2022 HKDSE Economics Practice Paper | DSE Mock

In an economy facing an inflationary gap, which of the following combinations of fiscal and monetary policies would most effectively help restore long-run macroeconomic equilibrium?

Suppose Country A and Country B produce two goods: Smart watches (W) and Toys (T). Assume constant opportunity costs.\nCountry A: 1 unit of labor can produce 4W or 2T.\nCountry B: 1 unit of labor can produce 2W or 2T.\nIf Country A and Country B trade, which of the following is the range of mutually beneficial terms of trade (in terms of Toys per Smart watch)?

Consider the market for coffee beans. Suppose a scientific study reveals that coffee consumption significantly improves focus and memory, and at the same time, a severe drought occurs in major coffee-producing countries. How would the equilibrium price and equilibrium quantity of coffee beans change?

In the AS-AD model, suppose an economy is initially at long-run macroeconomic equilibrium. If there is a sudden and significant rise in international oil prices (the economy is a net oil importer), in the short run, the price level will ________ and the real output level will ________.

In a banking system, the legal reserve ratio is 20%. Suppose a customer deposits \$100,000 in cash into Bank A. If banks do not hold excess reserves and there is no cash leakage to the public, what is the maximum possible amount of total credit (loans) created by the entire banking system?

Which of the following transactions would be included in the calculation of Hong Kong's Gross Domestic Product (GDP) for the current year?\n(1) The commission fee of \$5,000 charged by a Hong Kong auction house for the transaction of an antique vase.\n(2) A fee of \$120,000 received by a Hong Kong consulting firm for providing services to a company in Tokyo.\n(3) A \$10,000 monthly social security allowance paid by the Hong Kong government to an elderly resident.\n(4) A \$50,000 purchase of shares in a newly listed company by a Hong Kong resident.

Under the Linked Exchange Rate System of Hong Kong, the HK dollar (HKD) is pegged to the US dollar (USD) at a rate of 7.80 HKD to 1 USD. Suppose the USD depreciates against the Euro (EUR). Which of the following statements are correct?\n(1) The HKD will depreciate against the EUR.\n(2) Hong Kong's exports to Europe will become more price competitive.\n(3) The cost of Hong Kong tourists travelling to Europe will decrease.\n(4) Hong Kong's import prices from Europe (in terms of HKD) will decrease.

Suppose the price elasticity of demand for a local concert ticket is 1.5. If the organizer decides to raise the ticket price by 10%, how will the total revenue of the organizer change?

Susan is choosing between three mutually exclusive options for her Saturday afternoon:\nOption X: Study for her Economics exam, which she values at \$200.\nOption Y: Work part-time at a bookstore, which pays \$150 in wages.\nOption Z: Watch a movie with her friends, which she values at \$180 and costs \$80 for the ticket.\nAssume there are no other costs involved. What is Susan's opportunity cost of choosing Option X?

Suppose the government imposes a price floor (minimum price) below the equilibrium price of a certain good. What will be the effect on the market price and quantity traded of this good?

The table below shows the amount of food or clothing that Country A and Country B can produce with one unit of labor:

$$\begin{array}{|c|c|c|} \hline & \text{Food (units)} & \text{Clothing (units)} \\ \hline \text{Country A} & 10 & 5 \\ \hline \text{Country B} & 8 & 2 \\ \hline \end{array}$$

Which of the following statements is correct?

An economy is experiencing high inflation. The central bank decides to increase the required reserve ratio. At the same time, commercial banks decide to hold more excess reserves due to credit risks. Which of the following is correct?

The government relaxes the import quota on Japanese beef. At the same time, a scientific report highlights the health risks of consuming red meat. In the market for Japanese beef, the equilibrium price will _______ and the equilibrium quantity will _______.

There is a sudden increase in the price of imported raw materials in a small open economy. At the same time, the government increases its spending on infrastructure. In the short run, how will these events affect the aggregate price level and real GDP of the economy?

A Hong Kong resident owns a residential property in London and rents it to a British citizen. The monthly rental income received by the Hong Kong resident should be included in Hong Kong's ________ and the UK's ________.

The balance sheet of a banking system is shown below:

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

The required reserve ratio is \( 25\% \).
Suppose the public withdraws \$100 million of cash from the banking system and holds it as currency in circulation. If there is no subsequent cash leakage and banks fully utilize their excess reserves to create deposits, the maximum possible money supply in the economy will...

The price elasticity of demand for a good is 1.5. If the seller decreases the price of the good, the total revenue will ________ because the percentage increase in quantity demanded is ________ than the percentage decrease in price.

The table below shows the production relationship of a firm in the short run, where capital is a fixed factor:

$$\begin{array}{|c|c|} \hline \text{Number of Workers} & \text{Total Product (units)} \\ \hline 1 & 10 \\ \hline 2 & 24 \\ \hline 3 & 42 \\ \hline 4 & 56 \\ \hline 5 & 65 \\ \hline 6 & 70 \\ \hline \end{array}$$

At which worker does the Law of Diminishing Marginal Returns start to manifest itself?

Under the Linked Exchange Rate System of Hong Kong, the Hong Kong Dollar (HKD) is pegged to the US Dollar (USD) at a rate of 7.80 HKD to 1 USD. If the US Dollar depreciates against the Euro (EUR), which of the following is most likely to happen?

If the government imposes an effective price ceiling on a rental housing market, which of the following is a possible outcome?

The table below shows the maximum amount of clothing or food that Country X and Country Y can produce with the same amount of resources. \n\n| | Clothing (units) | Food (units) |\n|---|---|---|\n| Country X | 40 | 20 |\n| Country Y | 30 | 10 |\n\nWhich of the following statements is correct?

The government subsidizes the purchase of electric vehicles (EVs). At the same time, the cost of lithium batteries (a major input of EVs) drops significantly. How would the equilibrium price and equilibrium quantity of electric vehicles change?

An economy initially operating at long-run equilibrium faces a sudden increase in the prices of imported oil and raw materials. In the short run, how would the real GDP and the price level of this economy change?

Suppose a central bank lowers the required reserve ratio. Under which of the following circumstances will this policy be LESS effective in stimulating the economy?

Suppose the government of an importing country imposes an import quota instead of a tariff that achieves the same level of domestic production. Assume the quota licenses are allocated to domestic importers for free. Comparing the quota with the tariff,

Which of the following is most likely to cause a government budget deficit to narrow during an economic recovery?

When the price of smartphone cases drops by 10%, the total revenue of smartphone case sellers increases by 5%. This implies that the demand for smartphone cases is

Suppose an economy is originally at its long-run equilibrium. If the government increases its spending on infrastructure, what are the effects on the price level and real output in the long run (assuming no change in long-run aggregate supply)?

The government introduces a price floor for agricultural products which is set above the market equilibrium price. To make this price floor effective, the government promises to buy up all the surplus. As a result,

A Hong Kong resident owns a flat in London and rents it out to a British citizen. At the same time, a Japanese consultant is hired by a Hong Kong firm to work in Hong Kong for two weeks. How would the rental income received by the Hong Kong resident and the salary earned by the Japanese consultant affect Hong Kong's Gross Domestic Product (GDP) and Gross National Income (GNI)?

Country A and Country B produce Smart Watches (W) and Smart Glasses (G). With the same amount of resources, their maximum outputs are: \n\n* Country A: \( 40 \) units of W or \( 20 \) units of G\n* Country B: \( 30 \) units of W or \( 30 \) units of G\n\nSuppose transportation cost per unit of Smart Watch traded is \( 0.1 \) units of Smart Glasses, and it is borne by the exporter. Which of the following is a mutually beneficial terms of trade for both countries?

Suppose the central bank increases the required reserve ratio and at the same time sells government bonds to the public in the open market. Which of the following is the most likely effect on the money supply and the nominal interest rate in the short run?

Suppose a technological breakthrough significantly lowers the production cost of electric vehicles (EVs). At the same time, the government announces an increase in the annual registration tax for traditional petrol vehicles (a substitute for EVs). What are the effects of these two events on the equilibrium price and equilibrium quantity of electric vehicles?

In an economy initially in long-run equilibrium, there is an increase in business optimism about future economic growth, which leads to an increase in planned investment. At the same time, there is a surge in international crude oil prices. What will be the immediate short-run effects on the real GDP and general price level?

Suppose a small open economy imports smartphones. Initially, there is free trade. Now, the government decides to impose a tariff of \( \$T \) per smartphone imported, which reduces the quantity of imports. Which of the following statements is correct if the government instead replaces the tariff with an import quota that restricts the import quantity to the exact same level as under the tariff?

Suppose coffee and sugar are complements in consumption. When the supply of sugar decreases due to a bad harvest, the price of sugar rises significantly. At the same time, the total revenue of coffee shops from selling coffee decreases. Which of the following must be correct?

An economy is experiencing a severe recession. The government wants to stimulate aggregate demand. Which of the following combinations of fiscal policy measures would be most effective in increasing aggregate demand?

In a closed economy with no government sector, the marginal propensity to save (MPS) is \( 0.25 \). If planned investment increases by \( \$50 \) million, what will be the change in the equilibrium national income?

Suppose a small open economy is an exporter of agricultural products. If the government introduces an export subsidy of \( \$s \) per unit of agricultural exports, which of the following will happen in the domestic market?

The government imposes a price ceiling on residential rentals that is set below the market equilibrium level. Which of the following is an expected consequence of this policy?

Suppose the government reduces the personal income tax rate. At the same time, the central bank sells government bonds to the public. Which of the following is/are possible outcome(s)?
(1) The general price level remains unchanged.
(2) The real interest rate increases.
(3) The private consumption expenditure decreases.

The table below shows the maximum outputs of Smartphones and Watches of Country X and Country Y with the same amount of resources.
$$\begin{array}{|c|c|c|c|} \hline & \text{Smartphones (units)} & & \text{Watches (units)} \\ \hline \text{Country X} & 200 & \text{OR} & 100 \\ \hline \text{Country Y} & 120 & \text{OR} & 80 \\ \hline \end{array}$$
Suppose Country X and Country Y trade with each other. The transportation cost per unit of Watch traded is 0.2 units of Smartphones, which is borne by the importer. Which of the following can be the mutually beneficial terms of trade for 1 unit of Watch?
(1) 1.4 Smartphones
(2) 1.6 Smartphones
(3) 1.75 Smartphones
(4) 1.85 Smartphones

Coffee and tea are substitutes in consumption. Suppose a pest disease severely damages tea plantations, while the price of coffee beans (an input for making coffee) decreases. In the coffee market, the equilibrium price ____________ and the equilibrium quantity ____________.

Suppose an economy is initially operating at its long-run equilibrium. A technological advancement increases productivity across all industries. Simultaneously, the government increases the corporate profit tax rate. In the short run, the general price level will ____________ and the real output ____________.

The balance sheet of a banking system is as follows:
$$\begin{array}{lr|lr} \text{Assets (\$ million)} & & \text{Liabilities (\$ million)} & \\ \hline \text{Reserves} & 240 & \text{Deposits} & 1200 \\ \text{Loans} & 960 & & \\ \end{array}$$
Suppose the required reserve ratio is 20% and the banking system initially holds no excess reserves. A depositor withdraws $50 million from the banking system and holds it as cash. Assuming there is no other cash leakage and banks do not hold excess reserves, the money supply will ____________.

Suppose the government of Country A increases the profits tax rate on corporations.
(a) Explain the effect of this tax policy on aggregate demand in the short run. (3 marks)
(b) Explain whether this policy is an expansionary or contractionary fiscal policy, and its effect on the government's budget balance in the short run. (2.5 marks)

Country B is a small open economy that imports wheat. Suppose the world price of wheat is \(P_W\). The government decides to impose a tariff of \(t\) per unit on imported wheat.
(a) Explain how this tariff affects the domestic production and consumption of wheat. (3.5 marks)
(b) Explain the change in consumer surplus after the tariff is imposed. (2 marks)

Suppose that electronic books (e-books) and printed books are substitutes.
(a) Explain the immediate effect of a technological breakthrough that lowers the production cost of e-books on the market for printed books. (3.5 marks)
(b) Suggest one other factor that could lead to a decrease in the demand for printed books. (2 marks)

Suppose an economy is initially operating at its long-run equilibrium. There is a sudden and significant increase in international oil prices.
(a) Explain the effect of this shock on the price level and real output in the short run. (3.5 marks)
(b) What type of macroeconomic phenomenon does this situation represent? (2 marks)

Suppose the central bank of Country C lowers the required reserve ratio of commercial banks.
(a) Explain how this policy affects the money supply in the economy. (3.5 marks)
(b) State the effect of this monetary policy on the nominal interest rate. (2 marks)

Under free trade, Country X imports shoes from Country Y. Suppose Country X imposes an import quota on shoes.
(a) Explain how the import quota affects the total revenue of foreign exporters if the domestic demand for imported shoes is price inelastic. (3.5 marks)
(b) State who gains from the imposition of this quota, other than domestic producers. (2 marks)

Suppose the government of City Z imposes a price ceiling on residential rents that is set below the market equilibrium level.
(a) Explain the effects of this policy on the quantity of rental housing transacted and show whether a shortage or surplus occurs. (3.5 marks)
(b) Apart from a change in transacted quantity, explain one non-price rationing method that may emerge under this price ceiling. (2 marks)

Suppose an economy is experiencing a recessionary (deflationary) gap.
(a) With the aid of an AS-AD diagram, illustrate this situation. (3.5 marks)
(b) Explain how the economy can automatically adjust back to its long-run full-employment equilibrium in the long run without government intervention. (2 marks)

Answer all parts of this question. Country A and Country B are two countries producing Food (F) and Clothing (C) with the same total amount of resources. Their maximum outputs are: Country A can produce 100 units of Food OR 50 units of Clothing. Country B can produce 80 units of Food OR 80 units of Clothing. (a)(i) Explain which country has a comparative advantage in producing Food. (3 marks) (ii) Find the range of mutually beneficial terms of trade for 1 unit of Clothing. (3 marks) (b) Suppose Country A is a small open economy. The world price of Clothing is $10. The government of Country A decides to impose an import tariff of $2 per unit on Clothing. (i) Explain how this import tariff affects the consumer surplus of Country A's consumers and the government revenue of Country A. (4 marks) (ii) If the government replaces the tariff with an import quota that restricts the import quantity to the same level as under the tariff, compare the economic welfare of Country A under these two policies. (4 marks) (c) The government of Country A argues that trade protection on clothing is necessary to protect its domestic 'infant industry'. Critically evaluate this argument from the perspective of economic efficiency. (6 marks)

Answer all parts of this question. An economy is currently experiencing a severe recession with high unemployment. Policy makers are debating whether to implement monetary policy or fiscal policy to stimulate economic growth. (a) Suppose the central bank decides to conduct open market operations by purchasing government bonds from the public. (i) Explain, with reference to the credit creation process, how this policy affects the money supply of the economy. (5 marks) (ii) Explain how this monetary policy affects the interest rate, investment expenditure, and aggregate demand. (4 marks) (b) Suppose the government decides to implement an expansionary fiscal policy by increasing infrastructure spending. (i) Explain how an increase in government spending affects the equilibrium output and price level in the short run. (5 marks) (ii) Evaluate how the effectiveness of the above monetary policy and fiscal policy is affected under each of the following scenarios: - The economy is in a 'liquidity trap'. - There is a strong 'crowding-out effect'. (6 marks)

Read the following information about Country X and answer the questions. Country X has recently experienced a major technological breakthrough in Artificial Intelligence (AI), which has been rapidly adopted across all business sectors to automate production processes. To further boost long-term competitiveness, the government of Country X also announced a significant reduction in the corporate profit tax rate. (a) Explain how the breakthrough in AI technology affects the short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) of Country X. (4 marks) (b) Explain how the reduction in the corporate profit tax rate affects the aggregate demand (AD) and short-run aggregate supply (SRAS) of Country X. (5 marks) (c) With the aid of an AD-AS diagram, analyze the combined effects of the AI technology breakthrough and the corporate profit tax cut on Country X's equilibrium output and price level in the short run. (5 marks) (d) Write an essay to assess whether supply-side policies (such as promoting technology R&D and tax cuts) are superior to demand-management policies (such as increasing transfer payments to households) in achieving long-term economic growth and price stability. (6 marks) [Note: 1 of these marks is allocated to the quality of communication.]