2021 HKDSE Economics Practice Paper | DSE Mock

The table below shows the amount of labor resources required to produce one unit of Smartwatches and one unit of Leather Belts in Country X and Country Y:

$$\begin{array}{|c|c|c|} \hline & \text{Smartwatches} & \text{Leather Belts} \\ \hline \text{Country X} & 4 \text{ hours} & 2 \text{ hours} \\ \hline \text{Country Y} & 9 \text{ hours} & 3 \text{ hours} \\ \hline \end{array}$$

If both countries engage in mutually beneficial trade, which of the following statements is correct?

Suppose an economy is initially operating at its long-run equilibrium. If the government reduces personal income tax rates while electricity tariffs for all industries rise significantly, in the short run, the general price level of the economy will _________ and the real output will _________.

The balance sheet of a banking system is as follows:

$$\begin{array}{|lr|lr|} \hline \text{Assets (\$ million)} & & \text{Liabilities (\$ million)} & \\ \hline \text{Reserves} & 400 & \text{Deposits} & 2,000 \\ \text{Loans} & 1,600 & & \\ \hline \end{array}$$

Suppose the banks do not hold excess reserves and the public does not hold cash. If the central bank increases the required reserve ratio by 5 percentage points, the maximum change in money supply will be:

A cinema chain reduces the ticket price of morning shows by 15%. As a result, its total revenue from morning shows increases by 8%. Which of the following statements must be correct?

An experienced secondary school English teacher in Hong Kong resigns from her job and migrates to London, where she starts working as an English teacher in a high school. Which of the following statements is/are correct?

(1) She has demonstrated geographical mobility.
(2) She has demonstrated occupational mobility.
(3) Her departure will lead to a decrease in the labor supply of the education industry in Hong Kong.

Suppose the market for surgical masks is in equilibrium. The government then imposes an effective price ceiling on surgical masks. If there is a sudden outbreak of an infectious disease shortly after, causing the demand for surgical masks to increase significantly, how will the market price, quantity transacted, and the shortage of surgical masks change?

Which of the following transactions will increase Hong Kong's Gross Domestic Product (GDP) but leave its Gross National Income (GNI) unchanged?

Under the Linked Exchange Rate System of Hong Kong, the Hong Kong dollar is pegged to the US dollar. If the US Federal Reserve increases its interest rates to curb inflation in the United States, which of the following is most likely to occur in Hong Kong?

The table below shows the production of a cake shop in the short run, where kitchen space and ovens are fixed factors:

$$\begin{array}{|c|c|c|c|c|c|} \hline \text{Number of workers} & 1 & 2 & 3 & 4 & 5 \\ \hline \text{Total output (cakes per day)} & 20 & 45 & 75 & 95 & 110 \\ \hline \end{array}$$

At which worker does the Law of Diminishing Marginal Returns begin to set in?

An insurance company merges with a commercial bank. This is an example of _________ integration. A potential motive is to _________.

The market of Good X is in equilibrium. Suppose the government imposes a price ceiling below the equilibrium price. At the same time, the cost of production of Good X increases. Which of the following is correct?

Country A imports wine from Country B. Suppose Country A imposes an import quota on wine. Later, the domestic demand for wine in Country A decreases. Which of the following is correct?

Initially, the required reserve ratio of a banking system is \( 25\% \). The balance sheet of the banking system is as follows:

Reserves: \$300 million
Deposits: \$1,200 million

Suppose the central bank lowers the required reserve ratio to \( 20\% \), and at the same time, the public withdraws \$50 million of deposits as cash. If the banks do not hold excess reserves, what is the maximum change in the money supply?

Which of the following would lead to an increase in Hong Kong's Gross Domestic Product (GDP) for the year 2023?

(1) A Hong Kong resident paid a \$100,000 commission to a property agency in 2023 for buying a second-hand flat built in 2010.
(2) A Hong Kong toy manufacturer sold its inventory produced in 2022 to an European buyer in 2023.
(3) The Hong Kong Government distributed a \$20,000 subsidy to low-income families in 2023.
(4) A Japanese chef was employed by a Hong Kong restaurant to work in Hong Kong for 3 months in 2023, receiving a salary of \$150,000.

Suppose an economy is in long-run equilibrium. If a major trading partner of this economy experiences a severe recession, and at the same time, the government reduces the import tariff on raw materials, in the short run:

In economics, interest is defined as:

Suppose an economy is experiencing high inflation. To curb inflation, the central bank increases the required reserve ratio. According to the monetary transmission mechanism in a closed economy, this policy will lead to:

Suppose the government replaces a progressive personal income tax system with a flat (proportional) income tax system. How will this policy change affect equity and efficiency?

A cinema chain charges a lower ticket price for senior citizens than for other adults. Which of the following is/are the necessary condition(s) for the cinema chain to practice this price discrimination?

(1) The cinema chain is a price searcher.
(2) The cinema chain can prevent senior citizens from reselling their tickets to other adults.
(3) The cost of providing services to senior citizens is lower than that to other adults.

Suppose the export of premium cherries and standard cherries from Chile to Hong Kong is subject to a fixed transportation cost per kilogram. If this transportation cost increases, which of the following is correct?

Suppose the government imposes an effective price ceiling on Good X. If the production cost of Good X decreases, which of the following will definitely happen?

Country A and Country B only produce two goods, smartphones and T-shirts, with the same amount of resources. The table below shows their maximum output of both goods: Country A: 100 smartphones or 200 T-shirts; Country B: 80 smartphones or 120 T-shirts. If the mutually beneficial terms of trade is 1 smartphone = X T-shirts, which of the following can be the value of X?

Which of the following will increase the occupational mobility of labour?

During a period of high inflation and overemployment, which of the following combinations of policies is most effective in stabilizing the economy?

A Hong Kong resident owns a flat in London and rents it to a British citizen. The rental income received by the Hong Kong resident is included in:

The balance sheet of a banking system is as follows: Reserves: \$400; Loans: \$1,600; Deposits: \$2,000. Suppose the required reserve ratio is 20%. If a customer withdraws \$100 of cash from the banking system, and banks do not hold excess reserves, what is the maximum possible change in total deposits in the banking system?

Suppose the economy is initially at the long-run equilibrium. If the government increases its infrastructure expenditure and at the same time the world oil price surges, what will be the effect on the price level and real output in the short run?

Under which of the following conditions will a debtor (borrower) benefit from inflation?

A theme park charges adults \$500 and students \$300 for admission. Which of the following is NOT a necessary condition for the theme park to practice price discrimination?

Which of the following characteristics is shared by both a monopolistically competitive firm and a perfectly competitive firm?

Suppose Country A replaces an import tariff of $10 per bottle of wine with an import quota that restricts the import volume to the exact same level as under the tariff. Which of the following is correct?

A professional software engineer in Hong Kong changes his job to become a high school mathematics teacher in Hong Kong. This change shows that the engineer has ____________.

Suppose the government imposes an effective rent control (price ceiling) on private residential flats. If the supply of private residential flats decreases, what will happen to the rent and the quantity transacted?

Suppose the government reduces the corporate profits tax rate, which stimulates private investment. At the same time, the import price of raw materials decreases. In the short run, the general price level will ________ and the real output will ________.

If the central bank conducts an open market purchase of government bonds from the public, how will the money supply and the interest rate change?

Which of the following should be included in the calculation of Hong Kong's Gross Domestic Product (GDP) for the current year? (1) The salary of a Hong Kong resident who commutes and works in a factory located in Shenzhen. (2) The commission earned by a local real estate agent from selling a second-hand property. (3) The Old Age Living Allowance distributed by the Hong Kong Government to eligible elderly residents.

If the demand for a good is price inelastic, a decrease in the supply of the good will lead to:

The table below shows the maximum output of Clothing or Food that Country A and Country B can produce with the same amount of resources: Country A: 10 units of Clothing OR 20 units of Food. Country B: 15 units of Clothing OR 15 units of Food. Which of the following is correct?

Suppose the required reserve ratio of a banking system is 20% and banks hold no excess reserves. The public does not hold any cash. If a customer deposits $500,000 cash into a bank, the maximum possible change in the money supply in the economy is:

A theme park charges different admission fees for adults and students. Which of the following is NOT a necessary condition for the theme park to practice this price discrimination successfully?

Suppose the government of a small open economy increases the profit tax rate on corporations, and at the same time, the price of imported raw materials decreases. How would the price level and real output level of this economy change in the short run?

The table below shows the amount of Rice (R) or Computers (C) that Country A and Country B can produce per unit of labor:

Country A: 10R or 5C
Country B: 6R or 4C

Suppose the two countries engage in trade, and the terms of trade is 1 unit of Computer = 1.8 units of Rice. Which of the following statements is correct?

Suppose the central bank decreases the required reserve ratio of commercial banks, and at the same time, the government increases the salaries tax rates. Which of the following describes the combined effect on the money supply and aggregate demand?

If the government imposes an effective price floor on a good, which of the following will occur?

(1) Consumer surplus must decrease.
(2) Producer surplus must increase.
(3) Deadweight loss will be created.
(4) A market shortage will occur.

Mr. Chan, a software engineer, lost his job due to a tech industry downturn. He quickly found a job as a taxi driver because he already possessed a commercial driving license, and his new workplace is near his home. This case illustrates that Mr. Chan has:

Explain the short-run effect on the general price level and real output of an economy if there is a technological breakthrough in the manufacturing sector and at the same time the government increases the profit tax rate.

Country A is a small open economy that imports wheat. Suppose the government imposes a tariff on imported wheat. Explain how this tariff affects the consumer surplus and the total social surplus of Country A.

An economy is currently facing demand-pull inflation and an overheating problem. Explain how the central bank can use open market operations to tackle this problem, and state one limitation of using such a policy.

Suppose the government imposes a price ceiling on rental housing that is set below the equilibrium rent.\n(a) Explain how this price ceiling affects the quantity of rental housing transacted. (2.5 marks)\n(b) Explain why non-price rationing will emerge under this policy. (2.38 marks)

An experienced tourist guide in Hong Kong lost his job due to a decline in inbound tourism. He wanted to switch to becoming an online programming tutor but found it difficult because he lacks programming skills.\n(a) Identify and explain the type of labour mobility that is low in this case. (2.88 marks)\n(b) Suggest one government policy that can enhance this type of mobility. (2 marks)

Suppose the banking system has excess reserves of \$50 million. The required reserve ratio is 20%. Commercial banks do not hold excess reserves and there is no cash leakage. Calculate:\n(a) the maximum possible change in total bank deposits. (2.5 marks)\n(b) the maximum possible change in money supply. (2.38 marks)

State whether each of the following transactions should be included in the calculation of Hong Kong's GDP for the current year. Explain your answers.\n(a) A resident of Hong Kong purchases a second-hand car from a local dealer and pays a commission of \$3,000 to the dealer. (2.5 marks)\n(b) A Hong Kong consulting firm provides market research services to a company located in London, receiving a service fee of \$50,000. (2.38 marks)

A cinema chain reduces its ticket prices by 15%, resulting in a 10% increase in the number of tickets sold.\n(a) Calculate the price elasticity of demand for cinema tickets. (Show your working) (2.5 marks)\n(b) Explain whether the total revenue of the cinema chain will increase, decrease, or remain unchanged. (2.38 marks)

Suppose there is an unanticipated inflation in an economy. Discuss how this inflation affects the following two groups of people:\n(a) A person who holds a fixed-rate 30-year mortgage loan. (2.5 marks)\n(b) A retired person whose sole source of income is a fixed monthly pension. (2.38 marks)

Country A is a small open economy. Suppose the domestic demand and supply of good X in Country A are represented by typical downward-sloping demand and upward-sloping supply curves. The world price \(P_w\) of good X is lower than the domestic equilibrium price under autarky.

(a) With the aid of a demand-supply diagram, explain how the domestic consumption, domestic production and import of good X are determined under free trade. (5 marks)

(b) Suppose the government of Country A imposes an import tariff of \(t\) per unit.
(i) On the same diagram, show the effects of the tariff on the domestic price, domestic consumption, domestic production, and the volume of imports. Indicate the tariff revenue collected by the government. (4 marks)
(ii) Using the diagram, explain why the tariff leads to a net welfare loss (deadweight loss) to the society. (3 marks)

(c) Suppose the government replaces the tariff with an import quota which is exactly equal to the import volume under the tariff.
(i) Explain how the welfare effects of this quota differ from those of the tariff if the government distributes the quota licenses to domestic importers for free. (2 marks)
(ii) Explain how the welfare effects of this quota differ from those of the tariff if the government auctions off the quota licenses to the highest bidders in a competitive market. (1 mark)

Suppose Country B is currently facing high unemployment and its actual output is below the potential output level.

(a) Identify the type of output gap Country B is experiencing. (1 mark)

(b) With the aid of an aggregate demand-aggregate supply (AD-AS) diagram, show the current economic situation of Country B. Label the short-run equilibrium price level as \(P_1\), short-run equilibrium output level as \(Y_1\), and potential output level as \(Y_f\). (4 marks)

(c) Suppose the central bank of Country B implements an expansionary monetary policy.
(i) Describe TWO policy instruments the central bank can use to implement an expansionary monetary policy. (2 marks)
(ii) Explain the transmission mechanism of how this policy affects aggregate demand (AD) in the short run. (3 marks)
(iii) On the same diagram in (b), show the short-run effect of this policy on the price level and output level of Country B, assuming the policy successfully increases aggregate demand but the economy still operates below its potential output. (2 marks)

(d) An economist claims that "an expansionary monetary policy is always more effective than an expansionary fiscal policy in closing an output gap because it does not suffer from any policy lags."
Evaluate this statement by:
(i) explaining the concepts of "inside lag" and "outside lag" of macroeconomic policies. (2 marks)
(ii) indicating whether the economist's claim is correct with a brief justification regarding policy lags. (1 mark)

Source A: Country X is experiencing a high rate of inflation. The government is under pressure to resolve its massive budget deficit. At the same time, the Ministry of Finance proposes a supply-side tax reform by cutting the personal income tax rate to stimulate work incentive. However, the domestic manufacturing industry is lobbying for higher import tariffs to shield themselves from foreign competition.

Source B: Economic Indicators of Country X (at constant prices):
- Year 1: Private Consumption = $500 billion; Gross Domestic Investment = $150 billion; Government Consumption = $120 billion; Exports = $180 billion; Imports = $200 billion; Unemployment rate = 4.5%.
- Year 2: Private Consumption = $520 billion; Gross Domestic Investment = $140 billion; Government Consumption = $130 billion; Exports = $170 billion; Imports = $210 billion; Unemployment rate = 5.2%.

Questions:
(a) Based on Source B, calculate the real GDP of Country X in Year 1 and Year 2. Explain whether Country X experienced economic growth from Year 1 to Year 2. (5 marks)
(b) With reference to Source A, explain how the proposed cut in income tax rates will affect aggregate demand (AD). Illustrate your answer with an AD-AS diagram. (6 marks)
(c) Suppose the central bank of Country X decides to combat inflation by increasing the cash reserve ratio of commercial banks.
(i) Explain how this policy will affect the money supply. (4 marks)
(ii) Using the same AD-AS diagram in (b), show the combined short-run effect of the income tax cut and the increase in cash reserve ratio on the price level and real output of Country X. Assume the effect of the cash reserve ratio change dominates. (4 marks)
(d) The government also proposes raising import tariffs.
(i) Explain how an import tariff on foreign goods affects the domestic consumer surplus and government revenue of Country X. (5 marks)
(ii) Discuss whether this tariff policy is consistent with the goal of improving equity (income distribution) in Country X. (6 marks)