May/June 2016

A driver uses the following estimates when deciding whether to buy a car that she plans to use only in situations where she would otherwise have travelled by public transport. (listed values omitted here) What will be the opportunity cost in monetary terms to the driver over the year of travelling by car rather than by public transport?

Scarcity, choice and opportunity cost

In the diagram shown, D1 and S1 represent the original demand and supply curves for the US car market. Which change would move the demand curve for cars to D2 and the supply curve for cars to S2?

Demand and supply curves

A particular tax is imposed on every bottle of perfume that is sold. In the diagram, SS shows the supply curve before the tax, while StSt shows the supply curve after the tax. Which area shows the part of the tax revenue borne by consumers?

Maximum and minimum prices

Goods X and Y are complements. How will an increase in the supply of good Y affect the equilibrium price and quantity of good X?

Income elasticity of demand

The table sets out the price Rashid is prepared to pay for each successive cake and the cost of producing it. If the price is $0.50 and Rashid purchases four cakes, what is the monetary value of the consumer surplus and the producer surplus?

Cross elasticity of demand

The diagram illustrates the market demand and supply curves for wheat. What action should a government take to keep a minimum price of OP2?

Maximum and minimum prices

A product whose supply is infinitely elastic sells 1000 units each week at a price of $1 for each unit. Price elasticity of demand is 1.5 over the relevant range. The government introduces a tax of 10%. What will be the weekly tax revenue collected by the government?

Price elasticity of demand

A government provides a subsidy to the onion producers in a country. For which price elasticity of demand (PED) would this policy be most effective in lowering the price of onions?

Maximum and minimum prices

Which option gives the best description of a transfer payment?

Short-run costs

On 1 May 2012, Bolivia’s President Morales declared that Transportadora de Electricidad (TDE), a subsidiary of a Spanish company which owned and operated about three-quarters of Bolivia’s power grid, would be nationalised. What can be concluded from this?

Maximum and minimum prices

An economy experiences increasing raw material costs together with a drop in business confidence. What effect will this have on the economy’s real GDP and price level?

Economic growth

The shift from centrally planned economies to market economies was accompanied by a major change in the composition of output. What was one immediate result of this transition?

Resource allocation in different economic systems

The diagram presents an aggregate demand curve (AD). What is shown on the horizontal (X) axis and on the vertical (Y) axis?

Economic growth

The table presents data for a country in which consumers divide their income between three commodities, P, Q and R. From year 1 to year 2, in what way has the general level of prices changed?

Balance of payments

Using the Consumer Price Index, the UK inflation rate was 5.2% in September 2011. By June 2014, the UK inflation rate measured in this way had fallen to 1.6%. What can be concluded with certainty about the period from September 2011 to June 2014?

Balance of payments

If a country records a surplus on its balance of payments, its money supply is likely to:

6.3

In the diagram, the foreign exchange market first sits at equilibrium at X. After demand from US residents for holidays in Europe rises, what might the new equilibrium point be?

6.4

Which combination of movements in import prices and export prices would lead to a decline in the value of a country’s terms of trade?

6.3

The diagram illustrates the production possibility curves for two countries, X and Y. If productivity falls, country X’s production possibility curve shifts from X1 to X2. Which statement is correct?

Production possibility curves

What key argument could a government in a small country put forward during a deepening global recession to defend raising import tariffs and introducing other trade protectionist measures?

Protectionism

Which policy action would count as a supply-side policy measure?

Supply-side policy

Which policy measure is an expenditure-switching measure intended to cut a current account surplus?

Labour market

The diagram shows the production possibility curves for two economies, X and Y. Which statement about these two economies is correct?

Production possibility curves

A country is dealing with two issues at once: deflation and a current account deficit in the balance of payments. It chooses to create a budget deficit and reduce interest rates. What effects are these policies likely to have on the two problems?

Fiscal policy

A production possibility curve illustrates labour-intensive farming output alongside capital-intensive manufacturing output. Which of the following would not lead to a shift in this curve?

Production possibility curves

When working out a firm's short-run supply schedule, what is taken to stay constant?

Factors of production

Coffee is cultivated in two main varieties, arabica and robusta. The table shows information about the four biggest coffee-producing countries in 2013-2014. What conclusion can be drawn from the table about output in these four countries?

International trade and free trade

A manufacturer gradually lowers the price of his product in an effort to raise total revenue. The table shows the result of this policy. What is the price elasticity of demand for the product?

Price elasticity of demand

Public transport has an income elasticity of demand of –0.36. What does this show about public transport?

Price elasticity of demand

An ‘App’ for a phone has a perfectly elastic price elasticity of supply. At present, each ‘App’ sells for $10 and 200 ‘Apps’ are sold each day. As the ‘App’ gains popularity, demand rises by 50% at every price. What will be the effect of this change in demand?

Price elasticity of supply

In 2007, oil was 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

A US study advised teenagers to cut the quantity of fizzy drink that they drink. If this advice was followed, how could the outcome be shown on demand and supply diagrams for fizzy drinks and for sugar?

Income elasticity of demand

In the diagram, the supply curve indicates the number of parking spaces in a car park, while the demand curves show demand for spaces on four separate days (D1, D2, D3 and D4). The owner wants to impose a parking fee on each of these days so that the spaces are allocated through the market mechanism. Which pricing policy should the owner choose?

Income elasticity of demand

The diagram illustrates the demand curve and supply curve for a good on which the government has imposed a specific tax. What outcome will this tax produce?

Maximum and minimum prices

The diagram illustrates a consumer’s demand curve for a product. How does consumer surplus change as the product’s price rises in $5 increments between $5 and $20?

Cross elasticity of demand

A government sets a ceiling on rent to help make rented housing more affordable. What is likely to be a long-run effect if the ceiling is fixed below the current free market level?

Maximum and minimum prices

The figure illustrates the demand and supply curves for a good. S1 is the initial supply curve, while S2 shows supply after a tax has been imposed. How much tax revenue is received by the government?

Maximum and minimum prices

A country has an income tax in which the first $10 000 of earnings is not taxed, the following $20 000 is charged at 20% and any income above $30 000 is taxed at a maximum rate of 40%. In addition, it imposes a sales tax of 10% on most goods, while certain essential items are free from the tax. Which set of tax changes would be most likely to produce a more equal spread of income in the country?

Short-run costs

In the diagram, DD represents the demand curve for an agricultural commodity, S1 is the supply curve in period 1 and S2 is the supply curve in period 2. The dashed curve is a rectangular hyperbola. The government runs a buffer stock scheme, setting the price at OP1 in period 1 and OP2 in period 2. How do output and farm revenue in period 2 compare with period 1?

Maximum and minimum prices

A government chooses to privatise a nationalised company by passing ownership straight to its managers and workers. What is the most likely reason for making this decision?

Law of diminishing returns

During 2012, high street shops saw sales decline when domestic demand in an economy weakened. Even so, the effect on the wider economy was not as negative as had initially been expected. What could have reduced the impact on the economy?

Economic growth

What is required for specialisation to be effective?

Factors of production

In the diagram, the economy first rests in equilibrium at point X. The government then implements a supply-side policy measure, causing the economy to shift to point Z. Which supply-side policy and response could account for this movement?

Supply-side policy

A country recorded an annual deflation rate of 2% over four consecutive years. Which statement is correct for the four-year period?

Balance of payments

Orders for durable US manufactured goods decreased by 7.3%. What could account for this shift in trade, and in what way would it have influenced the US balance of payments?

6.3

The following exchange rates were noted: £1 = €1.208; $1 = €0.727; €1 = $1.375. Between which values should £1 be exchanged for $?

6.4

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

6.3

The diagram illustrates production possibility curves for two countries, X and Y. What can be deduced from this diagram?

Production possibility curves

Which of the following is not linked to increased economic integration between countries?

11.6

Which statement is not a valid reason for imposing an import tariff?

Protectionism

A rise in interest rates is an example of which category of policy?

Monetary policy

Policies that a government could adopt to cut a deficit on the current account include devaluation, cuts in government spending, rises in interest rates and tariffs. Which two of these policies are classed as expenditure-reducing?

6.5

The movement from WX to YZ on a country’s production possibility curve is illustrated. What might have led to this change?

Production possibility curves

Which policy, if taken up by a government to lower the inflation rate, could lead to a larger deficit on the balance of payments?

Monetary policy

Not long ago, thousands of ancient Roman coins were unearthed in a field in the UK. A museum collected funds to purchase them. Which function of money did the coins continue to perform?

Oligopoly

How can a market supply curve be described?

Demand and supply curves

In a country, the demand curve for new cars moved to the left. Which change could have caused this shift?

Demand and supply curves

The table shows estimated price elasticities and cross elasticities of demand for bus and rail travel. What change would there be in the volume of rail travel caused by a 1% rise in bus fares?

Price elasticity of demand

Bread has been estimated to have an income elasticity of –0.04. What conclusion can be drawn about bread from this figure?

Price elasticity of demand

SX, SY and SZ show the supply curves for goods X, Y and Z. When the price of each of the three goods increases from $5 to $10, what are the values of their price elasticity of supply?

Price elasticity of supply

The diagram illustrates alternative production possibilities for a bakery. It wants to raise cake output from 15 units to 25 units. What is the opportunity cost?

Production possibility curves

A manufacturer’s capacity to raise supply in the short run will be higher

Price elasticity of supply

For a market in one good, the quantity supplied (QS) and the quantity demanded (QD) are QS = P – 30 and QD = 240 – 2P, where P = price in dollars. After a tax change on the good, QS becomes P – 36. What effect will this change have on equilibrium price?

Demand and supply curves

The diagram depicts a market for a good that is met partly by domestic production and partly by imports. Sh1 represents domestic supply, while Sw represents world supply. Domestic supply then moves to Sh2. What would the consumption level be, and what is the corresponding import volume after the supply change?

Income elasticity of demand

In the diagram, D shows the demand curve for Indian tea exports, while S1 is the original supply curve. The Indian government abolishes the tax on tea exports, causing the supply curve to move to S2. Which areas on the diagram show the resulting fall in tax revenue received by the Indian government and the resulting rise in consumer surplus?

Income elasticity of demand

In a country, the normal sales tax rate is 10%, although food is exempt from tax and luxury goods are taxed at 20%. The table gives the spending patterns of three family types. Which option correctly describes the sales taxes in this country?

Short-run costs

In 2009, the government of China was dealing with lower demand in export markets and wanted to raise sales of electrical goods produced in China. Which policy would have achieved this aim?

6.4

Which of the following counts as a transfer payment?

National income statistics

In the diagram, D represents the demand curve for an agricultural commodity, while S shows the original supply curve. The government undertakes to keep farmers’ incomes at no less than their starting level. The harvests in the four years that follow are indicated by supply curves S1–S4. For which of these years will the government be able to avoid paying farmers any additional income?

Income elasticity of demand

Governments lower their holdings of assets through privatisation. They raise their holdings of assets through nationalisations. The diagram illustrates worldwide sales of state-owned assets and worldwide government purchases of private stock between 1988 and 2013 in US$ billion. What conclusion can be drawn from the diagram?

Maximum and minimum prices

In the diagram, AD1 and AD2 represent aggregate demand curves for an economy. What might cause the economy’s aggregate demand to move from AD1 to AD2?

Economic growth

Which statement gives the strongest justification for government intervention in a free market economy?

Government intervention in markets

What has to be the case if an economy is experiencing inflation?

Balance of payments

Assume that an average consumer’s spending is split among bread, meat, milk and vegetables in the ratio 4 : 3 : 2 : 1. Over a year, the price of bread decreases by 10%, the price of meat rises by 20%, and the prices of both milk and vegetables rise by 10%. By how much does the average price level increase during the year?

Balance of payments

In August 2013, a Dutch insurer said that it wanted to sell its South Korean Life Insurance group to a South Korean company for $1.65 billion. How would this transaction be shown in the Dutch balance of payments?

6.3

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

6.4

The value of the US dollar increased relative to the Australian dollar. What could be a consequence of this?

6.4

What combination of movements in export prices and import prices would lead to an improvement in a country’s terms of trade?

6.3

Countries X and Y together supply the world with computers and wheat. At present, each country splits its resources evenly between the two goods and achieves the output shown below. How would total output change if each country were to specialise fully in the product for which it has a comparative advantage?

International trade and free trade

For what reason might a government choose to raise the quota placed on imports?

Protectionism

What might be regarded as an expansionary supply-side policy?

Supply-side policy

To reduce a balance of trade deficit, the government of Indonesia has chosen to use expenditure-dampening policies. Which policy would best match this description?

Labour market

The diagram shows curve PP as the production possibility curve for a country that produces goods X and Y. Making X uses more labour than making Y. A law cuts the working hours of the labour force. Which curve could represent the country’s new production possibility curve?

Production possibility curves

Country X has an open economy and a floating exchange rate. It then shifts to a fixed exchange rate. Which combination of policy changes would be the most effective in lowering inflation?

Externalities

Which government-provided service could be explained using the concept of public goods?

Government intervention in markets

Which change does not have an instant impact on the position of the demand curve for a product?

Demand and supply curves

Which statement about market supply is correct?

Demand and supply curves

Under what conditions must consumers’ total spending on a good rise when its price rises?

Price elasticity of demand

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

Price elasticity of demand

The cross-elasticity of demand for good S with respect to the price of good P is +1.5. The cross-elasticity of demand for good S with respect to the price of good R is –1.5. The cross-elasticity of demand for good P with respect to the price of good R is –1.5. What conclusion can be drawn about goods P, R and S?

Price elasticity of demand

In Fiji’s balance of payments, how would revenue from tourist arrivals be entered, and in which section would it appear?

Economic growth

Explain the meaning of the term ‘equilibrium price and quantity’ in the market for a good or service, and show how a new equilibrium position is created when demand decreases.

Income elasticity of demand

Outline the functions of the factor enterprise in a modern economy, and explain how enterprise reacts to a rise in demand for a good.

Factors of production

Explain what could lead to a favourable movement in an economy’s terms of trade.

6.3

How did the balance on Turkey’s current account change between 2012 and 2013?

6.3

Use examples to show the distinction between private goods and public goods, and explain why only private goods will be provided in a free market economy.

1.6

Explain what is meant by ‘price elasticity of demand’ and, using examples, outline the factors that would make demand for a good relatively price-elastic.

Price elasticity of demand

Using examples, explain the instruments of monetary policy and supply-side policy.

Monetary policy

Suggest a change in the prices of exports and imports that could explain the change in the Australian terms of trade between 2011 quarter 3 and 2014 quarter 2.

6.3

Explain how economists apply the concept of elasticity to tell normal goods apart from inferior goods and to separate substitutes from complements.

Price elasticity of demand

Apply aggregate demand and aggregate supply analysis to distinguish cost-push from demand-pull causes of inflation.

Economic growth

Use production possibility diagrams to explain how specialisation and international trade can improve the standard of living of consumers in a country.

International trade and free trade

If a business raises its output, under what circumstances will this produce efficiency?

Behavioural economics

What must be in place for price discrimination to generate profit?

7.6

A firm whose product has a downward-sloping straight line demand curve is operating at an output level at which its marginal revenue is positive. Which strategy would be most effective if the owners of the firm want to maximise the firm’s total revenue?

7.5

The diagram illustrates a firm’s short-run and long-run average cost curves. Which curve is the firm’s long-run average cost curve?

7.5

The table presents the employment size distribution (%) of manufacturing firms in two European countries as reported by OECD in 2011. What is the most likely explanation for the different employment distribution in the two countries?

7.7

A firm experiences a demand curve for its product that slopes downward. If labour is the only variable factor input, in what way does the firm obtain its demand curve for labour?

Long-run costs and economies of scale

In the diagram, the ARPL curve represents the average revenue product of labour curve for a profit-maximising monopsony, while the MRPL curve shows its marginal revenue product of labour curve. The firm pays its workers the minimum wage, OW, imposed by the government of the country. The curves AFCL and MFCL indicate the firm’s average and marginal factor cost curves if there were no government intervention. What will happen to the number of workers employed by the firm if the minimum wage is abolished?

Long-run costs and economies of scale

What might increase the number of people employed in an industry producing good X?

Income elasticity of demand

Which pairing of fiscal policy measures would be most effective in lowering income inequality?

Taxes and subsidies

The diagram presents an industry’s supply and demand curves. At first, the government limits output to OQ. This output restriction is then lifted. If there are no externalities, which area on the diagram represents the net increase in economic welfare?

Cross elasticity of demand

What is excluded from the measurement of national income?

National income statistics

Joshua and Ruth are the sole inhabitants of a remote island. In the diagram, line XY represents the greatest quantity of goods available to Joshua and Ruth, while line OE shows points of equal distribution of the goods. Relative to the original point I, which point would show a rise in economic welfare under the Pareto Efficiency Criterion?

Behavioural economics

The graphs illustrate percentage changes in money GDP and consumer prices in a country from 2013 to 2015. Which conclusion can be inferred from the graphs?

National income statistics

Which of the following are typical features of most developing economies? (government debt-to-GDP ratio / average propensity to save)

11.4

Labour from developing countries often moves to developed countries and obtains employment. How would this movement of labour most likely influence economic growth and the pressure for wage rises in the developed country?

Long-run costs and economies of scale

Which type of unemployment is linked to a shortfall in aggregate demand?

Price stability and inflation

The diagram illustrates the yearly percentage (%) change in employment and output in the UK private sector from 2000 to 2012. In which year did labour productivity fall by the greatest amount?

Unemployment

Which is most likely to make the public’s ratio of cash to bank deposits fall?

Oligopoly