2002-CE

HONG KONG EXAMINATIONS AUTHORITY

ECON
PAPER 1 HONG KONG CERTIFICATE OF EDUCATION EXAMINATION 2002

ECONOMICS PAPER 1

8.30 am – 10.00 am (1½ hours)

This paper must be answered in English

1. This paper consists of two sections, A and B.

2. Section A contains nine questions. Attempt ALL questions. The

whole section carries 38 marks for content and 2 marks for effective
communication.

3. Section B contains three questions. Attempt any TWO questions.

Each question carries 23 marks for content and 2 marks for effective
communication.

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2002-CE-ECON 1–1
Section A (40 marks)

Attempt ALL questions.

1. Some job vacancies publications are distributed to people free of charge in MTR
stations. Explain whether these publications are free goods in society.
(3 marks)

2. Suppose the Organization of Petroleum Exporting Countries cuts its oil

production. At the same time, the demand for automobiles decreases.

With the aid of a diagram, explain under what condition the price of gasoline
would increase. (7 marks)

3.
Firm A Firm B
Number of workers employed 100 120
Number of working hours per worker 500 800
Output (units) 100 000 144 000

Calculate the average labour productivity of each firm and state TWO reasons
why the two productivities are different. (4 marks)

4. What is meant by limited liability ? (2 marks)

5. State THREE features of the market structure of stores selling computer

hardware in the Golden Computer Centre ( 高 登 電 腦 中 心 ) . (3 marks)

6. In Hong Kong, Mr Lee withdrew $300 000 from his savings account in Bank A.
He deposited 50% of this amount with a deposit-taking company and remitted
through a bank another 20% of this amount overseas. He put the rest of the
money in his safety box in Bank B.

What is the immediate effect of the above transactions on Hong Kong’s money
supply M1 and M3 ? Explain your answer. (6 marks)

7. List TWO functions of a central bank. (2 marks)

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8. State and explain TWO principles of taxation put forward by Adam Smith.
(4 marks)

9. The following table shows the maximum amount of toys and computers that
Country A and Country B can produce in a year with ALL of their resources
respectively.

Toys (Units) Computers (Units)

Country A 15 OR 5
Country B 10 OR 5

Explain whether we can conclude from the above table that Country A has

(a) an absolute advantage

(b) a comparative advantage

in producing toys. (7 marks)

END OF SECTION A

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Section B (50 marks)

Attempt any TWO questions.

10. The balance sheet of a banking system is as follows :

Assets ($Mn) Liabilities ($Mn)

Reserves 20 Deposits 100
Loans 80

(a) The public deposits $10 million of cash into the banking system.

(i) Suppose the banks do not hold excess reserves. Calculate the
maximum possible change in the money supply. Explain your
answer. (5 marks)

(ii) Give TWO possible reasons why the actual change in the money
supply could be less than the maximum possible change. (4 marks)

(b) Suppose the banks decrease their interest rates on home mortgage loans.
With the aid of a diagram, explain how this would affect the total
expenditure on the purchase of private housing. (6 marks)

(c) Suppose some large banks reduce their deposit interest rates while some
small banks increase their deposit interest rates.

Use the concept of opportunity cost to explain how this would affect the
flow of deposits between the above two types of banks. (4 marks)

(d) Bank A runs its business in Hong Kong. Tom is a consultant from Japan
who will work for Bank A for nine months. Afterwards he will return to
Japan.

Explain whether Tom’s salary for these nine months should be included in
the calculation of Hong Kong’s gross domestic product and gross national
product. (4 marks)

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11. (a) The following shows the gross domestic product (GDP) data of economy A
in a certain year.

$million
Private consumption expenditure 400
Net investment expenditure 180
Government consumption expenditure 250
Exports 500
Imports 650
Depreciation 150
Indirect business tax 50
Interest 200

(i) Calculate the GDP at market price of economy A. (3 marks)

(ii) Miss Wong, an Economics teacher in a tutorial school, tells her

students that the total spending of economy A’s consumers in market
value must be greater than $400 million. Give THREE reasons to
explain why she is correct. (6 marks)

(b) There are student places not yet filled in Miss Wong’s tutorial school. The
school decides to launch an advertising campaign to recruit more students
and to keep the tuition fee unchanged.

With the aid of a diagram, explain how a successful advertising campaign

would fill all the places and increase the total revenue of the school.
(7 marks)

(c) Students in the tutorial school with good academic achievements are
awarded coupons. These coupons can be used to purchase books in some
specified bookstores. Explain whether these coupons are ‘money’.
(3 marks)

(d) The tutorial school also publishes textbooks for sale to the public. Give
FOUR possible motives of such an expansion. (4 marks)

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12. Mr Wong runs a bookstore in Hong Kong. He sells books imported from
Britain. Suppose the exchange rate between the US dollar and the British pound
changes as follows:

April US$1 = £0.75

May US$1 = £0.70

(a) (i) Given the linked exchange rate system in Hong Kong, explain whether
the HK dollar appreciates or depreciates against the British pound as a
result of the above change in the exchange rate. (2 marks)

(ii) Suppose the price of books imported from Britain remains unchanged in
British pound and the demand for these books is inelastic.

With the aid of a diagram, explain how Mr Wong’s sales revenue of

these books in HK dollars would change. (7 marks)

(b) In order to cut expenses, Mr Wong reduces the monthly salaries of the staff
working in the bookstore.

(i) Give ONE advantage and ONE disadvantage to Mr Wong of paying his
staff by time rate over piece rate. (4 marks)

(ii) Explain whether the real income of his staff would necessarily fall
during deflation. (5 marks)

(c) Mr Wong’s bookstore has to pay profits tax and rates.

(i) Explain which of the above two taxes is an indirect tax.

(ii) Explain whether profits tax is progressive, proportional or regressive.

(5 marks)

END OF PAPER

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 2002 CE Economics Paper 1

Numerical Answers

Economics 1

3. Firm A : 2 units of output per man-hour

Firm B : 1.5 units of output per man-hour

6. M1 increased by $90 000.

M3 decreased by $60 000.

10. (a) (i) $40 million

11. (a) (i) $830 million

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