May/June 2014

What is likely to happen if unemployment rises permanently and workers lose their skills?

Price stability and inflation

In 2010, weak harvests cut fruit crops, and furniture producers offered substantial discounts on furniture products. How could these changes have affected the position of the supply curve for the products?

Demand and supply curves

The diagram depicts a supply curve. Which statement best describes the price elasticity of supply on this curve?

Price elasticity of supply

The table illustrates a competitive market at equilibrium across two periods. What might account for the shift from period 1 to period 2?

Income elasticity of demand

If a country has a summer that is very wet and cold, how could this affect the price of umbrellas and the price of ice creams?

Demand and supply curves

What is an external cost caused by an individual consuming take-away food?

7.4

A project involves a social cost of $100 million, a private cost of $40 million and an external benefit of $20 million. Its net social value is zero. What conclusion can be drawn about the project?

7.4

Which item would be least likely to appear in a cost-benefit analysis for a proposed new university?

Maximum and minimum prices

A local government arranged a craft show at its exhibition centre. Entry cost $3. It publicised the show by paying for adverts on advertising sites in the surrounding area. From the perspective of local residents, how can the craft show and the adverts be classified?

1.6

The diagram indicates that the initial market-clearing price is P1. The government then sets a maximum price of P2 for the industry. What will be the consequence of this?

Maximum and minimum prices

The diagram indicates that a country can produce a product for less than the world price. What happens if it participates in international trade?

International trade and free trade

What is most likely to happen in the short run if central planning is replaced by a market-based system?

Resource allocation in different economic systems

Which argument would an importer be most likely to put forward to win consumer support for free trade?

International trade and free trade

A country is a large cotton producer. Its government places a tax on cotton exports. What effect will this have on the price of cotton in the domestic market and in the world market?

Protectionism

A US company gets a dividend of US$20 million from shares it holds in a Brazilian company. In the balance of payments of the United States, how should this dividend be recorded?

6.3

Turkey's population was 73 m in 2007. Its labour force amounted to 36 m, of which 12 m were trained for the primary sector and 24 m were trained for the secondary and tertiary sectors. Unemployment stood at 10%. What was the number of people unemployed?

Price stability and inflation

The diagram shows macroeconomic equilibrium output and the price level shifting from Y and P to Y1 and P1. What might have caused this change?

Economic growth

The table presents an index of consumer prices (2005 = 100) for several countries in 2009, 2010 and 2011. Which statement about the period from 2009 to 2011 is not correct?

Balance of payments

Under what conditions will money lose its value?

Balance of payments

Which factor would do the most to help a country record a surplus on the current account of the balance of payments?

6.5

At the beginning of the year, the exchange rate between Country X’s dollar (X$) and Country Y’s pound (Y£) stands at X$4.80 : Y£1. Over the year, prices rise by 10% in Country X and by 20% in Country Y. Using Purchasing Power Parity theory, what exchange rate would you expect at the end of the year?

6.4

Devaluation always results in

6.4

The diagram shows the production possibility curve for an economy in Year 1 (X1 Y1) and Year 2 (X2 Y2). What conclusion can be drawn from the diagram?

Production possibility curves

Policies used to reduce a balance of payments deficit are split into two groups: expenditure-dampening policies and expenditure-switching policies. Which pair of policies in the table is classified correctly?

Labour market

In 2013, an American purchased an English football club. The funds used for the acquisition were borrowed, so the resulting interest payments in the future were expected to be more than US $95 million. Which function of money is best shown by this transaction?

Oligopoly

The demand in the market for a product is formed by the demand of three firms, X, Y and Z. The table gives the demand for each firm together with the market supply. What is the equilibrium price in the market?

Income elasticity of demand

In the diagram, D1 shows the original demand curve for student places at universities. What might cause the demand curve to move to D2?

Demand and supply curves

In the diagram, D1D1 is a demand curve in the form of a straight line, while D2D2 is a rectangular hyperbola curve. Which statement is correct?

Price elasticity of demand

The table illustrates how a consumer’s spending on different goods changes as her income rises from $20 000 to $24 000. Assuming everything else stays the same, for which goods is the consumer’s income elasticity of demand above 1.0?

Price elasticity of demand

The diagram illustrates the demand for and supply of a product. What conclusion can be drawn about the product?

Income elasticity of demand

By 2030, as the human population increases, the world will require at least 50% more food, 45% more energy and 30% more water from the same resources. What does this statement directly suggest?

Scarcity, choice and opportunity cost

The diagram illustrates four distinct straight-line supply curves. What conclusion can be drawn from the diagram?

Price elasticity of supply

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

Maximum and minimum prices

How would you define consumer surplus?

Cross elasticity of demand

In a market for a good, demand and supply both alter at the same time. Which pair of changes would let an economist say with certainty that greater resources will be required for its production, while not knowing the direction of the resulting change in price?

Income elasticity of demand

A positive externality may exist when

7.4

A company sets up a new factory on unused land at the edge of a town. Which of the following will be included among the externalities resulting from the factory’s opening?

7.4

A company owns a bridge and imposes a fee on every vehicle that crosses it. How would this charge be categorised?

1.6

The table presents the findings of a cost-benefit analysis concerning the construction of a new runway at an airport. costs US$m private 100 external 25; benefits US$m private 125 external 20. Which statement about the new runway is correct?

7.4

On the diagram, the starting quantity traded was Q and the price was P. The price later increased to P1 and the quantity traded increased to Q1. Which combination of government policy measures could account for this change?

Income elasticity of demand

The table sets out cars and televisions produced per worker per week before trade and specialisation. country X: cars 2, televisions 6; country Y: cars 8, televisions 48. Each country concentrates on the product in which it has a comparative advantage and then trades using an exchange rate that is between their opportunity cost ratios. Which change would prevent the countries from specialising and trading?

International trade and free trade

A country was positioned at point P on its production possibility curve. After the threat of invasion, it began preparing for war. The war then damaged the country’s infrastructure. Which changes on the production possibility curve diagram would be most likely to match these events?

Production possibility curves

A country manufactures washing machines. The government reduced both the tax on washing machines made in the country and the quota for imported foreign washing machines. What is the likely outcome?

Protectionism

The diagram illustrates the impact on the quantity of an import in the domestic market when a tariff is removed and the import price falls to P1. By how much will the quantity of imports rise?

Protectionism

A number of countries come together to create a single market and use one shared currency. Which term most accurately names this organisation?

11.6

The table gives the unemployment rate and the labour force size for four countries in 2012. Which country had the greatest number of people in employment in 2012? country A Egypt unemployment rate 12.6% labour force 27.7 million; B Iran 15.3% 26.4 million; C Italy 9.3% 25.1 million; D Turkey 8.0% 27.4 million.

Price stability and inflation

The diagram illustrates an economy’s aggregate demand curve together with two short-run aggregate supply curves. What might explain the change in real output from Y1 to Y2?

Economic growth

The table gives a country’s inflation rate over four years: 2009 4.0%; 2010 3.0%; 2011 2.5%; 2012 2.0%. What decreased between 2009 and 2012?

Balance of payments

Which of the following is not a possible cause of cost-push inflation?

Economic growth

What could cause a country to shift from a surplus to a deficit on the current account of the balance of payments?

6.3

What factors determine the purchasing power parity of a currency?

6.4

If the exchange rate is 5 Egyptian pounds (EGP) = 1 US dollar ($), an American product is sold in Egypt for EGP 100. Provided that the dollar price does not change, what would the product cost in Egypt if the Egyptian pound rises to 4 EGP = 1 US$?

6.4

Which one counts as a normative statement?

Economic methodology

The central bank of the US increases its interest rate in order to improve its balance of payments position. The diagram illustrates the resulting changes in the demand for, and supply of, US$ in the foreign exchange market. How should curves W, X, Y and Z be labelled to show the impact of the interest rate rise on the exchange rate? (Assume a change is shown by a move from a curve numbered 1 to a curve numbered 2.)

Labour market

Meera has recently completed a course at art college and has chosen to start her own business making clay models of well-known people. Which factors of production will she probably need to buy from other businesses?

Factors of production

The demand curve in the diagram illustrates how the number of car journeys is related to the cost of a car journey. What might cause the demand curve to move left?

Demand and supply curves

The diagram represents the market for milk. Two changes occur. First, the price of cattle feed increases sharply, then the government increases the tax on cheese, which uses milk in its production. Which movements of the demand curves for milk on the diagram are consistent with these events?

Income elasticity of demand

Where the price elasticity of demand for a commodity is unity, a rise in its price will

Price elasticity of demand

The table presents a consumer’s spending on a variety of goods at different income levels. For which good does the consumer have an income elasticity of demand greater than zero, but less than one?

Price elasticity of demand

What could cause a market supply curve to move to the right?

Demand and supply curves

A key idea in economics is that resources are limited. What follows with certainty from this?

Scarcity, choice and opportunity cost

A company manufactures televisions. What does the firm’s supply elasticity indicate?

Price elasticity of supply

If demand and supply in a competitive market each fall by 10% at every price, what happens to the equilibrium price and the quantity sold?

Income elasticity of demand

The graph illustrates the yearly % changes in the prices of new houses and existing houses in the United Kingdom from 2010 to 2012. What conclusion can be drawn from the graph?

Balance of payments

From 2006 to 2007, the world-market price of skimmed milk powder increased from $1000 per tonne to $2400 per tonne. If the market is a free market, what outcome will follow from this price change?

Income elasticity of demand

A company sets up a new factory on the town’s outskirts. Which items would be among the externalities resulting from the opening of this new factory?

7.4

The table lists some of the costs involved when a firm makes a good. output 23: total cost to society $316, external cost $16. output 24: total cost to society $322, external cost $18. What is the extra cost to the firm of producing the 24th unit?

7.4

How would the internalisation of negative externalities affect a product’s output and price?

7.4

A local council operates a museum. It previously charged an admission fee. It chose to offer free entry in the hope that more people would visit the museum and learn about the history of its area, which the council considers important. What can be said about the museum?

Government intervention in markets

From the diagram, D represents the demand curve for an agricultural commodity, while S1 shows the original supply curve. The government implements a buffer scheme to keep farm incomes at their starting level. If a bumper harvest shifts the supply curve to S2, what quantity would the government have to purchase from the farmers to add to the buffer stock?

Maximum and minimum prices

The production possibility curve indicates island J’s capacity to produce fish and fruit. It specialises completely in fish, where it has a comparative advantage, and exchanges fish for fruit with island K. Consequently, island J raises its consumption from 80 tonnes of fish and 60 tonnes of fruit, point X, to 100 tonnes of fish and 100 tonnes of fruit, point Y. What was island J’s exchange rate of fish for fruit?

Production possibility curves

When some former command economies have moved towards market economies, they have sometimes taken a gradual approach. This has involved keeping certain parts of the command system in place. Which is not a valid short-run reason for retaining the feature shown?

Resource allocation in different economic systems

The table presents data on the Gross Domestic Product (GDP) and the balance of payments for four countries. Which country recorded the largest net errors and omissions figure in terms of US$?

6.3

Which of the following would not be a reason for a government to set an import quota?

Protectionism

The European Union sets a quota on the quantity of garments brought in from China. What is likely to happen to the prices obtained by Chinese garment producers and to the prices paid by consumers of Chinese garments in Europe and the United States (US)?

Protectionism

The table presents a country’s employment figures. Population of working age: 100 million; number in employment: 60 million; number unemployed: 4 million. What are the participation rate and the unemployment rate?

Monopolistic competition

The table presents how the general price level in four countries changed over three years, with the figures given as index numbers. Which country had a steady rate of decline in the real value of money?

Balance of payments

During Year 1, the cost of a barrel of oil rose from $60 to $110. In Year 2, it climbed again to $115 per barrel. Suppose that any change in oil prices affects the overall price level straight away and that the Consumer Price Index weightings do not change. What effect will the oil price changes have on a country’s Consumer Price Index and on its inflation rate in Year 2 compared with Year 1?

Balance of payments

Why is a deficit on the current account of the balance of payments in economies with freely floating exchange rates often regarded as an economic problem?

6.3

In what situation does a country’s balance of trade in goods and services need to improve?

6.3

Suppose the Chinese monetary authorities are determined to keep the exchange rate of China’s currency, the Yuan, against the US$ within the range from P1 to P2 on the diagram. What could they do if demand moved from D1 to D2?

6.4

The table presents observations of an economy’s exchange rate and its current account balance across six years. Which concept is illustrated by the data in the table?

6.4

A country is operating at full capacity to produce electrical goods and medicines. A new innovation makes it possible for the country to manufacture a new medicine that then becomes highly demanded. How would this be shown by its production possibility curves?

Production possibility curves

A country sees a substantial rise in the value of its foreign exchange rate. Which statement best describes the most likely combination of effects?

6.4

What might stimulate the expansion of the international division of labour?

International trade and free trade

Which factor would not make the demand curve for foreign holidays shift to the left?

Demand and supply curves

A good has unitary price elasticity of demand and, when the price is $25, 100 000 units are sold. What price must the firm set if it wants sales to rise to 125 000 units of the good?

Price elasticity of demand

The diagram illustrates the effect of a 10% rise in consumer incomes on the demand for good X, moving it from D to D1. Which statement about good X is correct?

Price elasticity of demand

The diagram illustrates how a firm’s total revenue is related to the number of goods sold. What is the price elasticity of demand for the good?

Price elasticity of demand

A change in position along a supply curve for a product is likely to happen if there is an increase in

Demand and supply curves

Explain, with the help of a production possibility curve, the opportunity cost to India of choosing to produce transport facilities rather than education services.

Unemployment

Explain whether you would expect the price elasticity of supply of an agricultural product, such as rice, in a market to be elastic or inelastic.

Price elasticity of supply

Explain how private goods differ from public goods, and why a business can earn a profit from supplying private goods but not from supplying a public good.

1.6

Explain what is meant by the term ‘money’ and describe its characteristics in a modern twenty-first century economy.

Oligopoly

Using the information in the extracts, explain why New Zealand’s terms of trade were expected to ‘stabilise during 2013’.

International trade and free trade

Explain what is meant by the term ‘equilibrium price and quantity’ in the market for a good or service, and demonstrate how a new equilibrium is formed when demand increases.

Income elasticity of demand

Distinguish between income elasticity of demand and cross elasticity of demand, then explain how each one is used to identify different categories of product.

Price elasticity of demand

Using diagrams, explain the difference between demand-pull and cost-push causes of inflation.

Balance of payments

Calculate the food price inflation rate(s) from Table 1.

Scarcity, choice and opportunity cost

Explain the factors that might cause the price elasticity of demand for a good to be highly inelastic.

Price elasticity of demand

Explain, using appropriate diagrams, what is meant by the term ‘externalities’.

7.4

Explain the factors that may lead an economy to run a current account deficit.

6.3

In the diagram, LM represents an economy’s production possibility curve. Which statement is correct?

Production possibility curves

The diagram illustrates a firm’s demand curve and marginal revenue curve. At price P, what is the approximate price elasticity of demand?

Price elasticity of demand

What factors determine whether a market is contestable?

7.6

The diagram illustrates how an industry’s production cost changes when it shifts from perfect competition to monopoly. The demand for the industry’s product stays unchanged. How will this move in market structure affect price, output and consumer surplus in this industry?

7.6

A firm chooses to maximise sales revenue instead of profits. What is likely to be one consequence of this decision?

7.8

The diagram illustrates the cost and revenue curves for a profit-maximising monopolist. Which area represents the deadweight loss caused by the use of monopoly power?

Behavioural economics

Income inequality may be assessed using the Gini coefficient. It is measured on a scale from 0 to 100, and a larger figure indicates a higher level of inequality. The table below gives three Gini coefficient values for four OECD countries. The first comes from wages alone, the second includes government welfare payments, and the third includes welfare payments together with government spending on health and education. In which country did welfare payments contribute most to income redistribution?

Taxes and subsidies

What is one advantage of means-tested benefits compared with universal benefits?

Short-run costs

The diagram presents the monopolist’s marginal revenue curve as RTVX. If the government sets a maximum price, OS, what shape will the monopolist’s revised marginal revenue curve take?

7.6

The figures in the table are drawn from a country’s national income accounts. State the value of exports.

National income statistics

The table sets out a government’s expenditure and tax revenues during 2010-2013. What effect did the shifts in the government’s fiscal balance have on the national debt and on aggregate expenditure?

Fiscal policy

A consumer aims to maximise his utility. To what extent should he keep consuming each good?

Utility and rational consumer behaviour

Which of the following is not considered a leakage from the circular flow of income?

Aggregate demand and aggregate supply

In a closed economy with no government, if investment rises by $100 million and consumption rises by $300 million, what is the marginal propensity to consume?

Aggregate demand and aggregate supply

If a government raises the unemployment benefit rate, which diagram illustrates the resulting shift in the consumption function from C1 to C2?

Fiscal policy

If the velocity of circulation of money remains constant, and real output increases by 2% while the money supply grows by 5%, what is the approximate change in the price level?

Oligopoly

The diagram illustrates three distinct levels of the supply of money (MS) together with three liquidity preference demand for money curves (LP). The starting equilibrium is at point X. Money income falls, while bank credit expands at the same time. Which point might be the new equilibrium point?

Oligopoly

The graph illustrates the changes, shown as an index, in employment and GDP in the United Kingdom from 2008 to 2012. What conclusion can be drawn from the graph?

Unemployment