PERSPECTIVES IN ECONOMICS - TUTORIAL EXERCISE

1. The income growth rate and the inflation rate in Hong Kong between 1986 and 1996 are as follows:

            Income growth rate (%)         Inflation rate (%)

1986            10.8                                     2.8

1987            13.0                                     5.5

1988                8.0                                    7.5

1989                2.6                                  10.1

1990                3.4                                   9.8

1991                5.1                                 12.0

1992                6.3                                   9.4

1993                6.1                                   8.5

1994                5.4                                   8.1

1995                4.7                                   8.7

1996                5.0                                   6.0

Source: 1997 Economic Prospects, Hong Kong Government.

 1.1 In which year was inflation highest?

1.2 In which year was income growth lowest?

1.3 In which year(s) did inflation increase?

1.4 In which year did inflation decrease the most?

1.5 Draw a graph to find out the relationship between income growth and inflation.

2. Suppose country X produces only two goods - food and guns. The following table gives its production possibilities:

Food(million of tons)    Guns (thousand units)

0                                         500

5                                         450

10                                       320

15                                       220

20                                       110

25                                         0

2.1 Draw a graph of country X’s production possibility frontier.

2.2 What are the opportunity costs of producing food and guns in country X? List them at each output given in the table. What happens to the opportunity cost of guns as more and more people switched to produce guns?

2.3 Suppose country X can double its food production with improved technology. Show the effect of the increased productivity on the graph of the production possibility frontier.

3. Which of the following statements are positive and which are normative:

3.1 High interest rates prohibit many young people from buying their first home.

3.2 No family ought to pay more than 50% of its income in taxes.

3.3 A rise in wages will reduce the number of jobs available.

3.4 The government should provide a medical insurance scheme for everyone free of charge.

4. Which of the following are macroeconomic issues? Which are microeconomic issues?

4.1 How will the increase in the price of cigarettes affect smoking habits?

4.2 What caused the rate of inflation to fall last year?

4.3 Can rent control solve the problem of housing shortage?