(a) Explain the term dependency ratio. [3]

(b) What would cause an increase in the dependency ratio? [4]

(c) How would the increase in the dependency ratio affect the followings?
(i) a government,
(ii) firms, and
(iii) the growth of the economy. [5, 5, 3]


Answers:

(a) Dependency ratio: formula = 2 marks: number of dependants (1 mark)
to the working population (1 mark) “ratio of dependants to working population” = 2 marks. 3m

(b) High birth rate 1 mark explanation/reason 1 mark,
low death rate 1 mark explanation/reason 1 mark.
Also accept change in school leaving age and change in retirement age.
2 x 2 marks 4m

(c)
(i) a government: Each problem identified 1 mark, development up
to 2 marks e.g. increase in government expenditure (1 mark) on
schools (high birth rate) (1 mark), health care (low death rate) (1
mark). Other problems include decrease in revenue from income
tax (1 mark), balance of payments problems (1mark) due to
decrease home production (1 mark) and increased imports (1
mark). 5m

(ii) firms: Each problem identified 1 mark, development up to 2
marks e.g. fewer workers (1 mark), increase in wages (1 mark),
decrease in profits. Other problems include change in demand for
goods and services (1mark), problems of ageing population being
reluctant to adopt to new ideas (1 mark). 5m

(iii) the growth of the economy: Each problem identified 1 mark,
development up to 2 marks. e.g. fewer workers (1 mark), less
production (1 mark), lower GDP (1 mark). Other problems include
less innovation (ageing population). 3m

1 Which one of the following could explain a shift to the right of the supply curve for a good?

A The imposition of a tax on the good
B A new supplier entering the market
C A rise in firms’ wage costs
D A rise in the price of the good

2 Which one of the following is an example of market failure?

A Prices do not reflect the full social costs of production.
B Prices rise so that consumers cannot afford to buy all the goods that they used to purchase.
C Demand falls so that firms have to make workers redundant.
D A firm goes out of business because it cannot find a market for its products.

3 In August 2000 the World Health Organisation said that a 10% increase in cigarette prices worldwide would reduce consumption by 4% in high-income countries and by 8% in low-income countries.

The above statement suggests that

A smokers in high-income countries are twice as addicted as those in low-income countries.
B demand for cigarettes is price elastic in both low-income and high-income countries.
C income elasticity of demand for cigarettes is higher in low-income than in high-income countries.
D price elasticity of demand for cigarettes is negative in both high-income and low-income countries.


4 The diagram below shows the production possibility boundaries for Countries X and Y respectively.

The opportunity cost of cars in terms of bicycles


A is greater for Country X than for Country Y.
B is greater for Country Y than for Country X.
C increases as more cars are produced.
D increases as more bicycles are produced.





5 The National Grid is a system which distributes electricity throughout Britain. It is currently a monopoly. A possible advantage of this monopoly position to electricity customers is that

A a lack of competition in the electricity distribution industry encourages lower prices.
B the monopolist is able to offer lower prices to customers because it can exploit economies of scale.
C by charging high prices, the monopolist is able to ensure an efficient allocation of resources.
D there will be no need for innovation and invention in the electricity distribution industry and so customers can enjoy lower prices.

6 To benefit from specialisation, it is necessary

A to have an efficient means of exchanging goods and services.
B for labour productivity to be high.
C for the production possibility boundary of the economy to be moving outwards over time.
D for significant economies of scale to be gained in all industries.

7 Which one of the following statements involves a value judgement?

A The supply of coffee is likely to be inelastic in the short run.
B Economies of scale can lead to lower prices.
C Inferior goods have a negative income elasticity of demand.
D The government was wrong to introduce university tuition fees.

8 The diagram below shows the demand and supply curves for milk, where P1 is the initial equilibrium price.

The increase in price from P1 to P2 is most likely to be a result of

A an increase in milk production costs and a decrease in the price of complementary goods to milk.
B a successful advertising campaign for a milk substitute and a tax on milk.
C a decrease in the population and an increase in the subsidy on milk.
D a decrease in wages paid to all workers, including farm workers.


9 An external benefit is most likely to arise when

A firms are able to reduce their costs of production by undertaking research and development.
B a reduction in the tax on profits increases the amount of money firms have available for investment.
C the government subsidises commuter rail services in order to reduce road congestion.
D a firm is able to dispose of waste products into rivers free of charge.

10 Government failure occurs when

A government intervention leads to a net welfare loss compared to the free market solution.
B social costs in a market are greater than social benefits.
C the government fails to intervene in the market.
D externalities exist in a market.

11 The table below shows benefits and costs of a new motorway.




From the table it can be concluded that

A the social costs are £80 million.
B the social costs are less than the private costs.
C the social costs are less than the social benefits.
D social benefits are £20 million.

12 Price elasticity of supply for games consoles is likely to be higher

A the higher the income of consumers.
B in the long term than in the short term.
C the slower the rate of change in technological progress.
D the less firms are able to switch resources from the production of other goods into the production of games consoles.

13 All other things being equal, if strawberries and cream are complementary goods, a fall in the price of strawberries will

A shift the demand curve for strawberries to the right.
B cause a movement along the demand curve for cream.
C cause a fall in the price of cream.
D shift the demand curve for cream to the right.


14 The supply and demand diagram below relates to the market for a merit good.

The demand curve for the merit good shifts from D1 to D2, raising the market price from P1 to P2.

To reduce the price back to P1, the government could introduce a

A minimum price of OP1 per unit.
B subsidy of P1P2 per unit.
C subsidy of EF per unit.
D subsidy of GH per unit.




15 In a market economy, the market mechanism can achieve all the following except
A signalling changes in consumer tastes.
B causing supply to respond to changes in demand.
C eliminating excess supply and demand.
D ensuring a fair distribution of all types of good.

Answer:
1. B 2. A 3. D 4. B 5. B 6. A 7. D 8. B
9. C 10. A 11. C 12. B 13. D 14. C 15. D

Monetary Authority of Singapore closely monitoring property prices, inflation to stay tame

Inflation continues to be a key concern for MAS. It noted that business costs like wages and rentals have risen rapidly recently. CPI is expected to pick up in the second half, with the GST hike in July and some price increases in food and transport. The central bank expects CPI for the full year to come in at the upper end of its forecast range of 0.5-1.5%. It foresees inflation creeping up by 1-2% next year.

It's also keeping a close eye on rising property prices. "Impact of the rise in property prices and CPI - the first round effect is small. We'll watch the second round, to see if high prices will pass through to inflation as rental costs get passed on into prices of goods and services. On the financial stability front, the banking sector's exposure to property and construction sectors, as well as housing loans, is significant," said Heng Swee Keat, MD of MAS.

The central bank is maintaining its policy of allowing a modest and gradual appreciation of the Singapore dollar. The Singapore dollar is now hovering at 10-year highs against the greenback.

Source: Channel News Asia, 25th July 2007 (Extracted)


1a) Identify and explain the cause of inflation mentioned in the news article.
· Cost push inflation
· Cost of production has increased as the article mentioned that such as labour cost (wages) and rentals have increased
· The increase in GST would also cause tax push inflation as it raise the cost of living.
· Producer will increase prices to maintain profit.
· Increase in prices results in inflation.

b) Briefly explain what the Consumer Price Index (CPI) is.
· The CPI shows the general increase in the price level.
· The prices of a basket of goods are measured.
· The prices of the basket of goods in the current year are then compared to that of the base year.

c) (i) Explain what is meant by the ‘appreciation of the Singapore dollar”.

· The increase in the value of the Singapore dollar.
· Against other currencies such as the US Dollar.

(c) (ii) Discuss two impacts on Singapore that will arise from an appreciation of exchange rates.

· When S$ appreciates, prices of exports increase in overseas markets.
· If demand is elastic then foreign currency earnings will fall.
· This will lead to a smaller BOP surplus. Reverse for inelastic demand.
· When S$ appreciates, quantity demanded for S$ increases.
· This cause the BOP surplus to become bigger.
· Only if demand is inelastic will there be no change in foreign exchange expenditure.
· In the long run, the demand for Singapore exports will decrease and demand for the cheaper imported goods will increase. This will then lead to worsening of balance of payments.
· It will increase purchasing power of residents abroad e.g. real estate purchasing.
· Reliance on importer goods which are cheaper. Local industry is adversely affected .


d) Explain the roles of the central bank (MAS) as mentioned in the news article.
· One of its role is shown by the phrase “maintaining a gradual appreciation of the S$”
· it will intervene to prevent excessive fluctuation of S$ exchange rate
· MAS use the exchange rate as the main tool of monetary policy.
· It is “keeping an eye on the rise of property prices” because If the prices of goods and services are distorted by inflation, then there will not be clear signs and guides to efficient allocation of resources.
· Inflation will also discourage saving and investment as the value of assets can be eroded by unexpected inflation.