Contents Page No.

Techniques to Candidates 5

Section F －－－－ Measurement of Economic Performance 9

Ch16 － National Income, General Price Level, Unemployment Rate 11

Concept Map 1 (attached at the back of the book)

Section G －－－－ National Income Determination and Price Level 23

Ch17 － Aggregate Demand and Aggregate Supply 25

Ch18 － Determination of Level of Output and Price 35

Concept Map 2 (attached at the back of the book)

Section H －－－－ Money and Banking 47

Ch19 － Money and Banks 49

Ch20 － Money Demand and Money Supply and the determination

of Interest rate in the Money Market 53

Ch21 － Hong Kong as a Financial Centre 60

Concept Map 3 (attached at the back of the book)

Section I －－－－ Macroeconomic Problems and Policies 63

Ch22 － Business Cycles 65

Ch23 － Inflation and Deflation 66

Ch24 － Unemployment 73

Ch25 － Fiscal Policy 76

Ch26 － Monetary Policy 93

Concept Map 4 (attached at the back of the book)

Section J －－－－ International Trade and Finance 103

Ch27 － Free Trade and Trade Barriers 105

Ch28 － Balance of Payments 114

Ch29 － Exchange Rate 117

Concept Map 5 (attached at the back of the book)

5

Techniques to Candidates

1. HKDSE Exam Paper Format

The HKDSE Economics Examination, starting from 2012, consists of two written papers.

Sections Question

types

Weighting Duration Details Suggested time

allocation

Paper 1 MCQ 30% 1 hour 40 MCQ;

Compulsory

Spend an average of

1 min to 1.5 min on

each question

Use the last 10 min

for final check

A Short

Questions

30% Around 8 short

questions;

Compulsory

Spend at most

45 min

B Short

Questions/

Essay-type

Questions

31% Around 3

questions;

Compulsory

Spend around

50 min

Paper 2

C Short

Questions/

Essay-type

Questions

9%

2 hours

Around 1

question for the

chosen elective;

1 out of 2

Spend around

20 min;

Use the last 5 min for

final check

The weighting of Microeconomics and Macroeconomics is about the same for both paper 1 and

paper 2

2. Points to Note

A. To tackle the MCQs in Paper I, you should be familiar with:

(i) the definitions (especially the keywords);

(ii) the ideas of advantages, disadvantages, limitations, characteristics (pay more

attention to the ideas rather than the exact wording).

B. To tackle the short questions and essay questions in Paper II, you should:

(i) recite the exact wording of the definitions;

(ii) be familiar with the keywords and the logic flow used in each type of elaboration;

(iii) remember some common examples that can be used so that the markers can

understand your elaborations easily;

(iv) for essay questions especially, remember to relate the elaboration with the case

given (i.e. to be specific); also mind the coherence of the example used with the case

given, and not make it unrelated.

C. For paper II, it is wrong to think that the more you write the more you score. It is important

that what you write are at least logically consistent as inconsistent content or contradiction

may result in no marks.

7

3. The way to use this book to improve your exam performance

After learning each chapter in school, use this book to do the revision thoroughly. The following are

some tips for using the book:

Attributes Descriptions What to do with them

The words bolded in red. These are some keywords that

deserve some marks in the exam.

When doing your revision, pay special

attention to them.

Before the exam, just focus on them

and skim through the rest.

These are the definitions of some

key concepts that you have to

remember by heart (pay special

attention to the exact wording).

Pay attention to the keywords;

Recite them before tests or exams.

They remind you of special exam

skills to tackle specific questions.

Grasp the ideas of the techniques and

apply them when you encounter

related questions in exam.

They serve as an extension to a

topic which gives an in-depth

discussion to some difficult or not

frequently asked concepts.

Able students aiming high should pay

attention to them during their

revision.

They are some commonly asked

question types in exams.

Pay attention to the methods of

solving typical problems or the ways

of presentation.

They are some information

unrelated to exam but they just

give you more ideas about a

topic.

Just read them if you are interested

in. Skip them if you don’t have time.

Some special points that you

should pay attention to.

Remember their ideas by heart before

the exam.

Reference to pastpaper

conventional (long) questions

SP= HKDSE Sample paper

CE= HKCEE paper

AL= HKALE paper

E.g. CE 09(1) means CE paper

2009 question 1

Reference to pastpaper MC

questions is listed in a table at the

end of each section.

When doing your revision, refer to the

related pastpaper questions directly to

see whether you really understand the

topic thoroughly.

Prior to exam, use them to identify

which part is more important, i.e.

more frequently asked.

Frequently asked logical flows that

are worth memorizing for exams.

Remember the flows by heart during

your revision, especially the

keywords, as they can improve the

structure of your answers.

Exam tips and common errors

that are section-specific.

Read them thoroughly before the

exam but no need to recite them.

They show the relationship

between different important

entities within a section.

When finished one section, read the

mind map and make sure you know

the relationship between different

ideas.

Before the exam, read them if you

have enough time but skip them if

you don’t.

Exam TechniqueExam TechniqueExam TechniqueExam Technique

Definition

Know�moreKnow�moreKnow�moreKnow�more����

Illustration

Learn More!

Be Careful!

SP (4)

CE: 09(1), 08(9b),

07(10c), 06(2),

Exam Reminder

Concept Map

概 念 圖 5** 5*

Also, pay attention to the advantages, disadvantages, limitations, uses, characteristics, etc. in the book

as they are important for MCQ and short questions. They are already in point form for your easy

reference.

13

Measurement of Economic Performance

GDP = C + I + G + (X – M)

���� Expenditure Approach

���� Calculation

Measures the total expenditure on final goods and services produced by all resident

producing units.

Formula:

Expenditure Components Descriptions

Consumption expenditure (C) Mainly refers to consumption expenditure on final goods and services

by households;

Includes rental value of owner-occupied housing services.

Investment expenditure (I)

Gross domestic fixed capital formation represents the gross addition

to total stock of fixed assets. It includes expenditures of domestic

firms on currently produced fixed capital and fees for the transfer of

ownership of the assets.

Change in inventories refers to the change in total value of the

inventories held by domestic firms (i.e. Production – sales).

- Increase in inventories should be added as they represent the

unsold goods that are currently produced.

- Decrease in inventories should be deducted as they represent

sales of final goods that are not currently produced.

Depreciation refers to the expenditures that domestic firms need to

spend to maintain their stock of capital after using it for a period of

time.

Net domestic capital formation refers to the expenditures that

domestic firms spend to expand their stock of fixed capital and

inventories, i.e. gross domestic capital formation – depreciation.

Government consumption

expenditure (G)

Refers to the expenditures on goods and services by government

departments which are not engaged in commercial activities.

Composed of the expenditures on final goods and services and

compensation of employees by the government.

Does not include transfer payments like public assistance and

unemployment benefits.

Measures at cost instead of market value.

Exports (X) Refers to the foreign expenditures on goods and services produced

by the RPU of the territory.

= Domestic exports of goods and services + Re-exports of goods

Decomposition of Gross Investment Expenditure

Gross Investment Expenditure

/ Gross

Domestic Capital

Formation (I)

Net Investment Expenditure

/ Net

Domestic Capital

Formation

Gross Fixed Investment Expenditure

/ Gross

Domestic Fixed Capital

Formation

Depreciation/Capital

Consumption

Change in

Inventories

Net fixed Investment Expenditure

/Net Domestic Fixed Capital

Formation

Change in

Inventories

= = =

Depreciation/Capital

Consumption

CE: 08(11d),

07(10a), 06(5a),

02(11ai), 01(11bi)

AL: 07(II)(2a),

(2b)

27

National Income Determination and Price Level

���� Movement along the aggregate demand curve

Change in price level will lead to a change in aggregate

quantity demanded, i.e. movement along the aggregate

demand curve.

���� For example, when the price level falls from P1 to P2,

there is a movement along the aggregate demand

curve from point A to point B.

���� Shift in the aggregate demand curve

Change in factors other than price level will lead to a

change in aggregate demand, i.e. shift in the aggregate

demand curve.

���� For example, when there is an increase in aggregate

demand due to a non-price factor, there is a

rightward shift of AD curve from AD1 to AD2.

���� For example, when there is a decrease in aggregate

demand, there is a leftward shift of AD curve from

AD2 to AD1.

AD = C + I + G + X – M

The above four components are the determinants of aggregate demand

� Private consumption expenditure (C)

���� Factors affecting private consumption expenditure

���� Disposable income (Yd)

���� Desire to save

Disposable income (Yd) can be divided into consumption (C) and saving (S).

(Yd = C + S)

Hence, saving and consumption is negatively related.

17.3 Movement along vs. Shift in the Aggregate Demand Curve

17.4 Non-price Determinants of Aggregate Demand

Output

P1

P2

Y1 Y2

Price ($)

A

B

0

� � � �

Definition

It refers to the amount of income after deduction of personal income taxes

and addition of government transfers.

Be Careful!

Changes in

income taxes will

not affect income,

as income

received is the

same as before. It

will only change

disposable

income.

Be Careful!

If both disposable

income and

saving increase, it

is not a must for

the private

consumption to

fall. Hence, the

negative

relationship

between saving

and consumption

is valid only when

other factors such

as disposable

income are held

constant.

P1

Y1 Y2 Output

Price ($)

AD1

AD2

0

Given disposable income

remains unchanged C ↓↓↓↓ AD ↓↓↓↓

AD curve shifts

to the left

Desire to

save ↑↑↑↑

Tax rate ↑↑↑↑ Disposable

income ↓↓↓↓ C ↓↓↓↓ AD ↓↓↓↓

AD curve shifts

to the left

88

HKDSE Economics (Section I)

���� Effects of expansionary fiscal policy on short run equilibrium

⇒ E.g. sole ↑↑↑↑ in G or sole ↓↓↓↓ in T that is

discussed before; G > T; T > G slightly

⇒ ↑↑↑↑AE → ↑↑↑↑AD from AD1 to AD2

⇒ P↑↑↑↑, Y↑↑↑↑

⇒ Can be used to solve the problem of

unemployment/eliminate the deflationary gap

to achieve full employment (long-run

equilibrium)

���� Effects of contractionary fiscal policy on short run equilibrium

⇒ E.g. sole ↓↓↓↓ in G or sole ↑↑↑↑ in T that is

discussed before; T >>> G

⇒ ↓↓↓↓AE → ↓↓↓↓AD from AD1 to AD2

⇒ P↓↓↓↓, Y↓↓↓↓

⇒ Can be used to solve the problem of

overheating/eliminate the inflationary gap to

achieve full employment (long-run

equilibrium)/ relieve the inflationary pressure

of demand-pull inflation/ stabilize the price

level

Output

AD1

P*

Pf

LRAS

Inflationary gap

Price ($) SRAS

AD2

Potential output Current output

E1

E2

Output

AD2

Deflationary gap

Price ($) SRAS

AD1

LRAS

Current output Potential output

Pf

P* E1

E2

25.4 Effects of Fiscal Policy on Price Level and Output Level

89

Macroeconomic Problems and Policies

���� Effects of expansionary fiscal policy on long run equilibrium

(A) Factor endowments and technology level remain unaffected

⇒ Expansionary fiscal policy:

(A)↑↑↑↑AE&AD → AD1⇒AD2 (shift upward/

outward) → short run eqm. output level

↑↑↑↑ from Y1 to Y2 & eqm. price level↑↑↑↑

from P1 to P2 [From E1 to E2]

(B) If the policy does not affect factor

endowments and technology level, there

is no change in the long run eqm. output

level /full employment output level

⇒ SR output level (Y2) ＞ LR output level (Y1)

→ production cost↑↑↑↑→ SRAS1⇒SRAS2

(shift upward/inward) → SR output level returns

to the original LR output level (Y1) & P

increases to P3 in long run [From E2 to E3]

Conclusion (Definite result on P and Y)

If the expansionary policy cannot increase the long run aggregate supply (through increasing the

productivity, technology level, quality of inputs, human capital, social capital, etc.),

� Long run equilibrium output level/potential output level remains unchanged;

� Long run equilibrium price level increases.

Price ($)

AD1

Y1

P1

LRAS

AD2

Y2 Output

P2

P3

SRAS2

SRAS1

E1

E2

E3

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From increase in G to increase in AD

The amount of increase in AD caused by an increase in G is greater than that the initial increase in G

itself due to the multiplying effect.

For example, the government pays $10m to construction workers for a project → construction worker

pays $8m to a car owner for buying a car and saves $2m → the car owner pays $6.4m to a boat owner

for buying a boat and saves $1.6m…

Therefore, the $10m increase in government expenditure will finally trigger $(10+8+6.4+…)m increase in

Y. The aggregate expenditure will multiply and the amount of increase in AD is not only confined to the

initial increase in G.

(Note that the magnitude of shift of AD and AS is not required in the HKDSE syllabus)

Factors affecting SRAS vs Factors affecting LRAS

Factor employment affects the actual output level (and hence SRAS) while factor availability affects the

potential output level.

SP: (7b)

100

HKDSE Economics (Section I)

Pastpaper MC Questions Distribution Table

Topics HKDSE sample

papers

CE multiple-choice questions AL multiple-choice

questions

Business cycles - 10(31)(44), 09(31), 08(29),

07(31)(49), 06(27), 05(31),

04(32), 02(28), 01(38),

00(37)(38)

-

Relationship between nominal

and real interest rate

(28) - 10(II)(19), 08(II)(21),

06(II)(08)(21), 05(II)(22),

04(II)(17)(18), 03(II)(21)

Inflation (Deflation) - 07(33), 06(33) 04(II)(15), 03(II)(20)

Other effect of changes in

price level

- 09(33) 02(II)(18)

Income Redistributive effect of

changes in price level

- 09(33), 08(31), 05(33), 00(39) 09(II)(21)

Inflation and QTM - - 10(II)(17), 09(II)(22),

08(II)(18)(19), 07(II)(11),

06(II)(11),

05(II)(14)(18)(21),

04(II)(19), 03(II)(11),

02(II)(19)(23), 01(II)(23),

00(II)(16)

Unemployment and

underemployment

(23) 10(32), 09(32), 08(30), 06(30),

05(06), 05(32), 04(33), 03(30),

02(29), 01(30)

-

Cost of unemployment - 07(30), 02(31) -

Principles of taxation - 09(41), 06(41), 05(43), 02(39),

00(40)

-

Classification of taxes – direct

or indirect taxes

- 05(40), 02(43), 01(36)(37) -

Classification of taxes –

progressive, proportional,

regressive taxes

- 10(41), 09(42)(43), 08(43),

07(40), 05(39), 04(41)(42),

03(38), 02(43), 01(35), 00(41)

-

Comparison between direct

and indirect taxes

- - -

Effects of taxation on price

and output level

- - -

Other effects of taxation - 10(42), 09(44), 08(41), 08(44),

07(40)(42)(43), 06(39)(42),

05(41)(42), 04(43), 04(44),

03(31)(39-42), 02(40)(42),

01(39), 00(43)(45)

-

Tax system in Hong Kong - 10(40), 09(40), 08(40), 06(40),

05(41), 04(42), 03(44), 01(40),

00(42)

-

Public expenditure - 10(43), 09(45), 08(42), 02(41) -

Effects of public expenditure

on price and output level

(AS-AD model)

- - -

Other effects of public

expenditure

- - -

Types of budget position - - -

Effects of fiscal policy on price

level and output level

(36) - -