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FORM TP 20141701
CARIBBEAN

. . . . . . ... ,
0

_TEST CODE

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EXAMINATIONS

02216010

MAY/JUNE 2014

COUNCIL

CARIBBEAN ADVANCED PROFICIENCY EXAMINATION


ECONOMICS
Unit 2- Paper 01

1 hour 30 minutes
( 09 JUNE 2014 (a.m.) )

READ THE FOLLOWING INSTRUCTIONS CAREFULLY.


1.

This test consists of 45 items. You will have 1 hour and 30 minutes to answer them.

2.

In addition to this test booklet, you should have an answer sheet.

3.

Do not be concerned that the answer sheet provides spaces for more answers than there are
items in this test.

4.

Each item in this test has four suggested answers lettered (A), (B), (C), (D). Read each item
you are about to answer and decide which choice is best.

5.

On your answer sheet, find the number which corresponds to your item and shade the space
having the same letter as the answer you have chosen. Look at the sample item below.
Sample Item
Prime cost is calculated by adding direct factory expenses to the cost of
Sample Answer
(A)
goods used
goods bought
(B)
materials used
(C)
materials produced
(D)

The best answer to this item is "materials used", so answer space (C) has been shaded.
6.

If you want to change your answer, erase it completely and fill in your new choice.

7.

When you are told to begin, tum the page and work as quickly and as carefully as you can.
If you cannot answer an item, omit it and go on to the next one. You may come back to that
item later. Your score will be the total number of correct answers.

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iiiiiiiiii

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8.

9.

You may do any rough work in this booklet.


You may use silent non-programmable calculators to answer questions.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO.


Copyright 2012 Caribbean Examinations Council
All rights reserved.

02216010/CAPE 2014

-21.

The consumption function is given as


C =a+ bY. In this equation 'b' represents
(A)
(B)
(C)
(D)

autonomous investment
autonomous consumption
marginal propensity to save
marginal propensity to consume

Item 5 refers to the following diagram


which shows the savings function.
Expenditure
and
savings

E =Y
IN

2.

I
I
I

Which ofthe following BEST defines 'Real


National Income'?
(A)
(B)

(C)
(D)

The actual GDP in any given year


The money value of National
Income
National income adjusted for
inflation
GDP minus net property income
from abroad

Item 3 refers to the following diagram


which shows the simple circular flow of
income for an economy.

National income

5.

Which of the following represents the


marginal propensity to save?
(A)

Consumer
spending

(B)

3.

NT
OT
MT

VT

What is the economic agent labelled X?


(A)
(B)

(C)
(D)

Households
Government
Foreign sector
Financial sector

(C)

(D)

4.

In the classical model of the economy,


which of the following conditions MUST
exist for continuous equilibrium to be
achieved?
I.
II.
III.

Price flexibility
Wage flexibility
Downward stickiness

(A)

I and II only
I and III only
II and III only
I, II and III

(B)

(C)
(D)

6.

MT
OT

VT
MT

Which of the following concepts BEST


explains why, in the classical model, all
unemployment is voluntary?
(A)
(B)
(C)
(D)

Business cycle
Spare capacity
Wage and price flexibility
Compensating differentials

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0221601 0/CAPE 20 14

-3-

Item 9 refers to the following measures


diagram which shows two aggregate supply
curves of an economy.

Item 7 refers to the following diagram


showing the income expenditure model.

Aggregate
expenditure

E=y
AS 2
1

~~

te~~te
~~~ (\\\\}te
ei--~e~

Price
level

Ye

Output

Income
7.

What does RS represent?


(A)
(B)
(C)
(D)

8.

The inflationary gap


Autonomous saving
The deflationary gap
Autonomous investment

Which of the following measures CANNOT


be used to measure inflation?
(A)
(B)
(C)
(D)

9.

Which of the following would result in a


shift from AS 1 to AS 2?
(A)
(B)
(C)
(D)

10.

GDP Deflator
Expenditure Method
Producer Price Index
Consumer Price Index

If the marginal propensity to save is 0.4 the


simple multiplier will be
(A)
(B)
(C)
(D)

11.

An increase in wage rates


A decrease in labour productivity
A rise in the cost of raw materials
An increase in labour productivity

2
2.5
3
3.5

In Country X, the year 2013 is used as the


base year for measuring real GDP. What
is the value of the price index in tp.e year
2013?
(A)

(B)

10
100
150

(C)

(D)

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022160 10/CAPE 2014

-412.

Item 13 refers to the following diagram


which shows the aggregate demand _-\.D)
and aggregate supply (AS) curves in an
economy.

Which of the following graphs BEST


represents the slope of the Aggregate
Supply Curve in the short run?

AS
(A)
'!l

~
.....

AS 1

,AS2

(J

Price
level
AD2

National income

yl
(B)

13.

..

'!l

y2

AD1
Output

In the diagram the economy is in equilibrium


atAD 1 andAS 1

Suppose there is a technological advance in


this economy at which point will the new
equilibrium occur?

(J

AS
(A)
(B)
(C)
(D)

National income

AS

1
2
3
4

(C)
'!l

14.

In any given year, an increase in nominal


GDP means that

(J

c
~

(A)
(B)
National income

(C)
(D)

(D)

output has fallen and prices have


increased
output has increased or prices have
increased
prices have increased while output
remains constant
output has increased while prices
remain constant

..

'!l
~
~

(J

c
~

National income

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0221601 0/CAPE 2014

-5-

Item 15 refers to the following diagram


which represents the market for loanable
funds.

18.

The velocity of circulation can be defined


as the
(A)

Interest
rates

(B)

(C)

ie --

(D)
Quantity of loanable funds

15.

According to classical economists, this


market will always maintain equilibrium
because
(A)
(B)
(C)
(D)

16.

(D)

-.

17.

it is not allowed to operate freely


financial institutions have excess
funds
prices, including interest rates, are
flexible
commercial banks have a shortage
of funds

Which of the following actions 1s an


example of fiscal policy?
(A)
(B)
(C)

19.

A relaxation of credit controls


A reduction in value added tax
The alteration of the foreign
exchange rate
A change in the required reserve
ratios ofbanks

Which of the following groups of persons


is included in the labour force participation
rate?
(A)
(B)
(C)
(D)

20.

money stock in a given time period


divided by the level of prices
average time in which households
spend their money income
total value of transactions in a
given time period divided by the
average price level
number of times in a given time
period that a unit is used to
purchase final output

Stay-at-home housewives
Full-time university students
Those who are seeking employment
New prisoners sentenced to hard
labour

One of the limitations of monetary policy


is that it
(A)
(B)
(C)
(D)

is not permissive enough


is weakened by fiscal indiscipline
can eliminate lags in policy
implementation
is very effective in controlling the
money supply

"Too much money chasing too few goods."


This statement refers to
(A)
(B)
(C)
(D)

economic boom
cost-push inflation
.
.
econom1c recesswn
demand-pull inflation

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02216010/CAPE 2014

-----

-6Item 21 refers to the following graph.

23 .

Rate of
interest

The decision by government to increase


the spending levels can BEST be referred
to as
(A)
(B)
(C)
(D)

public debt
fiscal policy
a budget deficit
monetary policy

L(Md)

24.
0

21.

A rightward shift of the liquidity preference


curve is the result of
(A)
(B)
(C)
(D)

22.

Money balances

(A)
(B)
(C)
(D)

(A)
(B)

an increase in the rate of interest


expectation of a fall in share prices
an increase in the level of national
mcome
expectation of a depreciation of the
exchange rate

The Central Bank determines the stock of


money which remains fixed as interest rates
change, therefore the money supply curve
is
upward sloping
perfectly elastic
perfectly inelastic
downward sloping

In a situation of inflation, diagnosed as


caused by excess demand, which of the
following policies will be MOST effective
in controlling the rise in prices?

(C)
(D)

25.

The imposition of import controls


A reduction in the level of interest
rates
An increase in the level of direct
taxation
An increase in the public sector
borrowing requirement

The precautionary motive for holding


money is based on
(A)
(B)

(C)
(D )

uncertainties about the timing of


receipts and payments
uncertainties about the mm emen;
of bond and share prices
the fact that bond and share pri-- ~
have been on a downward trend
the fact that money is needed for
purchasing bonds and shares and
money is received at intervals

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0221601 0/CAPE 2014

-7Item 26 refers to the graph below which shows the classical model for a labour market.

(Aggregate labour supply)


ASL N

Wage
rate

We~------------~

(Aggregate labour demand)


ADL

26.

The broken line between the ASL and the N curve represents the
(A)
(B)
(C)
(D)

27.

Number of workers

total labour force


equilibrium wage rate
natural level of unemployment
disequilibrium level of unemployment

Which of the following statements BEST defines a price index?


(A)
(B)
(C)
(D)

A continuous increase in the overall price level


A measurement showing the cost of goods at a particular point in time
A decrease in the overall price level of all goods produced in a country
A measurement showing how the average price of a basket of goods changes over time

Items 28-29 refer to the following diagram which shows national income, tax revenues and
government spending over a three year period.
Tax revenues
OJ)

"Q

:g=

_._

=
eu c.
"' "'
= s=

..

H_I_

<!<

Government
spending

<!<...<!<

.. =
~ ~

<!<

><!

..

~ ~

'
Year 1

28.

Year2

What type of budgetary policy is used by


the government at point Tin the diagram?
(A)
(B)
(C)
(D)

Balanced budget
Monetary pol<icy
Budget surplus
Budget deficit

Year3

29.

National
income

At NM the government is using a


(A)
(B)
(C)
(D)

deficit budget
budget surplus
monetary policy
balanced budget
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0221601 0/CAPE 20 14

-8The debt service ratio for Country Y fell


from 80 per cent to 70 per cent between
2012 and 2013. This means that

30.

33 .

Sustainable development refers to a


situation where
(A)

(A)

(B)

(C)
(D)

some new loans have been taken


out in 2012
there has been a devaluation of the
exchange rate
some loans due for repayment have
been paid back
there has been a fall in the
expenditure on imports between
2012 and 2013

Items 31- 32 refer to the diagram below


which shows the US market for US$

(B)

(C)

(D)

34.

:~:~,

o.2

1ft~\

Ql Q2QP4

31 .

A systematic record of accounts that


monitors economic transactions between
one country and the rest of the world is
referred to as
(A)
(B)

Rate($)

Q5

(C)
(D)

D$

35.

Dollars ($)

Which of the following outcomes BEST


describes the situation if the exchange rate
were at $1 = 0.4?

(C)
(D)

32.

The dollar would be over-valued.


The dollar would be under-valued.
Demand would be less than supply.
The market would be in equilibrium.

(A)
(B)

(C)

36.

(A)
(B)

(A)
(B)

(D)

(C)
(C)

Q2
Q3

(D)

Q4

Economic union
Common market
Customs union
Free trade area

Which of the following features is NOT


a structural characteristic of Caribbean
economics?

What would be the equilibrium quantity of


dollars ($)?
Qt

capital account
current account
balance of trade
balance of payments

Which of the following terms refers to the


creation of a single monetary and fiscal
authority having jurisdiction over a number
of countries?

(D)
(A)
(B)

non-receivable resources are fully


employed
a high value is placed on
conservation for its own sake
there is a constant increase in real
GDP per capita over a number
of years
an improvement in people's welfare
can be maintained indefinitely
without depleting resources

Limited composition of export


Economic independence
Limited resource base
Small size

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02216010/CAPE 2014

-937.

(A)
(B )

(C)

(D)

Item 40 refers to the following diagram


showing the demand for imports of a
particular good into Country B (assuming
a perfectly elastic world supply).

Which of the following would be the


MOST likely cause of an increase in a
country's foreign currency resources?
An increase in the domestic rate of
inflation
An improvement in the country's
trade balance
An increase in the prices of the
country's most p rice elastic
exports
Government intervention on the
foreign exchange market to
prevent a depreciation

Price1 D

sl
'-I

P1 1

"

WS

Q1

38.

Which of the following terms refers to the


method of protection which restricts items
imported to a stated quantity?
(A)
(B)

(C)
(D)

39.

Quota
Tariff
Embargo
Exchange controls

An advantage of a fixed exchange rate


system is that it
(A)
(B)

(C)
(D)

40.

(D)

forces the government to constantly


monitor its value
requires the strong support of
government to maintain its value
provides an automatic solution to
balance-of-payment problems
reduces the uncertainties caused
by fluctuating import and export
pnces

II.
III.

(A)

(B)
(C)
(D)

-~

42.

Price increases, quantity decreases


Price increases, quantity increases
Price decreases, quantity increases
Price decreases, quantity decreases

Caribbean countries can maximize the


benefits of globalization by
I.

Quantity

How does an imposition of a quota at S 1


by government affect the price and quantity
of goods imported?
(A)
(B)
(C)

41.

World Supply

advertising and e xport i ng


indigenous goods to the world
ensuring MNCs hire workers at all
levels including management
investing locally and employing
only domestic labour and other
resources
I and II only
I and III only
II and III only
I , II and III

Which of the following is


globalization?
(A)
(B)
(C)
(D)

~OT 2. ~- --

Trade liberatiza
Technological
Reduce factor muvlll.&.,
Liberalizatio

0221601 0/CAPE 2014

- 1043.

Jamaica is a large-scale producer and exporter ofbananas. However, it faces increasing competition
for export markets from producers in countries like Costa Rica and Guatemala.
Which graph shows the impact of competition on the exchange rate of the Jamaican dollar against
the U.S. dollar? (Prices are quoted in U.S. dollars).

44.

Which of the following is an invisible export in the balance of payments ofTrinidad and Tobago?
(A)
(B)
(C)
(D)

The purchase of an overseas company by a Trinidad and Tobago firm


Repayment of an IMF loan by the Central Bank of Trinidad and Tobago
Payment of dividends to Japanese shareholders ofNissan Trinidad and Tobago
Expenditure by US tourist in Trinidad and Tobago on hotel accommodation goes in as a
tourism credit

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02216010/CAPE 2014

- 11 -

Item 45 refer to the following diagram showing the demand and supply of the poun
Fixed and Floating Exchange Rates
/$US

I~

r ----------------~------ - -- ---

- --- ------ - ---------- ~ ------

~ -- - --------- -- - - - - - - - - -

"'"

-1-- -

~- ------

'DI

0~------------------------~~~--~--------~------------------~~
16
10
12
14
Quantity of (billions)

45.

Assuming a floating exchange rate regime, before the United States increased their desire for
exports from the United Kingdom, the initial equilibrium was
(A) .
(B)
(C)
(D)

1
2

3
4

END OF TEST

IF YOU FINISH BEFORE TIME IS CALLED, CHECK YOUR WORK OX THIS


.{;

0221601 0/CAPE 2014

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