ECONOMICS INQUIRY FOR HKDSE HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION

ECONOMICS PAPER 1 (Mock Test 4)

Time allowed: 1 hour

INSTRUCTIONS Read carefully the instructions on the Answer Sheet. Stick a barcode label and insert the information required in the spaces provided. When told to open this book, you should check that all the questions are there. Look for the words END OF PAPER after the last question. All questions carry equal marks. ANSWER ALL QUESTIONS. You are advised to use an HB pencil to mark all the answers on the Answer Sheet so that wrong answers can be completely erased with a clean rubber. You should mark only ONE answer for each question. If you mark more than one answer, you will receive NO MARKS for that question. No marks will be deducted for wrong answers.

Not to be taken away before the end of the examination session

HKDSE-ECON 1-1 (Mock Test 4)

2011 Aristo Educational Press Ltd.

There are 40 questions in this paper. Choose the BEST answer for each question.

1.

Which of the following statements about scarcity is/are CORRECT? (1) Scarcity must exist when resources are limited. (2) The existence of scarcity implies that people need to compete with each other for resources. (3) The problem of scarcity is solved when a choice has been made. A. B. C. D. (1) only (2) only (1) and (2) only (1), (2) and (3)

2.

Suppose Miss Lee is considering one of the following options: Option 1 2 3 Details Buying a smartphone Joining a study tour to France Watching a concert Order of preference 1st 2nd 3rd

Which of the following will change Miss Lees opportunity cost of buying a smartphone? A. The smartphone costs Miss Lee more than she expects. B. Miss Lee finds that the smartphone is difficult to use. C. There is a strike in France that affects most of the local traffic. D. All tickets for the concert have been sold out. 3. During peak hours in summer, the air conditioning on buses can be classified as A. economic goods, because people prefer to have more air conditioning. B. economic goods, because the price of electricity is included in the bus fare. C. free goods, because people can enjoy the air conditioning as much as they want. D. free goods, because the air conditioning has no alternative uses. In a market-oriented economy, A. there is only price competition. B. private property rights are well-protected. C. all resources are privately owned. D. resource allocation is guided by price signals. Compared to a partnership, a private limited company (1) enjoys a lower profits tax rate. (2) has more capital. (3) is easier to practise division of labour. A. B. C. D. (1) only (1) and (3) only (2) and (3) only None of the above.

4.

5.

HKDSE-ECON 1-2 (Mock Test 4)

2011 Aristo Educational Press Ltd.

6.

The free public Wi-Fi service provided by the government in public libraries can be classified as A. a consumer good and a private good. B. an economic good and a private good. C. a producer good and a public good. D. a free good and a public good. Miss Cheung is the manager of an electronic parts manufacturer. She is considering adopting the following wage payment methods: profit-sharing, time rate and piece rate. If Miss Cheung aims at raising workers incentive to work and lowering the cost of monitoring output quality, she can adopt A. profit-sharing. B. piece rate. C. piece rate and profit-sharing. D. profit-sharing, time rate and piece rate. Under which of the following situations will diseconomies of scale exist? A. Total cost increases when output increases. B. Marginal product is negative. C. Marginal revenue is smaller than marginal cost. D. Average cost increases when output increases. Suppose a supermarket in Hong Kong took over a farm in New Zealand. Which of the following is LEAST likely to be the aim of the action? A. to reduce the number of competitors B. to spread risks C. to enjoy a lower average cost D. to ensure a reliable supply of meat

7.

8.

9.

10. Which of the following about scarcity and shortage is INCORRECT? A. Shortage can be eliminated by setting the price to the equilibrium level. B. Scarcity exists at the market clearing price level. C. Shortage exists when there is scarcity. D. The problem of scarcity cannot be eliminated by adjusting the market price. 11. The admission price of Ocean Park is fixed at $250 per adult. It is observed that during the Lunar New Year holidays, some people waited for hours at the ticket office to buy tickets but all tickets were sold out at their turns. Which of the following descriptions about the phenomenon is/are CORRECT? (1) There is an excess demand for the tickets. (2) There is price competition for the tickets. (3) There is non-price competition for the tickets. A. B. C. D. (1) only (1) and (3) only (2) and (3) only (1), (2) and (3)

HKDSE-ECON 1-3 (Mock Test 4)

2011 Aristo Educational Press Ltd.

12. The following diagram shows the eggs market in Hong Kong. E0 is the original equilibrium point.
Unit price S1 S0 E4 E1 E3 E2 D0 D1 D2 E0 S2

Quantity of eggs

Suppose Germany stopped exporting eggs to Hong Kong after the feed in their farms had been found contaminated. Meanwhile, Hong Kong people buy fewer eggs as they feel uncertain about the hygienic condition of eggs in general. The new equilibrium point would be at A. E1. B. E2. C. E3. D. E4. 13. Due to an increase in the cost of production, the equilibrium price of chocolate increases by 35% and the sellers total revenue increases by 10%. We can conclude that A. the demand for chocolate is inelastic. B. the supply of chocolate is elastic. C. the demand for chocolate is more elastic than the supply of chocolate. D. the price elasticity of demand of chocolate is 3.5. 14. Due to a decrease in transportation cost, the price of Australias red wine decreases from $70 to $50 and the quantity demanded increases by 20%. What is the arc elasticity of demand of Australias red wine? A. 0.5 B. 0.6 C. 1.2 D. 1.5

HKDSE-ECON 1-4 (Mock Test 4)

2011 Aristo Educational Press Ltd.

15. Refer to the following diagram.

Unit price ($)

10

50

Quantity of good X (units)

Initially, the market of good X is at equilibrium. If the government imposes a price floor at $8, A. there will be an excess demand for good X. B. the total revenue may increase, decrease or remain unchanged, depending on the elasticity of demand and supply. C. black market will not exist. D. the quantity transacted will be smaller than 50 units. 16. Suppose the government levies a per-unit sales tax on a good. If the demand for the good is elastic and the supply of the good is inelastic, the total revenue received by sellers will ______________ and the consumers tax burden will be ______________ than the producers burden. A. increase larger B. increase smaller C. decrease larger D. decrease smaller

HKDSE-ECON 1-5 (Mock Test 4)

2011 Aristo Educational Press Ltd.

17. The following table shows the market demand and market supply of a good. Unit price ($) 2 3 4 5 6 7 Market quantity supplied (units) 8 12 16 20 24 28 Market quantity demanded (units) 20 18 16 14 12 10

If the quantity transacted of the good is 20 units after the government provides a per-unit subsidy to the producers, we can conclude that (1) the amount of the per-unit subsidy is $3. (2) the total expenditure of consumers is $100. (3) the total amount of subsidy paid by the government is $60. A. B. C. D. (1) only (2) only (1) and (3) only (2) and (3) only

18. Which of the following is LEAST likely to be an example of oligopoly in Hong Kong? A. supermarkets B. Chinese restaurants C. mobile phone services D. production of soft drinks 19. The existence of detrimental externality implies that A. the marginal private benefit must be higher than the marginal social benefit. B. there must be under-production in the market. C. there is a divergence between private and social costs. D. government intervention is needed so as to restore the output to the socially optimal level.

HKDSE-ECON 1-6 (Mock Test 4)

2011 Aristo Educational Press Ltd.

20. Lorenz curve

Cumulative percentage of income

(A)

(B)

Cumulative percentage of households A: Lorenz curve of Country A B: Lorenz curve of Country B Refer to the above diagram. Which of the following statements is/are TRUE? (1) The Gini coefficient of Country A is smaller than Country B. (2) The Gini coefficients of both countries are smaller than 1. (3) The income distribution in Country A is less even than in Country B. A. B. C. D. (1) only (1) and (2) only (2) and (3) only (1), (2) and (3)

21. Suppose the growth rate of population in Country A is 5% in a certain year. At the same time, the growth rates of nominal GDP and real GDP are 3% and 7% respectively. We can conclude that A. both per capita nominal GDP and per capita real GDP increased. B. the living standard decreased. C. the price level decreased. D. the implicit price deflator of GDP increased. 22. Which of the following is NOT included in the gross domestic product of Hong Kong in 2008? A. the value of a vase produced but unsold in 2008 B. the dividends received by a Japanese from holding shares of a listed company in Hong Kong C. the expenditure on holding a fund-raising activity D. the money donated by Hong Kong citizens to India 23. Suppose there is a trade deficit in an open economy. This implies that the amount of capital inflow is ______________ than that of capital outflow and the capital and financial account balance is ______________. A. larger positive B. larger negative C. smaller positive D. smaller negative

HKDSE-ECON 1-7 (Mock Test 4)

2011 Aristo Educational Press Ltd.

24.
Price level

SRAS1 SRAS0

AD1 AD0

0
Quantity of output (real GDP)

Which of the following will shift the AD curve and the SRAS curve as the diagram above? A. a decrease in supply of labour and a decrease in the cost of production B. an increase in the cost of production and a decrease in the cost of borrowing C. an increase in the profits tax rate and an increase in the sales tax rate D. an increase in government expenditure and a decrease in the interest rate 25. Which of the following statements about a deflationary gap is CORRECT? A. A deflationary gap can exist in both the short run and long run. B. There is a deflationary gap when the full-employment output level is lower than the equilibrium output level. C. The existence of a deflationary gap implies that the short-run equilibrium is not attained. D. A deflationary gap can be eliminated by an increase in aggregate demand. Question bank password: kingofphysics 26. Suppose an economy is operating at the short-run equilibrium. An improvement in technology level in production will lead to ______________ in the price level and ______________ in the output level in the long run. A. an increase an increase B. a decrease an increase C. a decrease a decrease D. There is insufficient information to answer. 27. Which of the following about an economy that uses money in exchange and a barter economy is INCORRECT? A. The problem of double coincidence of wants exists in a barter economy but not in an economy that uses money in exchange. B. Inflation exists in an economy that uses money in exchange but not in a barter economy. C. The exchange ratio can be determined more easily in an economy that uses money in exchange than in a barter economy. D. The purchasing power is more easily to be stored in an economy that uses money in exchange than in a barter economy.

HKDSE-ECON 1-8 (Mock Test 4)

2011 Aristo Educational Press Ltd.

28. The following table shows the balance sheet of a banking system. Assets ($) Reserves Loans 750 1,750 Deposits Liabilities ($) 2,500

Suppose the banking system has excess reserves of $250 and the public holds $200 cash. The maximum banking multiplier is ______________ and the maximum possible amount of deposits is ______________. A. 4 $3,000 B. 4 $3,150 C. 5 $3,150 D. 5 $3,750 29. The following will lead to an increase in transaction demand for money EXCEPT A. people prefer to use credit cards less often. B. the inflation rate increases. C. the interest rate increases. D. the growth rate of real GDP increases. 30. If an economy is in the recovery stage, which of the following phenomena can possibly be observed? (1) The inflation rate increases. (2) The employment situation improves. (3) The money supply increases. . A. (1) only B. (1) and (2) only C. (2) and (3) only D. (1), (2) and (3) 31. Deflation does not occur when A. the consumer price index decreases from 100 to 95. B. the implicit price deflator of GDP decreases from 120 to 110. C. the inflation rate decreases from 5% to 3%. D. the prices of most goods and services decrease persistently. 32. According to the Quantity Theory of Money (QTM), money is neutral in the long run. This implies that A. a change in money supply will not lead to a change in real output. B. a change in money supply will not lead to a change in purchasing power of money. C. a change in the general price level will not lead to a change in money supply. D. a change in real output will not lead to a change in money supply. 33. Which of the following persons would lose when there is unanticipated deflation? A. Mr. Wong, who receives a fixed amount of interest from holding government bonds every month B. Miss Chan, who hires a domestic helper by paying a fixed monthly wage C. Mrs. Cheung, who receives a fixed amount of money from her husband every month D. Mr. Luk, who deposits money into a time deposit account at a fixed interest rate

HKDSE-ECON 1-9 (Mock Test 4)

2011 Aristo Educational Press Ltd.

34. Suppose the expected real interest rate is 7%. If the actual inflation rate turns out to be 3% higher than the expected inflation rate, then the realised real interest rate will be A. higher than the realised inflation rate by 3%. B. lower than the expected real interest rate by 3%. C. equal to 4%. D. equal to the nominal interest rate. 35. Refer to the following table. Population 950,000 101,000 45,000

Employed population Unemployed population Underemployed population

According to the above information, which of the following is/are CORRECT? (1) The unemployment rate is 9.6%. (2) The labour force is 1,096,000. (3) The employment rate is 90.8%. A. B. C. D. (1) only (2) only (2) and (3) only (1), (2) and (3)

36. Suppose the governments planned revenue is greater than its planned expenditure. If the actual revenue turns out to be smaller than the actual expenditure, we know that a ______________ ends up as a ______________. A. budget surplus budget deficit B. budget surplus deficit budget C. surplus budget budget deficit D. surplus budget deficit budget

HKDSE-ECON 1-10 (Mock Test 4)

2011 Aristo Educational Press Ltd.

37. Refer to the following diagram.

Price level LRAS

SRAS

E0

AD

Yf

Quantity of output (real GDP)

The economy initially operates at E0. Suppose the government wants to use fiscal policies to restore the output to the full-employment output level (Yf), she can consider A. lowering the sales tax rate. B. increasing the discount rate. C. reducing the profits tax rate. D. raising the salaries tax rate. 38. Suppose there are two countries and they produce good X and good Y. In which of the following situations MUST the two countries not trade with each other? A. The gain from trade of importing 1 unit of good X is higher than the opportunity cost of production but lower than the transportation cost. B. One of the countries has absolute advantages in producing both good X and good Y over another country. C. Both countries have technological advancement in producing both goods. D. The terms of trade lies between the opportunity costs of the two countries. 39. Compared to a tariff, imposing an effective import quota on a good A. leads to a greater increase in the producer surplus. B. results a smaller amount of deadweight loss. C. incurs a higher cost of administration. D. None of the above.

HKDSE-ECON 1-11 (Mock Test 4)

2011 Aristo Educational Press Ltd.

D0 1

40. Suppose there is a change in the exchange rate between the British Pound (GBP) and the Hong Kong dollar (HKD) as below. Year X February July Exchange rate 1 GBP = 12.93 HKD 1 GBP = 10.98 HKD

During the above period, the Hong Kong dollar has ______________ against the British Pound and the quantity of goods imported from Britain to Hong Kong would ______________. A. appreciated decrease B. appreciated increase C. depreciated decrease D. depreciated increase

END OF PAPER

HKDSE-ECON 1-12 (Mock Test 4)

2011 Aristo Educational Press Ltd.