2023 HKDSE Economics Practice Paper | DSE Mock

Suppose Country A and Country B only produce Computers and Toys with the same amount of resources.

Country A: 10 Computers OR 20 Toys
Country B: 15 Computers OR 45 Toys

If they open up for trade, which of the following is a mutually beneficial terms of trade for both countries?

The central bank of a country decreases the required reserve ratio while the government increases the income tax rates simultaneously. What will be the effect on the interest rate and the real GDP of the country?

A developer operates a private toll tunnel. Originally, the toll is $20 and the daily traffic is 50,000 vehicles. When the toll is raised to $24, the daily traffic falls to 45,000 vehicles. Which of the following statements is correct?

Suppose there is unexpected inflation in an economy. Which of the following individuals will gain?

The table below shows the production data of a firm in the short run:

| Labor (units) | Total Product of Good X (units) |
|---|---|
| 1 | 10 |
| 2 | 22 |
| 3 | 36 |
| 4 | 46 |
| 5 | 54 |

At which unit of labor does the law of diminishing marginal returns begin to set in?

Miss Chan plans to spend her Saturday afternoon either attending a concert, watching a movie, or staying at home to study. Her order of preference is:

First preference: Attending a concert (ticket price: $400)
Second preference: Watching a movie (ticket price: $100)
Third preference: Staying at home to study (cost: $0)

Suppose she has already bought a non-refundable concert ticket for $400. On Saturday morning, she is offered a free ticket to the movie by her friend. What is her opportunity cost of attending the concert now?

Suppose the government imposes an effective price ceiling on a good. If the demand for the good increases while the price ceiling remains unchanged, which of the following will occur?

Suppose an economy is initially operating at its long-run equilibrium. If there is a major technological breakthrough that increases the productivity of all industries, how will the price level and real GDP change in the short run?

In a closed economy, the following data are recorded:

- Private consumption expenditure: $500 million
- Gross private domestic investment: $150 million
- Government consumption expenditure: $100 million
- Depreciation: $20 million
- Indirect taxes: $30 million
- Subsidies: $10 million

What is the Gross Domestic Product (GDP) at market prices of this economy?

Under the Linked Exchange Rate System of Hong Kong, the Hong Kong dollar (HKD) is pegged to the US dollar (USD). If the US dollar depreciates against the Japanese Yen (JPY), which of the following is most likely to happen?

Mr. Chan has a free evening. He has three mutually exclusive options:

Option 1: Attend a concert. He has a ticket which was a free gift, but he can resell it for \$180. His valuation of the concert is \$300.

Option 2: Watch a movie. The movie ticket costs \$100, and his valuation of the movie is \$250.

Option 3: Work overtime and earn \$150.

What is the opportunity cost of attending the concert?

Suppose the market demand for public transport is price inelastic. If the government provides a subsidy of \$1 per trip to public transport operators, how will this affect consumer spending on public transport and the total revenue of the operators (including the subsidy)?

The government imposes a price ceiling on a certain good below its equilibrium price. Under which of the following conditions will the shortage of the good be smaller?

The table below shows the output of a firm with a fixed amount of machinery:

$$\begin{array}{|c|c|} \hline \text{No. of workers} & \text{Total output (units)} \\ \hline 1 & 10 \\ \hline 2 & 22 \\ \hline 3 & 36 \\ \hline 4 & 46 \\ \hline 5 & 52 \\ \hline \end{array}$$

Which of the following statements is correct?

The table below shows the amount of resources required to produce one unit of clothing and one unit of food in Country A and Country B:

$$\begin{array}{|c|c|c|} \hline & \text{Clothing (1 unit)} & \text{Food (1 unit)} \\ \hline \text{Country A} & 4 \text{ units} & 2 \text{ units} \\ \hline \text{Country B} & 6 \text{ units} & 5 \text{ units} \\ \hline \end{array}$$

Which of the following statements is correct?

Which of the following combinations of policies would most effectively curb high inflation and reduce a government budget deficit?

Suppose the actual inflation rate is 5%, while the expected inflation rate was 2%. Which of the following parties will gain?

The balance sheet of a banking system is as follows:

$$\begin{array}{lr|lr} \hline \text{Reserves} & \$300 \text{ million} & \text{Deposits} & \$1,000 \text{ million} \\ \hline \end{array}$$

Suppose the required reserve ratio is 20%. If the public deposits \$100 million of cash into the banking system, and the banks do not hold excess reserves in the end, the maximum possible change in the money supply is:

Suppose the government of an economy reduces the personal income tax rate and at the same time, the price of imported raw materials rises. In the short run, the general price level of the economy will ________ and the real GDP will ________.

Suppose a small open economy imports a certain good from the world market. If the government imposes an import tariff on this good such that the quantity of imports is reduced, which of the following will occur?

Initially, a student has three mutually exclusive options for his Saturday afternoon: Option 1: Study at home (Valuation: $150); Option 2: Watch a movie (Ticket price: $80, Valuation: $210); Option 3: Play video games (Valuation: $110). If the price of the movie ticket decreases to $70, the student will ______ and the opportunity cost of his choice will ______.

Good A and Good B are close substitutes. When the price of Good A increases, what will happen to the total revenue of Good A and the demand for Good B?

Suppose the government imposes a price ceiling on rental housing that is set below the equilibrium rent. Later, the demand for rental housing increases. Which of the following will occur as a result of the increase in demand?

The table below shows the relationship between the number of workers and the total product of a firm, with other inputs being fixed. Worker(s): 1, 2, 3, 4, 5, 6; Total product (units): 10, 24, 36, 46, 52, 55. Which of the following statements is correct?

Suppose the required reserve ratio of a banking system is 20%, and the system initially holds no excess reserves. A customer withdraws $50 million of cash from his deposit in a bank. If banks do not hold any excess reserves afterward, what is the maximum change in the money supply?

The table below shows the amount of labor hours required to produce 1 unit of computer and 1 unit of wine in Country X and Country Y. Country X: 1 unit of Computer requires 10 hours, 1 unit of Wine requires 5 hours; Country Y: 1 unit of Computer requires 8 hours, 1 unit of Wine requires 2 hours. Which of the following statements is correct?

Suppose there is an unanticipated inflation in an economy. Who of the following will benefit?

Suppose an economy is experiencing a recessionary gap. The government decides to increase its spending on infrastructure and simultaneously reduce the corporate income tax rate. Which of the following is the most likely effect of these policies on the government budget deficit and the aggregate demand in the short run?

Suppose the government of an economy increases the import tariff on raw materials, which are widely used in domestic production. At the same time, the government reduces the personal income tax rate. In the short run, how will the price level and real output of the economy change?

Which of the following items should be included in the calculation of Hong Kong's Gross Domestic Product (GDP) for the current year? (1) The salary of a Japanese chef working in a restaurant in Central, Hong Kong. (2) The value of a second-hand smartphone sold by a teenager on an online platform. (3) The government's cash payout of $10,000 to all permanent residents.

Suppose Country A and Country B only produce Smartphones and T-shirts. With all their resources, the maximum outputs of both countries are as follows:

Country A: 100 Smartphones OR 200 T-shirts
Country B: 60 Smartphones OR 240 T-shirts

Which of the following statements is correct?

Suppose an economy is experiencing a recessionary gap. Which of the following combinations of fiscal and monetary policies would most effectively help close this gap?

When the price of a good falls from \(\$20\) to \(\$16\), its quantity demanded increases from \(100\) units to \(130\) units. Which of the following statements about this good is correct?

Suppose the actual inflation rate is \(5\%\) while the expected inflation rate was \(2\%\). Who among the following will BENEFIT from this unexpected inflation?

The table below shows the production data of a firm in the short run, where labour is the only variable input.

| Labour (units) | Total Product (units) |
|---|---|
| 1 | 12 |
| 2 | 26 |
| 3 | 42 |
| 4 | 56 |
| 5 | 66 |

At which unit of labour does the law of diminishing marginal returns begin to set in?

Kelvin currently works as an accountant earning \(\$30,000\) per month. He is considering resigning to open a coffee shop. If he resigns, his estimated monthly revenue from the coffee shop is \(\$80,000\), and the operating costs (including rent, ingredients, and staff wages) will be \(\$60,000\). What is Kelvin's opportunity cost of opening the coffee shop?

The government imposes a price floor on Good Y that is set below its market equilibrium price. Which of the following is the most likely result of this policy?

Suppose there is a technological breakthrough that widely increases productivity across all manufacturing sectors in Hong Kong. In the AS-AD model, how will this affect the equilibrium price level and real GDP in the short run?

Assume that the required reserve ratio of the banking system is \(10\%\) and banks do not hold excess reserves. The public does not hold cash (i.e., all money is deposited in banks). If a customer withdraws \(\$5,000\) cash from Bank A and keeps it under his mattress, what will be the maximum change in the money supply in the economy?

Which of the following items would be INCLUDED in the calculation of Hong Kong's Gross Domestic Product (GDP) for the current year?

Suppose a piece of land owned by a developer can be used for three projects: Project A, Project B, or Project C. The developer's valuation of the three projects is: Project A > Project B > Project C.

Which of the following will lead to an increase in the opportunity cost of choosing Project A?

(1) The estimated construction cost of Project B decreases.
(2) The expected revenue of Project C increases significantly but remains less valuable than Project B.
(3) A government tax is newly imposed on Project A.
(4) The expected revenue of Project B increases but is still lower than that of Project A.

Suppose Good X is an inferior good and its demand is perfectly inelastic. If the government imposes a per-unit tax on the sellers of Good X, and at the same time, consumers' income increases, how will the equilibrium price and equilibrium quantity of Good X change?

The table below shows the production data of a firm in the short run:

$$\begin{array}{|c|c|} \hline \text{Number of labor (units)} & \text{Total product (units)} \\ \hline 1 & 15 \\ \hline 2 & 32 \\ \hline 3 & 45 \\ \hline 4 & 56 \\ \hline 5 & 65 \\ \hline \end{array}$$

Which of the following statements are correct?

(1) The law of diminishing marginal returns begins to apply when the 3rd unit of labor is employed.
(2) The average product of labor reaches its maximum when the 2nd unit of labor is employed.
(3) The marginal product of the 4th unit of labor is 11 units.

The following is the balance sheet of a banking system:

$$\begin{array}{l|r} \hline \text{Assets (\$)} & \text{Liabilities (\$)} \\ \hline \text{Reserves: } 300 & \text{Deposits: } 1500 \\ \text{Loans: } 1200 & \\ \hline \end{array}$$

Suppose the required reserve ratio is 20%.

If the public withdraws $50 of cash from the banking system, and banks do not hold any excess reserves in the end, the change in the money supply will be:

The table below shows the amount of resources required to produce one unit of Good X and one unit of Good Y in Country A and Country B:

$$\begin{array}{|c|c|c|} \hline & \text{Good X} & \text{Good Y} \\ \hline \text{Country A} & 4 \text{ units} & 2 \text{ units} \\ \hline \text{Country B} & 3 \text{ units} & 3 \text{ units} \\ \hline \end{array}$$

If the terms of trade are 1 unit of Good X = 1.5 units of Good Y, which of the following statements is correct?

Country A is a small open economy that imports wheat. Suppose the world price of wheat is \(P_w\). If the government of Country A imposes an import quota which is smaller than the free trade import volume, explain the effects of the quota on (a) the domestic price of wheat, and (b) the consumer surplus of Country A.

To curb high inflation, the central bank of a country increases the required reserve ratio of commercial banks. Explain how this policy would affect the country's money supply and nominal interest rate.

The manager of a cinema finds that when the ticket price is reduced from \(\$80\) to \(\$72\), the total revenue from ticket sales increases. State the law of demand. Determine whether the price elasticity of demand for cinema tickets is elastic, inelastic, or unit elastic, and explain your answer.

Suppose the actual inflation rate is \(5\%\) while the expected inflation rate was \(2\%\). Under this situation, explain who, between a fixed-rate mortgage borrower and the lending bank, will gain and who will lose.

Explain the Law of Diminishing Marginal Returns. Give ONE reason why this law only applies to the short run but not the long run.

Peter is considering whether to spend his evening attending a concert or staying at home to study for an exam. The ticket for the concert cost him \(\$500\), which is non-refundable. He also values staying at home to study at \(\$300\). On the day of the concert, Peter is offered a part-time job that evening which pays \(\$400\). Explain how the opportunity cost of attending the concert changes for Peter.

The government imposes a price floor on a rental housing market above the equilibrium rent. Explain the economic effects of this policy on (a) the quantity of rental housing transacted, and (b) the existence of a black market.

Suppose there is a technological breakthrough that significantly improves the overall productivity of a country. Explain the short-run effect of this breakthrough on the country's price level and real output using the Aggregate Demand-Aggregate Supply (AD-AS) model.

In a banking system, the total amount of deposits is \(\$1,000\) million and commercial banks hold no excess reserves. The required reserve ratio is \(20\%\). Suppose a customer withdraws \(\$100\) million from a bank and deposits it into a foreign bank account outside the domestic banking system. Calculate the maximum change in the domestic money supply. Show your workings.

To encourage the adoption of green technology, the government of Country H introduces a per-unit subsidy of \$10 on energy-saving air conditioners.

(a) With the aid of a diagram, explain how the introduction of this per-unit subsidy affects the consumer surplus and producer surplus of the air conditioner market. (6 marks)

(b) Suppose the demand for energy-saving air conditioners is more price-elastic than their supply.
(i) Explain whether consumers or producers will receive a larger share of the subsidy benefit. (3 marks)
(ii) Illustrate your answer in (b)(i) with a new demand-supply diagram. (4 marks)

(c) A research report claims that the deadweight loss of this subsidy policy could be zero. Under what condition about price elasticity of demand or supply would this claim be correct? Explain your answer. (3 marks)

The table below shows the maximum amount of Robots (R) or Food (F) that Country A and Country B can produce with one unit of resources.

$$\begin{array}{|c|c|c|} \hline & \text{Robots (R)} & \text{Food (F)} \\ \hline \text{Country A} & 10 & 5 \\ \hline \text{Country B} & 6 & 4 \\ \hline \end{array}$$

(a) (i) Calculate the opportunity cost of producing 1 unit of Food for both countries. (2 marks)
(ii) Determine which country has a comparative advantage in producing Food. Explain. (3 marks)

(b) Suppose the mutually agreed terms of trade are 1 unit of Food for 1.8 units of Robots.
(i) With calculations, show that both countries can gain from trading 10 units of Food. (4 marks)
(ii) State the range of terms of trade (in terms of Robots per unit of Food) that is mutually beneficial to both countries. (2 marks)

(c) Suppose Country A is a small open economy and initially imports Food. To protect domestic farmers, Country A's government imposes an import tariff on Food.
With the aid of a demand-supply diagram of Country A's domestic market for Food, explain how this tariff affects domestic price, import volume, and the deadweight loss of Country A. (5 marks)

Part (a)
Suppose Country A and Country B both use resource \(L\) to produce Food (\(F\)) and Clothing (\(C\)). The table below shows the amount of resource required to produce one unit of each good:

| | 1 unit of Food (\(F\)) | 1 unit of Clothing (\(C\)) |
| :--- | :---: | :---: |
| Country A | 4 units of \(L\) | 2 units of \(L\) |
| Country B | 6 units of \(L\) | 5 units of \(L\) |

(i) Which country has a comparative advantage in producing Food? Explain with calculations. (3 marks)
(ii) Suppose Country A is a small open economy and imports Clothing. Use a demand-and-supply diagram to illustrate the effect of imposing an import tariff on Clothing in Country A. Label the change in domestic production, imports, and the deadweight loss (if any). (5 marks)

Part (b)
Due to a global economic slowdown, Country A is experiencing a recessionary gap.
(i) With the aid of an AD-AS diagram, explain how the government of Country A can use expansionary fiscal policy to restore full employment. Label the recessionary gap, the policy action, and the new equilibrium in your diagram. (6 marks)
(ii) Suppose Country A's currency is pegged to the US Dollar under a fixed exchange rate system. Explain how this peg limits Country A's central bank from conducting an independent monetary policy to stimulate the economy. (3 marks)
(iii) 'An increase in government spending will always lead to an increase in real GDP by the same amount.' Do you agree? Explain your answer with reference to the crowding-out effect or other factors. (3 marks)

Part (c)
The balance sheet of the commercial banking system in Country A is as follows:
- Reserves: $250 million
- Loans: $750 million
- Deposits: $1000 million
The legal minimum reserve ratio is 20%.
(i) Calculate the excess reserves of the banking system. (2 marks)
(ii) Suppose the central bank reduces the legal minimum reserve ratio to 15%, and banks lend out all excess reserves. If there is no cash leakage (i.e., the public does not hold extra cash), calculate the maximum change in money supply. (4 marks)
(iii) Briefly explain one function of money that is affected when a country experiences hyperinflation. (2 marks)