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2.1 Answer the following questions - NSC Economics - Question 2 - 2024 - Paper 1
Question 2
2.1 Answer the following questions. 2.1.1 Name the TWO factors that determine the size of the multiplier in a two-sector model. 2.1.2 How can the South African Res... show full transcript
Worked Solution & Example Answer:2.1 Answer the following questions - NSC Economics - Question 2 - 2024 - Paper 1
Step 1
Name the TWO factors that determine the size of the multiplier in a two-sector model.
Answer
The two factors that determine the size of the multiplier in a two-sector model are:
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Marginal propensity to consume (MPC): This refers to the proportion of additional income that households are likely to consume rather than save. A higher MPC indicates a larger multiplier effect.
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Marginal propensity to save (MPS): This signifies the proportion of additional income that is saved. A lower MPS results in a larger multiplier since more income is being injected back into the economy.
Step 2
How can the South African Reserve Bank (SARB) use open-market transactions to increase money supply?
Answer
The South African Reserve Bank (SARB) can increase the money supply through open-market transactions by purchasing government securities or bonds from banks. This action injects liquidity into the banking system, allowing banks to have more money available for lending and thereby increasing the overall money supply in the economy.
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Step 6
Why are savings regarded as leakages in the circular flow model?
Answer
Savings are regarded as leakages in the circular flow model because they represent money that flows out of the spending cycle. When households save money in banks, it reduces the amount of money available for circulation, which could otherwise have been spent on goods and services, thereby slowing down economic activity.
Step 7
How can an increase in interest rates influence households on the circular flow?
Answer
An increase in interest rates can influence households in several ways:
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Reduced borrowing: Households may borrow less money from financial institutions due to higher costs of loans.
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Shift in spending patterns: Consumers may opt for fewer durable goods as their credit becomes more expensive.
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Increased savings returns: Households may see better returns on savings accounts, encouraging them to save more, thus further reducing spending in the economy.