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VERE TECHNICAL HIGH SCHOOL

ECONOMICS UNIT 2
MARCH 2015
GRADE:
12 & 13
TIME: 2 Hours
INSTRUCTION:

This paper consists of three (3) sections. There are TWO questions in
each section. You are required to answer THREE questions, ONE
from EACH section.
SECTION A
Answer ONE question from this section.

1. (a) (i)
(ii)
(b) (i)
(ii)

Define money.

(1 mark)

Outline THREE functions of money.

(6 marks)

Explain what is meant by fractional reserve banking system.

(3 marks)

Starting with an initial deposit of $100 and given a required reserve ratio of 10 per
cent, explain how commercial banks use this system to create money.
(6 marks)

(c) Explain how EACH of the following transactions affects the transactions demand for
money and the equilibrium interest rate.
(i)

A shortening of the pay period for workers

(3 marks)

(ii)

An increase in the nominal gross domestic product

(3 marks)

(iii)

An increase in the number of automated teller machines throughout the country.

(3 marks)
Total: 25 marks

2. (a) Explain what is meant by automatic stabilisers giving TWO examples of automatic
stabilisers.
(5 marks)
(b) (i)
(ii)

Explain what is meant by the term fiscal policy.

(3 marks)

Outline THREE ways by which fiscal policy can be used by Caribbean

governments to increase the level of employment and output in their economies.
(9 marks)

(c) Discuss TWO reasons why fiscal policy may not work in practice in small open
economies of the Caribbean.
(8 marks)
Total: 25 marks

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SECTION B
Answer ONE question from this section
3. (a) Define EACH of the following terms:
(i)

Fiscal policy

(2 marks)

(ii)

Budget surplus

(2 marks)

(iii)

Transfer payments

(2 marks)

(b) Outline THREE limitations of EACH of the following policies:

(i)

Monetary

(3 marks)

(ii)

Fiscal

(3 marks)

(c) Identify FOUR sources from which governments can borrow large sums of money to
finance their expenditure.
(4 marks)
(d) Evaluate THREE possible negative consequences of government borrowing.
(9 marks)
Total: 25 marks
4. (a) (i)
(ii)
(b) (i)
(ii)

Distinguish between unemployment and underemployment.

(4 marks)

Outline FOUR types of unemployment.

(8 marks)

With the use of examples, describes TWO types of inflation.

(6 marks)

Differentiate between nominal interest rate and real interest rate.(4 marks)

(c) Explain how expansionary monetary policy may be used, instead of fiscal policy, to
increase employment in the economy.
(3 marks)
Total: 25 marks

SECTION C
Answer ONE question from this section.
5. (a) Describe THREE types of demand for money.

(6 marks)

(b) Define EACH of the following tools of monetary policy:

(i)

Reserve requirement (RR)

( 2 marks)

(ii)

Open market operations (OMO)

(2 marks)

(iii)

Moral suasion (MS)

(2 marks)

(c)

Explain how the Central Bank can use monetary policy to have a positive impact on
aggregate demand.
(4 marks)

(d)

(i)

State the quantity theory of money.

(ii)

Identify the school of economics that advocates the use of the quantity theory.
(1 mark)

(e)

(3 marks)

Analyse how the changes in the money supply by the Central Bank can lead to inflation.
(5 marks)
Total: 25 marks

6. (a) Outline THREE methods that a government can use to finance its fiscal deficit.
(6 marks)
(b)

Explain how governments borrowing on the domestic market to finance large fiscal
deficits can affect EACH of the following:
(i)

Domestic interest rates

(2 marks)

(ii)

Domestic investment

(2 marks)

(iii)

The countrys exchange rate

(2 marks)

(c) State TWO reasons why Caribbean residents often have a very high demand for the
United States (US) dollar rather than their own domestic currency.
(4 marks)
(d) Identify THREE fiscal measures available to Caribbean countries to boost output in times
of recession and evaluate the effectiveness of EACH fiscal measure.
(9 marks)
Total: 25 marks