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rESrcoDE 02216020-|
MAY/JTINE 2016

CARIBBEAN EXAMINATIONS COUNCIL

CARIBBEAN ADVANCED PROFICIENCY EXAMINATION@

ECONOMICS
UNIT 2 -Paper O2

2 hours 30 minutes

READ THE FOLLOWING INSTRUCTIONS CAREF'ULLY.

l. This paper consists of THREE sections: I, Il and III.

2 There are TWO questions in each section. Candidates MUST answer THREE questions,
ONE from EACH section.

J Write your answers in the spaces provided at the end of each section in this booklet.

4 Do NOT write in the margins.

5 You may use a silent, non-programmable calculator to answer questions.

6 If you need to rewrite any answer and there is not enough space to do so on the
original page, you must use the extra lined page(s) provided at the back of this booklet.
Remember to draw a line through your original answer.

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

Copyright O 2015 Caribbean Examinations Council

All rights reserved.

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MODULE 1: MODELS OF THE MACROECONOMY

Answer ONE question.

1. (a) (i) Define the term 'equilibrium level of output'. [2 marksl

(ii) Outline TWO factors that could account for the volatility of investment spending.
[4 marks]

(b) Differentiate between the 'investment curve' and the 'investment demand curve' for an
economy. [4 marks]

(c) Table I shows the expected rate of return and the volume of investment, in millions, for
a country.

TABLE 1

Expected Rate of Return Volume of Expected Investment

of Return (millions)
("/") ($)

l1 55

l0 75

8 90

5 125

J r50

I 190

(i) Explain why the information in Table 1 essentially describes an investment demand
curve. [3 marks]

(ii) Using the information in Table 1, graph the investment demand curve
[4 marks]

(d) Discuss TWO ways in which businesses adjust their level of inventory investment if the
level of GDP is in disequilibrium. [8 marks]

Total25 marks

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2. (a)
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Describe the relationship between the marginal propensity to consume (MPC) and marginal
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propensity to save (MPS).
[2 marksl

(b) Table 2 shows the levels of GDP (disposable income) and savings in an economy.

TABLE 2

GDP (Disposable Income) Consumption Savings APC

($) (s)

480 -8
520 0

560 8

600 t6

640 24

680 32

720 40

760 48

800 56

Copy and complete Table 2 to show the 'consumption' and the 'average propensity to
consume'(PPC).
[6 marksl

(c) (i) From your completed Table2, draw ONE graph to show the consumption schedule
and ONE graph to show the saving schedule. [8 marksl

(ii) Determine the break-even level of income. [1 markl

(d) Discuss TWO ways in which the economy adjusts withdrawals if the level of GDP is in
disequilibrium. [t marks]

Total25 marks

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Write the answer to the question you have chosen to answer in $99!!q[ here.
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Question No.

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SECTION II
MODULE 2: MACROECONOMIC PROBLEMS AND POLTCIES

Answer ONE question.

3. (a) (i) Define the term 'inflation'and state how it is measured. t3 marksl

(ii) State FoUR challenges in measuring inflation accurately. [4 marksl

(b) Differentiate between 'cost-push inflation'and 'demand-pull inflation'. [4 marks]

(c) Describe Two ways in which inflation impacts a country's balance of payments.
[6 marks]

(d) Discuss ONE positive and ONE negative effect of inflation on an economy.
[8 marksl

Total25 marks

4. (a) (i) State THREE functions of money. [3 marksl

(ii) Outline TWO motives for holding money. [4 marksl

(b) Explain TWO ways in which the fluctuating value of money affects an economy.
[6 marksl

(c) Outline TWO ways in which a surplus of money affects the money market. [4 marks]

(d) The widespread use of credit cards has resulted in huge debts as people spend far more
than they earn. Discuss TWO potential economic consequences of a large increase in
consumer spending. [8 marksl

Total25 marks

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Write the answer to the question you have chosen to answer in Section II here.
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Remember to write the question number in the box provided below.

Question No.

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III
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MODULE 3: GROWTH, SUSTAINABLE DEVELOPMENT

AND GLOBAL RELATIONS

{.nswer ONE question.

s. (a) Explain what is meant by a 'current account deficit,. [3 marksl

(b) Explain TWO ways in which Caribbean countries could improve performance on their
currentaccount. [6 marksl
(c) Outline TWO ways in which EACH of the following policies may be used to correct
balance of payments disequil ibrium.

(i) Expenditure-switching [4 marks]

(ii) Expenditure-reducing [4 marks]

(d) Discuss ONE positive and ONE negative effect of a current account deficit on a country.
[8 marks]

Total25 marks

6. (a) (i) Explain the theory of comparative advantage. [3 marksl

(ii) Describe the trade patterns in the Caribbean. [2 marks]

(b) Describe TWO advantages and TWO disadvantages of regional trading groups, such as
North American Free Trade Agreement (NAFTA). [12 marksl

(c) Discuss the effectiveness of devaluation and quota policies in addressing trade deficits.
[8 marks]

Total25 marks

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chosen to answer in section
write the answer to the question you have III here'
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below.

Question No.

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Write the answer to the question you have chosen to answer in
Section IrI here.
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berow.

Question No.

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END OF TEST

IF YOU FINISH BEFORE TIME IS CALLED, CHECK YOUR WORK ON THIS TEST.

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