Oct/Nov 2012

Which kind of business can make the fullest use of division of labour?

7.7

Which price-and-quantity combination will cause price to increase and quantity to contract until equilibrium is achieved?

Income elasticity of demand

In a market economy, if demand for a product rises and the price goes up while output stays the same, what might account for this?

Price elasticity of supply

What will happen to consumer surplus if the supply of a product with a normal demand curve is halved?

Cross elasticity of demand

The diagram illustrates a market that is controlled by a maximum price. What would occur if that maximum price were taken away?

Maximum and minimum prices

From the diagram, Q1 shows the quantity of a good produced because of market forces. Which concept is shown at output Q1?

Income elasticity of demand

A government uses a cost-benefit analysis to decide whether a new airport should be built. Under which situation will it go ahead with the project?

Maximum and minimum prices

An international oil company said that it would end oil exploration off the coast of Namibia. This was because the oil found would only be enough to supply a local power station in Namibia and would not be sufficient for oil exports. What could be one benefit and one drawback for Namibia from this decision?

Scarcity, choice and opportunity cost

A government aims to raise the consumption of a merit good and lower the consumption of a demerit good. Which policy ought it to use for each good?

Maximum and minimum prices

A government wants to keep farmers’ incomes stable. It does this by using a policy of buying and selling farm products on the free market. In which situation would it not have to react to changes in the supply of farm products?

Maximum and minimum prices

The table sets out the output levels that three countries are able to produce. What is the most likely result?

International trade and free trade

The diagram illustrates the production possibility frontier for a desert island economy in which the inhabitants depend on only two commodities, coconuts and fish. What accounts for the shape of the production possibility frontier?

Production possibility curves

An economy that has long maintained very high trade barriers decides to move to completely free trade. What is most likely to rise in the short term?

Protectionism

Russia is a major exporter of wheat. In 2010, a poor harvest occurred and the Russian government banned all wheat exports to make sure there were sufficient supplies for home consumption. Which statement about Russia’s policy is correct?

Maximum and minimum prices

Which single combination of price changes has to lead to a worsening of the country’s terms of trade?

International trade and free trade

The table gives the number of workers and the industry’s annual output. Which statement is correct?

Factors of production

Which statement concerning an increase in the general price level in a country is correct?

Balance of payments

The table presents details of the nominal interest rate and the inflation rate for selected countries in July 2010. What conclusion can be drawn from this information?

Balance of payments

The two industries in a country are fishing and tourism. In 2010, the international exchange rate of the country’s currency fell. If nothing else changed, what effect did this have on the country?

6.4

The chart presents Australia’s exports to, and imports from, four trade partners in $billion for 1994 and 2004. With which country did Australia record a trade deficit in 1994 and a trade surplus in 2004?

6.3

Country X conducts trade with just two countries: Nigeria and Malaysia. 80 % of the nation’s trade is with Nigeria, while 20 % is with Malaysia. The starting value of the trade-weighted exchange rate index is 100. Country X’s currency appreciates by 10 % against the Nigerian Naira. Country X’s currency appreciates by 50 % against the Malaysian Ringgit. What will be the value of country X’s new trade-weighted exchange rate index?

6.4

In the diagram, curves D1D1 and SS show the demand for and supply of £ sterling in the foreign exchange market. What might lead the demand curve to move from D1D1 to D2D2?

6.4

India is not attaining its full economic potential because its rail, road and electricity infrastructure is poor. The issue is not insufficient government spending, but too few skilled civil engineers. Which factors of production would need to be increased?

Factors of production

What is one example of a policy that dampens expenditure?

Fiscal policy

Oil is in short supply worldwide. The diagram illustrates oil consumption and production (billion tonnes) in 2007 for selected countries. What conclusion can be drawn from the diagram?

International trade and free trade

How will an industry’s supply curve change if new firms join the industry?

Demand and supply curves

The demand curve in the diagram illustrates the number of passenger journeys made by train each week on a particular route. At the start, the fare is OP, but it is then cut by PW. Which area represents the amount paid for the extra journeys caused by the lower fare?

Demand and supply curves

The diagrams illustrate possible connections between income and the quantity of a good bought. Which diagram represents an inferior good?

Price elasticity of demand

The price elasticity of demand for good X equals 1. When the price is $12, the quantity demanded is 4000 units. What is the price when the quantity demanded rises to 20 000 units?

Price elasticity of demand

Consumer spending fell during the 2009-10 recession. A firm attempted to maintain high revenue by offering discounts to stimulate demand. It calculated the price elasticity of demand (PED) for its own product and the cross elasticity of demand (XED) for its rivals’ products. Under what circumstances could such promotions produce the outcome the company expected?

Price elasticity of demand

What is the key feature that defines a mixed economy?

Resource allocation in different economic systems

The diagram illustrates the market for computer games. The market is initially in equilibrium at X. What will the new equilibrium be if the tax on computer games rises and incomes decrease?

Income elasticity of demand

The diagram illustrates a market for a good that is provided partly by domestic production and partly by imports. Sh denotes domestic supply and Sm denotes imports. What is the level of consumption and the corresponding quantity of imports?

International trade and free trade

The diagram shows the impact of imposing a specific tax equal to JM on a good. Which area indicates the total tax revenue?

Maximum and minimum prices

In what situation would it be necessary to use an alternative to the price mechanism in order to allocate a good among consumers?

Resource allocation in different economic systems

Which policy used by an airline comes about because of an externality?

7.4

What outcome, from society’s perspective, will occur if the market price of a product does not take account of the negative externalities created during its production?

7.4

The table presents some of the costs and benefits, in $ millions, connected with a road building project. Both a government department and a profit-maximising private firm are considering whether to construct the road. private costs 450; external costs 75; external benefits 50; social benefits 550 Who would be prepared to build the road?

7.4

A government wants to increase farmers’ incomes without increasing the price of food for consumers. Which policy should it adopt?

Maximum and minimum prices

The diagram illustrates the market supply and demand curves for an agricultural product. The government assures producers a minimum price of OX for their output, while the market price is left to be set by demand and supply. Which area on the diagram shows the total subsidy payments made by the government to producers?

Maximum and minimum prices

For what reason might a government choose to lower tariffs on agricultural imports?

Protectionism

In the diagram, the initial production possibility curve is LM. What could make the curve move to NP?

Production possibility curves

A government thinks it can cut its trade deficit by imposing a tax on its principal export. Under what circumstances would this be most likely to be effective?

6.5

A country’s terms of trade rose from a base-year figure of 100 to 120 in the next year. If export prices had gone up by 50 %, what change occurred in the price of the country’s imports?

6.3

The table presents, in millions of US$, the balance for four items in a country’s current account over two years. year 1: goods –72, services 84, income 12, transfers –24. year 2: goods –87, services 46, income –3, transfers –44. What conclusions can be drawn about the changes from year 1 to year 2?

6.3

The table shows details of inflation rates, unemployment rates, and changes in wages for several countries in 2006. What conclusion can be drawn from the table about 2006?

Price stability and inflation

Which of the following is not one of the criteria used by the International Labour Office to decide whether a person is classified as unemployed during a labour force survey?

Price stability and inflation

The information below relates to money supply and prices in the years 2006 and 2010 for four countries. Over the period 2006 to 2010, which country experienced the greatest rate of inflation? (The answer choices match countries A-D, each with the stated money supply and price index pair.)

Balance of payments

An unexpected increase in the price of imported oil made the annual rate of inflation over a particular period higher than forecast. What could be a probable consequence of this?

Market failure

The table sets out the Canadian current account of the balance of payments for 2005 and 2006. The change in which item made the smallest contribution, and the change in which item made the largest contribution, to the shift from surplus to deficit in the Canadian current account balance between 2005 and 2006?

6.3

What is the most likely consequence of a widening deficit in a country’s balance of payments caused by higher imports of consumer goods?

6.3

In the diagram, D1 and S1 show the original demand and supply curves for the UK pound (£) in the foreign exchange markets. What would make the demand curve move to D2 and the supply curve move to S2?

6.4

The diagram illustrates a production possibility curve for an economy that makes only two goods, X and Y. The economy produces 1200 of good X and operates on its production possibility curve. What amount of good Y is sacrificed?

Production possibility curves

At what stage is introducing a tariff on a good most likely to cut a trade deficit?

6.5

What could make a country’s currency notes stop functioning as money?

Oligopoly

Which of the following would not make the demand curve for a good shift to a different position?

Demand and supply curves

What conclusion can be drawn about a product that has an income elasticity of demand (YED) of +1.5 and a cross elasticity of demand (XED) of +1.2?

Price elasticity of demand

A manufacturer sets a higher price for his product in an effort to boost total revenue. The table gives the outcome of this policy. price ($) 4 5 6 ; total revenue (000’s $) 400 500 600 Calculate the price elasticity of demand for the product.

Price elasticity of demand

In a free market that is out of equilibrium because there is a shortage of a product, what happens to the price, the quantity demanded and the quantity supplied as the market adjusts towards equilibrium?

Income elasticity of demand

For a good, the market demand equation is Qd = 310 - 20p and the supply equation is Qs = 10 + 10p, where p represents the price of the good. What is the equilibrium price?

Income elasticity of demand

In what way can division of labour benefit an economy?

Factors of production

The diagram illustrates the market for coffee. The starting equilibrium is X. The price of tea, which is a substitute, decreases and an indirect tax is levied on coffee. What will the new equilibrium position be?

Income elasticity of demand

The diagram illustrates the demand curve, DD1, and the supply curve, SS1, for eye operations. These operations are supplied free of charge to the consumer. Which statement is correct?

Income elasticity of demand

The diagram shows a market for a good where the equilibrium price is OU. The government sets a maximum price of OV. What effect will this have on consumer surplus?

Maximum and minimum prices

What government policy could restrict the rationing role of the price mechanism?

Maximum and minimum prices

A government is intending to step in within a market so that output is set at the socially desirable level by providing a subsidy. In order to meet this objective, what should the subsidy per unit be?

Maximum and minimum prices

Which of the following statements is correct?

Economic methodology

A government conducts a cost-benefit analysis for the construction of a new airport. It works out that the costs of building and operating the airport will be lower than the income the airport will earn. It also predicts that the benefits to third parties will exceed the costs to third parties. Which reason could the government give for choosing not to build this airport?

Scarcity, choice and opportunity cost

Which feature is a defining characteristic of a public good?

Behavioural economics

A government sets a maximum price for house rentals (maxPh) and a minimum price for cleaning services (minPc). The demand and supply curves are the same in both markets. Which diagram indicates that the maximum price is effective while the minimum price is ineffective in the two markets respectively?

Maximum and minimum prices

The diagram shows the production possibility curves for two economies, X and Y. Following soil erosion in economy X, the production possibility curve moves from X to X1. In line with the law of comparative advantage, what should country Y do after this change?

Production possibility curves

In the economy shown, the production possibility curve between capital goods and consumer goods is the line PQ. What is the opportunity cost when OS of consumer goods are produced?

Production possibility curves

What is one assumption underlying the basic theory of comparative advantage?

International trade and free trade

Which statement correctly describes the effect of a quota and a tariff?

Protectionism

From 2005 to 2010, a country’s import prices increased by 25%, and its terms of trade increased to 120 (2005 = 100). What change occurred in the country’s export prices?

6.3

A firm first hires 50 workers, each of whom works 40 hours per week, and its total output is 18 000 units. It later hires 10 more workers, again each working 40 hours, and total output increases to 19 200 units. What effect does this increase in employment have on labour productivity?

Factors of production

The table sets out several components of aggregate demand for selected countries, shown in US$ in 2009. What conclusions can be drawn from this information?

Economic growth

The graph illustrates a country’s average yearly inflation rate across a five-year period. What conclusion can be drawn about the overall price level over those five years?

Balance of payments

A country is experiencing balance of payments disequilibrium because its current account is in long-run deficit. Which consequence of this disequilibrium will lead to inflationary pressure?

Wage determination

If interest rates are cut, what is most likely to fall?

Monetary policy

The table provides information on trade between Singapore and New Zealand in 2001, the first year after they signed a free trade agreement. What can be concluded from the table?

International trade and free trade

At the moment, 1 unit of a country’s currency is exchanged for US$1.2. The country wants to fix its exchange rate at US$1.4. Which set of government measures in the foreign exchange market would need to be used to achieve this target?

6.4

In what way is labour distributed in a market economy and in a planned economy?

Resource allocation in different economic systems

A government wants the external exchange rate of its currency to rise in order to reduce inflationary expectations. What action should it take?

6.4

A customer who has purchased a DVD player with a credit card does not need to pay the bill until 56 days after the purchase is made. Which function of money is shown by this postponement of payment?

Oligopoly

At what point will the demand curve for motorcycles move to the left?

Demand and supply curves

Three firms, X, Y and Z, supply a market. The table gives their supply at four different prices. Which change in price is needed for market supply to fall by half?

Demand and supply curves

A government wants to levy a tax on a good so that most of the tax burden is borne by the producer rather than the consumer. Which type of elasticity should the good have in order to make this possible?

Price elasticity of demand

The diagram illustrates the link between the price and the total expenditure on a good. Which statement is correct?

Price elasticity of demand

The table shows one person’s demand for four goods at two income levels. Across this income range, for which good does that person have an income elasticity of demand = 1?

Price elasticity of demand

Between 1995 and 2007, which country was

7.4

Explain, with the use of diagrams, the different effects on the price and quantity of a product of the removal of a subsidy and the removal of an indirect tax on that product.

Maximum and minimum prices

Explain, using an aggregate demand (AD) and aggregate supply (AS) diagram, the different effects that cost-push and demand-pull inflation have on real output.

Economic growth

Explain the various types of international economic integration.

International trade and free trade

(i) Calculate the approximate sugar price in January 2008.

Demand and supply curves

Explain, using a production possibility diagram, how the opportunity cost of producing different combinations of goods can be measured.

Production possibility curves

Explain the factors that determine the demand for and supply of a currency in the foreign exchange market.

6.4

Explain why governments track changes in the general price level and why they usually use more than one measure of those changes.

Balance of payments

Explain how petrol consumption creates externalities.

Price elasticity of demand

Explain, with the aid of a diagram, what changes will alter the amount of consumer surplus available from the consumption of a good.

Cross elasticity of demand

Explain the factors that may lead to a fall in a country’s terms of trade.

6.3

Explain how an economy may record a deficit in trade in goods but still run a surplus on its current account of the balance of payments.

6.3

In an economy, it is impossible to improve one person’s situation without worsening another person’s situation. What does not necessarily follow from this?

Behavioural economics

A firm is presently trying to maximise its sales revenue. What is likely to occur if the firm chooses instead to seek maximum profit?

7.8

In the diagram, DD shows the demand curve for a monopoly producer, while the rectangular hyperbola ATC represents the firm’s average total cost curve. What level of output will maximise the firm’s profit?

7.6

Firms X, Y and Z are private firms that maximise profit. X is active in a perfectly competitive industry, Y operates in a monopolistically competitive industry and Z is the sole monopolist. Which statement is correct?

7.6

What would be the short-run impact on price, output and profits of a rise in demand for the product of a monopolistically competitive firm?

7.6

The diagram illustrates an industry’s supply and demand curves. If externalities are absent, which area on the diagram represents the net decrease in economic welfare when the government limits output to OQ?

Cross elasticity of demand

The diagram illustrates the market supply and demand curves for corn. What action should a government take in order to maintain a minimum price of OP2?

Maximum and minimum prices

The graphs illustrate how consumer prices and real GDP changed in a country from 2000 to 2010. Which conclusion can be drawn from the graphs?

Unemployment

Which asset would not be counted in a country’s broad money supply?

Oligopoly

Which of the following is a leakage from an economy’s circular flow of income?

Aggregate demand and aggregate supply

The diagram illustrates the saving and investment curves for a closed economy without government intervention. The potential level of output is OYP. What distance shows the gap between actual output and potential output?

Economic growth

The table provides data on an individual’s consumption of good X. price of good X $10 quantity demanded (units) 25 marginal utility (utils) 30. The diagram illustrates the marginal utility that a consumer obtains from consuming good Y. If the price of good X does not change, by what amount will the individual’s consumption of good Y rise when the price drops from $30 to $20?

Utility and rational consumer behaviour

The diagram illustrates how consumption expenditure and income are related. Which statement is correct?

Aggregate demand and aggregate supply

If the money supply rises by 6 %, and money income rises by 10 %, what conclusion can be drawn from this?

Monetary policy

Although a country has a balance of payments deficit, its money supply does not change. What might account for this?

6.3

What is most likely, over the long term, to result in an increase in world real GDP per head?

Unemployment

Which government policy would increase economic growth but would not necessarily encourage economic development?

Unemployment

Which type of unemployment occurs when aggregate demand is insufficient?

Price stability and inflation