Good Shepherd International

School
First Trial Examination, December 2015
Economics-Paper 3

Economics

Candidate No-

Higher level
Paper 3
1 hour
Instructions to candidates

Do not open this examination paper until instructed to do so.

You are permitted access to a calculator for this paper.
Do not open this examination paper until instructed to do so.
Answer two questions in the boxes provided.
Unless otherwise stated in the question, all numerical answers must be given exactly

or correct to two decimal places.

You must show all your working.
The maximum mark for this examination paper is [50 marks].

Answer two questions. Each question is worth [25 marks]. Write your answers in the boxes
provided
1

A business man from India decides to buy coal from Australia for his iron and steel
company. The current market exchange rate is AU$ 1.00=INR 47.60 where AU$ is the
Australian dollar and INR is Indian rupees. Assume that the businessman placed a
order for 15 metric tonne of black coal and 35 metric tonne of lignite coal. The price
of black coal is AU$ 65.79 per metric tonne and lignite coal is AU$ 61.94 per metric
tonne.

(a) Calculate the amount of expenditure by Indian businessman on imported coal in

Australian dollar.

[2]

(b) Calculate the total expenses on coal in Indian Rs.

[2]

Next time while placing the order the Indian business man discovers that the Australian
dollar has appreciated against the Indian rupees by 5.15 %.
(c) Calculate the new exchange rate.

[2]

(d) Calculate the increase in Australian dollar needed to pay for coal import if the
amounts of coal order remain same for the next year.

[3]

(e) Sketch on the following axes a fully-labelled diagram illustrating the appreciation of
the Australian dollar.
[2]

(f) Explain two reasons for which the Australian dollar may have appreciated against
Indian rupees.
[4]

(g) State one action the reserve bank of Australia could take to prevent a further
appreciation of the Australian dollar.

[1]

(h) Australia is suffering from a current account deficit of $ 100 and wishes to try to
reduce the deficit through devaluing its currency by 20%. Economists estimate that
the PED for the countrys imports is 0.6 while the PED for the countrys exports is
0.3. Will the devaluation have its intended effect? Explain your answer with help of
numerical calculation.
[3]

The prices of Indias imports and exports are given in the table below
Good

Price in 2011

Oil (import)

INR
200/barrel
INR 1/kg

Coal(Import)

Price in
2012
INR 250

Price in
2013
INR 100

INR1.10

INR 0.80

Price index Price index

Steel (Export)

INR
250/tonne
Machinery(Export) INR
100/piece

INR 200

INR 300

INR 100

INR 105

(i) Considering 2011 as a base year calculate the price index for exports and imports for
each year. Write the values in the above table.
[4]

(j) Calculate the terms of trade of India from 2011 to 2012.

[2]

The government of Country A has decided to implement an expansionary fiscal

policy. Direct income tax will be reduced in 2016 as illustrated in the following table
Table 1

Income
($ per year)

Rate of income
tax(2015)

Rate of income
tax (2016)

1-10,000

5%

0%

10,001-25,000

20%

10%

25,001-40,000

30%

20%

40,001 and over

40%

30%

(i)

Calculate the income tax paid in 2015 by an individual earning $75000 per year.
[2]

(ii)

Calculate the average rate of tax paid by the individual in 2016 (assuming the
individuals income remains the same as in 2015).
[3]

(iii)

Explain why a decrease in the rate of direct tax would affect the value of the
multiplier in country A.

[2]

In Country A an indirect tax of 20% is imposed on all goods and services purchased.
Some economists have argued that reducing the indirect tax would be preferable to
reducing income tax, due to the likely effects on the distribution of income.
(iv)

In the following box, sketch and label a Lorenz curve for country A to show the
likely effects on the distribution of income if the rate of indirect tax is reduced. [2]

(v)

With reference to your diagram in question (iv), explain how the Gini coefficient
would be derived.
[2]

(vi)

Explain how the increase in the rates of income tax in 2016 may affect equity in
the distribution of income in Thailand.
[4]

The GDP of Country A in 2014 was $ 60 billion, while in 2015 it was $ 65 billion.
The GDP deflator for the same year was
Table 2
Year

GDP deflator

2014

100

2015

114

(v) Calculate the percentage change in the real GDP of Country A from 2014 to 2015. [4]

Table below sets out data for the South Korean economy for the year 2009 and 2010.
These data are used to calculate the South Korean GDP using the expenditure approach.
Many economists see the success of South Koreas economy as being due to its strong
exports and high level of investment.
Table 3
2010(KRW

Exports
Investment

2009
(KRW)*
412
205

Consumption

386

408

Imports
Government expenditure

334
89

356
93

448
223

[KRW = South Korean Won]

Table 4 below shows the marginal propensities to save (MPS), tax (MPT) and import
(MPM) for South Korea
Table 4
MPS

MPT

MPM

0.3

0.3

0.2

(vii)

Define the term expenditure approach.

[1]

(viii)

Using the data in table 4, calculate the value of the Keynesian multiplier in South
Korea.
[2]

(ix)

Using the multiplier calculated in (viii), calculate the change in South Koreas real
GDP brought about by the rise in its exports from 2009 to 2010.
[3]

3
A firm making chocolate is concerned with its productive efficiency. The management
has looked at the production levels using different quantities of labour and the product and
cost data are set out in the table below.

(a)

and
of

Labour input

Total product

Total cost in USD

1
2

5
12

80
104

16

128

4
5

18
19

152
176

[2]

Outline the
difference
between fixed
variable costs
production.

(b) Using the data in the table below, determine the marginal product for the different
quantities of labour employed and complete the marginal product column in the table.
[2]
Labour input
0

Total product
0

12

16

18

19

Marginal product
-

(c) Using the data in the table in question (b), draw a graph to show the relationship
between marginal product and labour input. The axes and curve must be labelled. [2]

(d) On the graph above identify the point where diminishing returns set in.

[1]

(e) Using the data in the table, determine the marginal cost and average total cost figures
for the different quantities of total product and complete the marginal cost and
average cost columns in the table.
[4]

Labour Input

Total product
(units)

Total cost(in
USD)

56

80

12

104

16

128

18

152

19

176

Marginal
cost(in USD)

Average total
cost(in USD)

(d) Explain one possible source of economies of scale that this firm might benefit
from if it increases the scale of production.
[2]

The following table shows data for price elasticity of demand and income elasticity of
demand for four products for Ivan in Finland
Cheese

Coffee

Tennis ball

Story book

Price elasticity of
demand

-4.5

-0.25

-0.06

-5

Income elasticity
of demand

-0.21

0.56

1.5

10

(f) Outline one reason why price elasticity demand for tennis ball is low compare to story
book?
[2]

(g) Outline the reason why the income elasticity of demand for Cheese is negative.

[2]

(h) Though the Income elasticity of demand for both tennis ball and story book is
positive. Describe the reason behind higher income elasticity of demand for story
book than tennis ball.
[2]

(i) Calculate the percentage change in quantity demanded for coffee if the price of coffee
rises by 10%.
[2]

(j) What kind of products has Zero cross elasticity of demand?

[1]

(k) The cross elasticity of demand for Laptop and wireless internet connection was
estimated to be equal to -0.03. Explain the possible impact that an increase in laptop
prices might have on the demand for wireless internet connection.
[3]