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Assessment 8
ECONOMICS
1 hour 30 minutes
This paper must be answered in English.
There are THREE sections in this test.
Answer ALL questions.
Name: ____________________________
Class: ____________________________(
Marks: _________ / 86
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
Section A: Multiple Choice Questions (32 marks)
Study the following questions carefully and put the BEST answers in the boxes.
1. Refer to the following diagram:
Price level
AD
0
Aggregate output
Which of the following can be the reason for the above downward sloping aggregate demand curve?
(1) The law of demand states that the quantity demanded of a good rises when its relative price falls.
(2) The purchasing power of money decreases when the price level rises.
(3) A higher price level reduces the real money supply and increases the interest rate, leading to a decrease
in consumption and investment.
(4) Net exports decrease when domestic output is more expensive.
A.
B.
C.
D.
(1) and (2) only
(1) and (4) only
(2) and (3) only
(3) and (4) only
2. Refer to the following diagram:
Price level
AD1
AD2
Aggregate output
0
Which of the following are the possible causes of the above shift of the aggregate demand curve?
(1) A decrease in disposable income caused by a rise in tax
(2) A decrease in the purchasing power of money caused by a rise in the price level
(3) An increase in interest rate
(4) An increase in the national income of foreign economies
A.
B.
C.
D.
(1) and (2) only
(1) and (3) only
(2) and (4) only
(3) and (4) only
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
3. Along a vertical aggregate supply curve at the potential output level,
(1) nominal output does not change as the price level changes.
(2) the labour market is at full employment.
(3) the labour market is in shortage.
(4) real output and the price level are independent.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only
4. In long-run equilibrium, the price level is determined by _________, while the real output is determined
by _____________.
A. aggregate supply and aggregate demand jointly ... aggregate demand alone
B. aggregate demand alone ... aggregate supply and aggregate demand jointly
C. aggregate supply and aggregate demand jointly ... aggregate supply alone
D. aggregate supply alone ... aggregate supply and aggregate demand jointly
5. Refer to the following diagram:
Price level
AS1
AS2
0
Aggregate output
Which of the following are the possible causes of the above shift of the aggregate supply curve?
(1) The invention and adoption of newly improved production technologies
(2) A higher general education standard of the labour force
(3) A lower interest rate level
(4) A higher price level
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
6. In the long run, if the population size of an economy increases, the price level will __________and the
real GDP will
.
A. rise, fall or remain unchanged ... increase, decrease or remain unchanged
B. rise ... increase
C. rise, fall or remain unchanged ... increase
D. rise …increase, decrease or remain unchanged
7. Suppose Economy A is in long-run equilibrium. If the exchange rate of its currency falls, its price level
and aggregate output will increase and
and
respectively in the short run, and will
respectively in the long run.
A. remain constant ... increase ... remain constant
B. increase ... increase ... remain constant
C. remain constant ... increase ... increase
D. increase ... increase ... increase
8. Suppose Economy A is in long-run equilibrium. If workers go on strike and stage demonstrations
nationwide, the price level and aggregate output of Economy A will rise and
short run, and will
and
respectively in the
respectively in the long run.
A. remain constant ... fall ... remain constant
B. decrease ... remain constant ... increase
C. decrease ... remain constant ... decrease
D. decrease ... remain constant ... remain constant
9. The following table shows some statistics of an economy:
Year on year % change in Unemployment rate
Year
Quarter
real GDP
(%)
－4.2
2008
3rd
1.6
2009
Implicit price deflator of
GDP
132
4th
－3.5
2.7
127
1st
－2.7
3.5
116
2nd
－1.6
4.2
108
Based on the above table, which phase of the business cycle is the economy at?
A. Recession
B. Trough
C. Recovery
D. Peak
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
10. Refer to the following diagram:
Price level
AD2
AD1
0
Aggregate output
Which of the following are possible reasons for the above shift of the aggregate demand curve?
(1) A decrease in government expenditure
(2) A decrease in money demand
(3) A decrease in money supply
(4) A decrease in salaries tax rate
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only
11. Given that there is supply-side effect. If business prospects become pessimistic, which of the following
measures can the government adopt to stabilize the price level and real income?
A. Expansionary monetary policy
B. Expansionary fiscal policy
C. Contractionary monetary policy
D. Contractionary fiscal policy
12. Given that there is NO supply-side effect. When the short-run aggregate supply curve shifts rightward, a
contractionary fiscal policy
A. can stabilize the price level, but will make the real output fluctuate more.
B. can stabilize the real output, but will make the price level fluctuate more.
C. can stabilize both the price level and the real output.
D. will make both the price level and the real output fluctuate more.
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
13. Given that there is NO supply-side effect. Which of the following about an expansionary fiscal policy are
correct?
(1) The short-run aggregate supply curve shifts rightward.
(2) The aggregate demand curve shifts leftward.
(3) The price level will rise.
(4) The real output will increase in the short run.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only
14. Which of the following about an expansionary monetary policy are correct?
(1) The aggregate demand curve shifts rightward.
(2) The short-run aggregate supply curve shifts rightward.
(3) The price level will rise.
(4) The real output will decrease.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only
15. When money demand decreases, a contractionary fiscal policy
A. can stabilize the price level, but will make the real output fluctuate more.
B. can stabilize the real output, but will make the price level fluctuate more.
C. can stabilize both the price level and the real output.
D. will make both the price level and the real output fluctuate more.
16. If natural disasters that hinder production activities occur frequently, a contractionary monetary policy
A. can stabilize the price level, but will make the real output fluctuate more.
B. can stabilize the real output, but will make the price level fluctuate more.
C. can stabilize both the price level and the real output.
D. will make both the price level and the real output fluctuate more.
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
Section B: Short Questions (14 marks)
1. With the aid of separate diagrams, distinguish between a shift of and a movement along an aggregate
demand curve. Suggest TWO factors causing a shift of the aggregate demand curve. (8 marks)
Shift of an AD curve
Price level
Aggregate output
0
___________________________________________________________________________________
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Movement along an AD curve
Price level
Aggregate output
0
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
2. The initial state of an economy is at point A as shown in the following diagram:
Price level
LAS
SAS
B
P1
A
0
AD
Y1
Aggregate output
YF
Briefly explain how a macroeconomic policy can restore long-run equilibrium in the economy at point B.
Present the final state of the economy in the above diagram. (Hint: To simplify the analysis, you can
ignore the supply-side effects.) (6 marks)
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___________________________________________________________________________________
___________________________________________________________________________________
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
Section C: Structured Questions (40 marks)
1. Economy A is initially in long-run equilibrium. Suppose the trading partner of Economy A experiences
severe recession. With the aid of a diagram, use the AS-AD model to explain how the price level and real
GDP of Economy A will be affected in the
(a) short run, and (8 marks)
(b) long run. (6 marks)
Price level
Real GDP
0
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© Hong Kong Educational Publishing Co.
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
2. Economy A is initially in long-run equilibrium. Suppose the government of Economy A reduces the
salaries and profits tax rates substantially.
(a) With the aid of a diagram, use the AS-AD model to explain how the price level and real GDP of
Economy A will be affected in the short run. (10 marks)
Price level
Real GDP
0
(b) Explain briefly how the real GDP of Economy A will be affected in the long run. (4 marks)
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___________________________________________________________________________________
___________________________________________________________________________________
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___________________________________________________________________________________
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___________________________________________________________________________________
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
3. Suppose the government of an economy reduces the profits tax rate. The government expenditure is also
reduced. The reduction in government expenditure equals the reduction in profits tax revenue due to the
reduction in profits tax rate.
(a) How is the aggregate demand curve affected by the reduction in profits tax rate? (1 mark)
(b) How is the aggregate demand curve affected by the reduction in government expenditure? (1 mark)
(c) Explain the combined effects of (a) and (b) on the aggregate demand curve. (2 marks)
(d) How is the short-run aggregate supply curve affected by the reduction in profits tax rate? (1 mark)
(e) With the aid of a diagram, use the AS-AD model to explain how the above measures will affect the
price level and the real output of the economy in the short run. (7 marks)
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___________________________________________________________________________________
Price level
Aggregate output
0
___________________________________________________________________________________
___________________________________________________________________________________
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END
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
Assessment 8 (Suggested Answers)
Section A
(Each question carries 2 marks)
1. C
2. B
3. C
4. C
5. A
6. C
7. B
8. D
9. A
10. C
11. A
12. B
13. D
14. B
15. C
16. A
Section B
1. Shift of an AD curve
Mark allocation for the diagram:
-
Price level
Shift of the AD curve
(1)
AD2
0
AD1
Aggregat
e output
A shift of the AD curve is caused by a change in the factors affecting the quantity of
(1)
output demanded except the price level.
It is shown by a change in the quantity of output demanded at every price level.
It can be caused by: (any 2 factors below)
(1)+(1)
-
A decrease in local interest rate
-
A decrease in income tax rate, an increase in welfare allowances
-
A decrease in saving rate
-
An improvement in economic prospect
-
A decrease in profits tax rate, an increase in government expenditure
-
An increase in foreign national income
-
A decrease in domestic exchange rate.
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(1)
12
New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
Movement along an AD curve
Mark allocation for the diagram:
-
Price level
Movement along the AD curve
(1)
P1
P2
AD
0
AD1
AD2
Aggregat
e output
A movement along the AD curve is caused by a change in the price level.
(1)
It is shown by different quantities of output demanded at various price levels.
(1)
2. If expansionary monetary policy is adopted, money supply will increase which will
(1)
decrease interest rate and increase investment.
If expansionary fiscal policy is adopted, government expenditure will increase or taxes
(1)
will decrease.
The AD curve will shift rightward.
(1)
Both the price level and real income will increase.
(1)
Price level
Mark allocation for the diagram:
LAS
P2
A
SAS
AD1
Y1 YF
AD curve shifts rightward
(1)
-
The increases in the price level and
(1)
the real output
B
P1
0
-
AD2
Aggregate
output
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
Section C
1.
Mark allocation for the diagram:
Price level
LAS
(a)
SAS1
SAS2
A
P1
B
P2
C
P3
AD2
0
(1)
-
AD1 shifts leftward to AD2.
(1)
-
P1 decreases to P2.
(1)
-
Y1 decreases to Y2.
(b)
AD1
Real GDP
Y2 Y1
-
SAS1 shifts rightward to SAS2.
(1)
-
P2 decreases to P3.
(1)
-
Y2 returns to Y1.
(1)
(a) If the trading partner of Economy A experiences severe recession, its national income
(1)
will decrease.
This decreases the exports of Economy A to this economy.
(1)
In the short run, the AD curve of Economy A shifts leftward.
(1)
The economy adjusts from point A to B. Both the price level and the real GDP decrease
(2)
in the short run.
(b) As real GDP is less than the full-employment level, unemployment exists. In the long
(1)
run, wages and production costs can be adjusted downward. The SAS curve shifts
rightward.
The economy adjusts from point B to C. Eventually the price level further falls,
(1)
but real GDP returns to the full-employment level.
(1)
2. (a)
Mark allocation for the diagram:
Price level
LAS
SAS1
SAS2
AD1 shifts rightward to AD2.
(1)
-
SAS1 shifts rightward to SAS2.
(1)
-
Y1 increases to Y2.
(1)
-
Indicate P correctly (P may rise, fall
(1)
or remains constant. Note that if the
P
magnitude of the shift of the AD
AD2
0
-
AD1
Y1
curve equals that of the SAS curve,
then P will remain constant.)
Real GDP
Y2
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New Horizon Economics 5B
Chapters 10 - 11
Assessment 8
If the government of Economy A reduces the salaries and profits tax rates substantially,
(1)
consumption and investment expenditure will increase.
In the short run, the AD curve of Economy A shifts rightward.
(1)
The reduction in taxes will rasie labour supply, saving and investment.
(1)
The SAS curve of Economy A shifts rightward.
(1)
In the short run, the real GDP increases but the price level may rise, fall or remain
(2)
constant.
(b) The increase in labour supply and the accumulation of physical capital will increase the
(2)
potential output.
This will shift the LAS curve rightward, leading to a higher real GDP.
(2)
3. (a) The AD curve shifts rightward.
(1)
(b) The AD curve shifts leftward.
(1)
(c) As the rightward shift of the AD curve due to (a) is smaller than the leftward shift due
(1)
to(b),
the AD curve has a net leftward shift.
(1)
(d) The SAS curve shifts rightward.
(1)
(e)
Mark allocation for the diagram:
Price level
LAS
SAS1
SAS2
P1
P2
A
AD1 shifts leftward to AD2.
(1)
-
SAS1 shifts rightward to SAS2.
(1)
-
P1 falls to P2 and P3.
(1)
B
C
P3
0
-
AD2
Y2 Y1
AD1
Aggregate
output
As aggregate demand decreases, both the price level and the real output decrease.
(1)
As short-run aggregate supply increases, the price level further falls
(1)
but the real output increases.
(1)
Hence the final change in real output is uncertain, which depends on the magnitude of
(1)
the shifts of the aggregate demand and supply curves.
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