Macro86 86.1 Specify the assumptions under which a new cash deposit with a bank will lead to a multiple deposit

creation. Explain why the change in deposits is NOT equal to the change in money supply. (8 marks) 86.2 What is the acceleration principle? Explain why in a recession this principle may operate differently for a single firm and a closed economy.

(8 marks) 86.3 Built-in stabilizers may or may not create disincentives. Explain. (8 marks) 86.4 Explain how inflation may cause a redistribution of income (a) between private lenders and borrowers, and

(b) between private individuals and the government. (8 marks) 86.5 The following table give the labour requirement per unit output of X and Y in countries A and B:

Country Goods A B

X 1 3 Y 2 4

(a) State which country has an absolute advantage in the production of X and Y respectively. (1 mark) (b) Explain which country has a comparative advantage in the production of X and Y respectively.

(3 marks) (c) Suppose the productivity of labour in the production of X and Y in country B doubles. How does

it affect your answers in (a) and (b)? (4 marks)

86.6 It can be argued that unemployment is beneficial to both the unemployed and the economy. Explain in terms of the search theory. (8 marks)

86.7 (a) Using the IS-IM model, show how the rate of interest is determined. (16 marks) (b) The rate of interest is determined by monetary forces.

The rate of interest is determined by real forces. Reconcile these two statements. (8 marks)

86.8 (a) On the demand side of the economy, equality between saving and investment determines the equilibrium

level of income.

Saying and investment are always equal.

Can it be inferred from these two statements that income is always in equilibrium on the demand side ? Why ? (12 marks)

(b) Saving releases resources for investment which is an important determinant of income. According to the paradox of thrift, if the people as a whole try to save more, they may consequently suffer a fall in income. Reconcile these two statements. (12 marks)

86.9 (a) An increase in foreign trade protection by an economy may generate benefits to it, and so may a

reduction. Do you agree ? Give reasons. (12 marks) (b) Many of Hong Kongs trading partners have protectionist measures against imports. What would be the

consequences if Hong Kong counteracted by adopting protectionist measures also ? (12 marks) 86.10 The following figures relate to the gross domestic product (GDP) of Hong Kong (in current HK$ billion

unless otherwise stated) :

1980 1981 Private consumption expenditure 85.3 102.7 Government consumption expenditure 8.8 12.4 Contribution of manufacturing to GDP 30.5 36.0 Gross domestic fixed capital formation 45.5 55.4 Increase in stocks 3.7 3.9 Indirect taxes less subsidies 5.2 6.1 Exports of goods 98.2 122.2 Imports of goods 111.8 139.2 Exports of services 22.2 27.2 Imports of services 14.9 19.2 GDP deflator 100.0% 110.1%

Source : Census and Statistics Department, Estimates of Gross Domestic Product 1966 to 1983. (a) Calculate the GDP of 1980 and 1981 at current market prices. (10 marks) (b) Explain your calculation. (8 marks) (c) What is the rate of growth of the 1981 GDP over the 1980 GDP at constant market prices ?

(6 marks)