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ASSIGNMENT MEMORANDUM SUBJECT : MACRO ECONOMICS (MAC) ECONOMICS 1 (ECO1) : 1st SEMESTER 2011

ASSIGNMENT

SPECIFIC INSTRUCTIONS Answer ALL questions. QUESTION 1 1. Study the following Lorentz curve and then answer the questions: [15] (11)

(i) (ii) (iii) (iv) (v)

What does the Lorentz curve illustrate? What does line OB represent? Which line is the Lorentz curve? What is the shaded area called? Where will you find the greatest possible inequality?

(3) (2) (2) (2) (2) (4)

2. Another measure of inequality is the Gini coefficient. (i) (ii) (iii)

With reference to the Lorentz curve above, how is the Gini coefficient obtained? (2) When will the Gini coefficient be zero? (1) When will the Gini coefficient be one? (1)
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1. Answer: p. 71 (i) The Lorentz curve is a simple graphic device which illustrates the degree of inequality in the distribution of income or any other variable (3) Line OB represents perfect equality (2) The line that runs through a, b, c and d. (2) Area of inequality (2) Where one person earns the total income. (2)

(ii) (iii) (iv) (v)

2. Answer. p. 72 (i) (ii) (iii) By dividing the area of inequality by the area of the right-triangle formed by the axes and the diagonal (2) If incomes are perfectly distributed. (1) If all the income goes to one individual or household. (1)

QUESTION 2 South African Government spending has grown since the last World War in 1945. Identify and discuss three (3) major reasons for this growth in South African Government spending. Answer: P355 356 (Section 16.8) Students may discuss any three of the following: (i) Changing consumer preferences - Household income rose - Household spending rose - Greater demand for services by households - Thus Government spending rose Political and other shocks - For examples the wars in the late 70 and 80s - The effect of sanctions against South Africa - Government agencies like Sasol grew - After the wars spending stayed the same but moved to social spending Redistribution of income - Shift in the political balance of power to the lower income group (iv) Focus thus on social spending Improving the standard of living of the poor This happens often at the expense of others

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(1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)

(ii)

(iii)

Misconceptions and entitlement - People do not understand the true cost of public services - People overestimate governments ability to deliver
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(v)

People always demand more Question is how government reacts to these demands

(1) (1) (1) (1) (1) (1) (1)

Population growth and urbanization - South Africas population grew rapidly - So the demand for goods and services - People flocked to the city - HIV/AIDS also contributed

QUESTION 3 1. Define the balance of payments 2. Identify the four (4) components of the balance of payments 3. Identify the most important component of the balance of payments and provide the reasons for your answer Answer: p. 384 388

[15] (2) (4) (9)

1. Systematic statistical account of all economic transactions between the residents of a country and the residents of another country for a specific period. (2) 2. Components: (i) Current account (1) (ii) Capital transfer account (1) (iii) Financial account (1) (iv) Gold and foreign reserves (1) 3. (i) Gold and foreign reserves (1) (ii) Reasons: - Reflects the overall balance of payments (2) - It is required to ensure a smooth flow of international trade and finance (2) - To prevent large fluctuations in exchange rates between the domestic and foreign currencies (2) - It is an indicator of the authorities scope to stimulate the economy (2)

QUESTION 4

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Suppose the price of a packet of 20 cigarettes is R10.00. At this equilibrium price the quantity sold is 150 000 packets per week. Government now introduces an additional excise tax of R2.00 per packet. 1. Use the above data to construct a graph to explain the effect of the introduction of this excise tax. First draw the graph and then explain the effect. Indicate the following on the graph and explain: (i) The original equilibrium price and quantity
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(ii) (iii)

The new equilibrium price and quantity The tax levied per packet

(3) (3)

2. Identify the three groups of people that share the burden of this tax and explain how each group shares it. (6) Answer: p. 364 1. See figure 16-3 on p.363 2. Groups (i) Consumers of cigarettes They pay more for a packet (ii) Suppliers They receive less for a packet (iii) Employees of the cigarettes There are fewer jobs available.

(2) (2) (2)

QUESTION 5 1. 2. 3. 4. When does demand-pull inflation occur? Identify and explain the four (4) causes of demand-pull inflation When does cost-pull inflation occur? Identify and explain the five (5) causes of cost-pull inflation

[15] (3) (4) (3) (5)

Answer: p. 485 486 1. When aggregate demand for goods and services increases while the aggregate supply remains unchanged. (3) 2. Causes: - Increased consumer spending by households (1) - Increased investment spending by firms (1) - Increased government spending (1) - Increased export earnings (1) 3. Is triggered by increases in the cost of production. Increases in the cost of production push up the price level (3) 4. Causes: - Increases in wages and salaries (1) - Cost of imported capital and intermediate goods (1) - Increase in profit margins (1) - Decreased productivity (1) - Natural disasters (1)

QUESTION 6 The South African Reserve Bank is the monetary authority in South Africa.

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1. Explain the role the Reserve Bank play in formulating and implementing the monetary policy. (4) 2. Explain what services to the government do the Reserve Bank provide. (3) 3. Explain what economical and statistical services are provided by the Reserve Bank. (3)
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4. Explain how the Reserve Bank maintains financial stability in the country. (5) Answer: p. 321 322: 1. Role: (4) - SARB formulate and implement the monetary policy based on the current goals of the policy. - Main instrument is the repo/tender system. - Other instruments are cash-reserve requirements and open market transactions. 2. Services to the government. (3) - Governments banker and advisor. - Keeps the gold and other foreign reserves. Administration of exchange control. 3. Rendering economical and statistical services. (3) - Collects, - Process, - Interprets; and publishes economic and other data. 4. Maintaining financial stability. (5) - Supervises banks. - Responsible for the national payment system. - Banker of banks. - Sole mandate to manufacture and destroy banknotes and coins.

PRESENTATION

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