ASSESSMENT FEEDBACK

GUIDELINES FOR ANSWERS TO ASSIGNMENT QUESTIONS

Year 2023
Semester First semester
Module ECONOMICS I B (MACROECONOMICS)
Module code ECO10B

1. DETAILS OF LECTURER

Lecturer Mrs A Rossouw

Consultation times Mondays, 18:00 - 20:00

Telephone 063 767 0136

Email arossouw@stadiodl.ac.za

2. GUIDELINES FOR ANSWERS TO ASSIGNMENT QUESTIONS

Question 1 [10]
1.1. Nominal GDP indicates the monetary value of production (GDP at current prices) and does
not take inflation into account. ✓
1.2. The business cycle is the pattern of upswing (expansion) and downswing (contraction) that
can be identified in economic activity over a number of years. One complete business cycle
has four elements. ✓
1.3. Monetary and fiscal policy (collectively called demand management) can be used to
stimulate the economy through the employment of expansionary policies. ✓
Office 101, The Village Square, c/o Oxford and Queen Streets, Durbanville, Western Cape, 7550

CPD Vorster – Director | S Totaram – Director | D Singh – Director | JJ Human – Director

Company registration number: 2004/031722/07

1.4. Fiscal policy involves decisions about how much to spend, what to spend it on and how to
finance the spending. ✓
1.5. A bond is a financial instrument that promises that the issuer (the borrower) will regularly
pay the holder interest and will repay the capital amount at a certain date. The government,
for example, issues bonds with financing part of its expenditure. ✓
1.6. Frictional unemployment: (sometimes also called search unemployment) arises because it
takes time to find a job or to move from one job to another. ✓
1.7. The allocative function refers to the role of government in correcting market failure and
achieving a more efficient allocation of resources. ✓
1.8. A tax is progressive when the ratio of tax paid to taxable income increases as taxable
income increases. ✓
1.9. The repo rate is the rate at which the SARB provides loans to other banks. ✓
1.10. GDP is the total value of all final goods and services produced within the boundaries of the
country in a particular period (usually one year). ✓
Note to marker:
1 mark for each correct statement.

Question 2 [24]
2.1.1. The current account records the value of all exports and imports of goods and services,
along with all flows of income and current transfers between the country and the rest of the
world.✓ (1)
2.1.2. The price of a country’s currency in exchange for another country’s currency. ✓ (1)
2.1.3. To act as an intermediary between the surplus units and the deficit units in the monetary
economy. ✓ (1)

2.2. Tariffs ✓ – duties or taxes imposed on products imported into a country. They are used to
protect domestic firms against competition from imports (protective tariffs) or to raise
government revenue. ✓
Import quotas ✓ – seek to control the physical level of imports and are, therefore, a form
of direct intervention. ✓
Subsidies ✓ – are granted to home producers and have the same economic impact as a
tariff on imported goods. ✓
Non-tariff barriers ✓ – Channelling government contracts to domestic firms since the
technical specification of the contract cannot be met by the foreign companies. ✓
Exchange controls – limiting the amount of foreign currency available to purchase
imported goods.
Exchange rate policy – allowing the currency to depreciate reduces imports since the cost
of imported goods becomes more expensive.

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 Note to marker:
1 mark each for any four correct trade measures listed above.
(1 × 4) marks for corresponding explanation. (8)

2.3.1. The Conventional Measure (M1) ✓ – All coins and notes in circulation outside the
monetary sector plus demand deposits (cheque and transmission) that the private sector
keeps with monetary institutions. Only notes and coins in circulation outside of the
monetary sector (only cash in the hands of the public). ✓
A Broader Definition of Money (M2) ✓ – M1 plus all short- and medium-term deposits of
the private sector with monetary institutions. Short term = Period less than 30 days.
Medium-term = Period less than 6 months. ✓
The Most Comprehensive Measure of Money ✓ – M2 plus all long-term (maturity longer
than 6 months) deposits of the private sector with monetary institutions. Measure’s success
of the monetary policy. ✓ (6)
2.3.2. A current account serves as a means of payment. Funds in a current account is
immediately available for withdrawal, payment and/or transfer to another account ✓ and
therefore forms part of demand deposits or M1 money supply. ✓ (2)
Note to marker:
1 mark M1
1 mark for applicable explanation.
2.3.3. No. ✓ Money is not income. Income is the remuneration for factors of production while
money is the means of payment for goods and services. ✓ (2)
2.3.4. Rational behaviour by politicians pursuing vote maximising strategies. ✓
Rational behaviour by state bureaucrats resulting in bureaucratic failure. ✓
Rational behaviour by citizens and interest groups in the form of “rent-seeking”. ✓ (3)

Question 3 [15]
3.1.1. Structural unemployment. ✓ The firm no longer operates in South Africa and there is no
prospect of it returning. ✓ (2)
3.1.2. Structural unemployment. ✓ There has been a technological change and as a result, a
certain type of firm ✓ (those who manufacture cassette tapes) no longer exists. ✓ (2)
3.1.3. Seasonal unemployment. ✓ The workers will remain unemployed until the next harvest. ✓
(2)
3.1.4. Cyclical unemployment. ✓ unemployment is the result of cyclical factors (a downswing in
the business cycle). ✓ When economic conditions improve and motorcar sales pick up, the
workers will be hired again. ✓ (2)

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3.2. If c = 0.6, ✓
then the multiplier α = 1/(1 – 0.6) ✓
= 1/0.4 ✓
= 2.5 ✓
If I increases by R20 billion, ✓ then Y will increase by R20 billion × 2.5 = R50 billion. ✓✓
(7)
Note to marker:
Please use carry error marking where applicable.

Question 4 [14]
Note to marker:
Please use carry error marking where applicable.

4.1. The information only provides values for the MPC and the tax rate. Therefore we use the
following formula to calculate the multiplier:
Multiplier = …...1……..
1 – c(1 – t) ✓
= ………...1………….
1 – 0.882(1 – 0.15)
= ………..1……..
1 – 0.882(0.85)
= …..1……
1 – 0.75 ✓
= …1…
0.25
=4✓ (3)

4.2. The equilibrium income = Multiplier × Autonomous spending ✓

= 4 × (30 + 220 + 230) ✓
= 4 × 480 million
= 1 920 million ✓ (3)

4.3. The budget deficit/surplus is calculated as follows:

Budget deficit/surplus = Tax revenue – Government expenditure ✓
= (0.15 × 1 920) – 230 ✓
= 288 – 230 million
= 58 million ✓

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 The positive sign indicates that government expenditure is less than the tax revenue at an
equilibrium level of income of R1 920 million which represents a budget surplus. ✓ (4)

4.4. The gap = (Income at full employment – the equilibrium income) ÷ multiplier ✓
= (2 345 million – 1 920 million) ÷ 4
= 425 ÷ 4 ✓
= 106.25 million ✓
If the government increases its spending by R106.25 million, then the growth in the
economy through the multiplier process increases equilibrium income to R2 345 million. ✓
(4)

Question 5 [20]
5.1. Mark allocation for graphs:
1 mark for correct indication of axis (Y & P)
1 mark for indicating Po and P1
1 mark for indicating ADo
1 mark for indicating ASo and 1 mark for a positive slope or a vertical slope
1 mark for indicating correct direction from Po to P1
1 mark for indicating correct direction from ADo to AD1

1 mark for indicating ASo with horizontal slope

1 mark for indicating correct direction from Yo to Y1
1 mark for indicating correct direction from ADo to AD1 (10)

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5.2. The side-effect is clearly an increase in the price level (from P0 to P in the graph). ✓ (1)
5.3. The slope of the AS curve (which reflects supply conditions) is clearly important.
The steeper the curve, ✓ the greater the impact on the price level ✓ and the smaller the
impact on the level of output (and employment). ✓
In the extreme case, where the AS curve is vertical, ✓ the full impact will be on the price
level. ✓
The flatter the AS curve, the greater the impact on output (and employment) ✓ and the
smaller the impact on the price level. ✓
In the extreme case, where the AS curve is horizontal, ✓ the full impact will be on output
and employment, as illustrated in the second diagram. ✓ (9)

Question 6 [10]
Mark allocation for graph (5 marks):
1 mark for correct axis labels.
1 mark for starting at initial equilibrium (point A).
(At initial equilibrium, the corresponding inflation rate and unemployment rate should be provided.)
1 mark for outward shift of PC curve.
1 mark for increase in inflation rate
1 mark for increase in unemployment rate.

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Important:
• Marks awarded according to each individual’s graph.
• The equilibrium points and values for inflation and unemployment guided by the graph above.
• The specific points used to denote the (equilibrium points) and values may differ.
• Assessment of each individual’s graph according to its starting point, change and effect.

Explanation:
The original equilibrium is at A, with the inflation rate at 5% and the unemployment rate at 5%.
The impact of rioting on cost-push inflation is illustrated by the outward shift of the Phillips curve
from A to C. ✓
An increase in the inflation rate is accompanied by an increase in unemployment. ✓
In the diagram, the new equilibrium is at C, where the inflation rate has increased from 5% to 9%,
and the unemployment rate has increased from 5% to 7%.✓
If there are changes in the economy that give rise to a rightward shift of the Phillips curve, this
phenomenon is known as stagflation. ✓
The demand management instruments used by the fiscal and monetary policy are ineffective in
countering or correcting stagflation. ✓
Mark allocation for explanation (5 marks):
(Marks based on individual understanding.)
Core points
• Cost-push inflation is illustrated by the outward shift of the Phillips curve.

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• Inflation increase and unemployment increase.
• Correct reference to the provided graph (new equilibrium).
• Known as stagflation.
• Policy = ineffective.

Question 7 [7]
7.1. The business cycle is the pattern of upswing (expansion) and downswing (contraction) that
can be identified in economic activity over a number of years. One complete business cycle
has four elements:
• A trough (A or C) ✓
• An upswing or expansion (also called a boom) (A to B OR C to D) ✓
• A peak (B or D) ✓
• A downswing or contraction (also called a recession) (B to C) ✓ (4)
7.2. Economic growth can be stimulated by a rise in domestic demand ✓ (C + I + G), a rise in
exports ✓ (X) or a reduction in imports (Z). ✓ (3)

TOTAL: 100

3. CONCLUSION

Good luck with your studies!

Regards
Mrs A Rossouw