Macro 88 88.1. Investment depends on the rate of interest. The rate of interest depends on investment.

Reconcile these two statements with reference to the IS-LM framework. (8 marks) 88.2. The developed countries are more productive in all goods than developing countries.

There is no basis for trade between the two. Comment in terms of the principle of comparative advantage. (8 marks)

88.3 Suppose that under a fractional reserve system, an individual deposits his pocket-money

with a bank. Assuming that no bank keeps excess reserves, explain how this affects (a) total deposits, and (4 marks) (b) the money supply. (4 marks)

. 88.4 GNP = C + I + G + X - M where GNP : gross national product C : consumption expenditure I : investment expenditure G : government expenditure X : expenditure on exports M : expenditure on imports

(a) Although GNP is supposed to be measured at market value, there is one component which is not. What is that component? Name one item within that component. (4 marks)

(b) Why is M deducted? (4 marks)

88.5 The simple multiplier is usually expressed as the reciprocal of the marginal propensity to save. Explain how the multiplier would be affected if (a) there are imports. (4 marks) (b) there is full employment. (4 marks)

88.6 The following are hypothetical figures about the population of Hong Kong at a certain date (in thousands):

(a) Calculate the unemployment rate. (2 marks) (b) Explain how the unemployment rate in Hong Kong would be affected by the

following: (i) Some young workers give up their jobs to become full-time students.

(3 marks) (ii) Independent private provident funds are replaced by a central provident

fund. (3 marks)

88.7. (a) Generally, it is the interaction between the money market and the product market which

determines the equilibrium level of income. However, there are instances in which one market alone is sufficient to determine the equilibrium level of income. Discuss.

(15 marks) (b) In the light of (a), discuss the effectiveness of fiscal and monetary policies in regulating

the income level of an economy. (9 marks) 88.8. (a) Explain briefly three methods by which a government can control the money supply.

(9 marks) (b) Discuss how the methods you mentioned in (a) may not give the government complete

control over the money supply. (15 marks) 88.9. (a) Show, with a diagram, how a tariff can bring a net welfare loss to an economy.

(15 marks) (b) Despite (a), explain why tariffs are still imposed. (9 marks) 88.10. (a) Explain, with diagrams, the role of a government in maintaining the official rate under a

fixed exchange rate system. (12 marks) (b) In what way can private speculation endanger the above system ? (6 marks) (c) Explain how interest rates can be used to offset part of the pressure created by

speculation on the Hong Kong dollar under the linked exchange rate system. (6 marks)