Chapter 21 Business Cycle, Changes in the General Price Level and Unemployment

8/13/2019 Chapter 21 Business Cycle, Changes in the General Price Level and Unemployment

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Economics Inquiry for HKDSE Macroeconomics 2Chapter 21 Business Cycle, Changes in the General Price Level and Unemployment

Multiple Choice Questions

|!|EM51001|!|

What is a business cycle?

A. A business cycle refers to the periodic fluctuations of economic activity about its short-term

growing trend.

B. A business cycle refers to the periodic fluctuations of economic activity about its long-term

growing trend.

C. A business cycle refers to the development of the long-term growing trend of an economy.

D. A business cycle refers to the periodic fluctuations of the nominal GDP of an economy.

##

B

##

|!|EM51002|!| (revised)

If an economy is at a trough of a business cycle, which of the following phenomena can possibly be

observed?

(1) The inflation rate is high.

(2) Many people are being laid off.

(3) People spend less money.

(4) The nominal interest rate is at a high level.

A. (1) and (4) only

B. (2) and (3) only

C. (1), (2) and (3) only

D. (2), (3) and (4) only

Aristo Educational Press Ltd. 21-1


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##

B

A trough is the lower turning point of a business cycle. At this point, low business confidence leads to

low levels of investment, consumption, production and employment.

(2) is correct. At a trough, the unemployment rate is high and many people are likely to be laid off.

(3) is correct. At a trough, the low level of consumption is mainly due to a reduction in peoples

consumption.

(1) is incorrect. At a trough, as the general price level is low, there is a low inflation rate or even

deflation.

(4) is incorrect. The nominal interest rate is at a low level.

##

|!|EM51003|!|

The above graph shows that the economy is at a stage of ___________ and ___________ in year 2 and

year 3 respectively.

A. recovery trough

B. recovery peak

C. recession trough

D. recession peak


0

4321

Unemployment rate

Year

%

Growth rate of real GDP


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##

B

In year 2, the growth rate of real GDP is increasing while the unemployment rate is decreasing. This

implies that the performance of the economy is improving and thus the economy is in recovery.

In year 3, the growth rate of real GDP is at its highest while the unemployment rate is at its lowest. This

implies that the performance of the economy is doing its best and the economy is at a peak.

##

|!|EM51004|!|

In the above diagram, which point represents a phase of recovery of a business cycle?

A. A

B. B

C. C

D. D

##

D

Recovery is the upswing of a business cycle. During this period, the growth rate of real GDP starts to

rise. In the above diagram, the growth rate of real GDP is increasing at point D.

##


Average growth rate

Year

D

C

B

A

0



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|!|EM51005|!|

In year 2, which of the following phenomena can be observed in the economy?

A. Households income increases.

B. The growth rate of real GDP increases.

C. The volume of imports increases.

D. Government revenue from salaries tax decreases.

##

D

In year 2, as the unemployment rate is increasing and the general price level is decreasing, we know

that the economy is in recession. During this period, business confidence, levels of investment,

consumption, production and employment decrease. Increasing unemployment rate implies a decrease

in the households income. Therefore, government revenue from salaries tax would decrease. As levels

of consumption and investment decrease, the volume of imports would decrease and the growth rate of

real GDP would decrease.

##


Change of the general price level

04321

Year

%

Unemployment rate


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|!|EM51006|!|

The following phenomena are observed in an economy:

(1) The unemployment rate has stopped rising and starts to fall.

(2) Households income is increasing.

(3) Companies net profit is increasing.

Which phase of a business cycle is the economy in?

A. peak

B. recession

C. trough

D. recovery

##

D

Recovery is the upswing of a business cycle. During this period, improvement in business confidence

leads to increases in levels of investment, consumption, production and employment. Households

income and companies net profit are increasing while the unemployment rate starts to fall.

##

|!|EM51007|!|

Which of the following phenomena can be observed in an economy that is in recession?

(1) The total income from the retail sector decreases.

(2) The total expenditure on investment increases.

(3) The real GDP is higher than the nominal GDP.

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

D. (1), (2) and (3)



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##

A

(1) is correct. Recession is the downswing of a business cycle. During this period, as the level of

consumption decreases, the total income from the retail sector decreases.

(2) is incorrect. As the level of investment decreases in recession, the total expenditure on investment

decreases.

(3) is incorrect. Although the general price level decreases in recession, the nominal GDP is higher than

the real GDP if the current price level is higher than that of the base year.

##

|!|EM51008|!|

In 2009, the growth rate of real GDP of an economy reaches a record high while the unemployment

rate reaches a record low. This implies that

A. the economy will continue to grow rapidly.

B. the economy is probably at a peak.

C. the income distribution of the economy is quite even.

D. the money supply of the economy will increase.

##

B

At a peak, high business confidence leads to high levels of investment, consumption, production and

employment. Therefore, the growth rate of real GDP is high and the unemployment rate is low.

Options A, C and D are undetermined.

##

|!|EM51009|!|

Which of the following phenomena is LEAST likely to be observed in an economy which is at a peak

of a business cycle?

A. The aggregate demand increases.

B. The volume of imports and exports increases.

C. The gross investment decreases.

D. The number of people applying for unemployment benefit decreases.



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##

C

At a peak, there is high business confidence and a high level of investment. Gross investment would

increase instead of decrease.

##

|!|EM51010|!| (revised)

When an economy is at a trough, the ___________ is at a low level while the ___________ is at a high

level.

A. salaries tax revenue sales tax revenue

B. volume of imports volume of exports

C. investment expenditure returns from investment

D. production number of unemployed

##

D

A trough is the lower turning point of a business cycle. At this point, low business confidence leads to

low levels of investment, consumption, production and employment. The number of unemployed is at a

high level.

##

|!|EM51011|!|

Which of the following statements about inflation is INCORRECT?

A. Inflation is a persistent increase in the general price level.

B. Not all the prices of goods and services will increase during inflation.

C. If the general price level increases by 5% in one day and remains stable afterward, this is

considered as inflation.

D. The price of some goods may fall during inflation.



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##

C

Inflation is a persistent increase in the general price level. It is not inflation if the general price level

increases by 5% in one day and remains stable afterwards, because this is a once-and-for-all change in

the general price level.

##

|!|EM51012|!|

Which of the following situations can be classified as deflation?

(1) Prices of most goods decreased immediately after the government removed the sales tax.

(2) There are mega sales for many shops during the year-end period.

(3) Supermarkets offer discounts to their customers regularly.

A. (1) only

B. (2) only

C. (2) and (3) only

D. None of the above.

##

D

Deflation is a persistent decrease in the general price level.

(1) and (2) are incorrect. A once-and-for-all change in the general price level is not deflation.

(3) is incorrect. The general price level will not be affected by the discounts given by supermarkets.

##

|!|EM51013|!|

Which of the following descriptions about the general price level is INCORRECT?

A. A once-and-for-all change in the general price level is neither inflation nor deflation.

B. Changes in the general price level cannot be reflected in the consumer price index.

C. The general price level is the average level of prices of goods and services in an economy.

D. When an economy is in recovery, the general price level rises.



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##

B

The consumer price index is a measure of the weighted average of prices of a basket of consumer

goods and services to reflect changes in the general price level.

##

|!|EM51014|!|

Which of the following descriptions about the consumer price index (CPI) is CORRECT?

A. It measures the weighted average of prices of a basket of producer goods and services.

B. It measures the weighted average of prices of a basket of imported goods and services.

C. It measures the weighted average of prices of a basket of consumer goods and services.

D. It measures the weighted average of prices of all final goods and services.

##

C

##



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|!|EM51015|!|

The following shows the information about the gross domestic product of Country A.

According to the above diagram, which of the following statements is/are CORRECT?

(1) The real output has increased between 2005 and 2008.

(2) The general price level has increased between 2005 and 2008.

(3) The unemployment rate has decreased between 2005 and 2008.

A. (1) only

B. (2) only

C. (1) and (3) only

D. (2) and (3) only

##

A

(1) is correct. The increase in the GDP at constant market prices means that the real output has

increased.

(2) is incorrect.

Implicit price deflator of GDP = (GDP at current market prices / GDP at constant market prices)100

Between 2005 and 2008, the percentage increase in GDP at constant market prices is higher than the

percentage increase in GDP at current market prices, indicating that the implicit price deflator of GDP

has been decreasing. The general price level has decreased between 2005 and 2008.

(3) is incorrect. The change of unemployment rate cannot be determined from the above diagram.


GDP at constant market prices

GDP ($ billion)

2008200720062005

Year

GDP at current market prices

8,000

6,000

4,000

2,000

0


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##

|!|EM51016|!|

Year Nominal GDP

($ million)

Population

(million)

Implicit GDP deflator

1 500 50 902 X 60 100

Suppose from year 1 to year 2, the economys real GDP has decreased. According to the above table,

_________ is a possible value of X.

A. 550

B. 560

C. 570

D. 600

##

A

Implicit price deflator of GDP = (Nominal GDP / Real GDP) 100

If the economys realGDP has decreased, this implies that

$500 million / 90 > $X million / 100

555.56 > X

##



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|!|EM51017|!|

The above diagram shows the implicit GDP deflator of Country A from January 2008 to December

2009. Based on the diagram, we can conclude that during this period,

A. peoples income and the general price level were increasing.

B. the nominal GDP was increasing.

C. the real value of output was decreasing.

D. the purchasing power of money was decreasing.

##

D

Increasing implicit GDP deflator implied that the general price level was also increasing. Hence, the

purchasing power of money was decreasing.

Option A is incorrect. Peoples income does not necessarily increase when the general price level

increases.

Option B is incorrect. The change in the nominal GDP cannot be determined from the implicit GDP

deflator.

Option C is incorrect. The change in the real value of output cannot be determined from the implicit

GDP deflator.

##


2008 Jan

106

104

102

100

98

96

2009 Dec

Implicit GDP deflator


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|!|EM51019|!|

Year Nominal GDP

($ million)

Population

(million)

Implicit price deflator ofGDP

1 420 3 902 560 4 110

According to the above information, which of the following statements about the economy is

CORRECT?

A. The real GDP in year 1 is higher than that in year 2.

B. The general price level has decreased from year 1 to year 2.

C. The per capita nominal GDP in year 1 and year 2 are the same.

D. The per capita real GDP in year 1 is lower than that in year 2.

##

C

Per capita nominal GDP in year 1 = $420 million / 3 million = $140

Per capita nominal GDP in year 2 = $560 million / 4 million = $140

Option A is incorrect. The real GDP in year 1 ($420 million 100 / 90 = $466.67 million) is lower than

that in year 2 ($560 million100 / 110 = $509.09 million).

Option B is incorrect. An increase in the implicit price deflator of GDP represents an increase in the

general price level.

Option D is incorrect. The per capita real GDP in year 1 ($466.67 million / 3 million = $155.56) is

higher than that in year 2 ($509.09 million / 4 million = $127.27).

##



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|!|EM51020|!|

Year Real GDP ($ million) Implicit price deflator of GDP1 360 1002 480 120

According to the above information, which of the following statements about the economy is/are

CORRECT?

(1) The nominal GDP has increased.

(2) The inflation rate is 20%.

(3) The consumer price index has increased by 20%.

A. (1) only

B. (2) only

C. (1) and (2) only

D. (1), (2) and (3)

##

C

(1) is correct.

Nominal GDP in year 1 = $360 million

Nominal GDP in year 2 = $480 million120 / 100 = $576 million

The nominal GDP has increased in year 2.

(2) is correct.

Inflation rate = [(120 100) /100] 100% = 20%

(3) is incorrect. There is not enough information to determine the change in the consumer price index.

##

|!|EM51021|!|

If the inflation rate falls from 5% to 2%, this implies that

A. prices are going down steadily.

B. the consumer price index is decreasing.

C. prices are increasing at a decreasing rate.

D. the real output level is decreasing.

##



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C

An inflation rate is the percentage change in the general price level in a specific period. A falling

inflation rate means that prices go up at a decreasing rate.

Option A is incorrect. The price level is rising.

Option B is incorrect. If the inflation rate is positive, the consumer price index will increase.

Option D is incorrect. Inflation rate does not reflect a change in the real output level.

##

|!|EM51022|!|

Which of the following items is/are included in the calculation of Composite CPI of Hong Kong?

(1) households expense on transportation

(2) firms expense on buying office equipment

(3) households expense on electricity

A. (1) only

B. (2) only

C. (1) and (3) only

D. (2) and (3) only

##

C

The consumer price index is a measure of the weighted average of prices of a basket of consumer

goods and services to reflect changes in the general price level.

(1) and (3) are included. They belong to consumer goods and services.

(2) is not included. Office equipment is not a consumer good.

##



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|!|EM51023|!|

Suppose the nominal GDP is increasing at a decreasing rate. Meanwhile, both the population and

inflation rate is increasing.

Which of the following statements is/are CORRECT?

(1) The per capita nominal GDP must increase.

(2) The real GDP must decrease.

(3) The cost of living must increase.

A. (1) only

B. (3) only

C. (2) and (3) only


##

B

(3) is correct. The increasing inflation rate means that the general price level increases. Therefore, the

cost of living must increase.

(1) is incorrect. Since both the nominal GDP and the population are increasing, the change in per capita

nominal GDP is uncertain.

(2) is incorrect. Given that both the nominal GDP and the inflation rate are increasing, the change in the

real GDP is uncertain. It depends on the relative magnitude of the increase in the nominal GDP and the

increase in the inflation rate.

##

|!|EM51024|!|

Suppose the real GDP of an economy in the past year has increased from $100 billion to $120 billion,

while the nominal GDP of this year has decreased by 5%, as compared to last year. Assume last year is

the base year and the implicit GDP deflator of last year is 100. We can conclude that the implicit GDP

deflator during this period has

A. increased by 5%.

B. increased by 21%.

C. decreased by 5%.

D. decreased by 21%.



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##

D

Implicit GDP deflator = Nominal GDP / Real GDP 100

Implicit GDP deflator of this year = 95 / 120

100

= 79

Change of the implicit GDP deflator = (79 100) / 100 100%

= -21%

##

|!|EM51025|!|

According to the equation of exchange, when an economy is experiencing deflation, which of the

following is CORRECT?

A. If money supply decreases at the same rate as the general price level, real output and the

velocity of circulation of money will increase.

B. In the absence of changes in money supply, a decrease in the velocity of circulation of

money may lead to a rise in real output.

C. In the absence of changes in money supply, an increase in the velocity of circulation of

supply will be smaller than the increase in real output.

D. If money supply and real output remain constant, the velocity of circulation of money will

remain unchanged.

##

C

Equation of exchange: MV PY

When the variables in the equation of exchange are expressed in terms of percentage changes, the

equation becomes: % change in M + % change in V % change in P + % change in Y

Given that the economy is experiencing deflation, we know that % change in P < 0. If M remains

unchanged, when V increases, the increase in V will be smaller than the increase in Y.

Option A is incorrect. We only know that the changes in V and Y will be in phase, but we do not know

if they will increase, decrease or remain unchanged.

Option B is incorrect. If M remains constant, Y will decrease when V decreases.

Option D is incorrect. If both M and Y remain constant, V will decrease.

##



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|!|EM51026|!|

According to the Quantity Theory of Money (QTM), which of the following is/are CORRECT?

(1) When there is an increase in money supply, the general price level will increase at the same

rate as that of money supply.

(2) The velocity of circulation of money is assumed to be constant.

(3) The unemployment rate is always at its lowest.

A. (1) only

B. (2) only

C. (1) and (2) only

D. (2) and (3) only

##

B

(2) is correct. Irving Fisher put forward an important assumption for the equation of exchange: V is

assumed to be constant in the equation. V is determined by a number of factors, such as consumption

patterns, technology of transactions and income payment frequency. Since these factors do not change

frequently, V can be regarded as a constant.

(1) is incorrect. According to the Quantity Theory of Money, when there is an increase in money

supply, nominal output (PY) increases. However, the general price level does not need to increase at the

same rate as that of money supply.

(3) is incorrect. The Quantity Theory of Money does not make any prediction about the unemployment

rate.

##

|!|EM51027|!|

According to the equation of exchange, if the velocity of circulation of money holds constant, an

increase in money stock will lead to

A. an increase in the real GDP.

B. an increase in the nominal GDP.

C. a decrease in the unemployment rate.

D. deflation.



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##

B

Equation of exchange: MV PY.



If the velocity of circulation of money (V) remains constant, an increase in money stock (M) would

lead to an increase in the nominal GDP (PY).

##

|!|EM51028|!|

In the long run, money supply is neutral in the sense that

A. money supply does not change in the short run.

B. money supply does not change in the long run.

C. a change in money supply leads to a corresponding increase in real output.

D. a change in money supply has no effect on real output.

##

D

According to the Quantity Theory of Money (QTM), in the long run, real output is assumed to be

constant at the potential level. A change in money supply will lead to a corresponding change in the

general price level and will not affect the level of real output.

##

|!|EM51029|!|

According to the equation of exchange, if money supply drops while real output increases at the same

time, it is possible that

A. the velocity of circulation of money and the general price level grow at the same rate.

B. the growth rate of the general price level is higher than that of the velocity of circulation of

money.

C. the growth rate of the velocity of circulation of money is higher than that of the general price

level.

D. both the velocity of circulation of money and the general price level remain constant.



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##

C




If M drops while Y increases at the same time, we know that % increase in V > % increase in P.

##

|!|EM51030|!|

If there is a fall in the general price level,

A. the inflation rate must be negative.

B. the interest rate must fall.

C. the velocity of circulation of money must fall.

D. the real return of holding cash must increase.

##

D

If there is a fall in the general price level, the same amount of cash can buy more goods and services

than before. The purchasing power of money increases and the real return of holding cash must

increase.

##

|!|EM51031|!|

According to the equation of exchange, if money supply grows at a higher rate than nominal income,

we can conclude that

A. the velocity of circulation of money remains constant.

B. the growth rate of the general price level is lower than that of money supply.

C. the growth rate of real output is lower than that of money supply.




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##

D

Option A is incorrect.

Equation of exchange: MV PY.



If M grows at a higher rate than PY, the percentage change in the velocity of circulation of money (V)

must be negative in order to keep the two sides of the equation equal.

Options B and C are incorrect. There is not enough information to determine whether the growth rate of

the general price level or real output is lower than that of money supply.

##

|!|EM51032|!|

Read the following data about Country A.

Year Money supply ($ million) Nominal GDP ($ million)1 15 2502 18 320

According to the equation of exchange, which of the following must be CORRECT?

(1) The real GDP in year 2 is higher than that in year 1.

(2) The general price level in year 2 is lower than that in year 1.

(3) The velocity of circulation of money increases.

A. (2) only

B. (3) only

C. (1) and (3) onlyD. (2) and (3) only



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##

B

(3) is correct.




From year 1 to year 2, money supply (M) increased by [(18 15) / 15] 100% = 20%, while nominal

GDP (PY) increased by [(320 250) / 250] 100% = 28%. V increased by 8% in order to keep the two

sides of the equation equal.

(1) and (2) are incorrect. The changes in real GDP and the general price level are not reflected in the

question.

##

|!|EM51033|!|

According to the Quantity Theory of Money (QTM), in the long run, the velocity of circulation of

money (V) and real GDP (Y) are assumed to be constant. We can conclude that

A. the growth of money supply is the only factor leading to inflation.

B. a change in money supply will not affect nominal output.

C. nominal GDP and money supply is negatively related.

D. money supply and the general price level are also constant in the long run.

##

A


As V and Y are assumed to be constant, P increases only when M increases. Therefore, the growth of

money supply is the only factor leading to inflation.

Option B is incorrect. Change in money supply will not affect real output (Y) but it will affect nominal

output (PY).

Option C is incorrect. Nominal GDP and money supply are positively related.

Option D is incorrect. According to the Quantity Theory of Money, money supply and the general price

level are variables in the long run.

##



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##

A

During unanticipated deflation, the real value of Harrys insurance payment increases. Therefore, he

loses.

Option B is incorrect. During unanticipated deflation, the real value of a fixed amount of interest

increases. Therefore, Gary gains.

Option C is incorrect. During unanticipated deflation, the real value of the same amount of dividends

increases. Therefore, Francis gains.

Option D is incorrect. During unanticipated deflation, the real value of Mr. Chans wage payment

received increases. Therefore, he gains.

##

|!|EM51036|!|

When there is deflation,

A. the prices of all goods and services decrease.

B. all people will lose if the deflation rate is lower than expected.

C. the economy is in recovery.

D. the implicit price deflator of GDP decreases.

##

D

The implicit price deflator of GDP is a measure of the change in prices of final goods and services

included in the calculation of GDP. If there is deflation, it means the general price level decreases and

the implicit price deflator of GDP decreases.

Option A is incorrect. Although the prices of most goods and services go down during deflation, prices

of some goods may remain stable and prices of some goods may even rise.

Option B is incorrect. Some people will gain while some will lose, depending on whether they have

monetary assets or monetary liabilities.

Option C is incorrect. When the economy is in recovery, the general price level usually goes up.

##



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|!|EM51037|!|

Which of the following statements is CORRECT when there is unanticipated inflation?

A. Income of people will increase according to the rate of price increase.

B. People cannot behave accordingly in order to avoid loss.

C. The real income of people earning fixed income will increase.

D. The purchasing power of the same $100 banknote will increase.

##

B

As the inflation is unanticipated, people cannot correctly foresee the inflation rate. They cannot behave

accordingly to avoid loss.

Option A is incorrect. As the inflation is unanticipated, there will not be immediate adjustment to

peoples income.

Option C is incorrect. During inflation, the purchasing power of a fixed amount of income decreases.

Therefore, the real income of people earning fixed income will decrease.

Option D is incorrect. During inflation, the purchasing power of a fixed amount of money decreases.

##

|!|EM51038|!|

When there is unanticipated deflation, ___________ will gain and ___________ will lose.

A. borrowers lenders

B. bankers savers

C. shops holders of cash coupons

D. employees employers



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##

D

During unanticipated deflation, the purchasing power of employees fixed income will increase. As a

result, employees will gain and employers will lose.

Option A is incorrect. During unanticipated deflation, the purchasing power of loans and interest

payments will increase. Therefore, lenders will gain.

Option B is incorrect. During unanticipated deflation, the purchasing power of a given amount of bank

deposits and interest will increase. Therefore, savers will gain.

Option C is incorrect. During unanticipated deflation, the purchasing power of cash coupons of the

same face value will increase. Therefore, holders of cash coupons will gain.

##



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|!|EM51039|!|

The following diagram shows the trend of composite CPI of an economy.

Based on the above diagram, who will gain from 20X1 to 20X2 if the above change in the composite

CPI is unanticipated?

(1) an individual who borrowed money from a bank with a fixed interest rate in 20X2

(2) an individual who deposited money into a bank with a fixed interest rate in the 1st quarter of

20X1 and got it back in the 4th quarter of the same year

(3) a bank employee who was employed in 20X2 and received fixed amount of salary

A. (1) only

B. (3) only

C. (1) and (2) only

D. (2) and (3) only


Year

Composite CPI

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

20X1 20X2

%

0

2

4

6

-2

-4


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##

C

As reflected from the changes in the composite CPI, the economy experienced deflation in 20X1, while

there was inflation in 20X2.

(1) is correct. During unanticipated inflation, borrowers gain because the real value of loans and

interest payments decreases.

(2) is correct. During unanticipated deflation, savers gain because the real value of the bank deposits

and interest increases.

(3) is incorrect. During unanticipated inflation, the bank employee loses because the real value of the

fixed amount of income decreases.

##

|!|EM51040|!|

Which of the following parties will gain during unanticipated inflation?

A. Mr. Wong, who receives a fixed amount of unemployment benefits every month

B. Miss Lee, who lent out a sum of money to her friends at a fixed interest rate

C. Samuel, who deposited $30,000 into a time deposit account

D. Jenny, who pays a fixed amount of rent every month

##

D

During unanticipated inflation, the real value of Jennys rental payment decreases. Therefore, Jenny

will gain.

Option A is incorrect. During unanticipated inflation, the real value of the unemployment benefits that

Mr. Wong received decreases. Therefore, he will lose.

Option B is incorrect. During unanticipated inflation, the real value of loans and interest payments

decreases. Therefore, Miss Lee will lose.

Option C is incorrect. During unanticipated inflation, the real value of a given amount of bank deposits

and interest decreases. Therefore, Samuel will lose.

##



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|!|EM51041|!|

If there is unanticipated inflation,

A. the expected real interest rate is lower than the nominal interest rate.

B. the nominal interest rate is lower than the realised inflation rate.

C. the expected real interest rate is higher than the realised real interest rate.

D. the realised inflation rate is lower than the expected inflation rate.

##

C

Expected real interest rate = Nominal interest rate Expected inflation rate

Realised real interest rate = Nominal interest rate Realised inflation rate

If there is unanticipated inflation, the realised inflation rate is higher than the expected inflation rate.

The expected real interest rate is higher than the realised real interest rate.

##

|!|EM51042|!|

When there is ___________, the real interest rate is ___________ the nominal interest rate.

A. unanticipated inflation higher than

B. anticipated inflation equal to

C. unanticipated deflation lower than

D. anticipated deflation higher than

##

D

Nominal interest rate = Real interest rate + Expected inflation rate

When there is anticipated deflation, the expected inflation rate is negative. Hence, the real interest rate

is higher than the nominal interest rate.

Options A and C are incorrect. We do not have any information about the expected inflation rate, so we

cannot determine if the real interest rate is higher than, lower than or equal to the nominal interest rate.

##



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|!|EM51043|!|

When there is deflation,

A. the money stock will decrease.

B. the real GDP will increase.

C. the nominal interest rate will be higher than the real interest rate.

D. the real GDP will be higher than the nominal GDP.

##

D

Implicit price deflator of GDP = (Nominal GDP / Real GDP) 100

If there is deflation, the implicit price deflator of GDP is less than 100. The real GDP will be higher

than the nominal GDP.

Option A is incorrect. According to the equation of exchange (MV PY), when the general price level

(P) decreases, the change of money stock (M) depends on the changes of real GDP (Y) and the velocity

of circulation of money (V).

Option B is incorrect. An increase in the general price level will not directly lead to an increase in the

real GDP.

Option C is incorrect. Nominal interest rate = Real interest rate + Expected inflation rate

We do not have any information about the expected inflation rate, so we cannot determine if the

nominal interest rate is higher than, lower than or equal to the real interest rate.

##

|!|EM51044|!|

The nominal interest rate is

A. equal to the expected real interest rate when the expected inflation rate is zero.

B. the real rate of return on holding cash.

C. the return on holding shares.

D. the same as the realised real interest rate.



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##

A

According to Irving Fisher, nominal interest rate = real interest rate + expected inflation rate. When the

expected inflation rate is zero, the expected real interest rate is equal to the nominal interest rate.

Option B is incorrect. Real rate of return on holding cash = 0 inflation rate.

Option C is incorrect. The return from holding shares is determined by the dividend paid out by the

issuing company.

Option D is incorrect. Realised real interest rate = nominal interest rate realised inflation rate.

##

|!|EM51045|!|

Suppose Elaine borrowed money from a bank at a fixed interest rate of 5% per annum. If the general

price level increases continuously and at a faster rate than expected, Elaine will gain because

_________________.

A. the nominal amount of her repayment will have increased.

B. the purchasing power of her income will have increased.

C. the real value of her repayment will have decreased.

D. the amount of the loan from bank will have remained constant.

##

C

As the realised inflation rate is higher than the expected inflation rate, there is unanticipated inflation.

The real value of her interest payment decreases. Hence, she will gain.

Options A and D are incorrect. It is the real value of repayment that determines if Elaine gains from

unanticipated inflation, but not the nominal amount of her repayment nor the amount of the loan.

Option B is incorrect. Since the general price level increases, the purchasing power of her income

decreases.

##



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|!|EM51046|!|

Suppose the expected real interest rate and the expected inflation rate are 5% and 8% respectively. If

the real rate of return on holding cash is 5%, we can conclude that the actual inflation rate is

_________ and the nominal interest rate is _________.

A. -5% 13%

B. 5% 3%

C. -3% 13%

D. 3% 5%

##

A

Real rate of return on holding cash = 0 Actual inflation rate

5% = 0 Actual inflation rate

Actual inflation rate = -5%


5% = Nominal interest rate 8%

Nominal interest rate = 13%

##

|!|EM51047|!|

Suppose the expected inflation rate and the nominal interest rate of an economy are 2% and 7%

respectively. If the realised inflation rate is -3%, the realised real interest rate is __________.

A. 3%

B. 4%

C. 5%

D. 10%

##

D


Realised real interest rate =7% (-3%) = 10%

##



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|!|EM51048|!|

According to the Quantity Theory of Money (QTM), if the general price level decreases by 5%,

A. money supply will decrease by 5% in the long run.

B. real output will increase by 5% in the long run.

C. the nominal interest rate will be higher than the realised real interest rate by 5%.

D. the expected real interest rate will decrease by 5%.

##

A

According to the Quantity Theory of Money (QTM), in the long run, both the velocity of circulation of

money and real output are assumed to be constant. A decrease in the general price level will lead to a

proportional decrease in money supply.

Option B is incorrect. In the long run, real output is at the potential level. Therefore, the output level

would not change.

Option C is incorrect.

Nominal interest rate = Real interest rate + Inflation rate

If the realised inflation rate is -5%, the realised interest rate will be higher than the nominal interest rate

by 5%.

Option D is incorrect.


Since we do not have any information about the nominal interest rate and expected inflation rate, we

cannot determine the expected real interest rate.

##



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|!|EM51049|!|

Population

Population aged 15 or above 50,000,000

Employed population 35,000,000Unemployed population 3,500,000

Which of the following statements is/are CORRECT?

(1) The employed population comprises 70% of the labour force.

(2) The unemployment rate is 9.1%.

(3) The underemployment rate is 3%.

A. (1) only

B. (2) only

C. (1) and (3) only

D. (1), (2) and (3)

##

B

(2) is correct.

Labour force = Employed population + Unemployed population

= 35,000,000 + 3,500,000

= 38,500,000

Unemployment rate = (Unemployed population / Labour force) 100%

= (3,500,000 / 38,500,000) 100

= 9.1%

(1) is incorrect.

The proportion of the employed population to the labour force = (35,000,000 / 38,500,000) 100%

= 90.9%

(3) is incorrect. With no information on the underemployed population, we cannot calculate the

underemployment rate.

##



36/58


|!|EM51050|!|

Which of the following persons should NOT be included in the labour force?

(1) Paul has a full-time job at daytime and is a part-time student at night.

(2) Cecilia is a full-time student working as a voluntary tutor at a community centre.

(3) Shirley is the owner of a grocery store.

(4) Mrs. Chan is a housewife and her husband gives her a certain amount of housekeeping

money every month.

A. (1) and (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (2) and (4) only

##

D

(2) is incorrect. Volunteers are not included in the labour force.

(4) is incorrect. Housewives are not included in the labour force because they are unwilling to work.

##

|!|EM51051|!|

PopulationPopulation aged 15 or above 40,000,000Employed population 12,000,000Unemployed population 3,600,000Underemployed population 2,400,000

According to the above data,

A. the underemployment rate is 6%.

B. the unemployment rate is 23.1%.

C. the labour force is 40,000,000.

D. the labour force is 18,000,000.



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##

B

Labour force = Employed population + Unemployed population

= 12,000,000 + 3,600,000

= 15,600,000


= (3,600,000 / 15,600,000) 100%

= 23.1%

Option A is incorrect.

Underemployment rate = (Underemployed population / Labour force) 100%

= (2,400,000 / 15,600,000) 100%

= 15.4%

##

|!|EM51052|!|

Suppose the underemployed population and unemployed population of an economy is 120,000 and

300,000 respectively, while the unemployment rate is 4%. The underemployment rate of the economy

is __________.

A. 1.6%

B. 2.9%

C. 3.6%

D. 4%

##

A


4% = (300,000 / Labour force) 100%

Labour force = 7,500,000

Underemployment rate = (Underemployed population / Labour force) 100%

= (120,000 / 7,500,000) 100%

= 1.6%

##



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|!|EM51053|!|

Read the following data of an economy carefully.

Population

Population aged 15 or above 34,500,000Employment rate 94%Unemployment rate 6%

According to the above information,

A. the economy does not have the problem of underemployment.

B. the unemployed population of the economy is 2,070,000.

C. the labour force of the economy is 34,500,000.

D. the number of employed population in the economy is indeterminate.

##

D

As employed population = labour force employment rate, with no information on the labour force, we

cannot calculate the number of employed population.

##

|!|EM51054|!|

Which of the following policies will MOST likely cause the unemployment rate to fall?

A. The government loosens the policy on importing foreign labour.

B. The government lowers the minimum wage level.

C. The government increases the amount of unemployment benefits.

D. The government increases the salary of civil servants.



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##

B

If the government lowers the minimum wage level, more people will be employed and the number of

unemployed people will decrease. If the labour force remains constant, the unemployment rate will fall.

Option A is incorrect. If the government loosens the policy of importing foreign labour, the labour force

will increase. As importing foreign labour may reduce the job opportunities of domestic workers, the

unemployed population may increase. Therefore, the change in the unemployment rate is uncertain.

Option C is incorrect. An increase in the amount for unemployment benefits would encourage people to

be unemployed and reduce the motivation for unemployed people to find jobs. The unemployment rate

would increase.

Option D is incorrect. The salary level of civil servants has no direct relationship with the

unemployment rate.

##

|!|EM51055|!|

Which of the following people should be included in the employed population?

(1) an owner of a caf who earns profit

(2) a housewife who teaches part-time yoga classes

(3) a doctor who quit his job and decided to pursue further study

A. (1) only

B. (2) only

C. (1) and (2) only

D. (1) and (3) only

##

C

(1) should be included in the employed population, as the owner of the caf has a formal job

attachment and earns profit.

(2) should be included in the employed population, as a housewife who teaches part-time yoga classes

works for pay.

(3) should not be included in the employed population, as a doctor does not have a formal job

attachment.

##



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|!|EM51056|!|

Which of the following will MOST possibly lead to a decrease in the unemployment rate?

A. More people are voluntarily unemployed because they do not want to work.

B. The government carries out a voluntary retirement scheme, hoping to attract more civil

servants to have early retirement.

C. As economic performance is improving, more firms decide to enlarge their production scale.

D. The number of places provided by universities decreases.

##

C

Unemployment rate = Unemployed population / Labour force 100%

Firms deciding to enlarge their production scale implies that they will hire more labour, which may

lower the unemployment rate.

Options A and B are incorrect. When more people are voluntarily unemployed, or more civil servants

choose to retire earlier, the labour force will decrease. If the number of unemployed remains

unchanged, the unemployment rate will increase.

Option D is incorrect. If the number of places provided by universities decreases, more young people

cannot continue studying and have to enter the labour market. The labour force will increase.

Nevertheless, some of them may be able to find jobs after entering the labour market. The change in the

unemployment rate is thus uncertain.

##

|!|EM51057|!|

Which of the following statements about unemployment and underemployment is INCORRECT?

A. Both the unemployed and underemployed populations are included in the labour force.

B. The underemployed population is included in the employed population, but the unemployed

population is not included.

C. Both the unemployed and underemployed people are willing to work more.

D. A teacher who quit his job because of an illness is regarded as unemployed but not

underemployed.



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##

D

A teacher who quit his job because of an illness is not included in the labour force. As he is not

available for work, he is neither unemployed nor underemployed.

##

|!|EM51058|!|

Which of the following is NOT a loss to society caused by unemployment?

A. The gross domestic product will be lower.

B. The governments financial burden is increased due to the increased expenditure on

unemployment benefits.

C. The general price level will be lower.

D. Less salaries tax revenue can be collected.

##

C

##

|!|EM51059|!|

Which of the following is/are the cost(s) of unemployment?

(1) Unemployed people may lose confidence in themselves which may lead to a higher suicide

rate.

(2) The problem of unemployment may cause many families to face financial difficulties and an

increased number of family conflicts would result.

(3) The potential production level of the economy cannot be attained.

A. (3) only

B. (1) and (2) only

C. (2) and (3) only

D. (1), (2) and (3)

##

D

##



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Short Questions

|!|ES51001|!|

Suppose the profits of firms and government revenue from sales tax of an economy decreased in a

certain year.

(a) Which phase of a business cycle was the economy MOST probably in? (1 mark)

(b) How would the following change during the period?

(i) the general price level (1 mark)

(ii) the unemployment rate (1 mark)

(iii) firms demand for loans (1 mark)

##

(a) recession / contraction (1 mark)

(b) (i) The general price level decreases. (1 mark)

(ii) The unemployment rate increases. (1 mark)

(iii) Firms demand for loans decreases. (1 mark)

##

|!|ES51002|!|

The following diagram shows Country As growth rate of real GDP in different periods.

(a) What is a business cycle? (2 marks)

(b) According to the above diagram, identify the phase Country A is in at point X. (1 mark)

(c) After a few years, Country A is situated at point Y. Apart from the change in real GDP, give TWO

general economic phenomena which occur in this phase. (2 marks)


Average growth rate

Year

Y

X

0



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##

(a) A business cycle refers to the periodic fluctuations of economic activity about its long-term

growth trend. (2 marks)

(b) trough / depression (1 mark)

(c) Country A is in recovery at point Y. The general economic phenomenon includes:

- increasing investment expenditure

- decreasing unemployment rate

- increasing general price level

- Any reasonable answer(s)

(Mark the FIRST TWO points only, 1 mark each)

##

|!|ES51003|!|

Identify and explain whether the following are regarded as inflation.

(a) The government decided to impose a sales tax on all goods and services. (3 marks)

(b) A bad harvest resulting from the cold weather caused the prices of most fruits and vegetables to

increase to a level much higher than usual for two months. (3 marks)

(c) The price of airline tickets increases steadily before the Christmas holiday. (3 marks)

##

(a) No. (1 mark)

Inflation is a persistent increase in the general price level. Imposition of a sales tax will only lead

to a once-and-for-all increase in the general price level, which is not persistent. (2 marks)

(b) No. (1 mark)

Inflation is a persistent increase in the general price level. A bad harvest will only lead to a

temporary increase in the price of fruits and vegetables, which is not persistent. (2 marks)

(c) No. (1 mark)

Inflation is a persistent increase in the general price level, which is the average level of prices of

goods and services in an economy. An increase in the price of an individual good will not cause

the general price level to increase. Therefore, this is not regarded as inflation. (2 marks)

##



44/58


|!|ES51004|!|

(a) What is the consumer price index? (2 marks)

(b) In comparing the consumer price index and the implicit GDP deflator, which one is a better

indicator for measuring the change in the cost of living? Why? (3 marks)

##

(a) The consumer price index is a measure of the weighted average of prices of a basket of consumer

goods and services to reflect changes in the general price level. (2 marks)

(b) The consumer price index. (1 mark)

The implicit GDP deflator covers all final goods and services while the consumer price index only

covers a basket of consumer goods and services consumed by typical households. The consumer

price index can better reflect the changes in the prices of goods and services which households

usually consume. (2 marks)

##

|!|ES51005|!|

State ONE similarity and ONE difference between the implicit GDP deflator and the consumer price

index. (4 marks)

##

Similarity:

- Both are used to reflect the change in the general price level.

- Any reasonable answer

(Mark the FIRST point only, 2 marks)

Difference:

- The implicit GDP deflator covers all final goods and services included in the calculation of GDP,

while the consumer price index covers a basket of consumer goods and services consumed by a typical

household in different expenditure groups.

- Any reasonable answer

(Mark the FIRST point only, 2 marks)

##



45/58


|!|ES51006|!|

Suppose the real GDP and the nominal GDP of year 20X2 has increased by 3% and 7% respectively

when compared to year 20X1. If year 20X1 is the base year, what will be the growth rate of the implicit

GDP deflator in year 20X2? (4 marks)

##

Implicit GDP deflator = (Nominal GDP / Real GDP) 100

Given year 20X1 is the base year, the implicit GDP deflator in year 20X1 is 100. Therefore, the

nominal GDP of 20X1 is equal to the real GDP. Let the nominal GDP of 20X1 be N.

Implicit GDP deflator in 20X2 = (1.07N / 1.03N) 100

= 103.9 (2 marks)

Growth rate of implicit GDP deflator in 20X2 = (103.9 100) / 100 100%

= 3.9% (2 marks)

##

|!|ES51007|!|

Julia said, A change in money supply will affect the real GDP of an economy both in the short run and

the long run.

Timothy said, A change in money supply will only affect the real GDP of the economy in the short run

but not in the long run.

Who is CORRECT? Explain. (5 marks)

##

Timothy is correct. (1 mark)

According to the Quantity Theory of Money, the velocity of circulation of money (V) is assumed to be

constant in the short run. Therefore, a change in money supply will lead to a change the general price

level (P), the real GDP (Y) or the nominal GDP (PY). (2 marks)

In the long run, both the velocity of circulation of money and the real GDP are assumed to be constant.

A change in money supply will only lead to a change in the general price level but not the real GDP.

(2 marks)

##



46/58


|!|ES51008|!|

(a) Suppose the government increases money supply. According to the Quantity Theory of Money,

how will the real output and the general price level change respectively in the long run? Explain.

(4 marks)

(b) The Quantity Theory of Money assumes that the velocity of circulation of money is a constant.

Explain why the velocity of circulation of money is assumed to be constant. (2 marks)

##

(a) According to the Quantity Theory of Money, in the long run, real output is assumed to be constant

at the potential level. Therefore, it will remain constant even if the government increases money

supply. (2 marks)

On the other hand, as both real output and the velocity of circulation of money are assumed to be

constant in the long run, an increase in money supply will lead to a proportional increase in the

general price level. (2 marks)

(b) The velocity of circulation of money is determined by a number of factors, such as consumption

patterns, technology of transactions and income payment frequency. Since these factors do not

change frequently, V can be regarded as a constant. (2 marks)

##

|!|ES51009|!|

Refer to the following information of an economy.

Year Nominal GDP

($ million)

Implicit price deflatorof GDP

1 150 88.22 175 95.3

(a) Find the inflation rate from year 1 to year 2. (2 marks)

(b) Suppose people did not expect any change in the general price level in year 2. Explain whether the

following persons would gain or lose.

(i) Mr. Chan rented an office premise at a fixed rent. (3 marks)

(ii) Miss Lee borrowed a loan from a bank for investment at a fixed interest rate. (3 marks)



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##

(a) Inflation rate = (95.3 88.2) / 88.2 100% (1 mark)

= 8% (1 mark)

(b) (i) Mr. Chan will gain. (1 mark)

The real value of a fixed amount of rent decreases during unanticipated inflation. (2 marks)

(ii) Miss Lee will gain. (1 mark)

The real value of the loan and interest payments decreases during unanticipated inflation.

(2 marks)

##

|!|ES51010|!|

Suppose an economy is expected to experience deflation.

(a) Explain why the number of housing transactions will decrease during this period. (2 marks)

(b) If the rent of a house is adjusted according to the inflation rate, explain whether the tenant of that

house will gain or lose during this period. (2 marks)

##

(a) If deflation is expected to occur, people will hold fewer real assets because the value of real assets

usually falls during deflation. As a result, the number of transactions of housing will decrease and

people will hold more of their wealth in the form of monetary assets. (2 marks)

(b) As people will behave according to the change in inflation rate, wealth redistribution will not

occur. The tenant will neither gain nor lose. (2 marks)

##



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|!|ES51011|!|

Read the following about the change in the general price level of Country A.

(a) According to the above diagram, in which year did deflation start in Country A? Explain.(3 marks)

(b) Suppose people did not expect deflation to occur in that year. Explain whether the following

persons would gain or lose in that year.

(i) Mrs. Chan, who was receiving a fixed amount of Comprehensive Social Security Assistance

every month (3 marks)

(ii) Miss Lee, who was hiring a part-time domestic helper by a fixed hourly wage (3 marks)

##

(a) Deflation started at 2008 in Country A. (1 mark)

The percentage change in the composite CPI was negative in 2008, indicating that the general

price level of Country A was falling continuously. (2 marks)

(b) (i) Mrs. Chan would gain. (1 mark)

The real value of the fixed amount of Comprehensive Social Security Assistance increased

during unanticipated deflation. (2 marks)

(ii) Miss Lee would lose. (1 mark)

The real value of the same amount of wages paid by Miss Lee increased during

unanticipated deflation. (2 marks)

##


Year

2006 2007 2008 2009

6

4

2

0

-2

-4

Percentage change in the composite CPI (%)


49/58


|!|ES51012|!|

(a) According to Irving Fisher, what is the relationship between the nominal interest rate and the real

interest rate? (2 marks)

(b) Under what condition will the real interest rate be negative? (2 marks)

##

(a) According to the equation put forth by Fisher, the nominal interest rate equals to the sum of the

real interest rate and the expected inflation rate. (2 marks)

(b) The real interest rate will be negative if the expected inflation rate is higher than the nominal

interest rate. (2 marks)

##

|!|ES51013|!|

Suppose the expected real interest rate and the nominal interest rate of an economy are 7% and 4%

respectively.

(a) What is the value of the expected inflation rate? (2 marks)

(b) If the realised inflation rate turns out to be 2%, what will be the value of the realised real interest

rate? (2 marks)

##

(a) Expected real interest rate = Nominal interest rate Expected inflation rate

7% = 4% Expected inflation rate (1 mark)

Expected inflation rate = -3% (1 mark)

(b) Realised real interest rate = Nominal interest rate Realised inflation rate

Realised real interest rate = 4% 2% (1 mark)

= 2% (1 mark)

##

|!|ES51014|!|

Determine whether there is inflation or deflation in the following situations.

(a) The nominal interest rate is higher than the realised real interest rate. (3 marks)

(b) The percentage change in the consumer price index decreases. (3 marks)



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##

(a) Inflation. (1 mark)


When the nominal interest rate is higher than the realised real interest rate, the realised inflation

rate is positive; there is inflation. (2 marks)

(b) Uncertain. (1 mark)

When the percentage change in the consumer price index is positive, there is inflation. Only when

the percentage change in the consumer price index decreases to a negative value, there is

deflation.

(2 marks)

##

|!|ES51015|!|

Number of personsTotal population 25,000,000Population aged 15 or above 20,000,000Employed population 6,800,000Unemployed population 1,500,000Underemployed population 1,200,000

Based on the above data, calculate

(a) the labour force; (2 marks)

(b) the unemployment rate; and (2 marks)

(c) the underemployment rate. (2 marks)

##

(a) Labour force = Employed population + Unemployed population

= 6,800,000 + 1,500,000

= 8,300,000 (2 marks)

(b) Unemployment rate = (Unemployed population / Labour force) 100%

= (1,500,000 / 8,300,000) 100%

= 18.1% (2 marks)



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(c) Underemployment rate = (Underemployed population / Labour force)100%

= (1,200,000 / 8,300,000) 100%

= 14.5% (2 marks)

##

|!|ES51016|!|

Explain whether the following people should be included in Hong Kongs labour force.

(a) a secretary who has been laid off and is searching for a new job (2 marks)

(b) a full-time housewife who is seeking voluntary work (2 marks)

(c) a pregnant woman who applies for a three-month pregnancy leave (2 marks)

##

(a) Yes. (1 mark)

As the secretary is seeking for a job and is available for work, she is regarded as unemployed. She

should be included in Hong Kongs labour force. (1 mark)

(b) No. (1 mark)

As the housewife is unwilling to work, she is neither regarded as employed nor unemployed. She

should not be included in Hong Kongs labour force. (1 mark)

(c) Yes. (1 mark)

As the pregnant woman is still being employed during her pregnancy leave, she is regarded as

employed. She should be included in Hong Kongs labour force. (1 mark)

##

|!|ES51017|!|

Explain how the following will affect the unemployment rate of Hong Kong.

(a) There are increasing number of professionals quitting their jobs to study, and their vacancies are

being filled by people in the unemployed population. (3 marks)

(b) More students who have studied abroad stay in foreign countries to work. (3 marks)

##

(a) The unemployment rate of Hong Kong will decrease. (1 mark)

The labour force and the unemployed population will fall by the same amount. As unemployment

rate = (unemployed population / labour force)

100%, the unemployment rate will decrease.

(2 marks)



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(b) The unemployment rate would remain unchanged. (1 mark)

Students who have studied abroad do not belong to the labour force and the unemployed

population of Hong Kong. Therefore, they stay in foreign countries to work will not affect the

unemployment rate. (2 marks)

##

|!|ES51018|!|

Suppose the orders of a large-scale factory dropped dramatically. The factory decided to switch all the

full-time workers to a part-time basis and restrict their working hours to 30 hours per week. Explain

how the unemployment rate and the underemployment rate would be affected. (6 marks)

##

The unemployment rate would remain unchanged. (1 mark)

As the factory switched all the full-time workers to a part-time basis, the unemployed population would

not be affected and the unemployment rate would remain unchanged. (2 marks)

The underemployment rate would increase. (1 mark)

As the workers could only work less than 35 hours per week, they would become underemployed.

Since the underemployed population increased while the labour force remained unchanged, the

underemployment rate would increase. (2 marks)

##

|!|ES51019|!|

The Census and Statistic Department reported that the unemployment rate has decreased while the

unemployed population has increased last year. How would you expect the labour force to change

during this period? Explain. (3 marks)

##

Unemployment rate = (Unemployed population / Labour force) 100% (1 mark)

If the unemployment rate has decreased while the unemployed population has increased, the labour

force must have increased, and the percentage increase in labour force would be greater than the

percentage increase in unemployed population. (2 marks)

##



53/58


|!|ES51020|!|

Every year, many university graduates enter the labour market. Suppose after the outbreak of the

financial tsunami, many enterprises which hired lots of graduates in previous years have reduced the

number of places for graduates. This made it difficult for many university graduates to find a full-time

job.

(a) How would you expect the unemployment rate of Hong Kong to be affected by the influx of

university graduates into the labour market, given the reduction in the number of places for

graduates? Explain your answer. (3 marks)

(b) State TWO costs of unemployment to the university graduates and society respectively. (4 marks)

##

(a) Unemployment rate = (Unemployed population / Labour force) 100% (1 mark)

The influx of university graduates into the labour market increases both the size of the

unemployed population and the labour force. As the outbreak of the economic tsunami made it

difficult for university graduates to find a full-time job, the percentage increase in the unemployed

population would possibly be greater than that of the labour force, the unemployment rate would

increase. (2 marks)

(b) Costs of unemployment to the university graduates:

- lower standard of living

- psychological problems



Costs of unemployment to society:

- loss in output

- social and political unrest



##



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Long Questions

|!|EL51001|!|

Study the following data for Country A.

Year Nominal GDP ($ million) Real GDP ($ million) Unemployment rate (%)2017 680 680 7.52018 750 700 7.22019 780 720 6.82020 800 750 6.6

(a) Which phase of a business cycle is Country A MOST likely in between 2018 and 2019? Give

TWO economic phenomena of Country A in the period that are not indicated by the above data.

(3 marks)

(b) Identify whether Country A experienced inflation or deflation between 2018 and 2019. Explain

your answer. (3 marks)

(c) Explain how the real income of the following persons would change between 2018 and 2019:

(i) Josephine who signed a contract and earned a fixed amount of salary (2 marks)

(ii) Simon whose salary has been adjusted according to the general price level (2 marks)

##

(a) Country A is most likely in recovery between 2018 and 2019. (1 mark)

The economic phenomena of Country A in the period:

- improving investment expenditure

- stronger business confidence



(b) The implicit GDP deflator of 2018

= $(750 / 700) million 100

= 107.14 (1 mark)

The implicit GDP deflator of 2019

= $(780 / 720) million 100

= 108.33 (1 mark)

Since the implicit GDP deflator increased, Country A experienced inflation between 2018 and

2019. (1 mark)



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(c) (i) Since Country A was experiencing inflation, the purchasing power of Josephines fixed

income would decrease. Therefore, her real income would decrease. (2 marks)

(ii) If Simons salary has been adjusted according to the general price level, his real income

would remain unchanged. (2 marks)

##

|!|EL51002|!|

Study the following data of an economy. Suppose 2019 is the base year.

Year Output Quantity (units) Unit price ($)2019 Orange 3,000 13

Apple 6,000 15

2020 Orange 5,000 12Apple 4,000 13

Assuming Country A only produces oranges and apples.

(a) Calculate respectively, Country As GDP at

(i) constant market prices (2 marks)

(ii) current market prices (2 marks)

in year 2019 and year 2020.

(b) Find the implicit GDP deflator and the inflation rate for 2020. (4 marks)

(c) Suppose people expected there would be neither inflation nor deflation in 2020. If Cyrus has

borrowed a loan from a bank at a fixed interest rate of 5% at the beginning of 2020 and the

repayment period was 2 years, would Cyrus gain or lose? (3 marks)

##

(a) (i) GDP at constant market prices of 2019

= $3,000 13 + $6,000 15 = $129,000 (1 mark)

GDP at constant market prices of 2020

= $5,000 13 + $4,000 15 = $125,000 (1 mark)

(ii) GDP at current market prices of 2019

= GDP at constant market prices of 2019 = $129,000 (1 mark)

GDP at current market prices of 2020

= $5,000 12 + $4,000 13 = $112,000 (1 mark)



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(b) Implicit GDP deflator of 2020

= ($112,000 / $125,000) 100 = 89.6 (2 marks)

Inflation rate of 2020

= [(89.6 100) /100]

100% = -10.4% (2 marks)

(c) The negative inflation rate indicates that there was unanticipated deflation in 2020. This means

that the real value of the loan and interest payment that Cyrus had to repay increased. Therefore,

he would lose. (3 marks)

##

|!|EL51003|!|

An economy is in recession. Suppose the inflation rate calculated from the consumer price index is -2%

while the inflation rate for the same period calculated by the implicit GDP deflator is -5%.

(a) Why are the inflation rates calculated from the two indicators different? (3 marks)

(b) Explain which of the above measurements is a better indicator in measuring the change in the cost

of living. (3 marks)

(c) The following table shows the data about the employment situation of the economy in the period:

PopulationEmployed population 1,050,000Unemployed population 76,000Underemployed population 52,000

(i) Calculate the unemployment rate of the economy. (2 marks)

(ii) Suppose the government imposed a minimum wage law in this period. Explain how it would

affect the unemployment rate. (3 marks)

##

(a) The consumer price index measures a basket of consumer goods and services while the implicit

GDP deflator measures all final goods and services included in the calculation of GDP. The

inflation rates calculated from the two indicators are different because the two indicators cover

different goods and services. (3 marks)



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(b) Consumer price index. (1 mark)

The consumer price index only covers a basket of consumer goods consumed by a typical

household in different expenditure groups. It can reflect changes in prices of the goods and

services which households usually consume. However, the implicit GDP deflator includes all final

goods and services included in the calculation of GDP. Therefore, the consumer price index can

better measure the change of the cost of living. (2 marks)

(c) (i) Unemployment rate = [76,000 / (1,050,000 + 76,000)] 100% (1 mark)

= 6.75% (1 mark)

(ii) The imposition of a minimum wage law increased firms cost of production. As the economy

is experiencing recession, the business confidence and the profits of firms are decreasing.

Imposing a minimum wage law in this period would cause the profits of firms to fall further.

As a result, firms would decrease output and recruit less labour. The unemploy

Chapter 21 Business Cycle, Changes in the General Price Level and Unemployment

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Transcript of Chapter 21 Business Cycle, Changes in the General Price Level and Unemployment