to invest. 
 Related industries like taxidermies, hostels, etc. will expand
and create more job opportunities. 
 People in rural areas will have the opportunity to be educated, skilled and employed.  (Any 2 x 2)
(Accept any other correct, relevant answer.)
(4)
QUESTION 8
Study the cartoon below and answer the questions that follow.
8.1
Name the type of economy in the circular flow illustrate above
 Open economy
(1)
8.2
Identify ONE participate in the circular flow which interact with
foreign sector
(1)
8.3
Briefly describe the term leakages
 Any flow of money which does not give rise to a further
round of income from within the economy
(2)
8.4
How does unemployment affect the circular flow model?
 Production will decrease thus lead to less spending and
available of resources in the goods market
 If the economy is having an increase of unemployment it affects the income in the country. 
 If unemployment increases, government can collect taxes
lesser as unemployed cannot pay taxes to the government
(2)
8.5
Explain briefly the significance of circular flow of income.
(2x2)
 Businesses provide individuals with income (in the form of
compensation) in exchange for their labor.
 That income is spent on the goods and services businesses
produce
(4)
11
QUESTION 9
Study the table below and answer the questions that follow
9.1
Which method of calculating the national account is used
above
 Expenditure method
(1)
9.2
Name one item used to convert GDP to GNP
 Plus, primary income to the rest of the world 
 Minus primary income to the rest of the world
(1)
9.3
Briefly describe the term gross fixed capital formation
 is measured by the total value of the gross fixed capital formation, changes in inventories and acquisitions less disposals of valuables for a unit or sector
(2)
9.4
How do imports of goods and services affect the multiplier?
 If the imports of goods and services are relatively small,
then each successive round of the multiplier effect will have
larger amounts of demand, and the multiplier will be
high.
(2)
9.5
Use the table above and calculate the economic growth rate
for 2018.showll all calculations
 A=641 512 D=937 740
(4)
QUESTION 10
MULTIPLIER
Assume an economy is initially in equilibrium where income (Y) equals R100
000m, savings (S) R40 000m and consumption (C) R60 000m.
Source: Enjoy Economics, 2012
10.1

Briefly describe the term macroeconomic multiplier.
(2)
A small increase in spending produces a proportionately larger increase in national income 
10.2 What does the term equilibrium in the extract refer to?
(2)
 Injections = Leakages 
(2)
10.3
Calculate the marginal propensity to consume (mpc).
 mpc = R100 000 – R40 000 = R60 000
60 000 = 0,6 or 0,6 
10.4 Calculate the value of the multiplier. Show ALL calculations.
1
 K=
1−𝑚𝑝𝑐
(2)
(4)
1
= 1−0.6
= 2,5 

12
HINT: All section B questions have TWO 8 marks questions, numbered according to questions not like in this document.
Paragraph type questions – Middle Cognitive
QUESTION 11
11.1
Explain the difference between production and income
(8)




11.2
Production is when business combines factors of production
in planned activity to bring about goods and services that
will satisfy the needs and wants of society. 
Income is the reward that the factors of production receive
for being part of the production process
Taxes is form of income from firms and households to government 
Investments, pensions, and Social Security are primary
sources of income for retirees.
Draw and interpret an open four-sector circular-flow diagram.
(8)
13
11.3
11.4
11.5
Explain how double counting can be avoided when GDP is estimated
 Only count value added in each phase of the production process
 Only add income earned by factors of production
 Only add the value of final goods and services, when
sold to final users (including inventories that was produced
this year and is held to be sold in the future)
Distinguish between measurement at current prices and
measurement at constant prices
 A change in the value of total production at current prices includes both changes in the prices of products and
changes in the quantity that is produced .
 A change in the value of total production at constant
prices is only due to a change in the quantity that is produced
(8)
(8)
Explain the difference between nominal GDP and real GDP
(8)







11.6
Nominal GDP refers to the value of production at current
prices 
It is also known as national product at current prices.
Nominal value of production is calculated by multiplying the
volume of the final goods and services by their prices.
Inflation has not yet been taken into consideration
real GDP refers to the value of production at constant prices

It is also known as national product at constant prices.
The rate of inflation as expressed by the consumer price index (CPI) has been taken into account.
Distinguish the difference between GDP and GNI
(8)





GDP refers to all production inside a country, regardless of
whether the production factors that are used are South African or not .
As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country's
economic health
GDP = Consumption + Investment + Government Spending
+ Net Exports
GNP refer to all income received by South Africans, regardless of where they worked or stay .
GDP – factor payments to foreigners + factor payments to
South Africans = GNI
14
11.7
Discuss gross capital formation
(8)



11.8
Gross capital formation consists of gross fixed capital formation plus changes in inventories.
 Gross fixed capital formation refers to the purchase of
capital goods such as buildings, machinery and equipment.
Changes in inventories refer to the net value of the goods
and services produced during a certain period but not sold
yet ,and goods and services
Explain the difference between money market and capital market
Money market
 Here short-term loans and very short term funds are saved
and borrowed by the consumers and business enterprises.
√√
 Banks, insurance companies are examples. √√
 Bank debentures, treasury bills, government bonds are
(8)
Capital markets
Here long term funds are borrowed and saved by consumers and business enterprises, √√
 e.g. mortgage bonds. √
 The Johannesburg Stock Exchange (JSE) is a key institution
in the capital market, √√
 shares are traded here. √√


11.9
Discuss components of expenditure method
(8)

National income by expenditure method = C+I+G+ (X-M)
where√√
C= Private Consumption expenditure by households √
 “C” (consumption) is normally the largest GDP component in
the economy, consisting of private expenditures (household
final consumption expenditure) in the economy√√.
 Personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. √√
I= Gross Domestic Investment expenditure√
 “I” (investment) includes, for instance, business investment
in equipment, but does not include exchanges of existing assets. √√
 Spending by households (not government) on new houses
is also included in Investment√√
G= Government Final consumption and investment expenditure√
15

“G” ( government spending ) is the sum of government expenditures on final goods and services. √√
 It includes salaries of public servants, purchase of weapons
for the military, and any investment expenditure by a government√√
Exports √
 “X” (exports) represents gross exports. GDP captures the
amount a country produces, including goods and services
produced for other nations’ consumption, therefore exports
Imports √
 “M” (imports) represents gross imports. √√
 Imports are subtracted since imported goods will be included in the terms “G”, “I”, or “C”, and must be deducted to
avoid counting foreign supply as domestic√√
11.10
Explain the interactions between economic participants in a
closed economy.
Households
 There is a flow of money and goods and services between
the household sector and business sector. 
 Households are the owners of the services of factors of production and they place their factors of production on the
market so that it can be bought. 
 Households earn income in the form of wages by selling
their factors of production to business.
(8)
 Business uses factors of production to produce goods and
services on which the household sector spends their income 
 Businesses place goods and services on the product market which is bought by households to satisfy their needs 
State / Government

There is a flow of money and goods and services between
the household sector and State. 
 Household sector provides the state with labour and receive
income. 
 The state provides the household with public goods and services (e.g.) parks, hospitals 
 Households pay taxes to the state. 
 This is income for the state. 
 There is a flow of money and goods and services between
the business sector and State. 
16



11.11
The business sector provides the state with goods and services for which the state pays. 
The state provides the business sector with public goods
and services E.g. Roads, Electricity, harbours, etc.
Business pay taxes to the state
Discuss the multiplier and its effect on the national income if
the marginal propensity to consume (mpc) is 0,6 and investment increases by R10 bn.
1
K = (1−𝑚𝑝𝑐)
(8)
1
= (1−0.6) 
1


= 0.4
= 2.5 (The multiplier) 
= 2.5 x 10 bn 
= 25 bn 
Therefore, an investment of R 10bn will produce an R 25bn
increase in national income
The multiplier effect starts off with unused resources in the
economy  (e.g.) increase in investment, like construction

The new workers would then have income to purchase consumer goods which in turn stimulates the demand for goods
and services 
and this results in increased levels of production which further increases the level of employment 
11.12
With aid of a circular flow diagram. Explain the multiplier process.
(8







Mining firm invests an initial R100 million of autonomous investment 
This money will return to the households in terms of income earned from the factors of production
Assume MPC=0.8 and MPS=0.2- 
Households save 20% and the rest is spent on the goods and services produced
by the firms
80 million again returns to the households in terms of factor income
A total of 20% is saved(R16 million) leaving R64 million to be spent on goods and
services
The size of the multiplier is determined by the extra income produced in each
round of spending . 
17
11.13
Discuss basic assumption of the multiplier effect
(8)








There is change in autonomous investment and that induced
investment is absent. 
The marginal propensity to consume is constant. 
Consumption is a function of current income. 
There are no tine lags in the multiplier process. An increase
(decrease) in investment instantaneously leads to a multiple
increase (decrease) in income. 
The new level of investment is maintained steadily for the
completion of the multiplier process. 
There is net increase in investment. 
Consumer goods are available in response to effective demand for them. 
There is surplus capacity in consumer goods industries to
meet the increased demand for c r consumer goods in response to a rise in income following increased investment
18
11.14
Explain the multiplier concept with the aid of a well-labelled graph.
(8)

The multiplier describes the fact that changes in spending/expenditure
have an impact on income that is greater than the original change in
spending 

Expenditure/spending increase from 20 to 50 (expenditure change by 30)
which causes an increase in income from 300 to 700 (Income change by
400) 

ΔY / ΔJ = 400 / 30 = 13.3 

Therefor for each R1 increase in expenditure the aggregate income will rise
by R13,30 
QUESTION 12
Paragraph type questions – Higher cognitive
12.1. Why Are the Factors of Production Important to Economic Growth?
 The factors of production are the resources used in creating and producing a good
or service and are the building blocks of an economy. 
 The factors of production are land, labour, capital, and entrepreneurship, which
are seamlessly interwoven together to create economic growth. 
 Improved economic growth raises the standard of living by lowering production
costs and increasing wages
 technology helps to increase the efficiency of the factors of production, it can also
replace labour to reduce costs.  For example, artificial intelligence and robotic
machines are used in manufacturing boosting productivity, reducing costly errors
from human beings, and ultimately reducing labour cost
19
12.2. How are leakages affecting the circular flow?
 In economics, leakage refers to capital or income that diverges from some kind of
iterative system. 
 Leakage is usually used in relation to a particular depiction of the flow of income
within a system, referred to as the circular flow of income and expenditure, in the
Keynesian model of economics. 
 Imported goods are sometimes referred to as a source of "leakage" because they
can have the effect of transferring income that was earned in one country to another country. 
 cash leakages occur when amounts of money are borrowed from banks but not redeposited. 
 Leakages also occur in the form of funds deposited in banks but not lent out. In
this system, cash leakage lowers the ability of credit creation. 
12.3. How does consumption affect economic growth?
 An increase of consumption raises GDP by the same amount, other things equal.

 current income (GDP) is an important determinant of consumption,  the increase of income will be followed by a further rise in consumption:  a positive
feedback loop has been triggered between consumption and income
 fiscal conditions, with particular tax and subsidies impacting the timing and the
amount devoted to purchases; VAT expected increases, for instances, might lead
to anticipation to purchases. 
 the relative success of past investment in shares or other financial instruments; in
fact, a housing, a real estate or a stock-exchange boom are likely to promote an
euphoria tide with growing consumption
12.4. How do financial institutions serve as a link between savings and
investment?
 Financial markets help to efficiently direct the flow of savings and investment in
the economy in ways that facilitate the accumulation of capital and the production
of goods and services
 The price of credit and returns on investment provide signals to producers and
consumers—financial market participants
 Commercial banks promote savings by providing a wide range of deposits with
varying combinations of liquidity and rate of interest to suit the needs and preferences of different savers
12.5. How does unemployment affect the circular flow of income?
 in the circular flow of income labour is one of the factors of production. If the economy is having an increase of unemployment it affects the income in the country.
 as of the increasing of unemployment the firms will lower the wages of their employees and the employees cannot do anything, the employer can easily find
other employees to replace them. This will cause a lower gross domestic product
(GDP) or output in the country. 
 If unemployment increases, government can collect taxes lesser as unemployed
cannot pay taxes to the government. 
 Firms will be having lesser profit due to unemployment and there will be a reduction of corporate tax. 
20

Households cannot spend more and only spend in the necessary goods, low consumption and low consumer spending. This will lead a decrease in tax revenues
from service tax and value added tax (VAT). 
12.6. Why government expenditure is an injection into the economy?
 public spending may increase the aggregate demand which further stimulates the
economic growth and employment. 
 government spending is positively related with economic growth. 
 Government expenditure plays an important role in determining the changes in the
level of national income, providing the right needs for potential output and sustaining the welfare of the economy. 
 Educational expenditure is similar to investing in the quality of labour for future
purposes
12.7. How does the international sector (foreign sector) affect the economy?
 As incomes in other nations rise, the people of those nations will be able to buy
more goods and services—including foreign goods and services. 
 Any one country's exports thus will increase as incomes rise in other countries and
will fall as incomes drop in other countries. 
12.8. How does the circular flow of income primarily affect households?
 The circular flow of income primarily affects households or firms as it provides the
income that workers need to live and the revenue that businesses need to run. 
 business industry is producing or manufacturing goods which are demand of the
consumers and they are spending (leakage) on these goods to fulfil their satisfaction. 
 The sectors are providing income to each other and running the economy
12.9. Analyse the impact of closed economy on South Africa economy
 In a closed economy, an expansion of the money supply will cause the LM curve
to shift to the right and the interest rate to fall. 
 The interest rate will fall in the short run but not in the long run when wages and
prices are flexible
 A closed economy is self-sufficient, which means that no imports enter the country
and no exports leave the country
 A closed economy makes the production of goods highly limited, both in terms of
quantity and variety. People are forced to consume what is available, curbing their
freedom to consume various goods and services
12.10. Why does lack of education affect factor market
 The knowledge and skills of workers available in the labour supply is a key determinant for both business and economic growth. 
 An economy's productivity rises as the number of educated workers increases
since skilled workers can perform tasks more efficiently
 unsuccessful economy has few workforce capable of operating industries at a
level where it holds a competitive advantage over the economies of other countries. 
21
12.11. How does inflation affect financial markets?
 When inflation increases, purchasing power declines, and each rand can buy
fewer goods and services. 
 the way interest rates impact the price of bonds—when rates rise, bond prices
fall—dividend-paying stocks are affected by inflation: When inflation is on the
upswing, income stock prices generally decline
12.12. Analyse the impact of drought on production?
 Businesses that sell boats and fishing equipment may not be able to sell some of
their goods because drought has dried up lakes and other water sources. 
 People who work in the timber industry may be affected when wildfires destroy
stands of timber. 
 Power companies that normally rely on hydroelectric power (electricity that's created from the energy of running water) may have to spend more money on other
fuel sources if drought dries up too much of the water supply. The power companies' customers would also have to pay more. 
12.13. How do investors impact on the multiplier?
 A higher investment multiplier suggests that the investment will have a larger stipulative effect on the economy
 extra government spending on roads can increase the income of construction
works, as well as the income of materials suppliers. 
 any increase in public or private investment spending has a more than proportionate positive impact on aggregate income and the general economy
12.14. How does the multiplier effect government policy?
 The multiplier effect refers to the theory that government spending intended to
stimulate the economy causes increases in private spending that additionally
stimulates the economy. 
 Government spending gives households additional income, which leads to increased consumer spending. 
12.15. How do taxes affect the multiplier?
 The government spending multiplier effect is evident when an incremental increase in spending leads to an rise in income and consumption. 
 The tax multiplier is the magnification effect of a change in taxes on aggregate demand. 
 The decrease in taxes has a similar effect on income and consumption as an increase in government spending. 
 When the government cuts taxes instead, there is an increase in disposable income. 
 Part of the disposable income will be spent, but part of it will be saved. 
 The money that is saved does not contribute to the multiplier effect. 
 The increase in spending and tax cuts will increase aggregate demand, but the extent of the increase depends on the spending and tax multipliers
22
SECTION C
HINT: All section C questions have TWO questions 5 & 6 NOT 9 & 10 like in
this document. In the examination you will need to answer only one.
ESSAY STRUCTURE
HINT: Section C – the long question, must be answered in FOUR sections: Introduction (definition), Body (headings and full sentences in bullets) additional part
and conclusion (summarising). The mark allocations for Section C is as follows:
[40]
QUESTION 11

Discuss the role of markets in the circular flow.
marks)

Evaluate the contribution/role of firms in growing the economy (10 marks)
(26
INTRODUCTION
The economy of a country is regarded as an open economy because of the presence of
households, producers, government, the foreign sector and the financial sector as active
participants in the economy. Markets link the participants in the economy 
BODY: MAIN PART
PRODUCT / GOODS / OUTPUT MARKETS 
 These are the markets for consumer goods and service s
 Goods are defined as tangible items, like food, clothes, cars, etc. that satisfies
some human wants or needs
 Buying and selling of goods that are produced in markets e.g. 
 Capital Goods market for trading of buildings and machinery
 Consumer goods market for trading of durable consumer goods, semi-durable
consumer goods and non-durable consumer goods. 
 Services are defined as non-tangible actions and include wholesale and retail,
transport and financial markets. 
FACTOR / RESOURCE / INPUT MARKETS
 Households sell factors of production on the markets: rent for natural resources,
wages for labour interest for capital and profit for entrepreneurship 
 The factor market includes the labour, property and financial markets. 
 The market where services of factors of production are traded e.g. labour is hired
and capital is borrowed – these services earn wages, interest, rent and profits
23
FINANCIAL MARKETS
 They are not directly involved in the production of goods and services, but act as

a link between households , the business sector and other participants with
surplus finds
E.g. banks, insurance companies and pension funds
MONEY MARKETS
 In the money markets short term loans, and very short term funds are saved and
borrowed by consumers and business enterprises 
 Products sold in the market are bank debentures, treasury bills and government
bonds 
 The simplest form exists when parties make demand and short-term deposits and
borrow on short term 
 The SARB is the key institution in the money market
CAPITAL MARKETS



In the capital markets long term funds are borrowed and saved by consumers
The Johannesburg Security Exchange (JSE) is a key institution in the capital
market 
Products sold in this market are mortgage bonds and shares
FOREIGN EXCHANGE MARKETS




On the foreign exchange markets, businesses buy / sell foreign currency to pay
for imported goods and services
These transactions occur in banks and consists of electronic money transfers
from one account to another
The leading centres / most important foreign exchange markets are in London,
New York and Tokyo 
e.g. Traveller’s cheques to travel abroad
FLOWS THROUGH THE MARKETS 

Flows of private and public goods and services are real flows and they are
accompanied by counter flows of expenditure and taxes on the product market 
 Factor services are real flows and they are accompanied by counter flows of
income on the factor market
 Imports and exports are real flows and are accompanied by counter flows of
expenditure and revenue on the foreign exchange market 
(26)
POSITIVE ROLE
 Firms employ different factors of production which includes employing workers (labour) to produce goods and services. 
 By employing labour, firms pay wages creating a flow of income to households , which
is spent by households on goods produced by different firms. 
24






Firms develop new products and services to try to respond to consumer preferences
and tastes. 
For example, in response to increased demand for coffee, firms have opened new
stores to cater for the new demand/ they can also involve offering new services such
as home delivery by supermarkets. 
Firms invest in capital and new technology to improve productivity in the economy
and ultimately higher living standards. 
Firms provide goods and services for the consumer which has enabled greater specialisation in the economy. 
For example, labour saving devices such as washing machines, vacuum cleaners,
childcare have saved time for ‘household chores’ enabling women to enter the labour
force in greater number. 
Firms pay taxes which contribute to social welfare the government pays to its citizens to ensure economic development. 
NEGATIVE ROLE
 Production by firms may lead to negative externalities of production, e.g. pollution and loss of natural resources. 
 Firms with monopoly power can charge excessive prices and cause an inefficient
allocation of resources. 
 Firms which are publicly owned and supplying essential services may struggle to
increase profits which can lead to regular bail-outs from the state. 
CONCLUSION

Markets are critically important institutions in our economic system, because
they regulate supply and demand and safeguard stable prices and confidence
(Accept any other relevant higher order conclusion.)
25
SECTION D: Homework
1.1.1. 
1.1.2. C 
1.1.3. A 
1.1.4. A 
1.1.5. C 
1.1.6. D 
1.1.7. D 
1.1.8. A 
1.1.9. D 
1.1.10.
C 
1.1.11.
1.1.12.
1.1.13.
1.1.14.
1.1.15.
1.1.16.
1.1.17.
1.1.18.
1.1.19.
1.1.20.
A 
B 
D 
B 
A 
B 
A 
B 
D 
A 
1.2
Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A – I) next to the question number (1.2.1 – 1.2.8)
in the ANSWER BOOK, for example 1.2.9 J.
1.2.1. C
1.2.2. A
1.2.3. B
1.2.4. G
1.2.5. D
1.2.6. E
1.2.7. H 
1.2.8. F
1.3
Give ONE term for each of the following descriptions. Write only the term
next to the question number (1.3.1 – 1.3.6) in the ANSWER BOOK. Abbreviations, acronyms and examples will NOT be accepted.
1.3.1
1.3.2
1.3.3
1.3.4
1.3.5
1.3.6
1.3.7
1.3.8
1.3.9
1.3.10
Money market 
Financial institutions
Gross domestic Product
Nominal GDP
multiplier effect
Money flow 
Real GDP 
Open economy 
Capital market 
Government spending 
SECTION B:
QUESTION 2
2.1
Name TWO types of the economy in the circular flow
 Closed economy
 Open economy 
(2 x 1)
(2)
2.2
List any TWO financial markets in the economy
 Money market
(2 x 1)
(2)
26

Capital market
2.3
Name two examples of government expenditure
 Spending on hospitals
 Spending on schools
(2 x 1)
(2)
2.4
List any TWO injections in closed economy
 Government spending 
 Investment 
(2 x 1)
(2)
2.5
Name TWO flows found in a open economy
 Real flows
 Money flows
(2 x 1)
(2)
2.6
List any TWO use of per capita income figures
 To indicate economic development 
 To compare living standards
 To indicate living standards/poverty level
(2 x 1)
(2)
2.7
Name TWO types of spending in money flow of an open economy
(2 x 1)
 Taxes paid to government 
 Sales revenue 
 Interest 
(2)
2.8
List the TWO types of markets of a factor market
 Labour market
 Land market 
 Financial markets
(2 x 1)
(2)
2.9
Name TWO products sold in the money market
 Bankers acceptances 
 Treasury bills
 Reserve bank debentures
(2 x 1)
(2)
2.10
List any TWO products sold in the capital market
 Mortgage bonds
 Shares 
(2 x 1)
(2)
(1 x 2)
(2)
QUESTION 3
3.1
How does the mpc relate to the multiplier
 The higher the mpc the higher the multiplier. 
3.2
Why is gross National Product of south African generally
lower than the Gross Domestic Product
(1 x 2)
(2)
27

Foreigner’s contribution to our economy is more than our
contribution to their
economies. 
3.3
How will the multiplier be influenced when a country experiences net leakages
(1 x 2)
 The multiplier will decrease due to a loss of income. 
3.4
What is the purpose of the residual item when the expenditure
method is used to calculate national income?
(1 x 2)
 Residual item: serves to balance the national accounts
when the three methods do not yield exactly the same answer. 
3.5
Why are households regarded as the important participant in
the circular flow?
(1 x 2)
 households consume the goods offered by the firms. However, households also offer firms factors so that the firms
can produce products for the household to later consume
3.6
Why does South Africa prescribe to the System of National
Accounts as stipulated by the International Monetary Fund
(IMF)?
(1 x 2)
 SA must comply with international best practices in terms of
the provisioning of national accounts data. 
3.7
What effect does taxes and subsidies have on the calculation
of basic prices?
(1 x 2)
 Taxes and subsidies change the price of goods and, as a
result, the quantity consumed. 
3.8
How will the scenario, I+G+X>S+T+M, effect the national income?
(1 x 2)
 The national income will rise because the injections are
larger than the leakages. 
3.9
How will the multiplier be influenced when foreign direct investments increase in the local economy
(1 x 2)
 FDI allows the transfer of technology, uplift competition in
the domestic input market, contributes to human capital development and Profits created by FDI contribute to corporate
tax revenues in the host country
(2)
(2)
(2)
(2)
(2)
(2)
(2)
28
3.10
What is the effect of an increased marginal propensity to consume on the multiplier?
(1 x 2)
 The higher the MPC, the higher the multiplier—the more the
increase in consumption from the increase in investment
(2)
DATA RESPONSE
QUESTION 4
Study the following extract and answer the questions that follow
SAVERS
Firms
households
Financial intermediaries
Government
Firms
Households
BORROWERS
4.1
List any institution found in the financial market
 South African Reserve Bank
 Johannesburg Securities Exchange 
(1)
4.2
Name ONE leakage that exist between financial intermediaries
and households.
 Savings 
(1)
4.3
Briefly describe the term closed economy
 A closed economy is a type of economy where the import
and export of goods and services don't happen, which implies that the economy is self-sufficient and has no trading
activity from outside economics
(2)
4.4
Explain the basic function of a financial intermediary?
(2)
29

4.5
taking deposits from savers and lending the money to borrowers; pooling the savings of many and investing in a variety of stocks, bonds, and other financial assets; and making loans to small businesses and consumers.
How do unemployment affect household savings?
(2x2)
 the unemployed spend less because of their lower personal
income.
 unemployment causes negative expectations, even for
those employed, and this can act as a curb on spending and a stimulus to saving
(4)
QUESTION 5
Study the following information and answer the questions that follow
Autonomous consumption
Investment spending
Government spending
Marginal propensity to consume
50 billion Rands
200 billion Rands
250 billion Rands
0.6
5.1
Name one leakage in the four -sector model of the multiplier
 Imports
 Taxes 
(1)
5.2
What is the marginal propensity to save?
 0.4
(1)
5.3
Briefly describe the term marginal propensity to consume
(2)

Marginal Propensity to Consume is the proportion of an
increase in income that gets spent on consumption.
5.4
Why is government spending classified as part of autonomous spending in the Keynesian model?
 Most government spending is considered autonomous expenditure because it is necessary to run a nation
 Autonomous expenditures are related to autonomous consumption because they are necessary to maintain a basic
standard of living.
(2)
5.5
Calculate the multiplier effect above
K=1/1-06
=1/0.4
=2.5
(4)
(2x2)
30
2.5x200=500
QUESTION 6
Study the article below and answer the questions that follow.
The South Africa agriculture sector is estimated to register a CAGR of 4.5% during
the forecast period (2020-2025). In 2019, the price received by the farmers in the
country increased by 4.3% and the prices that farmers pay for agricultural inputs
increased by 5%.

The increase in the population level of the country has fueled the demand
for cereals. Maize is the staple food in the country, consumed in its direct
form, and is used for products, such as sweeteners, bread, and cornmeal.
Wheat is also another major staple food in the country, which is mostly imported, as it is economical to import rather than produce it domestically.
Most of the country’s oilseed demand is met by domestic production. However,
palm oil, a well-in-demand oilseed in the country, is currently imported from Indonesia and Malaysia. In the forecast period, the country is expected to reduce imports to a great extent and become self-sufficient in the production of oilseeds.
6.1
What generates income in agriculture of South Africa
 Production 
(1)
6.2
In which market of the circular flow does agricultural fall.
 Goods and services market
(1)
6.3
Briefly explain the concept net domestic production.
(2)

A measure of the value of production once adjustments have
been made for consumption of fixed capital √√
6.4
Why is agriculture important at Johannesburg security exchange
 Increases flow of money √√
 Increase movement of goods and services between one
country to another√√
 More investors will be attracted to sell√√
6.5
How are households’ relations with government affected by
natural disasters?
(2 x 2)
 Household will not able to pay taxes to the government
which is a source of revenue for the government √√
(2)
(4)
31

Government will lose high source of revenue and less
spending will be available to infrastructure √√
QUESTION 7
Study the table below and answer the questions that follow.
INCOME(Rands)
0
50
100
150
200
CONSUMPTION
(Rands)
10
50
90
130
170
Savings
(Rands)
-10
0
10
20
30
Investment
(Rands
20
20
20
20
20
7.1
What is the marginal propensity to save?
 MPS=0.20√
(1)
7.2
What is the marginal propensity to consume (mpc) on the
above table?
MPC =0.80
C/Y = 170-130/200-150
40/50=0.80√
(1)
7.3
7.4
Describe the term national income multiplier
 The fiscal multiplier is the ratio of a country's additional national income to the initial boost in spending or reduction in
taxes that led to that extra income√√
Discuss how a decrease in investment spending will affect the
equilibrium level of income in a simple Keynesian model.






(2)
(2)
The intercept is determined by the size of autonomous expenditure√√.
The intercept determines the position of the consumption function
√√.
When autonomous expenditure increases, √√ e.g. from 𝐶̅1 to 𝐶̅2 ,
the C-function will shift upward by the amount of the increase in
autonomous consumption. √ At each income level, consumption
will now be higher than previously by the amount of the increase
in 𝐶̅,
The slope of the consumption function is determined by the marginal propensity to consume √√
When the marginal propensity to consume decreases, the slope
of the consumption function will become smaller (flatter), and the
consumption function will swivel down√√, e.g. from C to C' in the
diagram on the left√.
At all income levels above zero, consumption will now be
lower than previously (e.g. C2 is lower than C1).
32
7.5
Explain the economic significance of the intercept and the
slope of the consumption function.
 With a decrease in investment spending, the level of aggregate demand will fall √√ at each level of income
 . Firms will experience an unplanned increase in inventories
and will cut back on production √√. Thus, the equilibrium
level of income will fall (to Y') √√.
 Moreover, the decrease in income will be greater than the
decrease in investment spending √√because of the multiplier effect √√ (which works in reverse in this case) thus
Δ𝑌>Δ𝐼.
(4)
Question 8
DIGITIZATION LEADS STANDARD BANK TO CLOSE BRANCHES, CUT JOBS
The future of traditional banking in South Africa is under the spotlight after standard bank
announced its closing 91 branches and cutting around 1,200 jobs.
8.1
Name the market above
 Financial market
(1)
8.2
Which key institution is involved in the market illustrated
 Johannesburg Security Exchange✓
 South Africa Reserve Bank✓
(1)
8.3
Briefly describe the term corporation for public deposits(CPD)
 Invests short-term funds of the government and other funds
of the public sector. ✓✓
(1)
8.4
How is foreign exchange market affected with current news of
standard bank
 Low credit creation will be available and investors are in fear
of their savings ✓✓
(1)
33
8.5
Explain why the investment function has a negative slope
 The investment function shows the relationship between the
interest rate level and investment.✔ When the interest rate
decreases, for example from i1 to i2 , it becomes less expensive to borrow money.✔ Therefore, more investment
projects will be viable at the lower interest rate level and investment will increase from I1 to I2.✔ The investment function has a negative slope to illustrate this negative relationship between the interest rate level and the level of investment.✔
(1)
QUESTION 9
Study the diagram below and answer the questions that follow.
9.1
What is depicted in the diagram above
 Circular flow diagram / Two sector model 
(1)
9.2
Which participants is the major consumer in the economy
 Households
(1)
9.3
Briefly describe the term circular flow
(2)
34
It is a simplification showing how the economy works and
the relationship between income, production and spending
in the economy as a whole.
(Accept any other correct relevant response.)
9.4
What is the role of the factor market in the circular flow
 A factor market is where factors of production are traded
e.g. land for interest, labour – wages and salaries, entrepreneur for profit, capital for interest.
 Households sell their factors of production in the factor market and receive income. 
market and the factor market receives an income.
(2)
9.5
How does the multiplier effect influence the government in
marking decisions?(2x2)
Government can influence:
 Economic growth and the macro-economic issues such as
employment and inflation by manipulating injections and
leakages.
 Decreasing taxes: disposable income of consumers will increase, increasing total demand.
 Which results in higher consumer expenditure
 Profits after tax of producers will increase thus increasing
total demand which results in higher investments.
 Increasing consumption of goods and services: If government spends more money, total demand will increase 
 Increase exports: this will result in an injection of foreign
money into the domestic economy 
(1)
35
QUESTION 10
Study the diagram below and answer the questions that follow.
10.1
Which method was used in the calculation of the gross domestic product (GDP) above?
 Production method / Value added / GDP (P) 
(1)
10.2
Which year is currently used as the base year by the South African Reserve Bank (SARB)?
 2010
(1)
10.3
Briefly describe the term gross national product.
 The value of all final goods and services produced by the
citizens of a country over a particular period
(2)
10.4
Which sector has increased its contribution to the GDP steadily since 2014(
 Tertiary sector 
(2)
10.5
What happened to the value added by the primary sector between 2015 and 2016? Motivate your answer. (2x2)
 The contribution of the primary sector declined from R307
875 m in 2015 to R291 143 m in 2016 
(1)
36
QUESTION 11
Study the diagram below and answer the questions that follow.
Gross National Income 2016 - 2019
11.1
When did south African reach its highest GNI
 January 2018
(1)
11.2
Name ONE method that can be used to calculate the GDP
 Production method√
 Expenditure method√
(1)
11.3
Briefly describe the concept gross national income.
 Is the total remuneration for the factors of production received by people of South African nationality in a given period√√
(2)
11.4
How would the GNI @ market prices be calculated?
 GNP = GDP plus primary income from the rest of the world
minus primary income to the rest of the world / GDP plus nett
primary income √√
(Accept any other correct and relevant response)
(2)
11.5
Explain the importance of measuring national account aggregates. (2x2)
 Are an important source of information regarding the health of
an economy√√
 They enable planners and policy makers to set realistic goals
and make policy recommendations√√
 Are used to indicate the economic activity within a country√√
 Are an important yardstick to measure economic activity from
one year to the next√√
 Are an important indicator to compare prosperity levels among
countries√√
 Are used to determine the standard of living in a country√√
(1)
37
QUESTION 12
Study the diagram below and answer the questions that follow.
12.1
Identify the original consumption function on the graph above.
 C = 200 + 0.5Y 
(1)
12.2
What is the marginal propensity to consume (mpc) on the
graph?
 mpc = 0.5 
(1)
12.3
Briefly describe the term induced consumption.
 Induce consumption is the portion of consumption that varies with disposable income. When a change in disposable
income “induces” a change in consumption on goods and
services. 
(2)
12.4
How will an increase in government spending affect the multiplier?
 An increase in government spending increases the amount
of money in circulation. This will stimulate spending and
therefore increases the multiplier effect. 
(2)
12.5
Use the formula K = Y/ I to calculate the multiplier from the
scenario. Show ALL calculations. (2x2)
(1)
K = Y / I  = 600/300 = 2 
The multiplier is 2
38
QUESTION
13.1
13
Paragraph type questions-Middle cognitive
Illustrate and explain how an increase in the income level will affect the
money market.
(8)

When income increases from Y1 to Y2, the active demand for
money increases . Therefore, the demand for money curve L shifts to the
right to L(Y2) . The total demand for money at interest rate level i0 increases
from M1 to M2 and therefore the money supply increases from M1 to M2
13.2
With aid of diagram of multiplier explain how the economy move due to
an increase in investment as a result of decrease in the interest rate level
(8)
39






13.3
Due to a decrease in the interest rate level more investment projects are
viable and therefore investment increases by ΔI.
Total autonomous spending increases illustrated by the upward shift of
the A curve to A ’
The economy moves from point E0 to point B due to the increase in
autonomous investment
At point B spending (A) exceeds income (Y) (illustrated by the fact that
point B lies above the 45º line
Retailers and producers will find that their inventories will decrease
✔due to the increased demand.
To satisfy the excess demand, producers will increase production
Use the following diagram to show how an increase in autonomous consumption expenditure will influence the economy
The level of autonomous consumption increases; therefore, the consumption
function shifts upwards by the amount by which autonomous consumption
increases (Δ2C ) . Due to the increase in consumption, aggregate spending
increases and therefore production in the economy will increase.  The
economy will move to a new equilibrium at a higher income level Y2. 
Make sure you indicate the upward parallel shift of the A curve correctly
using an arrow, and also the increase in the income level.
(8)
40

13.4
Differentiate between subsidies on production and subsidies on products
(8)
Subsidies on production

A production subsidy is a payment made by a government to firms in
an industry based on the output or production. 

Subsidies on production is used to stimulate output for a good, due to
its strategic importance. 
Subsidies on products

Subsidy of products are subsidies payable per unit of a good or service produced or imported. 

A subsidy on a product usually becomes payable when the good is
produced, sold or imported. 

The subsidy may be a specific amount of money per unit. 
13.5
Differentiate between taxes on production and taxes on products.



(8)
Taxes on production
Taxes on production are imposed on firms during the production process.

It does not depend on the actual value of production. 
E.g. payroll taxes, recurring taxes on land, buildings or other structures, registration fees, stamp duties etc. 
Taxes on products
 These are taxes pain on finished products. 
 Product taxes are paid on the actual volume of production. 
It is paid per unit of product. For example, excise duty, service tax, sales tax etc. 
41
QUESTION 14
14.1
14.2
How can the multiplier be used to analyze the economic impact of professional sports?

Attracting professional sports teams and building sports stadiums to create
jobs√√ and stimulate business growth is an economic development strategy√√

the multiplier is lower for professional sports than for other local entertainment options, the arrival of professional sports to a city would reallocate entertainment spending√√ in a way that causes the local economy
to shrink, rather than to grow√√
How can households as an important participant in the circular flow
model contribute in building the economy
 The owners of the four factors of production can try to increase the
quality thereof to make a better contribution to the economy. 
 Households can sell their factors of production at lower rates to
help lower the inflation rate and build the economy. 
 Households (labourers) can limit labour unrest and strikes where
they usually claim unrealistic wage/ salary increases (much more
than the current inflation rate). 




14.3
Paragraph type questions-Higher cognitive
(8)
(8)
Households can increase their savings and contribute indirectly to
increased production in the manufacturing sector. 
Households can limit their spending on luxury goods that will limit
the aggregate demand and stabilise prices. 
Households can concentrate on buying South African goods to
stimulate local production, future exports and increased penetration
of markets internationally. 
Households can pay their relevant taxes and claim better service
delivery and infrastructure development. 
How is Gross domestic Product derived by using the expenditure method

Expenditure on GDP measures total expenditure on final goods and
services produced within the borders of the country. 

It is calculating by adding together expenditures of the participants in an

Households spend on durable goods/ semi-durable goods/ non- durable
goods and services. 

State spends on public goods

Businesses spends on capital goods 

The residual item is included as balancing item. 
(8)
42

The exports of the foreign sector are added and the imports are subtracted. 
GDP(E) = C + G +I + (X – M) 
14.4
Analyse the impact of unemployment on financial sector



14.5
An increase in the unemployment rate can be translated into an increasing of non-performing loans and thus lowering bank liquidity. 
An increase in public deficit will involve increasing bank loans and thus
will decrease liquidity
percentage-point increase in unemployment leads to roughly a percentage-point rise in the charge-off rate, the amount of defaulted loans
written off at a loss
How are national account conversions made?





(8)
(8)
National accounts) are the implementation of complete and consistent
accounting techniques for measuring the economic activity of a nation.

All countries use national account figures
South Africa uses the SYSTEM OF NATIONAL ACCOUNTS (SNA) prescribed by the United Nations. 
GDP, GDE, and GDI have a great deal to do with the prices we use such
as nominal and real prices, prices before or after taxes. 
Indirect taxes and subsidies are the most important determinants of the
end values of the circular flow aggregates. 
43
SESSION 2:
SECTION A: TYPICAL EXAM QUESTIONS
QUESTION 1:
Section A – Short Questions
HINT: When answering Section A – short question, it is important not to rush
but to read the questions carefully and to make sure you understand what the
question is asking. Always remember one alternative is completely wrong, one
is nearly correct and one is totally correct. It is easy to eliminate the completely
wrong answer, but if you do not read the question carefully the nearly correct
answer will also appear correct. The answer will NEVER be two options. Only
ONE option is correct. Your answer will immediately be marked incorrect if you
write TWO options.
1.1
Various options are provided as possible answers to the following
questions. Choose the answer and write only the letter (A–D) next to the
question number.
1.1.1. C 
1.1.2. C 
1.1.3. B 
1.1.4. D
1.1.5. B 
1.1.6. B 
1.1.7. A 
1.1.8. B
1.1.9. C
1.1.10. A
1.1.11. B
1.1.12. C
1.1.13. C
1.1.14. B
1.1.15. C 
1.2
Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A – I) next to the question number (1.2.1 – 1.2.8)
in the ANSWER BOOK, for example 1.2.9 J.
1.2.1. D
1.2.2. A
1.2.3. B
1.2.4.C
1.2.5. F
1.2.6. D
1.2.7. G
1.2.8.H
44
1.3
Give ONE term for each of the following descriptions. Write only the term
next to the question number (1.3.1 – 1.3.6) in the ANSWER BOOK. Abbreviations, acronyms and examples will NOT be accepted.
1.3.1
Expansionary fiscal policy 
1.3.2
Exogenous 
1.3.3
Contraction 
1.3.4
Contractionary Monetary Policy
1.3.5
Endogenous 
1.3.6
Exogenous 
1.3.7
Fiscal policy 
1.3.8
Restrictive fiscal policy
1.3.9
Keynesianism 
1.3.10
Kitchin cycles 
1.3.11
1.3.12
Trough 
1.3.13
Economic boom
1.3.14
Peak 
1.3.15
Kondratief 
QUESTION 2:
HINT: When the question requires you to “list” or “name”, you need not write a
sentence but merely one or two words. This MUST be done in bullet form.
2.1
List any TWO types of business cycles
 Kitchin cycle
 Juggler cycle
 Kuznets cycle 
 Kondratieff cycle
2.2
Name TWO turning points in business cycles
 Peak 
 Trough
45
2.3
Name TWO periods recognized in business cycles
 Expansion 
 Contraction
2.4
List any TWO phases found in expansion period
 Recovery 
 Prosperity 
2.5
Name any TWO monetary policy instruments
 Moral suasion
 Exchange rate policy
 Interest rate 
2.6
List any TWO examples of endogenous factors
 Change in investment 
 Change in aggregate demand 
 Change in aggregate supply
 Monetary policy 
2.7
Name any TWO examples of exogenous factors
 Natural disasters 
 Political reasons
 Psychological reasons
 Change in weather patterns
2.8
List TWO instruments of fiscal policy that government can use
 Taxation
 Government spending 
2.9
Name any TWO phases found in the contraction period
 Depression 
 Trough 
QUESTION 3:
3.1
How does a recession affect the average person
(1x2)
 When people are out of work or making less money, they
may not be able to pay their bills.  This can cause people
to go into debt or even lose assets such as their homes or
cars. 
2
3.2
How does depression affect the economy?
 Increase unemployment and prices
(1X2)
2
3.3
How does fiscal policy affect economy
(1x2)
2
46

Fiscal policy describes changes to government spending
and revenue behaviour in an effort to influence the economy
3.4
Why fiscal policy is important
(1x2)
 Fiscal policy is an important tool for managing the economy
because of its ability to affect the total amount of output produced—that is, gross domestic product
2
3.5
Why is monetary stability important
(1x2)
 It is vital to economies because price levels determine inflation and deflation—inflation
2
3.6
How does a phase of expansion lead to recession?
(1X2)
 There is increase in economic activity such as production,
employment, output, wages, profits, demand and supply of
products and sales. the demand for goods and services
starts declining rapidly
2
3.7
What happens to prices when the economy is in a trough?
(1X2)
 Prices increase due to short in supply
3.8
Why do lower interest rates lead to increased investment?
(1x2)
 Lower interest rates encourage additional investment
spending, which gives the economy a boost in times of slow
economic growth. 
3.9
Why does the level of economic activity fluctuate?
(1X2)
 These changes are caused by levels of employment,
productivity, and the total demand for and supply of the nation's goods and services. 
3.10
How does the state use fiscal policy to influence business
cycles?
(1x2)
 By adjusting its level of spending and tax revenue, the government can affect economic outcomes by either increasing
or decreasing economic activity
2
2
2
2
47
DATA RESPONSE QUESTIONS
QUESTION 4:
Study the information and answer the questions that follow
l
4.1
Identify the point marked ‘C’ in the graph above.
 Trough/lowest turning point 
(1)
4.2
Which feature underpinning forecasting is represented by
AC?
 Length of business cycle 
(1)
4.3
Briefly describe the term business cycle.
 Refer to fluctuations in economic activity or production over several months or years
 Refer to successive periods of increasing and decreasing economic activities
(2)
4.4
Explain the significance of a long-term trend in the economy.
 They show the general direction of the economy over a long period of time. 
 Trends rising gradually will be positively sloped in the long run.
(2)


4.5
Positively sloped trends indicate a growing economy. 
(Any 1 x 2)
(2x2)
(4)
48


They give consumers, businesses and the state a glimpse of the
direction in which the economy might be heading. 
When these indicators rise, the level of economic activities will
also rise a few months later. 
(Accept any other relevant and correct response)
QUESTION 5:
Study the information and answer the questions that follow
5.1
Give the alternative term for recovery (growth) as depicted
from trough to peak in the diagram.
 Expansion period 
 Upswing period 
(1)
5.2
How is the length of a business cycle measured?
 It is measured from peak to peak/measured from trough to
trough. 
(1)
5.3
Briefly describe the term business cycle.
 Refers to successive periods of growth and decline in economic activities over a given period of time. 
 Refers to successive periods of increase and decrease in
economic activities over a given period of time. 
(Accept any other correct relevant response
(2)
5.4
Explain the government policy that is effective in smoothingout the business cycle when the economy is at the peak.
(2)
49


Contractionary monetary policy is the most effective in
smoothing- out business cycles out of the peak, since the
interest rates are increased while money supply is lowered.

Contractionary fiscal policy can be applied where government spending is reduced and taxes are increased – budgeting for a surplus. 
(Accept any other correct relevant response)
5.5
How effective are government policies in stimulating the economy at the trough? (2x2)
 Expansionary fiscal policy can be used to recover from a recession by increasing government spending, and thereby
increasing aggregate demand. 
 Increasing government spending, especially on infrastructural development 
 Reducing taxes, which could increase disposable income
 These factors will have a stimulating effect on production,
employment and other factors of production
(Accept any other correct relevant response)
(4)
QUESTION 6:
Study the information and answer the questions that follow
SA DOWNGRADE SETS SCENE FOR GREATER TURMOIL
The Minister of finance warns that Moody’s action to downgrade South Africa will add to prevailing financial market stress caused by the technical recession emanating from power outages and currently the COVID 19. South Africa’s financial markets, hit by dislocation that
prompted Reserve Bank intervention could have a shaky start after Moody’s stripped the
country of its last remaining investment-grade rating.
50
6.1
Name the phase of the business cycle that is discussed on the
above information.
 Recession/ Depression
(1)
6.2
According to the above information, what has been the cause
for the contractions in the economy?
 Power outages/ COVID 19
(1)
6.3
Briefly describe the trough
 A trough is the lowest turning point in a business cycle
when there is a slump in economic activities. 
(2)
6.4
Briefly explain how loss of income can negatively affect the
performance of economic activities.
 When people lose their sources of income, they tend to also
lose their purchasing power hence reducing the demand for
goods that are produced in various economic sectors. 
(2)
6.5
How can the Monetary Policy Committee use interest rate as a
tool to reduce slow economic performance?
(2x2)
This can be done by:
 Reducing interest rates which will allow people to pay less
interest in the loans so that they remain with more money to
spend. 
 Charging reasonable rates on long-term loans and bonds
so that investors can gain confidence to borrow capital thus
creating job opportunities. 
 Cutting interest that is paid by the production sector of the
economy so that they can rather re-invest or be able to pay
salaries for their employees. 
(4)
QUESTION 7:
Study the information and answer the questions that follow
51
7.1
What message is depicted in the above cartoon?
 Economic growth
(1)
7.2
What main economic indicator is used to determine the state
of the South African Economy?
 Real Gross Domestic Product
(1)
7.3
Give a reason for the current state of the economy.
 Aggregate demand decreases
(2)
 World slows down in economic activities
 Inflation rate increases 
7.4
How can government stabilise the business cycle?
 The government can stabilise business cycles
through monetary and fiscal policy measures 

 The government can apply supply and demand side
policies to stabilise prices 

 The government might take measures to influence
the aggregate demand that will stimulate consumer
spending
(2)
 The government might take measures to influence
the level of aggregate supply and lead to an increase
in domestic production and lower inflation pressure
 
52
7.5
How can the South African government avoid public – sector
failure?
 Improving the quality of management skills in
the public sector 
 Reducing corruption, including nepotism when hiring public sector employees 
 Reducing bureaucracy by investing in modern
systems such as a IT system 
 Increasing accountability 
(4)
QUESTION 8:
Study the information and answer the questions that follow
SOUTH AFRICA FACING ITS LONGEST DOWNWARD BUSINESS CYCLE SINCE 1945:
According to a report by the Centre for Risk Analysis, South Africa’s latest business cycle
has been in a downward phase since 2013. It seems unlikely that the cycle will experience
an upward trajectory in the near future.
8.1
Identify the longest period (months) in which South Africa experienced an upswing in the economy.
 99/100
(1)
8.2
How long (years) is the current downswing of the South African economy?
 5 years
(1)
8.3
Briefly describe the term economic trend
 The indicates the general pattern or direction of the economy. 
(2)
53
8.4
Why are long upward amplitudes preferred than long downward
amplitudes in the economy?
 The long upward amplitudes coincide the successive economic performance which is characterise by high investments and increased consumption patterns. 
 The long downward amplitudes are not preferred because
they coincide with the decline in economic performance
which is characterised by weak consumption and lack of investments in the economy. 
(2)
8.5
How can the South African government use open market
transaction to overcome the above ongoing economic decline? (2x2)
 The South African Reserve Bank can buy financial securities
such as shares/ bonds from commercial banks which can increase the quantity of money available in the circulation for
credits. 
 The buying of financial securities is normally accompanied
by lower interest rates that make credit cheaper to accelerate economic activities. 
(4)
54
QUESTION 9:
Study the information and answer the questions that follow
9.1
Identify a trough in the business cycle above.
 T1/T2/T3√
(1)
9.2
During which year was the first business cycle fully completed
in the graph above?
 2007 / 2001 – 2007 √
(1)
9.3
Briefly describe the term(actual) business cycle
 A real business cycle occurs when the effects of irregular
events / seasonal / long-term growth trends are removed
from the time series data√√
(Accept any other correct relevant response)
(2)
9.4
How can the South African government use government
spending as fiscal measure to stimulate the economy?
 Governments can increase economic activity by increasing
government spending √√
(2)
9.5
How could the South African Reserve Bank have prevented
the business cycle from plunging to T3?
(2x2)
The Reserve bank can:
 adjust the repo rate downwards, that will lead to lower interest rates √√
(4)
55

decrease cash reserve requirements to make more money
available at banks, for loans √√
 buy securities in the open market (open market transactions) √√
 stabilise the exchange rate √√
 increase the money supply √√
(Accept any other correct relevant response)
QUESTION 10:
Study the information and answer the questions that follow
10.1
Name ONE endogenous cause of business cycles
 Changes in levels of investment √
 Changes in total demand levels √
 Changes in total supply levels √
 Technological changes / innovation √
 Monetary policies / measures √
(Accept any other correct relevant response)
(1)
10.2
Describe the state of an economy during a recession
 Businesses begin to invest and produce less. √
 Fewer people will be employed. √
 Households will receive less income and will spend less.
√
 The real GDP decreases. √
(Accept any other correct relevant response.)
(1)
10.3
When is an economy officially in recession
(2)
56

It occurs when there is a continuous decrease in economic
activity for a period of six consecutive months (two quarters)√√
10.4
What can the SARB do to stimulate the economy?
 Expansionary Monetary and fiscal policies should be implemented. √√
 To stimulate demand and economic activities during a recession, the Reserve Bank may reduce interest rates. √√
 During a recession, a reduction in tax rates may increase
disposable income and stimulate the demand for goods
and services. √√
 During a recession, the government could increase its
spending in order to stimulate a slow economy. √√
 Demand for credit starts to increase. √√
(Accept any other correct relevant response.)
(2)
10.5
How can aggregate supply be increase to combat inflation
caused by excess demand? (2x2)
Aggregate supply can be increased:
 when the cost of production is reduced, producers can
supply more goods and services at a lower price. √√
 when supply is influenced by government by improving
the efficiency of inputs in markets, no shortage will exist
and price will be stable. √√
 with supply infrastructure services such as transport,
communication and energy improving will reduce costs
and keep prices lower√√
 by reducing administrative costs such as inspections and
unnecessary regulations, will reduce costs √√
 When the efficiency of markets is improved it will bring
supply and demand in equilibrium keeping prices stable√√
(Accept any other correct relevant response.)
(4)
57
QUESTION 11:
Study the information and answer the questions that follow
FNB MAINTAINS 7% PRIME LENDING RATE AFTER SARB INTEREST RATES DECISION
Following the South African Reserve Bank’s (SARB) decision to keep interest rates unchanged,
FNB will maintain its prime lending rate at 7 percent.
FNB will review its position after the next SARB Monetary Policy Committee meeting in March
2021.
11.1
Name the government policy above
 Monetary policy 
(1)
11.2
Who is the governor for South Africa Reserve Bank
 Mr Lesetja Kganyago
(1)
11.3
Briefly describe the interest rate
 the proportion of a loan that is charged as interest to the
borrower, typically expressed as an annual percentage of
the loan outstanding. 
(2)
11.4
How do exchange rate policy affect business?
 Depreciation of your local currency makes the cost of importing goods more expensive, which could lead to a decreased volume of imports
(2)
11.5
Discuss combination of monetary and fiscal policies
(2x2)
 Fiscal policy affects aggregate demand through changes in
government spending and taxation. 
 Those factors influence employment and household income, which then impact consumer spending and investment. 
 Monetary policy impacts the money supply in an economy,
which influences interest rates and the inflation rate. 
(4)
QUESTION 12:
Study the information and answer the questions that follow
58
12.1
Name the causes of exogenous factor above
 Change in weather patterns
(1)
12.2
 Contraction 
(1)
12.3
Briefly describe the term exogenous factor
 an exogenous variable is one whose value is determined
outside the model and is imposed on the model
(2)
12.4
How does weather affect demand?
 Can lead to increase in prices
(2)
12.5
Discuss the endogenous factors as a cause of business cycle(2x2)
 This follows the belief that economic growth is primarily the
result of endogenous and not external forces√√
 This is often called the Keynesian view. This approach
holds the view that markets are inherently unstable and
therefore government intervention may be required√√
 The price mechanism fails to co-ordinate demand and supply in markets and this gives rise to upswings and downswings√√
 Prices are not flexible enough√√ (e.g. wages) √
 A business cycle is an inherent feature of a market economy√√
 Indirect links or mismatches between demand and supply
are normal
features of the economy√√
(4)
59
QUESTION 13:
8 minutes
Section B
Study the information and answer the questions that follow
RECESSION
D
E
C
L
I
N
E
INTEREST RATE
RATE OF INFLATION
ECONOMIC ACTIVITY
EMPLOYMENET
D
E
C
L
I
N
E
13.1
Which phase is after recession in the business cycle
 Prosperity 
(1)
13.2
Name ONE period of business cycles
 Expansion 
 Contraction 
(1)
13.3
Briefly describe the term recession
 A recession is a significant decline in economic activity
spread across the economy, lasting more than a few
months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sale
(2)
13.4
Explain how does the economy recover from recession?
 Economic recovery is the process of reallocating resources
and workers from failed businesses and investments to new
jobs and uses after a recession.  An economic recovery
follows after the recession and leads into a new expansionary business cycle phase
(2)
13.5
How effective will be an expansionary monetary policy in
times of recession? (2x2)
 Expansionary monetary policy involves cutting interest rates
or increasing the money supply to boost economic activity.
(4)

60


QUESTION 14
14.1
Paragraph type of questions
Middle order



14.2
If confidence is very low, then people may not want to invest or spend, despite lower interest rates. 
Expansionary monetary policy may boost consumer spending, however, if we are in a global recession, then there
may be a strong fall in exports which outweighs the improvement in consumer spending
(8)
The line of cycle that moves above the steady growth line represents the
expansion phase of a business cycle. 
In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand
and supply of products, and sales. 
The growth in the expansion phase eventually slows down and reaches
to its peak. This phase is known as peak phase
Explain the nature of business cycle
(8)
Recovery phase





Economic recovery is the process of reallocating resources and workers from failed businesses and investments to new jobs and uses after
a recession. 
An economic recovery follows after the recession and leads into a new
There is a greater demand for goods and services.
This lead to an increase in Production. 
More jobs are created 
61


Business confidence rises and there is increased spending by firms
There is increased economic activity and the country enters into a period of prosperity 
Expansion phase
 There is a great degree of optimism in the economy
 Entrepreneurs borrow more money to buy machines and equipment
(Investment) 
 Employment levels rise, and this give rise to a rise in salaries and
wages and spending increases
 A peak is reached
 There is a larger amount of money in circulation and this leads to an inflationary situation in the economy and lead to a recession. 
Recession phase
 A recession phase is when there is negative economic growth rate for
two consecutive quarters. 
 It is introduced by a decrease in profits of businesses that is the result
of inflation and over production. 
 There is a decrease in production that lead to a drop in employment.
 Unemployment increase and this give rise to a feeling of pessimism.
 There is a decrease in economic activity, and the economy slows
down. 
Depression phase
 During a depression money is in short supply, leading to a further decline in spending. 
 There is a negative impact on investment spending.
 Economic activity is at its lowest, and a trough is reached.
 Cost of production decreases. 
14.3
(8)
Kitchen cycles: 
 Last between 3 to 5 years caused by adapting inventory levels in businesses. 
Juglar cycles: 
 Last from 7 to 11 years and are caused by changes in net investments
Kuznets cycles: 
 Last between 15 to 20 years, caused by changes in activity in the
building and construction industry. 
Kondratieff cycles: 
62

Last longer than 50 years, caused by technological innovations, wars
and discoveries of new deposits of resources e.g. gold. 
14.4
Distinguish between taxes and government expenditure


14.5
(8)
The nature and composition of government expenditure influences economic growth and social welfare. 
Government expenditure, which influences national GDP, also influences government tax revenues
Discuss interest rate and open market transactions as instruments of
monetary
(8)
Interest rate changes

It is used to influence credit creation by making credit more expensive
or cheaper
 Stabilisation of the exchange rate by encouraging capital inflows or
outflows in order to take care of deficit or
 Surplus on the current account of the balance of payments
Open market transactions
 SARB selling securities to restrict bank credit
 Banks have less money to lend and cannot extent as much credit as
before
 To encourage credit the SARB buys securities in the open market and
money then flows back into the system
 Bank uses money to create credit
14.6
Discuss cash reserve requirement and moral suasion as instruments of
monetary
(8)
Moral suasion
 SARB consults with the banks and persuade them to act in a manner
desirable to the prevailing economic conditions
 Sells paper such as bills and bonds
Cash reserve requirement
 This is the minimum percentage of total deposits that banks have to

keep as cash and that may be used for lending or investing 
A change in the cash reserve requirement makes more or less money
available in the banking system
63
QUESTION 15
15.1
Paragraph type of questions
Higher cognitive
How could the monetarists’ viewpoint on government policies cause a
Monetarists viewpoints:
(8)

Markets are inherently stable and that a disequilibrium in the markets
are caused by faulty policies√√
 The most important cause of economic fluctuations is inappropriate
government policies√√.
 The monetarist’s feel that state intervention will cause distortion of
equilibrium. √√
 Equilibrium is caused by supply and demand√√
 If any imbalance occurs the market forces of supply and demand will
always bring the market back to equilibrium√√
 The bigger the government intervention, the greater the distortion will
be√√
 An undesirable increase in the money supply will lead to a contraction√√
 An undesirable decrease in the money supply will lead to a decrease in
production processes. √√
 Government should carefully control the stock of money in the economy so that it does not distort the equilibrium that markets forces will
automatically establish. √√
(Accept any other relevant argument).
15.2
Evaluate the use of fiscal policies to influence the economy








(8)
Fiscal policy refers to the government’s use of taxation and
spending to achieve economic objectives of the state. 
When the economy is in a recession the state can use expansionary fiscal policy to stimulate the economy. 
This is achieved by increasing government expenditure and reducing taxation. 
Injections into the circular flow stimulate demand for goods and
services, thus stimulating supply and increased output. 
A continuation of government spending and decreased taxation
can over stimulate the economy, fueling inflation. The value of
purchasing power of money will decrease. 
The government need to apply restrictive fiscal policy in an attempt to dampen the economy. 
This is achieved by decreasing government spending and increasing taxation. 
Restrictive fiscal measures could lead to unemployment due to a
decrease in demand for goods and services. 
(Accept any other correct relevant response)
64
15.3
How has the Keynesian (endogenous) school of thought influence the
 The Keynesian (endogenous) view is that markets are inherently unstable, therefore government intervention is necessary to 65stabilize
the economy√√
 They argue that changes in value of total expenditure bring about
changes in demand√√
 Government can intervene through fiscal policy which includes taxes
and government spending√√
 During a recession, government can increase its spending and reduce
taxes. (stimulate)√√
 This will increase the level of economic activity e.g. production, employment, income and demand√√
 During a peak the government can increase taxes and reduce government spending√√
 This will result in reduced income, reduced demand for factors of production, and expenditure√√
(8)
15.4
How will businesses react to the different phases in the business cycle
(8)

Business cycle fluctuations occur around a long-term growth trend and
are usually measured by considering the growth rate of real gross domestic product. √√
Expansion
 More workers are hired due to demand of goods and services which
increase the costs for each job and reduce profits√√
Peak
 At the peak of the business cycle, the economy can be said to be “overheated.” √√
 High profits are made and quality of work may begging to decline √√
Contraction
 As the economy begins to contract, business begins to slow down
and he might have to lay off some of the less experienced workers
√√
15.5
How does lack of investors contribute to trough in a typical business cycle
 lack of investment at other times then dries up the volume of income
and production in the circular flow, leading to a contraction. √√
 misplaced government investment in improving industrial capacity
could be inefficient and fail to increase productivity in the economy√√
 an economic downturn and a fall in the rate of economic growth, business will cut back on investment√√
 lack of investing in skills and education can decrease labour productivity. √√
(8)
65
SESSION 3:
SECTION A: TYPICAL EXAM QUESTIONS
Section A – Short Questions
QUESTION 1:
HINT: When answering Section A – short question, it is important not to rush
but to read the questions carefully and to make sure you understand what the
question is asking. Always remember one alternative is completely wrong, one
is nearly correct and one is totally correct. It is easy to eliminate the completely
wrong answer, but if you do not read the question carefully the nearly correct
answer will also appear correct. The answer will NEVER be two options. Only
ONE option is correct. Your answer will immediately be marked incorrect if you
write TWO options.
1.1.1.
1.1.2.
1.1.3.
1.1.4.
1.1.5.
1.1.6.
1.2
C √√
C √√
D √√
D √√
D √√
A √√
1.1.7. C √√
1.1.8. B √√
1.1.9. B √√
1.1.10.
B √√
1.1.11.
D √√
1.1.12.
B √√
Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A – I) next to the question number (1.2.1 – 1.2.8)
in the ANSWER BOOK, for example 1.2.9 J.
1.2.1. F√
1.2.2. A√
1.2.3.b √
1.2.4.E√
1.2.5.C√
1.2.6.D√
1.3
Give ONE term for each of the following descriptions. Write only the term
next to the question number (1.3.1 – 1.3.6) in the ANSWER BOOK. Abbreviations, acronyms and examples will NOT be accepted.
1.3.1
Lagging indicator√
1.3.2
Trend √
1.3.3
Aggregate supply √
1.3.4
Aggregate demand √
66
1.3.5
Economic indicator √
1.3.6
1.3.7
Coincident √
1.3.8
Length √
1.3.9
Amplitude √
QUESTION 2:
HINT: When the question requires you to “list” or “name”, you need not write a
sentence but merely one or two words. This MUST be done in bullet form.
2.1
 Demand side policy √
 Supply-side policy √
(2X1)
2
2.2
List any TWO economic indicators
 Lagging √
 Coincident √
(2X1)
2
2.3
Name any TWO non-economic indicators
 Length √
 Trend √
 Moving averages √
(2X1)
2
2.4
List any TWO examples of leading economic indicators
(2X1)
 Commodity prices√
 Equity prices √
 Average manufacturing hours worked √
2.5
2.6
Name any TWO examples of coincident economic indicators
(2X1)
 Volume of imports√
 Industrial production index√
 Value of wholesale retail and new vehicle√
List any TWO lagging economic indicator
 Unemployment rate√
 Number of commercial vehicles sold√
(2X1)
2
2
2
67

Real investment in machinery and equipment √
2.7
Name TWO segments of Philips curve
 Inflation √
 Unemployment √
(2X1)
2
2.8
List any TWO economic sources of efficiency
 Tax rates√
 Capital consumption √
 Human resources development √
(2X1)
2
2.9
Name TWO measures of supply-side policies
 Reduction of costs√
 Improving the efficiency √
 Improving the efficiency of markets√
(2X1)
2
QUESTION 3:
3.1
20 Minutes
(Taken from various sources)
Why does unemployment decrease when GDP increases?
(1x2)
 some sectors are more labour-intensive than others, meaning that the labour requirement of some sectors is higher
than that of others to produce the same amount of output.
√√
 the unemployment rate is higher (lower) if the GDP reduction comes from more (less) labour-intensive sectors√√
3.2
What is a criticism of the Phillips curve?
(1x2)
 The main criticism of the Philips Curve is that the negative
relationship between unemployment and inflation is the
short-run phenomenon. √√
 In the long-run, such a trade-off disappears, a situation
where the unemployment rate moves towards the equilibrium√√
3.3
How can extrapolation be used in predicting the trend of the
economy?
(1x2)
 Known data about economic trends can be used to predict
future trends
3.4
Why does a business cycle diagram serve as a forecasting
model?
(1x2)
2
2
2
2
68

3.5
It is a tool that can be used to determine and predict the level
of economic
activity in a country / It helps to make predictions about changing conditions and future events that may
significantly affect the economy. 
Why does unemployment rise during the recession phase of
(1x2)
 A recession is a period of economic contraction, where businesses see less demand and begin to lose money. √√
 To cut costs and stem losses, companies begin laying off
workers, generating higher levels of unemployment√√
2
Data Response
QUESTION 4:
Study the graph below and answer the questions that follow
4.1
Provide a name for the graph given above.
 Philips curve √
(1)
4.2
What is the original natural rate of unemployment in the graph
above?
 14%√
(1)
4.3
Briefly describe the term new economic paradigm.
 The new economic paradigm refers to government
policies designed to ensure a high rate of economic
(2)
69
growth without having supply constraints and price
inflation. 
4.4
Explain how the government can use its fiscal policy to speed
up the recovery of an economy.
Government can speed up the recovery of the economy by:
 reducing taxes which will give consumers and companies
more money to spend on goods and services and for companies to expand their production capacity. √√
 increasing government spending which will increase aggregate expenditure and demand and thus stimulate economic
activity and employment. √√
 increasing government spending and simultaneously decreasing taxes. √√
(Accept any other correct relevant response)
(2)
4.5
With the aid of a graph, illustrate the effect of demand-side
and supply-side policies in smoothing out business cycles.
(2x2)
(4)



There is an inverse/negative/opposite relationship.
As inflation increases unemployment decreases 
or as inflation decreases unemployment increases.
70
QUESTION 5:
Study the information and answer the questions that follow
October 2018
35 044
South Africa: New Passenger Car Sales
October 2019
35 904
5.1
What type of economic indicator is reflected in the table
above?
(1)
5.2
economic indicator.
 Lagging
 Coincident
(1)
5.3
Briefly describe the term economic indicator
 A statistic used to measure some aspect of the economy 
(2)
5.4
Explain the trendline of a business cycle
 The trendline indicates the general direction of an economy
over time. 
(2)
5.5
Analyse the state of the economy by using the data provided
in the table above. (2x2)
 There was hardly any growth in the economy between 2018
and 2019. 
 New passenger car sales are a leading indicator and the
statistic/indicator shows that the sales of new car sales were
basically stagnant between the two years. 
(4)
(Accept any other correct relevant response)
71
QUESTION 6:
Study the cartoon and answer the questions that follow
6.1
Identify the phenomenon illustrated above.
 Inflation (demand-side and supply-side policies) ✓
(1)
6.2
Name the infrastructure services in the illustration.
 Transport ✓
(1)
6.3
Briefly describe the monetary policy
 Monetary policy is the macroeconomic policy laid down by
the central bank. It involves management of money supply
and interest rate and is the demand side economic policy
used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
(2)
6.4
Explain under which circumstances monetary policy will be
most effective to stimulate demand and increase the income
level in the aggregate demand and aggregate supply.
 When investment demand is more interest elastic,✔ a given
decrease in the interest rate will have a larger effect on investment.✔
 Therefore, aggregated demand will increase more than
when investment demand is more interest elastic.✔
(2)
72



6.5
The flatter the aggregate supply curve,✔ the larger the increase in income due to a given shift of the aggregate demand curve.✔
The increase in the income level will thus be larger if the aggregate supply curve is flatter.✔
Thus, the more interest elastic investment is and the flatter
the aggregate supply curve, the more effective monetary
policy will be to stimulate demand
How will price increase affect the economy and standard of
living? (2x2)
 Less money to spend then businesses don’t profit as
much

Suffer from depression or struggle to provide for their families

Unemployment increases
(4)
QUESTION 7:
Study the graph and answer the questions that follow
Foreign Direct Investment in South Africa decreased by 16545 ZAR Billion in the
third quarter of 2020
73
7.1
Name the approach of business cycle shown above

7.2
7.3
Endogenous √
Which year is having the least on investment?

(1)
2020√
Briefly describe the term lagging economic indicators

(1)
(2)
Economic indicator that do not change direction until after
the business cycle has changed its direction√√
7.4
How an increase in investment may affect unemployment?
 Unemployment will be reduced due to investment injected√√
(2)
7.5
Calculate the moving averages from January 2018 to January
2020
(2x2)
-13 817 + (-3164)+10 528=-6 453/2√√=-11 717√√
(4)
74
QUESTION 8:
Study the graph below and answer the questions that follow
8.1
Name the new economic paradigm policy illustrated above
 Demand -side policy √√
(1)
8.2
What do you think will happen to the AD curve when there is a
decrease in consumer confidence or business confidence?
 A decrease in consumer confidence or business confidence
(1)
8.3
Briefly describe the term aggregate supply
 the total supply of goods and services available to a particular market from producers√√
(2)
8.4
Explain how Changes by Consumers and Firms Can Affect AD
 When consumers feel more confident about the future of the
economy, they tend to consume more. √√ If business confidence is high, then firms tend to spend more on investment,
believing that the future payoff from that investment will be
substantial√√
(2)
75
8.5
How Government Macroeconomic Policy Choices Can Shift
(2x2)
 Tax policy can affect consumption and investment spending,
too. √√
 Tax cuts for individuals will tend to increase consumption
demand, while tax increases will tend to diminish it. √√
 Tax policy can also pump up investment demand by offering
lower tax rates for corporations or tax reductions that benefit
specific kinds of investment higher government spending will
cause AD to shift to the right√√
(4)
QUESTION 9:
Study the information and answer the questions that follow
9.1
Name the new economic paradigm policy illustrated above
 Supply-side policy √
(1)
9.2
Identify the original equilibrium intersection
(1)
76
9.3
Briefly describe the term aggregate demand
 Aggregate demand is an economic measurement of the total
amount of demand for all finished goods and services produced in an economy. √√
(2)
9.4
When Does A Supply Shock Shift Potential GDP?
 Suppose there is a decrease in aggregate demand, which is
shown by a leftward shift in AD √√
 In the short term, wages are sticky and output decreases
along the SRAS√√
 Over time, wages decrease and as they do, the SRAS shifts
to the right due to the decrease in firms’ cost of production.
The SRAS continues to shift until GDP has returned to potential. √√
(2)
9.5
How Changes in Input Prices Shift the AS Curve?
(2x2)
 Higher prices for inputs that are widely used across the entire economy, such as labor or energy, can have a macroeconomic impact on aggregate supply. √√
 Increases in the price of such inputs represent a negative
supply shock, shifting the SRAS curve to shift to the left. √√
 This means that at each given price level for outputs, a
higher price for inputs will discourage production because it
will reduce the possibilities for earning profits. √√
(4)
QUESTION 10:
Study the extract below and answer the questions that follow
ECONOMIC INDICATORS USED IN FORECASTING
manufacturing sector and softer commodity prices in the month all contributed to a fall.
10.1
Identify an example of a leading economic indicator from the
above extract
(1)
77
10.2
Name the factor that contributed to a fall in the manufacturing
sector
 Fewer hours worked in the manufacturing sector 
(1)
10.3
Briefly explain the term composite indicator
 It is a grouping of various indicators of the same type into a
(2)
single value. 

The single figure forms the norm for a country’s economic
performance. 
10.4
Explain how leading economic indicators are used in forecasting?
 Leading economic indicators change before the economy
(2)
changes, giving a warning of what we can expect in the future. 

They lead the economy indicating changes before the
changes happen. 

They reach a peak/trough a few months before the business
cycle reaches a peak/trough 

10.5
Examples: share prices, total number of new cars sold etc. 
How can the government use fiscal policy to stimulate the
economy?
(2x2)
 Raising government spending (G) with borrowed money
(4)
(budget deficit) / Aggregate expenditure and demand will increase and employment is likely to increase. 

Decreasing taxes consumers and producers have a larger
part of their incomes available to spend on goods and services or investment / aggregate expenditure increases and
employment increases. 

Raising government spending and simultaneously decreasing taxes will have a strong effect of increasing government
spending and consumers and producers will have more to
spend or to invest demand increases substantially and employment increases. 
78
QUESTION 11:
Study the information and answer the questions that follow
Imports into South Africa reached an all time high of over R125 billion in October of 2018.
This year, however, the import industry has suffered under restrictions and delays caused
by the global pandemic.
According to Trading Economics imports into South Africa are expected to be around R103
billion by the end of this quarter. They estimate imports into South Africa to reach around
R105 billion in the next 12 months. In the long-term, South African imports are projected to
trend around R106 billion during 2021, increasing to R108 billion by 2022. So, while there is
a definite decline, there are clear signs that the import sector is ready to pick up again.
SA’s main imports are: machinery (23.5% of total imports), mineral products (15.1%), vehicles and aircraft vessels (10%), chemicals (10.9%), equipment components (8.1%) and iron
and steel products (5.3%)
11.1
Identify an example of a leading economic indicator from the
above extract
 Coincident economic indicator√
(1)
11.2
Name ONE example of lagging indicator on the above extract
 Real investment in machinery and equipment √
(1)
11.3
Briefly explain the term lagging indicator
 Economic indicators that do not change direction until after
the business cycles has changed its direction√√
(2)
11.4
Why is unemployment rate an important economic indicator?
 uses to determine the health of the economy when setting
monetary policy. Investors also use current unemployment
statistics to look at which sectors are losing jobs faster√√
(2)
11.5
How does real output affect unemployment?
(2x2)
 output measures the productive capacity of the economy
when unemployment is at its natural rate. Because people
move from job to job as a regular event, the natural rate of
unemployment is generally believed to be greater than zero:
√√
 There will almost always be some unemployment in the
economy. √√
 Thus, potential output is not the maximum an economy
could theoretically produce, but a lower, sustainable number√√
(4)
79
QUESTION 12:
Study the information and answer the questions that follow
12.1
Name the feature underpinning forecast labelled A
 Amplitude √
(1)
12.2
Identify the economic phase which occurs at A
 Recovery √
 prosperity√
(1)
12.3
Briefly describe the term length of a business cycle

(2)
12.4
What is the purpose of a trend line?
 The trend line shows that the economy is always moving upwards or growing in the long run. The trade cycle is used to
analyse the state of the economy. √√
(2)
12.5
How is the length of a business cycle measured? (2x2)
(4)
80
QUESTION 13
Paragraph type of questions
Middle order
13.1
Discuss moving averages for 6 years with numerical values as features
underpinning forecasts

A moving average is a tool used to analyse changes that occur in a
series of data over a period of time √√

It is calculated to iron out small fluctuations and reveal trends in the

The data given can be used to calculate the moving average for the
business cycle for the past three years in order to smooth out any
minor fluctuations and to indicate the trend over the past three
years √√

The quantitative method does forecasting based on mathematical
models, statistics and historical time series data √√

It is evident from the historical time series data given, that numbers
that were collected at regular intervals or for a certain period
showed a specific trend √√

These can be the GDP figures over the past five years √√

This method is accurate when used for short-term to medium-term
forecasting √√

Moving averages are calculated over a certain time (e.g. a few
months) to smooth out minor fluctuations in the data √√

By using moving averages determined from the given data, economists get a clearer picture of the general trends in the business cycle √√

The qualitative method does forecasting based on intuitive judgement, own opinions, market research and subjective probability estimates√√

It is also known as the judgemental method √√

This method is appropriate to use when previous data is not available and when long-term forecasting is done √

E.g. is when various economics experts use their knowledge and
their intuitions about the future to make predictions about the economy √√

The six year moving average for above table would be:

- (5 + 8 + 9 + 11 + 4+6) / 6 = 7.1 √√

By calculating the moving average, economists or businesses will
be able to analyse economic trends (by 7 to 8%) √√
(8)
13.2
Distinguish the difference between amplitude and extrapolation as features of underpinning forecasts
Amplitude
 Amplitude refers to the deviation from the trend line to the trough and
from the trend line to the peak of the business cycle √√
 It shows the severity of each phase of the business cycle, the shorter
the amplitude – indicates a mild recession √√
 The larger the amplitude, the more extreme the changes that occur √√
(8)
81

If the peak is far from the trend line it means the underlying causes of
expansion are very strong / If the peak is close to the trend line, the
underlying causes are weak √√
Extrapolation √
 Past data is used, where predictions are made about the future based
on assumptions related to trends √√
 Extrapolation means to estimate something unknown from the facts
and information that is known √√
 Extending a trend into the future may provide information on what is
likely to happen √√
 If a business cycle has passed through a trough and entered into a
boom phase, forecasters may predict that the economy will grow in the
 Extrapolation techniques are sometimes used to predict future share
prices √√
 The trend of the curve must be followed to complement the completed
section. Take a calculated decision to continue beyond the level of a
resistance point √√
13.3
With aid of diagram discuss Philips curve as demand-side policies
(8)
Inflation:
 Aggregate demand increases more quickly than aggregate supply and
this causes price increases. 
 If the supply does not react to the increase in demand, prices will increase. 
 This will lead to inflation (a sustained and considerable in the general
price level) 
Unemployment:
82
 Demand-side policies are effective in stimulating economic growth. 
 Economic growth can lead to an increase in demand for labour. 
 As a result more people will be employed and unemployment will increase. 
 As unemployment decreases inflation is likely to increase. 
 This relationship between unemployment and inflation is illustrated in
the Phillips curve. 
 The PC curve shows the initial situation. A is the point of intersection of
the PC curve with the x-axis. It shows the natural rate of unemployment, for instance 14%
 At point A inflation rate is zero. 
 If unemployment falls to C for instance, 8%, inflation caused by wage
increases is at 6%.
 If unemployment increases from C to B to A, inflation falls from 6% to
2% to 0%.
13.4
Explain reduction in costs as a supply -side policies
 Infrastructural services: reasonable charge and efficient transport,
communication, water services and energy supply. 
 Administrative costs: these costs include inspection, reports on applications of various laws, regulations and by-laws, tax returns and returns providing statistical information.
 It adds to costs and businesses carry a heavy burden 
 Cash incentives: it includes subsidies for businesses to locate in neglected areas where unemployment is high and compensation to exporters for certain costs they incur in development of export markets.

(8)
13.5
Discuss expansionary and contractionary policies in smoothing out business cycles
 Monetary policy is conducted by the monetary authorities, which include the Monetary Policy Committee of the South African Reserve
Bank. 
 Expansionary monetary policy refers to a decrease in the interest rate
level . 
 Fiscal policy is conducted by the Treasury Department of the South African government. 
 Expansionary fiscal policy refers to an increase in government expenditure and/or a decrease in the tax rate . 
(8)
83
13.6
Explain the effect of demand-side and supply-side policies using a graph
(8)
AS
Price
level
AS1
P
Y







13.7
Y1
National income
(Real GDP)
Explanation:
The above graph shows:
Aggregate demand (AD) and aggregate supply (AS) are in equilibrium
at point C.
If aggregate demand is stimulated so that it moves to AD1 and aggregate supply responds promptly and relocates at AS1 a larger real output becomes available without any price increases.
Supply is often sticky and fixed in the short term.
Therefore, if aggregate demand increases to AD1 and aggregate supply does not respond, intersection is at point F. Real production increases but so do prices, in other words with more inflation.
The aggregate demand curve locates at any position to the left of AS1
inflation prevails.
The solution is to create conditions that ensure that supply is more
flexible.
If the cost of increasing production is completely flexible, a great real
output can be supplied at any given price level.
Discuss lagging and composite as features of underpinning forecasting
Lagging indicators:
 Won't change direction until after the business cycle has changed its
direction/the specific turning points tend to follow the reference turning
points 
 They serve to confirm the behaviour of the coincident indicators 
(8)
84

Examples of these indicators are hours worked in construction and total of commercial vehicles sold 
Composite economic indicator √
 A summary of various indicators of the same type into a single value.
√√
 The three composite indicators are often used to calculate a single
composite indicator, √√ that is single number to benchmark a country’s
economic performance. √√
13.8
Use a diagram and discuss the cycle length and amplitude as features
underpinning forecasting
Length of a cycle 

Measuring a cycle from peak to peak or trough to trough 

Longer cycles show strength and shorter cycles show weakness with
(8)
regard to economic activities 
Amplitude 

Measures the distance of the variable from the trend line 

Amplitude refers to the vertical (height) difference between a trough
and the next peak of a cycle 

13.9
The larger the amplitude, the more extreme the changes that occur 
With aid of diagram discuss the cycle length and the trend line as features
underpinning forecasting
LENGTH
•
This is the time that it takes for a business cycle to move through
one complete cycle. ✓✓
•
It is measured from peak to peak/trough to trough. ✓✓
•
It is useful to know the length because the length tends to remain
relatively constant over time. ✓✓
•
If business cycles have a longer length, we consider the economy
to be strong. ✓✓
•
If business cycles have a shorter length, we consider the economy
to be weak ✓✓
(Any 2 x 2)
(8)
Trend line:
 The trend line that rises gradually will be positively sloped in the long
run, the rising line indicates a growing economy√√
 The trend indicates the general direction in which indexes that were
used in the business cycle move√√
85


13.10
The trend will change when the time series data change their behaviour patterns of the past√√
However some forces have to be overcome for that to happen e.g. Resistance points and Channels√√
Discuss leading and coincidence as features underpinning forecasting
 Give consumers, businesses and the state a glimpse of the direction in
which the economy might be heading.√√
 When these indicators rise, the level of economic activities will also rise
a few months later. √√
and sales. √√
(Examples only count 1, must give 2 for 2 marks
(Any 2 x 2)
Coincidence
 These indicators move at the same time as the economy
 Example the value of retail sales is a coincident economic indicator
 If the business cycle reaches a peak and the begins to decline,the value
of retail sales will reach a peak and then begin to decline
Examples of coincidence indicator
 Industrial production index
 Volume of imports
 Utilization of productive capacity in manufacturing 
QUESTION 14
Paragraph type of questions
(8)
Higher cognitive
14.1
How does unemployment and inflation affect GDP?
 The Phillips curve is the relationship between inflation, which affects the
price level aspect of aggregate demand, and unemployment, which is
dependent on the real output portion of aggregate demand. 
 As more workers are hired, unemployment decreases.  Moreover,
the price level increases, leading to increases in inflation
 Expansionary efforts to decrease unemployment below the natural rate
of unemployment will result in inflation. 
 This changes the inflation expectations of workers, who will adjust their
nominal wages to meet these expectations in the future. This leads to
shifts in the short-run Phillips curve
(8)
14.2
How important are low direct tax rates to achieving supply side improvements?
 lower income tax rates increase the incentives for people to work harder,
 leading to an increase in labour supply and more output. 
 lower taxes do not always increase work incentives (e.g. if income effect
outweighs substitution effect). 
 Firms may not invest the increased profit but give to shareholders or
save
(8)
86
14.3
Why is it impossible to achieve zero unemployment and low inflation
rates in an economy?
 Demand side policies are effective in stimulating economic growth, it
increases the demand for labour and this reduces unemployment. 
 But as unemployment falls, inflation starts to rise. 
 This is because aggregate demand increases, aggregate supply does
respond immediately and becomes sticky and fixed in the short term.

 Real production increases, but so do prices – more inflation. 
 It has become a normal phenomenon for countries to choose how
much unemployment they would like to trade-off for inflation. 
 This phenomenon is illustrated by the Phillips curve. 
(8)
14.4
(8)
Leading indicators are important in forecasting because:





They predict when the next change in the business cycle will be

They are being used to gain some sense of where the economy is
Investors are using them to adjust their strategy to benefit from future market conditions that will affect their revenue 
Businesses are using them to anticipate economic conditions 
Policy makers are using them for considering adjustments to monetary policy
87
SECTION C
HINT: All section C questions have TWO questions 5 & 6 NOT 9 & 10 like in
this document. In the examination you will need to answer only one.
HINT: Section C – the long question, must be answered in FOUR sections: Introduction (definition), Body (headings and full sentences in bullets) additional part
and conclusion (summarising). The mark allocations for Section C is as follows:
QUESTION 15
 Discuss in detail the demand-side policies used in ‘smoothing of cycles’
(26 marks)

Explain the effect of supply-side policies on South Africa economy
(10 marks)
INTRODUCTION

Demand Side Policies are attempts to increase or decrease aggregate demand to
affect output, employment, and inflation
(Max.2)
BODY: MAIN PART
Demand-side policies
Inflation:
It focuses on aggregate demand in the economy
When households, firms and the government spend more, demand in the
economy increases. 
This makes the economy grow but lead to inflation.
 Aggregate demand increases more quickly than aggregate supply and this causes
price increases. 
 If the supply does not react to the increase in demand, prices will increase. 
 This will lead to inflation (a sustained and considerable in the general price level)

Unemployment:





Demand-side policies are effective in stimulating economic growth. 
Economic growth can lead to an increase in demand for labour. 
As a result more people will be employed and unemployment will increase. 
As unemployment decreases inflation is likely to increase. 
This relationship between unemployment and inflation is illustrated in the Phillips
curve. 
 The PC curve shows the initial situation. A is the point of intersection of the PC
curve with the x-axis. It shows the natural rate of unemployment, for instance
14%
 At point A inflation rate is zero. 
88
 If unemployment falls to C for instance, 8%, inflation caused by wage increases is
at 6%.
 If unemployment increases from C to B to A, inflation falls from 6% to 2% to
0%.
Phillips curve (PC)
Labelling of axes = 1
Drawing of correct 2
curves = 1
Point A = 1
Max 4 marks
 supply-side policies are government attempts to increase productivity and increase efficiency in the economy. 
 if successful, they will shift aggregate supply (as) to the right and enable higher
economic growth in the long-run
 supply-side policies can contribute to reducing structural, frictional and real wage
unemployment and therefore help reduce the natural rate of unemployment
 supply-side policies will increase the sustainable rate of economic growth by increasing lras; this enables a higher rate of economic growth without causing inflation. 
 by making firms more productive and competitive, they will be able to export more.
this is important in light of the increased competition from an increasingly globalised marketplace
Conclusion
89
QUESTION 16
 Discuss in detail the supply- side policies used in ‘smoothing of cycles’
(26 marks)
 Explain peak and trough by using the Philips curve
(10 marks)
INTRODUCTION
Supply-side policies are government attempts to increase productivity and increase efficiency in
the economy. If successful, they will shift aggregate supply (AS) to the right and enable higher
economic growth in the long-run
(Accept other relevant definition/description of smoothing/new economic paradigm.
(Max.2)
BODY: MAIN PART
Supply-side policies
Reduction of costs 



Infrastructural services: reasonable charge and efficient transport, communication,
water services and energy supply. 
Administrative costs: these costs include inspection, reports on applications of various laws, regulations and by-laws, tax returns and returns providing statistical information.
Cash incentives: it includes subsidies for businesses to locate in neglected areas
where unemployment is high and compensation to exporters for certain costs they
incur in development of export markets. 
Improving the efficiency of inputs 




Tax rates: low tax rates can serve as an incentive to workers. It will improve the
productivity and output. 
Capital consumption: replacing capital goods regularly creates opportunities for
businesses to keep up with technological development and better outputs
Human resource development: to improve the quality of manpower by improving
health care, education and training. 
Free advisory service: these promote opportunities to export. 
Improving the efficiency of markets 



Deregulation: removal of laws, regulations and by-laws and other forms of government controls makes the market free. 
Competition: encourages the establishment of new businesses 
Levelling the play field: private businesses cannot compete with public enterprises

90
Answers must be in full sentences and well described with examples to be able to obtain
2 marks per fact.
 During business cycle contractions the unemployment rate rises and during expansions the unemployment rate falls. 
 The low point in the unemployment rate usually occurs just before the peak. The
high point usually occurs just after the trough.
 It appears that the increase in the unemployment rate is usually faster than the decline. 
 unemployment rate may surge upwards to a peak and then slowly fall back. This
may be because hiring is more costly and time-consuming than firing, or that firms
are reluctant to let go of staff until and then do so in a rush
 During economic contractions, when output is falling, the inflation rate also declines. 
 During recoveries, when the economy nears the peak of the business cycle, the
rate of inflation increases. 
 The inflation cycle does not perfectly match the business cycle. While inflation
generally declines during contractions, the decline does not stop when the trough
is reached and recovery begins. Inflation continues to fall during the early stages
of the recovery. 
CONCLUSION
91
SECTION D: Homework
1.1.1.
1.1.2.
1.1.3.
1.1.4.
1.1.5.
1.1.6.
1.2
B 
B 
C 
A 
B 
A 
1.1.7. A 
1.1.8. D 
1.1.9. C 
1.1.10.
A 
1.1.11.
C 
1.1.12.
A 
Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A – I) next to the question number (1.2.1 – 1.2.8)
in the ANSWER BOOK, for example 1.2.9 J.
1.1 Matching questions
1.2.1 E
1.2.2 A
1.2.3 I 
1.2.4 H
1.2.5 C
1.2.6 J
1.2.7 L
1.2.8 D
1.2.9 K
1.2.10 B
1.2.11 G
1.3
F
Give ONE term for each of the following descriptions. Write only the term
next to the question number (1.3.1 – 1.3.6) in the ANSWER BOOK. Abbreviations, acronyms and examples will NOT be accepted.
1.3.1
Depression
1.3.2
Fiscal 
1.3.3
Kuznets cycle 
1.3.4
Extrapolations 
1.3.5
1.3.6
1.3.7
Expansion 
Amplitude 
1.3.8
Exogenous factors
92
SECTIOB B: HOMEWORK
QUESTION 2 20
2.1
Name any TWO types of interest rate indicators
 Repo rate 
 Nominal interest rate 
 Prime interest rate 
 Real interest rate 
2.2
Name TWO service indicators
 Electricity
 Refuse disposal
 Water supply
 Sanitation
2.3
List any TWO monetary policy instruments
 Interest rate
 Cash reserve requirement 
 Open-market transaction
 Moral suasion 
(2 x 1)
(2)
2.4
Name TWO turning points in a typical business cycle
 Peak 
 Trough
(2 x 1)
(2)
2.5
Name any TWO measures that improve market efficiency (2x1)
 Deregulation 
 Competition 
 Levelling the play field 
(2)
2.6
List TWO measures to improve the efficiency of inputs
 Tax rates
 Capital consumption 
(2 x 1)
(2)
3.1
How does the South African government try to smooth out
fluctuations in the business cycle? (1 x 2)
 From the fiscal policy side the government can increase
or decrease taxation
 and/or government expenditure
 From the monetary policy side interest rates can be increased/decreased to manage the money in circulation√√
(2)
3.2
How will the contraction phase of a business cycle influence
the economy through interest rates? (1 x 2)
(2 x 1)
(2)
(2)
(2 x 1)
QUESTION 3
(2)
93

In the latter stage of a downswing interest rates will decrease √ more people will borrow money to stimulate the
economy √ In the early stage of a downswing interest rates
will increase √ to dampen the economy - people will borrow
less money √
3.3
How can extrapolation be used in predicting business cycles?
(1 x 2)
 By extending the current trend line/To base forecasting on
3.4
How is length and amplitude of a typical business cycle measured?
(1 x 2)
 The length of a business cycle is the period of time containing a single boom and contraction in sequence. ... Business
cycles are usually measured by considering the growth rate
of real gross domestic product
3.5
Why do investors loss confidence during trough?

(2)
(2)
(1 x 2)
(2)
No growth will be taking place and they deviate their optimal
investment allocation to avoid assumed risk
QUESTION 4
Study the following extract and answer the questions that follow
94
4.1
Identify the trend line in the business cycle above.
 K√
(1)
4.2
Which letter represents a trough in the diagram above?
 D√
(1)
4.3
Briefly describe the term business cycle.
 Successive periods of expansion and contraction √ in economic activities √
(Accept any other correct relevant description
(2)
4.4
Explain economic activity during phase EF in the business cycle.
 Economy is growing and improving rapidly √√
 More businesses open up and more workers are hired √√
 Increased demand for credit which increases interest rates
√√
(Accept any other correct relevant response
(2)
4.5
How can the length (BF) be used in forecasting of business
cycles?
(2x2)
 Because the length remains relatively constant, one can
forecast that the next cycle will be of a similar length √√
 If a business cycle has a length of 12 years, it can be predicted that 12 years will pass between successive peaks or
troughs or that it will take 6 years for the economy to pass
through a recession √√
(4)
(Accept any other correct relevant response)
95
QUESTION 5
Study the following information and answer the questions that follow
5.1
What do dotted lines a and b represent?
 Amplitude√
(1)
5.2
Name turning point D?
 Peak 
(1)
5.3
Briefly describe the term real (actual) business cycles.
 Real changes in economic activities over a period of time√√
(2)
5.4
What is the importance of the length (T2–T3) of a business cycle?
 The length of the business cycle is the amount of
time it takes to move
through one complete cycle√√
(2)
96

Longer cycles show strength – shorter cycles show
weakness√√
 The length in this instance is approximately 3 years
and we can predict
 that the following one will also take approximately 3
years or shorter√√
(Accept any other relevant response)
5.5
What can the government do to ensure that high inflation does
not occur during peaks of business cycles?
(4)
(2x2)



Government can increase taxes√√
Government expenditure can be reduced√√
Monetary policy instruments e.g. increased interest
rates, inflation targeting√√
(Accept any other relevant responses related to fiscal and
monetary policy
QUESTION 6
Study the article below and answer the questions that follow.
6.1
How long does a Juglar cycle last?
 7–11 years 
(1)
6.2
What is the slope of the trendline in the above graph?
(1)
97

Positive slope
6.3
Describe the term composite indicator.
 It is a summary of the various indicator groups into a
single number to benchmark a county’s economic performance.
(2)
6.4
Explain briefly the government’s aim with business cycle policies.
 It is to achieve the best possible growth rates for the country.
How can the length be used in forecasting of business cycles?
(2 x 2)
 Longer cycles show strength which will indicate that the next
cycle will also be strong. 
 With a length of 11 years , it can be predicted that 11 years
will pass between successive peaks or troughs for
the economy. 
(2)
6.5
(4)
QUESTION 7
Study the table below and answer the questions that follow.
YEAR
GDP(bn)
2017
5
2018
8
2019
9
2020
11
2021
4
7.1
Name any other economic indicators used in forecasting
 Coincident 
 Lagging 
(1)
7.2
List ONE reason for growth of Gross domestic product
 Increase in aggregate demand 
 Increase in aggregate supply
(1)
7.3
Briefly describe the term economic indicator
 A statistic used to measure some aspect of the economy
7.4
Why Is the Moving Average (MA) Important for Traders and
Analysts?
 Their most basic function is to create a series of average
values of different subsets of the full data set. A natural
complement to any time series interpretation, a moving average can smooth out the noise of random outliers and emphasize long-term trends.
7.5
Calculate moving averages for 5 years above
(2)
(2)
(4)
98
5+8+9+11+4=37
37/5=7.4
Question 8
Study the table below and answer the questions that follow.
8.1
Name the monetary policy instrument above
 Interest rate
 Repo rate 
(1)
8.2
Which exchange rate policy is being used by South African
Reserve Bank
 Free floating rate policy 
 Managed floating rate policy
(1)
8.3
Briefy describe the term monetary policy
 Monetary policy is an economic policy that manages the
size and growth rate of the money supply in an economy.
(2)
8.4
Explain open market transactions as a instrument of monetary
policy
(4)
99




Open market transactions
SARB selling securities to restrict bank credit
Banks have less money to lend and cannot extent as much credit
as before
To encourage credit the SARB buys securities in the open market
and money then
flows back into the system
Bank uses money to create credit

8.5
Discuss the difference between cash reserve requirements
and moral suasion




QUESTION
9
(1)
Moral suasion
SARB consults with the banks and persuade them to act in a –
manner desirable to the prevailing economic conditions
Sells paper such as bills and bonds
Cash reserve requirement
This is the minimum percentage of total deposits that banks have
to keep as cash and that may be used for lending or investing
A change in the cash reserve requirement makes more or less
money available in the banking system
Paragraph type questions-Middle cognitive
9.1
Explain endogenous approaches to business cycels
 This follows the belief that economic growth is primarily the result of
endogenous and not external forces√√
 This is often called the Keynesian view. This approach holds the view
that markets are inherently unstable and therefore government intervention may be required√√
 The price mechanism fails to co-ordinate demand and supply in markets and this gives rise to upswings and downswings√√
•
Prices are not flexible enough√√ (e.g. wages)√
•
A business cycle is an inherent feature of a market economy√√
•
Indirect links or mismatches between demand and supply are
normal features of the economy√√
(8)
9.2
(8)




Theories by the Monetarists ( Friedman) and Keynesians (Keynes)
extreme and only true under specific circumstances √√
Under real circumstances, government pursues economic growth irrespective of inherently stable or unstable market. √√
Therefore governments aren't extreme, but transparent and follow
pragmatic policies √√
The root of the new economic paradigm is embedded in the prevention of unstable conditions that will lead to contractions √√
100


According to the new economic paradigm it is possible for output to
rise over extended periods of time without being hampered by supply constraints and inflationary pressures
Embedded in demand-side and supply-side policies √√
9.3
Distinguish between expansion phase and depression phase of a typical
Expansion phase √
 There is a great degree of optimism in the economy √√
 Entrepreneurs borrow more money to buy machines and equipment
(Investment) √√
 Employment levels rise, and this give rise to a rise in salaries and
wages and spending increases √√
 A peak is reached√√
 There is a larger amount of money in circulation and this leads to an inflationary situation in the economy and lead to a recession. √
Depression phase √
 During a depression money is in short supply, leading to a further decline in spending. √√
 There is a negative impact on investment spending. √√
 Economic activity is at its lowest, and a trough is reached. √√
 Cost of production decreases. √√
(8)
9.4
Discuss the monetary policy instruments used in stabilising the economy.
Interest rate changes
 It is used to influence credit creation by making credit more expensive or
cheaper
 Stabilisation of the exchange rate by encouraging capital inflows or outflows
in order to take care of deficit or
 Surplus on the current account of the balance of payments
Open market transactions
 SARB selling securities to restrict bank credit
 Banks have less money to lend and cannot extent as much credit as before
 To encourage credit the SARB buys securities in the open market and money
then flows back into the system
 Bank uses money to create credit
Moral suasion
 SARB consults with the banks and persuade them to act in a –manner desirable to the prevailing economic conditions
 Sells paper such as bills and bonds
Cash reserve requirement
 This is the minimum percentage of total deposits that banks have to keep as
cash and that may be used for lending or investing
 A change in the cash reserve requirement makes more or less money available in the banking system
(8)
101



9.5
Exchange control policy
A measure taken to prevent capital assets from being transferred to other
countries
A policy usually developed by developing countries where the central bank
fears that large amounts of foreign currency will be removed from a country
These have been reduced in South Africa recently
Any other relevant argument.
(Any 4 x 2
Discuss the Monetarist approach as a cause of business cycles.
 Also called the sunspot theory / exogenous approach √√
 Believe markets are inherently stable.√√
 Departures from the equilibrium state are caused by factors outside of the
market system.√√
 Market forces (supply and demand) kick in and bring the economy back
to its natural state or equilibrium route.√√
 These interferences are not part of the normal forces operating in the
market.√√
 Governments should not interfere in the markets. √√
 Major cause of economic fluctuations are inappropriate government policies √√, undesirable increases and decreases in money supply √√
weather conditions √√ shocks (September 11) √√ structural changes √√
severe increases in the price of fuel √√ and wars√√
(Maximum 4 marks for examples
QUESTION 10
10.1
(8)
Paragraph type questions-Higher cognitive
How can taxation be used to stimulate employment in South Africa?
(8)
Individual Income Tax
 Lower taxes effectively increases the disposable income of people√√
 This could lead to an increase in the demand for goods and services√√
 Businesses (suppliers) will have to increase their production to compensate for the increased demand√√
 This could lead to job creation√√
Company Tax:
 Lower company tax increase investment possibilities to expand the
 This will create the opportunity to employ more people√√
Taxes on imports:
 Import/custom duties reduce imports√√
 Stimulate local production and create more jobs√√
(Accept any other relevant facts)
10.2
(8)
How has the Keynesian (endogenous) school of thought influenced business cycles?
102







The Keynesian (endogenous) view is that markets are inherently unstable, therefore government intervention is necessary to stabilise the
economy√√
They argue that changes in value of total expenditure bring about
changes in demand√√
Government can intervene through fiscal policy which includes taxes
and government spending√√
During a recession, government can increase its spending and reduce
taxes. (stimulate)√√
This will increase the level of economic activity e.g. production, employment, income and demand√√
During a peak the government can increase taxes and reduce government spending√√
This will result in reduced income, reduced demand for factors of production, and
expenditure√√
10.3
How could the Monetarist’s viewpoint on government policies cause a
Monetarists viewpoints:
 Markets are inherently stable and that a disequilibrium in the markets
are caused by faulty policies√√
 The most important cause of economic fluctuations is inappropriate government policies√√.
 The monetarist’s feel that state intervention will cause distortion of equilibrium.
Equilibrium is caused by supply and demand√√
 If any imbalance occurs the market forces of supply and demand will always bring the market back to equilibrium√√
 The bigger the government intervention, the greater the distortion will
be√√
 An undesirable increase in the money supply will lead to a contraction√√
 An undesirable decrease in the money supply will lead to a decrease in
production processes.√√
 Government should carefully control the stock of money in the economy
so that it does not distort the equilibrium that markets forces will automatically establish.√√
(Accept any other relevant argument).
10.4
How does the government use the fiscal policy to restrict the economy?

Decreasing government expenditure to limit aggregate demand


Reducing production, as fewer goods and services be needed,
few factors of production will be employed and disposable income as well as expenditure will decrease 
(8)
(8)
103

Increasing taxes, which will lead to a decrease in disposable income and will lead to a decrease in aggregate demand 

Reducing government spending and simultaneously increasing
taxes: this will have a double effect 

Government spending decreases and consumers and producers
also have less spending .

Demand drops substantially, inflation decreases
104
SECTION C
HINT: All section C questions have TWO questions 5 & 6 NOT 9 & 10 like in
this document. In the examination you will need to answer only one.
ESSAY STRUCTURE
HINT: Section C – the long question, must be answered in FOUR sections: Introduction (definition), Body (headings and full sentences in bullets) additional part and
conclusion (summarising). The mark allocations for Section C is as follows:
MARK ALLOSTRUCTURE OF ESSAY:
CATION:
Introduction
Max 2
The introduction is a lower-order response.
 A good starting point would be to the main concept related to
the question topic
 Do not include any part of the question in your introduction.
 Do not repeat any part of the introduction in the body
 Avoid saying in the introduction what you are going to discuss
in the body
Body:
Main part: Discuss in detail/ In-depth discussion/ Examine/ CritiMax 26
cally discuss/ Analyse / Compare/ Distinguish/ Differentiate/ Explain/ Evaluate
Additional part: Give own opinion/ Critically discuss/ Evaluate/ Critically evaluate/ Draw a graph and explain/ Use the graph given and
Max 10
explain/ Complete the given graph/ Calculate/ Deduce/ Compare/
Explain Distinguish / Interpret/ Briefly debate/ How/ Suggest
Conclusion
Any Higher or conclusion include:
Max 2
 A brief summary of what has been discussed without repeating
facts already mentioned in the body
 Any opinion or value judgement on the facts discussed
 Additional support information to strengthen the discussion/analysis
 A contradictory viewpoint with motivation, if required
Recommendations
TOTAL
40
QUESTION 19
 Discus in detail the features of underpinning forecasting.

(26 marks)
Explain the effect of demand-side policies on South Africa economy (10
marks)
INTRODUCTION
Accurate prediction is not possible in Economics. The best the economists can do is to
try and forecast what might happen. There are a number of techniques available to help
economists to forecast business cycles, e.g. economic indicators OR
105
Successive periods of contraction and expansion of economic activities 
(Accept any other relevant introduction)
(2)
BODY: MAIN PART

These are indicators that change before the economy changes / coincide with the
reference turning point 
warnings) of where the economy might be heading. 
 Peak before a peak in aggregate economic activity is reached.
 Most important type of indicator in helping economists to predict what the economy will be like in the future 
 When these indicators rise, the level of economic activities will also rise in a few
months' time/an upswing 
 E.g. job advertising space/inventory/sales ratio
Coincident economic indicators

They move at the same time as the economy / if the turning point of a specific time
series variable coincides with the reference turning point
 It indicates the actual state of the economy
 E.g. value of retail sales. 
 If the business cycle reaches a peak and then begins to decline, the value of retail
sales will reach a peak and then begin to decline at same time
Lagging economic indicators

They do not change direction until after the business cycle has changed its direction
 They serve to confirm the behaviour of co-incident indicators
 E.g. the value of wholesalers' sales of machinery
 If the business cycle reaches a peak and begins to decline, we are able to predict
the value of new machinery sold
Composite indicator


It is a summary of the various indicators of the same type into a single value
Their values are consolidated into a single value , if this is done we find a value of
a composite leading , coincident and lagging indicator
Accept ONE example from the table below:
• Net new companies registered
• Number of new vehicles sold
CO-INCIDENT INDICATORS
• Registered unemployed
LAGGING INDICATORS
• Employment in non-agricultural sectors.
106
• Net gold and other foreign reserves
• Number of residential building plans
passed
• Share prices
• Real export of goods (gold excluded)
• Gross operating surplus as % of GDP
• Labour productivity in manufacturing
• Commodity prices in US \$ for a basket
of SA export commodities
• Opinion survey of the average hours of
work per factory worker in the manufacturing sector
• Opinion survey on stocks in relation to
• Opinion survey of volume of orders in
manufacturing
• Physical volume of manufacturing production
• Real retail sales
• Real merchandise imports
• Utilization of capacity in
manufacturing
constant prices excluding
agriculture, forestry and
fishing
• Industrial production index
• Value of wholesale, retail
and new vehicle sales at
constant prices
• Total formal non-agricultural employment
• Hours worked in construction
• Cement sales in tons
• Number of commercial
vehicles sold
• Real investment in machinery and equipment
• Unit labour cost in manufacturing
• Wholesale sales of metals, machinery and equipment
• Prime overdraft rate of
banks
• Value of non-residential
buildings completed at
constant price
Length 

This is the time that it takes for a business cycle to move through one complete
cycle (measured from peak to peak) 
 It is useful to know the length because the length tends to remain relatively constant over time. 
 If a business cycle has the length of 10 years it can be predicted that 10 years will
pass between successive peaks or troughs in the economy. 
 Longer cycles show strength. 
 Cycles can overshoot. 
Ways to measure lengths:
 Crisis to crisis 
 Historical records 
 Consensus on businesses experience 
Amplitude 





It is the difference between the total output between a peak and a trough. 
It measures the distance of the oscillation of a variable from the trend line / It is the
intensity (height) of the upswing and downswing (contraction and expansion) in
economic activity 
A large amplitude during an upswing indicates strong underlying forces – which result in longer cycles 
The larger the amplitude the more extreme the changes that may occur / extent of
change 
E.g. During the upswing inflation may increase from 5% to 10%. (100% increase)

107
Trend 


A trend is the movement of the economy in a general direction. 
It usually has a positive slope because the production capacity of the economy increases over time 
 Also known as the long term growth potential of the economy. 
 The diagram above illustrates an economy which is growing – thus an upward
trend (positive slope) 
 Trends are useful because they indicate the general direction in which the economy is moving – it indicates the rate of increase or decrease in the level of output
Extrapolation 

Forecasters use past data e.g. trends and by assuming that this trend will continue, they make predictions about the future
 Means to estimate something unknown from facts or information that are known

 if it becomes clear that the business cycle has passed through a trough and has
entered a boom phase, forecasters might predict that the economy will grow in the
 It is also used to make economic predictions in other settings e.g. prediction of future share prices
Moving average 

It is a statistical analytical tool that is used to analyse the changes that occur in a
series of data over a certain period of time / repeatedly calculating a series of different average values along a time series to produce a smooth curve 
 The moving average could be calculated for the past three months in order to
smooth out any minor fluctuations 
 It is calculated to iron out (minimize) small fluctuations and reveal long-term trends
Answers must be in full sentences and well described with examples to be able to
obtain 2 marks per fact.
Learners should be awarded 1 mark per 8 headings and examples.
(8 x 1) (8)
(Max 26)


Demand-side policies might also focus on reducing the cost for businesses of employing extra labour
Monetary policy involves the country’s central bank controlling the interest rate
and money supply. Monetary policy affects Aggregate Demand (AD). An expansionary monetary policy increases Aggregate Demand, while a contractionary
108

Open market operations that remove reserves from the banking system will require that these banks reduce lending activity and allowing competition for fewer
available loans to push interest rates upward. Higher interest rates will always
make certain investment projects unprofitable thus leading to the abandonment of
these projects. 
109
SESSION 4:
MACROECONOMICS: PUBLIC SECTOR
SECTION A: TYPICAL EXAM QUESTIONS
QUESTION 1:
Section A – Short Questions
HINT: When answering Section A – short question, it is important not to rush
but to read the questions carefully and to make sure you understand what the
question is asking. Always remember one alternative is completely wrong, one
is nearly correct and one is totally correct. It is easy to eliminate the completely
wrong answer, but if you do not read the question carefully the nearly correct
answer will also appear correct. The answer will NEVER be two options. Only
ONE option is correct. Your answer will immediately be marked incorrect if you
write TWO options.
1.1.1. B 
1.1.2.
D 
1.1.3.
A 
1.1.4.
B 
1.1.5.
B 
1.1.6.
B 
1.1.7.
A 
1.1.8.
C
1.1.9.
C 
1.1.10.
D 
1.1.11.
C 
1.1.12.
D 
1.1.13.
A
1.1.14.
C 
1.1.15.
C 
1.1.16.
B
1.1.17.
C 
1.1.18.
A
1.1.19.
A
1.1.20.
A
1.1.21.
C
110
1.2
Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A – I) next to the question number (1.2.1 – 1.2.8)
in the ANSWER BOOK, for example 1.2.9 J.
1.2.1
1.2.2
1.2.3
1.2.4
1.2.5
1.2.6

1.2.7
1.3
Community goods

1.3.6
Pareto efficiency
Merit/Public


1.3.7
Parastatals
Nationalisation 
1.3.8
Deregulation
Public corporation


Privatisation

GROWTH, EMPLOYMENT AND REDISTRIBUTION 
(NOT GEAR)
Fiscal policy 
(10 x 1)
(10)
Give ONE term for each of the following descriptions. Write only the term
next to the question number (1.3.1 – 1.3.6) in the ANSWER BOOK. Abbreviations, acronyms and examples will NOT be accepted.
1.3.1
Public goods 
1.3.2
Economic growth 
1.3.3
Parastatals 
1.3.4
Free riding 
1.3.5
Collective goods
1.3.6
Communal goods
1.3.7
Market failure 
1.3.8
Merit goods
1.3.9
Demerit goods
1.3.10
Accountability 
1.3.11
Pareto efficient 
1.3.12
Privatisation 
1.3.13
Nationalisation 
1.3.14
National budget 
1.3.15
Medium-term expenditure framework
111
1.3.16
1.3.17
Excise duty 
1.3.18
Indirect tax
1.3.19
Direct tax
1.3.20
Substitution effect 
1.3.21
Special interest groups 
1.3.22
Macroeconomics 
QUESTION 2:
HINT: When the question requires you to “list” or “name”, you need not write a
sentence but merely one or two words. This MUST be done in bullet form.
2.1
Name any TWO taxes on goods and services
 Excise duties 
(2X1)
2
2.2
Name TWO objectives of the state
 regte ingebou
(2X1)
2
2.3
Name TWO types of public goods
 Collective goods
 Communal goods
(2X1)
2
2.4
Name any TWO problems experienced in public sector provisioning
(2X1)
 Politicians
 Structural weaknesses 
 Special interest groups
2.5
Name the TWO main fiscal policy instruments that can be used
by government to regulate the economy
(2X1)
 Taxation 
 Government spending 
2
2
112
2.6
List any TWO necessity of the public sector
 To supply public goods
 To conserve resources 
 To manage the economy
(2X1)
2
2.7
List any TWO items of main budget
 Revenues 
 Expenses 
(2X1)
2
2.8
List any TWO effects of fiscal policy
 Income distribution 
 Consumption 
 Price level
(2X1)
2
2.9
Name TWO variables of national budget
 Tax 
 Government expenditure 
(2X1)
2
2.10
Name TWO features of fiscal policy
 Goal-bound
 Demand-based
 Cyclical 
(2X1)
2
2.11
List any TWO effects of public sector failure
 Economic instability 
 Social instability
 Inefficient use of resources
(2X1)
2
2.12
List any TWO reasons for public sector failure
 Apathy 
 Management failure 
 Corruption 
 Lack of motivation
(2X1)
2
2.13
List any TWO composition of the public sector
 Central government 
 Regional government 
 Local government 
(2X1)
2
2.14
Name TWO features of public sector failure
 Ineffectiveness
 Inefficiency 
(2X1)
2
2.15
List any TWO equitable share grants to municipalities
(2X1)
 Basic services
 Development needs
2
113


QUESTION 3:
3.1
3.2
3.3
3.4
3.5
Institution needs
Fiscal capacity 
(Taken from various sources)
How does wasteful spending by the government affect economic growth?
(1x2)
 The wasteful spending affects the economy negatively. If
government misuse state resources, it hampers infrastructure development which result to less job creation and poor
growth in economy. 
What is the effect of the fiscal policy on the general price level?
(1x2)
 Direct tax reduces inflationary pressure 
 A rise in indirect taxes in indirect taxes will raise the general
price level/inflation
How does the South African government use progressive tax to
achieve economic equity?
(1x2)
 Taxation on profits, taxation on wealth, capital gains tax and
taxation on spending are used to finance free services for the
poor. 
What is the relationship between the main budget and MTEF?
(1x2)
 The main budget is guided by the MTEF, which estimates
expenditure and income for a three-year period. 
Why would public sector failure lead to economic instability?
(1x2)
 Incorrect use of fiscal policy would not stabilise prices. 
3.6
Why are public goods important
(1x2)
 Public goods are important because they are designed to be
available to the public in general and possess specific qualities that prevent individuals or groups from being unable to
access them.
3.7
How are socio-economic rights are embedded in the budgets of
the South African government
(1x2)
 
3.8
How does public debt affect GDP?
(1x2)
 The economy is able to grow positively when the debt level is
below the threshold. However, when public debt to GDP exceeds the threshold, the growth start to decline
2
2
2
2
2
2
2
2
114
3.9
Why is the debt to GDP ratio important?
(1x2)
 The debt-to-GDP ratio is a useful tool for investors, leaders,
and economists. It allows them to gauge a country's
ability to pay off its debt.
3.10
How does government spending affect unemployment rate?
(1x2)
 Following a policy change that begins when the unemployment rate is low, the same government spending increase
causes total employment to change
Data Response
QUESTION 4:
2
2
(Taken from various sources)
Study the information and answer the questions that follow
4.1
Name a monetary instrument used to achieve price stability.
 Interest rates 
(1)
4.2
What is the inflation target range set by the South African Reserve Bank?
 3–6 %
(1)
4.3
Briefly describe the term repurchase rate (Repo rate).
 Repurchase rate is the rate at which the central bank of a
country lends money to commercial banks.
(2)
115
4.4
Explain the reason why government pursues price stability as
a macroeconomic objective.
 The government pursues price stability because stable
prices lead to better results in terms of job creation and economic growth.
(2)
4.5
(How does the South African Reserve Bank maintain price stability?2x2)
The South African Reserve Bank maintains price stability by:
 setting and maintaining inflation targeting range of 3–6%.

 controlling the amount of money in circulation by changing
interest rates.
(4)
QUESTION 5:
Study the information and answer the questions that follow
5.1
Identify the fiscal instrument shown on the above table.
 Taxation
(1)
5.2
According to the table above, how much is contributed by
companies to government revenue?
 R230.2 billion
(1)
5.3
Briefly describe the term national budget
 The national budget is the statement of government‘s
planned expenditure and anticipated income for the fiscal
year.
(2)
5.4
Calculate the value of A from the above table.
546.8 + 230.2 + 360.6= 1 137.60 
(2)
5.5
How does public sector failure affect the tax system of the
country?
(2x2)
(4)
116



Leading to an increase in the tax rate paid by the stateowned enterprises. 
Discouraging most tax payers from contributing their taxes
due to misappropriation of funds by government officials.
Shrinking tax revenue collected by government as it results
to tax evasion. 
QUESTION 6:
Study the information and answer the questions that follow
We won't privatise state enterprises needed for development
As government works on reforming state-owned enterprises (SOEs), the president has assured
that state assets will be kept if they are strategic for the development of the economy of South
Africa.
During the State of the Nation Address, the president shared on the progress made in turning
around state-owned enterprises which have been plagued with corruption and mismanagement.
It was highlighted that over the past year, new boards had been appointed at Eskom, Denel,
Transnet, Safcol, Prasa and SA Express. The new boards had been mandated with addressing
corruption of the past.
6.1
Which policy is used by the government to influence economic activities?
 Fiscal policy 
(1)
6.2
What is the role of the Minister of Finance?
 To present the Main Budget 
(1)
6.3
Briefly describe the concept privatisation
 It is when the government sells more than 50% of the
shares of state-owned enterprises to the private sector.
(2)
6.4
Briefly explain why the government aims to achieve economic
growth.
 To achieve economic development which benefits the residents of the country through a higher standard of living. 
 To make the country attractive to foreign investors.
(2)
6.5
How will the eradication of corruption and mismanagement of
SOEs benefit the economy?
(2x2)
 Ensuring financial sustainability which will stabilise the economy through quality service delivery. 
 They will fulfil their development and economic role to reach
the macro economic aims of the government. 
(4)
117

It will lead to political and economic stability which will attract
foreign investments.
QUESTION 7:
Study the information and answer the questions that follow
7.1
Name the biggest contributor of revenue to the State.
 Personal income tax
(1)
7.2
What is the current VAT rate in South Africa?
 15% 
(1)
7.3
Briefly describe the term indirect tax
 A tax that is charged when money is spent on products such
and it is shifted to the consumers as VAT, excise duty, import duty etc. 
(2)
7.4
Why is it necessary for government to provide schools and
hospitals for its citizens? .
 Private schools and hospitals are too expensive, and most
the citizens will not be able to afford it. 
 Education and health are under supplied by the market, and
government must fill the gap to meet the demand. 
 The government collects taxes from its citizens and must
provide for such basic services. 
 The government is responsible for ensuring economic
growth and development in the country. 
(2)
7.5
How does the Minister of Finance use his discretion on fiscal
decisions?
(2x2)
(4)
118
The minister is guided by international benchmarking:
 deficit rule: not to exceed 3% of GDP
 borrowing rule: only for capital expenditure
 debt rule: not to exceed 60% of nominal GDP
 The socio and political conditions must also be considered as per circumstances in the economy. 
 The political aims or mandates form an integral part
in policy making
(Accept any other correct relevant response)
QUESTION 8:
Study the information and answer the questions that follow
8.1
Which curve is depicted in the graph above?
 The Laffer curve 
(1)
8.2
What tax rate will generate maximum revenue for the government?
 40%
(1)
8.3
What is the correlation between a tax rate of zero and a tax
rate of 100%
for government?
 If the tax rate is low, government revenue will be less and
vice versa. 
(2)
8.4
Why will an increase in tax rate not necessarily increase government revenue?
 Tax avoidance will increase, seeking legitimate ways
to avoid these high taxes. 
(2)

Tax evasion will take place; people will find illegal
was of not paying tax. 
119

8.5
Some individuals may decide that it will be better stay
unemployed. 
Suggest ways that the state can use to increase its revenue
without increasing taxation.
(2x2)
 The state can resort to borrowing of money, locally or
 The state can sell its state-owned business therefore
 The state can seek donations from other countries
 The state can also sell government securities on the
open market. 
(2)
(Accept any other correct relevant response)
(4)
QUESTION 9:
Study the information and answer the questions that follow
PUBLIC AND PRIVATE SECTOR INTEGRATION
Financial investments through public private partnerships are critical in meeting the socioeconomic needs of the people. Addressing backlogs in essential public services and simultaneously maintaining fiscal prudence require the country's budgetary resources to work
harder.
(Source: https://mg.co.za/tag/gauteng-treasury)
9.1
Name ONE example of socio-economic needs of people.
 Poverty elevation
 Education
 Health
 Housing and living costs
 Infrastructure and services pressures
 Employment
(Accept any other correct relevant response)
(1)
9.2
Give ONE example how the private sector can assist the government to address socio-economic issues.
 Financing certain community projects. 
 Build infrastructure on behalf of government, e.g. schools
etc. 
(Accept any other correct relevant response)
(1)
120
9.3
Briefly describe the term public-private-partnerships
 Public-private partnerships involve collaboration between a
government agency and a private-sector company that can
be used to finance, build, and operate projects, such as public transportation networks, parks, and convention centres.

(2)
9.4
What is fiscal prudence?
 The government is using financial resources wisely per
the needs of people. 
 Corruption must be eradicated to provide efficient and
effective service delivery to people. 
(2)
9.5
How can public private partnerships contribute to income redistribution?
(2x2)
 The private sector can invest to community projects that can
create jobs for the unemployed. 
 The Private sector can give back to communities through internships, scholarships and bursaries as a measure to improve skills development in the province. 
(Accept any other correct relevant response)
(4)
QUESTION 10:
Study the information and answer the questions that follow
Illicit cigarettes cost SA billions in lost revenue
The drop in sales volumes of excise-paid tobacco products has resulted in a significant loss
of revenue for the government, as consumers move to cheaper illicit products, said economic research house Econometrix on Tuesday.
Citing National Treasury data, Econometrix said income from tobacco excise declined by
R1.94 billion between 2015/16 and 2017/18, despite the government raising excise taxes
annually for several years in a bid to discourage smoking while collecting revenue.
“Considering the high price elasticity for tobacco products, holding excise at current levels
is the only way to prevent further erosion of the tax base, while enforcement measures are
implemented to curb the illicit tobacco trade,” Jammine said.
Source: The citizen
121
10.1
Identify other excise tax which is not mentioned in the article.
 Alcohol ✓
 Gasoline 
 Gambling 
(1)
10.2
What is the other name for excise taxes?
 Sin taxes
(1)
10.3
Briefly describe the term tax
 a compulsory contribution to state revenue, levied by the
government on workers' income and business profits, or
added to the cost of some goods, services, and transactions.
(2)
10.4
Explain the criteria for a good tax.
Neutrality ✓
(2)

Taxation should have the minimum possible effect on relative prices✓✓
 Compensating for the failure of the market to provide an efficient allocation of resources. ✓✓
Equity ✓

Charge or levy that has to be paid for goods and services
provided by the government-the more you receive the more
you have to pay.eg. toll roads, parks, library services, hospital services✓✓
 Rich people should therefore pay more tax than poor people. ✓✓



10.5
Government should employ people to write tax laws, design tax forms, collect taxes and assess tax returns✓✓
Tax invasion is illegal✓✓
Tax avoidance should be avoided to ensure that practices of exploiting these loopholes doesn’t occur. ✓✓
Analyses who bears the burden of a specific excise tax. (2x2)
 The consumers of cigarettes who have to pay more for each
packet of cigarettes✓✓
 The suppliers who receive less for each packet of cigarettes-this means that the profits of the owners or shareholders of the cigarette companies are lower than before✓✓
(4)
122

The employees of the cigarette companies-since the production of cigarettes has fallen, there will be fewer jobs
available in the cigarette industry.{the existing employees
will have to accept wage cuts which will shift the supply
curve to the right✓✓
QUESTION 11:
Study the information and answer the questions that follow
'Where will government find R4bn?': Taxis demand Covid-19 billions
Taxi bosses have rejected a R1.1bn Covid-19 relief payment from the government and are
threatening to bring SA to a halt unless they get billions more.
The R1.1bn offer of a one-off payment was turned down in talks between the South African
National Taxi Council (Santaco) and transport minister Fikile Mbalula this week. Taxi owners
are demanding R20,000 per taxi for each month of the lockdown. With an estimated
200,000 taxis across SA, a bailout on these terms could cost up to R4bn a month.
Santaco did not give a total figure for how much it wanted but insists further talks with Mbalula on the taxpayer-funded bailout would be on the basis of its numbers, not his. The taxi
industry has announced fare hikes of between 10% and 25% nationwide
It is understood taxi owners also want the regulation restricting them to 70% loads
scrapped. Mbalula is apparently open to granting that request but is standing firm on the
R1.1bn figure.
Source: Sunday times
11.1
Name the reason for public sector failure from the extract
above
 Self -seeking interest groups√
(1)
11.2
Identify one positive externalities for using public transport
(1)

Reduces negative externalities i.e. pollution√
11.3
Briefly describe the term rent-seeking
 Attempts by interest groups to influence government behavior to their advantage √√
(2)
11.4
What can government do to avoid public sector failure?
 Introduce profit incentives√
 Performance targets into the government sector √
 Increase competition in local governments√
 Public -private partnerships√
(2)
11.5
Discuss the instruments available to government to achieve
its objectives
(2x2)
(4)
123

Fiscal policy and monetary policy can be used to achieve
government objectives. √√
 Fiscal policy refers to changes in the budget √; the policy
variables available in the budget are taxes √ and expenditure √.
 Expansionary fiscal policy will refer to a decrease in taxes
√√and an increase in government expenditure √√.
 Monetary policy refers to changes in the interest rate level,
and the monetary policy instrument available to the monetary authorities is the interest rate level √√.
Expansionary monetary policy refer to a decrease in the interest
rate level √√
QUESTION 12:
Study the information and answer the questions that follow
PUBLIC SECTOR CHALLNEGS
The public sector comprises three levels of government, namely national, provincial and local government. The government programmes include the Medium-term strategic Framework implemented from 2014-2019 as part of the National Development Plan. It consists of
various focus areas such as education, health and economic growth and development
12.1
Which level of government develops policy and coordinates
services across all nine provinces
National Government
(1)
12.2
Name ONE macroeconomic objectives of the state
Price stablity
(1)
12.3
Briefly describe the term accountability
(2)
12.4
How will the government benefit from privatising state-owned
enterprises
(2)
12.5
Why is the pricing policy a problem for the government in respect of the provisioning of goods and services
(2x2)
(4)
QUESTION 13:
Study the information and answer the questions that follow
124
Inflation edges up as food and drink prices bite
13.1
Name the effect of fiscal policy illustrated above
 Price level√
(1)
13.2
List other effect of fiscal policy
 Consumption √
 Income distribution v
 Incentives √
 Discretion √
(1)
13.3
Briefly describe the term consumption
 √√
(2)
13.4
Explain why the Laffer curve has a characteristic shape.
 The shape of the curve is a function of taxable income elasticity√√
 i.e., taxable income changes in response to changes in the
rate of taxation. √√
(2)
13.5
Discuss the relationship government spending and the level
of national income.
(2x2)
 an increase in government spending results in an increase
in national income. √√
 an autonomous increase in government spending generates
a multiple expansion of income√√
(4)
QUESTION 14:
125
Study the information and answer the questions that follow
2021 tax year (1 March 2020 - 28 February 2021)
14.1
Name one source of government revenue
 Taxation √
(1)
14.2
Which department is responsible for personal income tax
 South African Revenue Services√
(1)
14.3
Briefly describe the term personal income tax
 Personal income tax is a type of income tax that is levied on
an individual's wages, salaries, and other types of income√√
(2)
14.4
How do taxes affect the economy in the long run?
 High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can
also slow long-run economic growth by increasing deficits.
√√
(2)
14.5
Calculate personal income tax for Ms Mhlanga who earns
R120 429
(4)
= 18 % x 120 429 
=0.18 x 120 429 
= 21 677,22 
QUESTION 15
15.1
Paragraph type of questions
Middle order
Briefly discuss efficiency and parastatals as reasons that contribute to
public sector failure.
Parastatals:
 Service provisioning of parastatals such as Eskom and Transnet lead to
monopolies √√
 SOEs are created when government starts a new business or nationalize an existing one √√
(8)
126



15.2
These typical monopolies are known for high prices where the consumer
has no say √√
Inefficiency in service provisioning such as SAA led to irregular service
delivery and a waste of state revenue √√
Infrastructure is mostly provided by government and sometimes lacks
maintenance
√√
(Max 4)
Differentiate between community goods and collective goods.
Community goods
 No price can be charged for these goods. √√
 The services provided by these goods are indivisible√√
 Examples: defence, police services, street lighting√√ (Max 4)
Collective goods
(8)
 Charges can be levied although they are indivisible√√
 Free riders are excluded by levying fees √√
(Max 4)
(Accept any other correct alternative response
15.3
Explain accountability as a problem of public sector provisioning.
Accountability:
 Government is required to make and implement policies / economic accountability refers to efficient government policies and resource usage
/ to give an explanation of one’s decisions, actions and expenditures √√
 Accountability is underpinned by ministerial responsibilities: the DG’s
are the accounting officers √√
 Parliamentary questioning: public debates – issues being questioned in
parliament where Ministers have to respond √√
 The National Treasury is responsible for expenditure control √√
 In South Africa the auditor-general reports annually in writing on each
government department √√
 Responses will earn full marks if the argument/fact is fully explained
and within the context of the question.
 Public servants are required to give an explanation of their decisions
and actions / regular financial reporting / focus on soliciting feedback
√√
 The public holds government accountable for the effective delivery of
services and the implementation of policies √√
 Greater emphasis on output and performance / performance based
management √√
 Increasing accountability on all levels √√
 The Batho Pele campaign – people-centered √√
 Financial accountability refers to expenditure control √√
 Empowerment of users √√
 Citizens’ charters / participation of citizens √√
 Public complaints mechanisms √√
 Service delivery surveys √√
Transparency – citizens can make informed decisions √√
(8)
127
15.4
Explain privatisation as a problem of public sector provisioning.
Privatisation:
 Refers to the transfer of functions and ownership from the public to the
private sector √√
 The aim of privatisation is to reduce the relative size of the public sector.
• Advantages of privatisation: it provides additional funds to the government / generates an income to be used for redistribution of wealth √√
 It stimulates growth and improves the overall efficiency and performance of the economy √√
 More people can participate in the economy √√
 Leads to undersupply or no supply √√
 State-owned enterprises are bureaucratic, inefficient and unresponsive
to consumer needs / increase efficiency in the economy / optimal functioning of market forces √√
 Public enterprises do not pay tax – privatisation broadens the tax base
√√
 Make funds available for housing, education, health care and the poor
/ lessens the pressure on government’s budget / eradicates fiscal problems √√
 Promotes black economic empowerment / opportunity for all to participate in free market – benefits BEE √√
 Restructure ownership of state assets together with Department of Public Enterprises e.g. defense and transport √√
 Optimal functioning of market forces / profit maximisation √√
 Development of SMMEs √√
 If services to rural areas are fully privatised, the services to rural areas
may be terminated or become more expensive √√
(2 x 2)(4)
(8)
15.5
Explain management failure and lack of motivation as reasons for public
sector failure.
Management failure Ignorance,
 e.g. lack of leadership, experience and training, might result in the improvement of the welfare of someone at the expense of someone else.
√√
Lack of motivation
 Workers rarely receive incentives for successful service delivery, but are
only monitored on inputs√√ and correctly following procedures and processes. This might lead to limited services, high cost and low quality. √√
(8)
15.6
Illustrate with an aid of diagram the Laffer curve
(8)
128













15.7
The Laffer curve shows the relationship between tax rates and tax revenue collected by the government √√
The curve shows that as tax increase government revenue increases
up to a certain point (e.g. t2) √√
If the tax rate rises beyond ‘t’, (e.g. at t1 there will be a decline in government revenue √√
When the tax rate is high people are less likely to work hard√√
If tax is 100% then nobody will work because all income would go to
the government √√
Too high tax rates may lead to tax evasion and avoidance √√
Reduction in tax rates will lead to a decrease in tax evasion and increase the incentive to work, save and invest √√
If tax rate is zero, no government revenue will be raised √√
Economists use this to justify a reduction in the level of income tax √√33
The apex of the curve shows the tax rate where government revenue
can be maximised √√
This point can vary from country to country – the Laffer curve may not
always be symmetrical – it can peak at 40% or even at a 90% rate √√
Evidence suggests that tax rates in most countries are below t. √√
In South Africa individual and company income tax rates were reduced
Explain how socio-economic rights are embedded in the budgets of the
South African government
Positives
 Education : government spends most of their revenue in education
which empower the youth √√
 Social grants : these help to alleviate poverty in South Africa and equal
distribution of income√√
Negatives
(8)
129


These social rights affect state’s economic objectives and puts strain
on total expenditure. √√
The total expenditure that is allocated to economic growth is affected√√
(Accept any other correct relevant response)
15.8
Differentiate between Medium Term Expenditure Framework (MTEF) and
Medium Term Budget Policy Statement (MTBPS
 Medium-term budgetary frameworks (MTBFs) are defined as those fiscal arrangements that allow government to extend the horizon for fiscal
policy making beyond the annual budgetary calendar. √√
 Although the approval of the annual budget law remains the key step in
which important decisions on budgetary policy are adopted, most fiscal
measures have budgetary implications that go well beyond the usual
yearly budgetary cycle. √√
 As a result, a single year perspective provides a poor basis for sound
fiscal planning. √√
 MTBFs usually cover the preparation, execution, and monitoring of multiannual budget plans and contain both expenditure and revenue projections as well as the resulting budget balances√√
(8)
15.9
Explain discretion as effect of fiscal policy
 Minister of finance may use his or her discretion on a number of fiscal
decisions i.e. how much to reduce income tax√√
 How much to spend on new infrastructure √
 The deficit rule: √ The deficit on the budget should not exceed 3% of
GDP√√
 The borrowing rule: √ Borrowing should only be used for capital expenditure, Current expenditure should be covered by current income√√
 The debt rule: Public debt and guarantees should not exceed 60% of
nominal GDP√√
(8)
15.10
Explain sources of government income
 This includes customs duties and diamond export levy√√
Tax on the domestic sale of goods and services
duties i.e tobacco and alcohol and the fuel levy√√
Property tax: A levy to be paid on property owned√√
Taxes on income and profits : This includes revenue received from companies tax and tax on dividends received by individuals who own shares in companies√√
Tax on payroll and workforce: This takes the form of personal income tax,
which includes pays as you earn and standard income tax on employees√√
(8)
15.11
Discuss reasons for inefficiency of the public sector
BUREAUCRACY √
(8)
130


There is too much rules and procedures (red tape). √√
Officials focus on following rules such that they are indifferent to the
quality of service. √√
 Sometimes they are insensitive to the needs of the client. √√
 Policies take a long time to implement. √√
INCOMPETENCE √
 There is a lack of skills or ability to do a task successfully √√
 A reason for this could be improper qualifications, lack of training and
experience etc. √√
CORRUPTION √
 Government officials are guilty of sometimes taking bribes, commit
fraud, resort to nepotism √√
 Politicians sometimes promote policies, which might involve an inefficient allocation of resources in order to secure votes. √√
 Sometimes trade unions and business influence government to distribute resources so that they benefit at the country's expense √√
15.12
Distinguish special interest groups and lack of motivation as reason for
public sector failure.
Special interest groups
 Attempts by interest groups such as farmers or organised labour to
influence government to their own advantage√√
Lack of motivation
 Workers rarely receive incentives for successful service delivery, but are
only monitored on inputs and correctly following procedures and processes. √√
 This might lead to limited services, high cost and low quality√√
(8)
(8)
QUESTION 16
Paragraph type of questions
Higher cognitive
16.1
Evaluate the impact of value added tax in the economy.
 increasing the VAT rate increases the cost of living for all South Africans,
especially the poor√√
 increased tax revenue is spent holds economic consequences for all regions in terms of GDP growth and aggregate consumption√√
 The main drawback to the VAT model is its increased cost to business
 and by extension, the consumer VAT promotes investment if it replaces
distortionary taxes and earns more revenue to the government√√
 VAT ensures that international trade takes place on a transparent basis
and avoids distortions like tax cascading associated with alternative
commodity taxes√√
(8)
16.2
How can the government reduce the cost of the business sector to stimulate aggregate supply?
 Reducing the cost of production means that a greater output can be
supplied at any given price level. 
(8)
131
 Services by parastatals that provide infrastructural services must become more cost effective by lowering cost and improving their
productivity. 
 Aspects such as deregulation and simpler tax regulations can decrease administrative costs of businesses. 
 Incentive schemes such as cash allowances and subsidies to promote exports
 The decentralisation of businesses can also decrease the total cost
16.3
How successful is the government in achieving its macroeconomic objectives?
economic Growth: 
 SA targets 4–5% economic growth. Previously RSA had a 5% growth
rate
 Recently the growth rate decreased steadily (presently below 3%)
Full Employment: 
 Compared to foreign countries unemployment is very high (Expanded
unemployment is over 30%)
 Efforts by SA government to reduce these figures includes the GEAR
strategy, focus on small business enterprises, Public Works Programme
Exchange rate stability: 
 SA is now using a free-floating exchange rate system in line with international benchmarks. 
 Unfortunately, our currency has lost its value, with a general trend of
depreciation over the last few years. 
Price stability: 
 For the past few years, South Africa has managed to remain within the
3–6% inflation target. 
Economic equity: 
 Economic equity has improved (BEE, affirmative action, gender equity)

(Accept other correct relevant response)
(8)
16.4
How can the government improve the efficiency of service delivery?
Municipalities can improve efficiency in service delivery by
 Appointing qualified staff with enough experience as top managers√√
 Training employees continually to equip them with relevant skills to
handle the demand of their job
 Eliminate corruption by criminally charging and prosecuting those who
are found to be involved in it
 Holding employees accountable for their poor job performance, as a
way to ensure that every official take their jobs seriously√√
(8)
132


Rewarding employees who perform above expectations rewarded accordingly to encourage them even more√√
Improving revenue collection by ensuring the clients pay for the services they consume√√
(Accept any other correct relevant response)
16.5
Evaluate the provisioning of public goods and services in South Africa
Provision of public goods and services is adequate because:
 More people have access to schools and medical services than before.√√
 More infrastructure has been built, example Gautrain, toll roads, improved airports.√√
 The South African defence force is protecting the people of South Africa
as no major security incident has happened.√√
 Provision of public goods and services is not adequate because:
 The standard of education and health care is still not able to compare
with other developed countries. √√
 Many South Africans still do not have access to basic goods and services like electricity, water and sewerage√√
 The crime rate in South Africa is amongst the highest in the world which
indicates the lack of an efficient police force√√
(Accept any other correct relevant response.)
(8)
16.6
Why are State-Owned Enterprises (SOE’s) seen as a problem in public
sector provisioning?
 The costs of maintaining and managing SOEs are very high
 These costs result in higher taxes and larger public debt
 Private enterprises are more cost-efficient than public enterprises
 SOEs are bureaucratic, inefficient and unresponsive to consumer
needs 
 SOEs do not operate per the profit motive-they sometimes incur large
losses, which must be funded by tax money
 SOEs are the exact cause of huge unemployment and a shortage of
funds for other developments
(8)
16.7
Evaluate the impact of social rights that promoted through the national
budget
Positives
 Education : government spends most of their revenue in education
which empower the youth √√
 Social grants : these help to alleviate poverty in South Africa and equal
distribution of income√√
Negatives
(8)

These social rights affect state’s economic objectives and puts strain
on total expenditure. √√
133

The total expenditure that is allocated to economic growth is affected√√
(Accept any other correct relevant response)
(Allocate a max of 2 marks for mere listing/examples)
16.8
How is it possible to exclude individuals from using public goods
 It is the feature of public goods and services that once they have been
provided, they can be used by everyone
 For example, once traffic light is installed or fireworks display arranged
.it is impossible to prevent individuals from enjoying benefits of them
 These goods are sometimes called collective goods; parks , beaches,
 Free riders refer to a situation where individuals benefit for goods, they
did not pay for
(8)
16.9
How does poor service delivery affect the community?
 In many municipalities, poor delivery of services result in community
protests like strikes, stay-away or total shut downs of specific areas. No
workers are allowed to leave for work. Thus, the loss of man-hours
leads to a loss of production. 
 Strikes are associated with looting and vandalism, which have an effect
 Private business owners identified poor service delivery relating to utilities
(electricity and water) as having the greatest negative impact on their
taxes) were affecting operations, thus having a negative impact on their
growth and ultimately on the economy. 
 Poor operations and maintenance and sewage treatment contributes to
pollution of water resources. In a water scarce country, it leads to higher
water tariffs for consumers. 
 Pollution as a result of poor wastewater and sewage treatment infrastructure has a direct impact on human health and the environment.

 Poor service deliver often leads to corruption. Millions are being stolen,
budgetary constraints for all spheres of government. 
 Poor maintenance of infrastructure like roads etc. impact negatively on
(8)
16.10
How does expansionary fiscal policy affect interest rates?
 An expansionary fiscal policy, with tax cuts or spending increases, is
intended to increase aggregate demand. √√
 If an expansionary fiscal policy also causes higher interest rates, √√ then
firms and households are discouraged from borrowing and spending (as
occurs with tight monetary policy), thus reducing aggregate demand√√
(8)
134
SECTION C
HINT: All section C questions have TWO questions 5 & 6 NOT 9 & 10 like in
this document. In the examination you will need to answer only one.
QUESTION 17
 Discuss in detail the reasons for public sector failure

(26 marks)
How can the government improve service delivery in your community?
(10 marks)
INTRODUCTION
Public sector failure occurs when the government fails to manage the economy and the
resources under its control optimally
MAIN BODY
Management failure 
 Ignorance, e.g. implementing conflicting policies or wrong policies
- Apathy 
 Successful public production relies on long-term accountability
 Poor accountability can lead to inefficiencies such as corruption, poor service delivery, etc
 Poor accountability is the result of low motivation, poor training, lack of competence, etc
- Lack of motivation 
 Frontline workers rarely receive incentives for successful service delivery
 There is little stipulation for service quality or quantity
 No measurement of effectiveness or productivity and few rewards and penalties
for it. 
- Bureaucracy 
 When rules of procedures are complex, we are dealing with the problem of bureaucracy. 
 Bureaucracy makes policies: take long to implement or it is not implemented successfully. 
 Because of self interest, bureaucrats can manipulate policies to benefit themselves at the expense of the people. 
Politicians 
 Politicians tend to promote policies and spend money on projects as long as they
 These policies might involve an inefficient allocation of resources
- Structural weaknesses 
 Most of the departments are not able to provide proper services because of the
lack of skilled people to do the job. 
 Expansion of government services to previously excluded areas makes it difficult
to provide a good service
- Special interest groups 
 groups such as labour unions and business groups can also cause government
failure. 
135

they can also influence the government to distribute resources so that they can
benefit at the expense of the country
 The government can assess community needs to avoid wasteful spending. 
 Monitoring team from the governance must be sent to communities to ensure the
quality of service delivery. 
 Government must fight corruption to ensure within municipalities to ensure efficiently
use of resources. 
 Municipal officials must be held accountable and regularly interact with communities.

 The municipal budget must be transparent to the community. 
(Accept any other correct relevant response)
Conclusion
The government aims at improving the functioning and efficiency of the economy as a
whole. 
Max 2
(Accept any other higher order conclusion)
[40]
136
SECTION D: Homework
1.1.1. C 
1.1.2. C 
1.1.3. D 
1.1.4. D 
1.1.5. A 
1.1.6. C 
1.1.7. C 
1.1.8. C 
1.1.9. 9 
1.1.10.
B 
1.2
Choose a description from COLUMN B that matches the item in COLUMN
A. Write only the letter (A – I) next to the question number (1.2.1 – 1.2.8)
in the ANSWER BOOK, for example 1.2.9 J.
1.2.1. E
1.2.2.A
1.2.3.B
1.2.4.D
1.2.5.H
1.2.6.F
1.2.7.G
1.2.8. C
1.3
Give ONE term for each of the following descriptions. Write only the term
next to the question number (1.3.1 – 1.3.6) in the ANSWER BOOK. Abbreviations, acronyms and examples will NOT be accepted.
1.3.1
Mixed economic system
1.3.2
Externalities 
1.3.3
Communal goods
1.3.4
Free riding 
1.3.5
Budget 
SECTIOB B: HOMEWORK
QUESTION 2 20
2.1
Name any TWO pricing policy options
(2 x 1)
(2)
137



Free-charger services
User-charges 
Subsidies 
2.2
List TWO instruments of fiscal policy?
 Taxation 
 Government spending 
(2)
2.3
Name TWO examples of government expenditure
 Education 
 Social security 
 Health 
(2 x 1)
(2)
2.4
Name TWO examples of social services
 Education 
 Health 
 Safety and security
(2 x 1)
(2)
2.5
List any TWO forms of the public sector
 National 
 Provincial 
 Local 
 Public corporations 
(2 x 1)
(2)
(2 x 1)
QUESTION 3
3.1
How is the public benefiting from the government subsidised
products? (1 x 2)
 When government subsidies are implemented to the supplier, an industry is able to allow its producers to produce
more goods and services. 
 This increases the overall supply of that good or service,
which increases the quantity demanded of that good or service and lowers the overall price of the good or service
(2)
3.2
What is the main aim of privatisation?
(1 x 2)
 to increase efficiency and to reduce the size of the public
sector; 
 to reduce public debt/deficit and to obtain funds; and to
strengthen the stock markets
(2)
3.3
Why is it important for the government to use the tax system
effectively?
(1 x 2)
(2)
How does government impact society??
(2)
3.4
(1 x 2)
138
 Governments provide the parameters for everyday behavior for citizens, protect them from outside interference, and
often provide for their well-being and happines
3.5
Why is value based pricing better?
(1 x 2)
 Value-based pricing ensures that your customers feel
happy paying your price for the value they're getting. √√
QUESTION 4:
8 minutes
(2)
Section B
Study the information and answer the questions that follow
4.1
What is the deficit rule percentage of GDP
 3%
(1)
4.2
Name one use for government borrowing money
 Used for Capital expenditure 
(1)
4.3
Briefly describe the term national debt
 the net accumulation of the national government's annual
budget deficits
(2)
4.4
Explain the discretion of the debit rule
 The deficit on the budget should not exceed 3% GDP
(2)
4.5
How does deficit spending relate to the national debt (2x2)
 A government experiences a fiscal deficit when it spends
more money than it takes in from taxes and other revenues
excluding debt over some time period. 
 This gap between income and spending is subsequently
closed by government borrowing, increasing the national
debt
 An increase in the fiscal deficit, in theory, can boost a sluggish economy by giving more money to people who can
(4)
139
QUESTION 5:
8 minutes
Section B
Study the information and answer the questions that follow
5.1
Which period does a person over the age of 65 and over receive R128 650
 2020/21
(1)
5.2
Which age is exempt from income tax in South Africa
 Over 65
(1)
5.3
Briefly describe the term fiscal policy
 Fiscal policy is the means by which a government adjusts its
spending levels and tax rates to monitor and influence a nation's economy.
(2)
5.4
How does education benefit from taxes
(2)
140


5.5
Tax-free educational assistance benefits include payments
for tuition, fees and similar expenses, books, supplies, and
equipment. 
The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for workrelated courses
Calculate the personal income tax for Mr Samsung who is 40
years old and earns R260 500 for the year ending 2020.
(4)
= 37 062 + [ 26% of the amount above R205 900]
= 37 062 + [ 26% of (260 500 – 205 900)]
= 37 062 + [0.26 x 54600] 
= 37 062 + 14 196
= 51 258 – rebate
= 51 258 – 14 958
= 36 300 
QUESTION 6
Study the article below and answer the questions that follow.
6.1
Name any ONE budget plan that the government oversees.
(1)
141



6.2
Main budget √
Medium-Term Expenditure Framework (MTEF) √
Medium-Term Budget Policy Statement (MTBPS) √
What challenge is the government facing as depicted in the cartoon above?




(1)
Poor spending of public funds √
Mismanagement of public funds √
Corruption √
Ineffective governance √
6.3
Briefly describe the term budget.
 A document containing details about the expected revenue
and projected expenditure. √√
(2)
6.4
Why will an increase in tax rate not necessarily increase government revenue ?
(2)
Instead of paying more taxes the individuals may:



6.5
Avoid paying tax √√
They may decide not to work √√
How can the government effectively reduce management failure?
(2 x 2)
Government can reduce management failure by:



(4)
Employing people according to skills, competence levels
and qualifications √√
Providing leadership workshops and training √√
Ensuring that no one's welfare is improved at the expense of
someone else √√
(Accept any other relevant and correct response).
QUESTION 7
Study the table below and answer the questions that follow.
TAX REVENUE
PERSONAL INCOME TAX
CORPORATE INCOME TAX
VAT
CUSTOMS AND EXCISE DUTIES
2018/ 19
505.8bn
231.2bn
348.1bn
97.4bn
142
FUEL LEVIES
OTHERS
TOTAL
77.5bn
84.8bn
1344.8bn
7.1
Identify ONE indirect tax from the table above.
 Customs and Excise duties√
 VAT√

Fuel Levies√
(1)
7.2
Name the government department responsible for monitoring the
effective use of public funds.
 The National Treasury√
(1)
7.3
7.4
Briefly describe the tax excise duties.
 A percentage levied on manufacture, sale or use of locally
produced goods, such as alcoholic drinks or tobacco products.√√
(Accept any other relevant correct response)
Why is it necessary for government to provide schools and
hospitals for its citizens?
 Private schools and hospitals are too expensive, and the
majority of the citizens will not be able to afford it.√√
 Education and health are under supplied by the market, and
government must fill the gap to meet the demand √√
 The government collects taxes from its citizens and must
provide for such basic services√√
 The government is responsible for ensuring economic
growth and development in the country√√
(2)
(2)
(Accept any correct relevant response.)
7.5
Calculate the total percentage contribution of personal income
tax to the government’s total tax revenue. Show all calculations. (Round-off to two decimals.)
Personal Income Tax: 505.8 √ x 100
1344.8
1
TOTAL
= 37.61%√√ / 38%√√
(4)
Question 8
143
Study the table below and answer the questions that follow.
8.1
Name non-profit organisation that are financed by the central
government
 Council for scientific and industrial research (CSIR)
 South African Bureau of Standards (SABS)
 Commission for human rights
(1)
8.2
List any provincial government in South Africa
(1)





8.3
Gauteng 
Free state 
KwaZulu Natal
North West
Western cape




Eastern cape
Northern cape 
Limpopo
Mpumalanga 
Briefly describe the term public sector)
 A term broadly used to include all agencies which make up
the government 
(1)
144
8.4
How does the central government control the economy?
 the government influences economic activity through two
approaches: monetary policy and fiscal policy.
Through monetary policy, the government exerts its power
to regulate the money supply and level of interest rates.
Through fiscal policy, it uses its power to tax and to spend
(1)
8.5
Discuss the main duties of government according to Adam
Smith
 to protect its citizens against external threats
 to maintain law and order within the country
 to provide certain goods and services which are needed by
the citizens but which are not profitable for entrepreneurs to
provide
(1)
QUESTION
9.1
Paragraph type questions-Middle cognitive
Briefly discuss distribution of income (economic equity) and price stability as macroeconomic objectives.






9.2
9
Distribution of income (economic equity):
Progressive income tax and tax on profits, wealth and expenditure
are used to finance free social services 
E.g. education, primary healthcare, basic economic services and to
pay cash grants to poor and other vulnerable people 
(Max
4)
Price stability:
Stable prices lead to better results in terms of job creation and economic growth 
The SARB inflation target is 3–6% and has been successful in keeping inflation within this target 
(accept above upper limit response)
Interest rates, based on the repo rate is the main instrument used to
achieve price stability 
A stable budget deficit also has a stabilising effect on the inflation
rate and on prices 
(Allocate a max of 4 marks for mere listing of facts/examples
Explain accountability as problems of public sector provisioning



(8)
(8)
Government is required to make and implement policies / economic accountability refers to efficient government policies and resource usage
/ to give an explanation of one’s decisions, actions and expenditures √√
Accountability is underpinned by ministerial responsibilities: the DG’s
are the accounting officers √√
Parliamentary questioning: public debates – issues being questioned in
parliament where Ministers have to respond √√
145


The National Treasury is responsible for expenditure control √√
In South Africa the auditor-general reports annually in writing on each
government department √√
 Responses will earn full marks if the argument/fact is fully explained
and within the context of the question.
 Public servants are required to give an explanation of their decisions
and actions / regular financial reporting / focus on soliciting feedback
√√
 The public holds government accountable for the effective delivery of
services and the implementation of policies √√
 Greater emphasis on output and performance / performance based
management √√
 Increasing accountability on all levels √√
 The Batho Pele campaign – people-centered √√
 Financial accountability refers to expenditure control √√
 Empowerment of users √√
 Citizens’ charters / participation of citizens √√
 Public complaints mechanisms √√
 Service delivery surveys √√
Transparency – citizens can make informed decisions √√
10.3
Discuss the reasons for the existence of a public sector


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10.4
(8)
Market failure / inefficient resource allocation √√
Provision of public goods and services √√
Problems with externalities require government intervention. e.g. negative externalities - government restricting output √√
Provision of merit goods - broad social benefit √√
Discourage demerit goods - taxes to discourage consumption and production. √√
Prevention of monopolies or encourage competition. √√
Redistribution of income for the benefit of society. √√
Managing the economy/stabilising the economy /enforcing a legal structure √√
Differentiate between productive and allocative Inefficiency
Productive inefficiency
 In terms of cost it means that a business does not produce goods at the
lowest possible cost. √√
 There is room to reduce costs without producing fewer goods or without
producing a lower quality good.√√
 In terms of marginal cost it means that one producer can produce an
additional unit of a good at a lower extra (marginal) cost than others in
the economy.√√
Allocative inefficiency
(8)
146
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This kind of inefficiency means that the product mix does not reflect
consumers' and therefore resources are not allocated in the right proportions.√√
The quantities preferred by consumers are not available.√√
10.5
Explain the reasons for public sector failure.
 Politicians tend to promote policies and spend money on projects as
long as they get votes in return. √√
These policies might involve an
inefficient allocation of resources. √√
 Many public sector entities lack capacity because of a shortage of skills
/ management failure / Bureaucracy √√
This means that funds are
often left unspent and then returned to the treasury. √√
 Lack of accountability / Parastatals (public enterprise) √√ leads to inefficiency, corruption / crime, and poor service delivery. √√
 Lack of motivation / apathy √√ Workers rarely receive incentives for
successful service delivery. This leads to services being limited, low in
quality and high in cost. √√
 Rent seeking / special interest groups / own interest √√
Individuals
and enterprises influence government to act in their interest e.g. profitable contracts, favourable regulations etc. ignorance, personal and hidden agendas, questionable motives improve the welfare of someone at
the expense of another. √√
 Serious structural weakness in the economy / Privatisation √√ This can
result in social goals not being attained. √√
 Objectives are not attainable / overpopulation √√ employment, housing
and feeding programs not possible with limited resources √√
 Assessing needs √√ leads to under and oversupply √√
Pricing policy √√ problems in determining the price for public goods and services √√
QUESTION 11
11.1
(8)
Paragraph type questions-Higher cognitive
How can the South African municipalities improve efficiency in service
delivery?
Municipalities can improve efficiency in service delivery by
 Appointing qualified staff with enough experience as top managers√√
 Training employees continually to equip them with relevant skills to
handle the demand of their job
 Eliminate corruption by criminally charging and prosecuting those who
are found to be involved in it
 Holding employees accountable for their poor job performance, as a
way to ensure that every official take their jobs seriously√√
 Rewarding employees who perform above expectations rewarded accordingly to encourage them even more√√
 Improving revenue collection by ensuring the clients pay for the services they consume√√
(Accept any other correct relevant response)
(8)
147
11.2
Evaluate the provisioning of public goods and services in South Africa
(8)
Provision of public goods and services is adequate because:
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11.3
More infrastructure has been built, example Gautrain, toll roads, improved airports.√√
The South African defence force is protecting the people of South Africa
as no major security incident has happened.√√
Provision of public goods and services is not adequate because:
The standard of education and health care is still not able to compare
with other developed countries. √√
Many South Africans still do not have access to basic goods and services like electricity, water and sewerage√√
The crime rate in South Africa is amongst the highest in the world which
indicates the lack of an efficient police force√√
(Accept any other correct relevant response.)
Evaluate the success of the South African Reserve Bank in maintaining
price stability in the economy.
The South African Reserve Bank was successful by:
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maintaining the inflation between 3% and 6% for most years since the
implementation of the inflation target range.√√
the repo rate has been effectively used to keep inflation within the target√√
e.g. the inflation rate was higher than 6% in 2016, the SARB has increase
the repo rate in 2017. The inflation rate has decreased to under 6% currently.√√
Stable prices also increased investor confidence in South Africa. √√
The South African Reserve Bank was unsuccessful by:
 Inflation rate was outside the target range in late 2016 and early 2017,
exceeded the 3% - 6% target range.√√
 This impacted negatively on the economy and the SARB was compelled
to increase the repo rate.√√
(Accept any other correct relevant response)
11.4
How does corruption influence good governance in South Africa?
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(8)
Corruption can hamper the smooth running of a government. √√
It can result in political instability. √√
Socio-economic problems, like poverty, can increase. √√
Financial mismanagement, services cannot be provided to citizens√√
It affects service delivery due to insufficient funds for community projects. √√
148
National development is handicapped in an atmosphere of political instability
and uncertainty, with the result that effective long-term planning is jeopardized.
√√
(Accept any other correct relevant response)
11.5
How can the South African government going about to achieve a more
equitable income distribution?
The South African government attempt to achieve an equitable income
distribution through:
Using a progressive tax system
 Higher income earners are taxed higher at tax rate.
 These taxes are used to finance social development.
 The poor benefit more than those with higher incomes
Providing benefits in kinds
 These include the provision of education, school meals, and
health care
 Limited quantity of free electricity and water are provided 
Providing cash benefit to the economically venerable
 Disability grants, child support and unemployment insurance are
cash grants. These are known as social security payment 
Wealth taxes
 Transfer duties are paid when properties are bought.
 Estate duties are paid on the estates of the deceased
 Taxes are used to finance development expenditure which benefit the poor 
The process of land restitution and land redistribution
 To those who lost their land due to discrimination
 They can choose to be paid in cash or the retain the land
 Training and capacitating of new land owners will determine the
success of this strategy 
(Accept any other correct relevant response)
(8)
SECTION C
HINT: All section C questions have TWO questions 5 & 6 NOT 9 & 10 like in
this document. In the examination you will need to answer only one.
QUESTION 12
 Evaluate the problems of public sector provisioning in South Africa
(26 marks)

Outline examples of problems with regards to public sector provisioning you have
observed in your own community or elsewhere in South Africa
(10 marks)
INTRODUCTION
The government responds to market failures by establishing and maintaining state owned
enterprises to provide public goods and services 
Any other relevant introduction (Max. 2)
149
BODY: MAIN PART
1. Accountability 
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It is required to give an explanation of one's decisions, actions and expenditures over a period of time 
There are mechanisms for evaluating government's economic and financial
performance 
That the desired quantities and quality of goods and services for which
taxes are raised are delivered 
That monopolies, corruption, nepotism, incompetence and apathy does not
occur 
Two important elements of accountability is participation and transparency
Ministerial responsibilities, i.e. the ministers of government departments
are responsible for decisions and actions and expenditures 
Parliamentary questioning arises and members of the government departments have to respond 
The national treasury is responsible for treasury control 
The auditor-general reports annually in writing on each government department
2 Efficiency 
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Public goods are efficiently provided if Pareto efficiency is achieved 
That is if resources are allocated in such a way that no one can be made better off
without making someone else worse off 
Bureaucracy the official rules and procedures. /insensitivity to the needs of
their clients 
Incompetence- the lack of skill or ability to do a task successfully/May have
improper qualifications/or an attitude of apathy 
Corruption- the exploitation of a person's position for private gain
/taking
bribes, committing fraud, nepotism 
3 The problem of assessing needs 
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State-owned enterprises do not operate according to the forces of supply and demand 
It becomes thus very difficult for state-owned enterprises to assess needs and
they are thus prone to under- or over-supplying public goods and services 
The census and other household surveys as well as local government structures
provide this type of information 
Since resources are scarce, government must then decide which needs and
whose needs are to be satisfied 
150
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In the private sector houses are built according to the price that people are able
and willing to pay 
In the public sector housing is regarded as a social responsibility and authorities
supply them according to the needs of people 
4. Pricing policy 
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In a market economy prices are determined by supply and demand 
The objectives of firms are to maximise their profits and they usually set prices to
achieve this objective 
Government does not pursue the profit maximisation objective 
Government takes into account certain social, economic, political and environmental conditions as well as public opinion 
Free-of-charge services- this is met from taxes  and applies to most community goods and collective goods  (e.g.) defense, police  whereby charges
and toll fees are levied 
User-charges  option to charge depends on technical reasons  (e.g.) cost of
providing a double lane road could be recovered by toll charges  Economic reasons  such as services like water and electricity  that have a zero price  political reasons  where income distribution is significantly unequal, administrative
rationing according to need takes place  (e.g.) public health and education 
Direct and indirect subsidies direct subsidies are used to cover part of the costs
 (e.g.) urban bus service  and an indirect subsidy is used to write off accumulated losses or deficits 
Standing charges -called availability charges  (e.g.) water and electricity 
standing charges goes to meet fixed costs and the price per unit consumed covers variable costs 
Price discrimination - different users have different elastic ties of demand for a
good  (e.g.) commercial and manufacturing businesses pay higher rates than
households and they pay on a sliding scale
5. Parastatals 
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state-owned enterprises that either render a service or when an existing enterprise is nationalised  They focus on making a profit and maximizing cost at the
expense of the needs of some groups  (e.g.) Iscor  SABC, SAA, Spoornet

6. Privatisation 
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refers to the process whereby state-owned enterprises and state-owned assets
are handed over or sold to private individuals 
cost of maintaining and managing state-owned enterprises are high which can
lead to higher taxes and larger public debt 
State-owned enterprises are not run as efficiently as private enterprises 
151
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Nationalisation is the process whereby the state takes control and ownership of
privately owned assets and private enterprises 
It includes contracting of services, public-private partnerships, increasing competitiveness 
(Max 26
marks)
Possible problems in your community or elsewhere
• Lack of drinking water due to burst pipes 
• Lack of electricity due to lack of infrastructure (load shedding) 
• Lack of schooling – no buildings available – lack of maintenance 
• Lack of health services due to lack of staff, infrastructure, strikes 
• lack of adequate housing (RDP) 
(Max 10 marks - List of examples max 5 marks)