Sing Yin Secondary School
Mock Examination (2013-14)
S6 Economics, Paper 2
Full marks: 120 Duration: 2 hours & 15 mins
Group____ Class ______
Name: ___________________________ Class number: ____
Section A: (50 marks) Answer ALL the questions.
1. Consider the following fiscal measures of the government:
Measure (1): Exemption of rates
Measure (2): Doubling the tobacco tax
(a) Explain whether rates are direct tax or indirect tax? (2 marks)
(b) Explain whether the tobacco tax in Hong Kong is a progressive tax, proportional tax or a
regressive tax. (2 marks)
(c) Will measure (2) necessarily increase the fiscal balance of the government? Explain your
answer. (3 marks)
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2. Factory A employs two inputs in production only, namely capital and labour. The table below
shows the input-output relationship of the factory.
Capital (units) 10 10 10 10 10 10
Labour (units) 0 1 2 3 4 5
Total output (units) 0 100 200 320 420 500
Define the law of diminishing marginal returns and explain whether this law applies to Factory A.
(5 marks)
3. The government of Economy A increased its money supply by 6% in 2012.
(a) Based on the quantity theory of money, what would be the growth rate of the price level in
2012 given that the real GDP grew at 2% in that year. (4 marks)
(b) Suppose the expected inflation rate was 2% in 2012. Would a bond holder who received
fixed interest gain or lose? Explain your answer. (3 marks)
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4. In Hong Kong, households are generally not charged for waste disposals and the use of the
landfill facilities.
(a) Are the landfill facilities provided by the government public goods? Explain your answer.
(3 marks)
(b) “Negative externalities may result when households are not charged for waste disposal.”
Do you agree? Explain your answer. (3 marks)
5. Refer to the following balance sheet of a banking system. Suppose the public holds a total of
$200 million of cash and there is no excess reserve in the banking system now.
Assets ($million) Liabilities ($million)
Reserves 500 Deposits 2000
Loans 1500
(a) Calculate the money supply and the monetary base. (2 marks)
(b) Assume that the public decides to hold $300 million of cash instead of $200 million.
(i) Calculate the maximum banking multiplier and maximum possible change in the money
supply. (2 marks)
(ii) Will the monetary base change too? Explain your answer. (2 marks)
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6. Suppose there are only two countries, Country A and Country B. The table below shows the
quantity of goods each of them can produce with one unit of resources.
Good X (units) Good Y (units)
Country A 10 Or 40
Country B 50 Or 80
(a) Explain whether Country B will export or import Good X. (3 marks)
(b) Suppose the terms of trade are 1X : 3Y and Country B has to pay a transportation cost of 0.5Y for each
unit of Good X traded. Will Country B gain from the trading of Good X. (3 marks)
7. Why is the aggregate supply curve vertical in the long run but not in the short run? (5 marks)
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8. Suppose the exchange rates between the US dollar (USD) and the Japanese yen (¥) change as
follows:
Period 1 : USD 1 : ¥ 100
Period 2 : USD 1 : ¥ 110
(a) How would the exchange rate between the Hong Kong dollar (HKD) and the Japanese yen
change in the same period? Explain your answer. (2 marks)
(b) Suppose the general price level in Japan remains unchanged. How would the change of the
Hong Kong dollar’s exchange rate in (a) above affect the following from period 1 to 2:
(i) The number of Hong Kong visitors to Japan
(ii) The total expenditure (in HKD) of the Hong Kong visitors in Japan, given that the
demand of the Hong Kong visitors is elastic.
Explain your answers to (i) and (ii) above with the aid of a diagram. (6 marks)
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Section B: (54 marks) Answer ALL questions.
9. James and some of his friends operate a partnership to sell sportswear in Fa Yuen Street, in
which there are lots of sports shoe and sportswear shops.
(a) State TWO external economies of scale and TWO external diseconomies of scale of the
sports shoe and sportswear shops in Fa Yuen Street. (4 marks)
(b) State TWO advantages of setting up a partnership over a limited company. (2 marks)
(c) James’ shop accepts Renminbi in transactions and it also has a Renminbi savings account.
To James’ shop and the tourists who pay in Renminbi, which TWO functions of money does
Renminbi perform? Explain your answers. (4 marks)
(d) James’ partnership has bought the shop from the landlord and does not have to pay any
rent. Shortly after that, land rent in Fa Yuen Street rises sharply. Will this rise in land rent
affect the cost for the partnership to run the sportswear shop? (3 marks)
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10. In view of the growing number of tourists, Hong Kong Disneyland and Ocean Park Hong Kong
have implemented plans to expand its scale to include more attractions. At the same time, the
government has also planned to develop new tourist facilities.
(a) To what market structure does the market of theme parks in Hong Kong belong?
Name TWO features of this market structure. (3 marks)
(b) Ocean Park Hong Kong has planned to expand to the hotel business.
(i) To what type of expansion does it belong? Explain your answer. (2 marks)
(ii) State TWO possible motives of this type of expansion. (2 marks)
(c) The expansion of tourist facilities and the tourist industry will raise the general price level
but will not have any effect of the real GDP in the long run. Do you agree? Explain your
answer with the use of a AS-AD diagram. (6 marks)
Price level
Real GDP
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11. The diagram below shows the demand for and supply of farm products in Country A, which is a
small open economy. P1 is the world price as well as the domestic price of farm products.
Price ($)
Supply
P1
Demand
Quantity of farm products
Suppose Country A imposes a tariff on the import of farm products to protect the interest of
local farmers.
(a) How will the following change after the imposition of the tariff? Illustrate the changes with
the diagram above. (6 marks)
(i) The domestic price of farm products.
(ii) The total quantity of farm products imported by Country A
(iii) The total output of domestic farm products
(iv) The producer surplus of local farmers
(b) Explain, with the aid of the diagram above, the losses caused by the tariff on society.
(4 marks)
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12. The government has adopted the Elderly Health Care Voucher Scheme (HCVS) to subsidize the
medical expense of the elders. All eligible elders are provided with 20 health care vouchers of
$50 each. These vouchers can only be spent on the medical services in the private sector.
Consider the following:
Event (1): The charges of public clinics are fixed by the government. Each day, people have to
wait for hours for the services of the clinics and many of them are the elderly.
Event (2): Each eligible elder can now receive 40 health care vouchers of $100 each.
(a) Answer the question below with a demand-supply diagram: (6 marks)
(i) Why do people need to wait for the medical services of public clinics?
(ii) How will Event (2) affect the average waiting time of each person in public clinics?
Explain your answer.
(b) With a separate diagram, explain how Event (2) will affect the price and the producer
surplus in the market of private medical services? (4 marks)
Price ($) Price ($)
Quantity of public Quantity of
medical services private medical
services
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(c) Name the TWO functions of the market price. Explain whether the Elderly Health Care
Voucher Scheme interferes with these two functions. (4 marks)
(d) “The government should increase the amount of healthcare subsidies to the elderly.”
Evaluate this statement. (4 marks)
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Section C (16 marks) Answer Question 13.
Elective 2:
13. Refer to the diagram below. Line AA’ is the production possibilities frontier of Country A. It
produces at point P0 before specialization and trade.
Good Y
A P0
Good X
T’ A’
Assume that line TT’ is the trade line facing Country A.
(a) Which good, Good X or Good Y, will Country A specialize in and export? Explain your answer.
(4 marks)
(b) Draw the consumption possibilities frontier (CPF) of Country A on the diagram and explain
why Country A can gain from trade. (3 marks)
(c) What would be the production point of Country A after specialization? (Label it as P 1 on the
diagram above.) Would Country A consume at this point? Explain your answer.
(3 marks)
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For more than a decade, the growth rates of the real GDP of the Mainland of China have
exceeded many of the developed countries.
(d) Explain TWO possible reasons for the rapid economic growth in the Mainland since the
economic reform in 1980s. (4 marks)
(e) State TWO possible costs of such a rapid economic growth in the Mainland. (2 marks)
End of Paper
