May/June 2017

What is implied when scarcity exists?

Scarcity, choice and opportunity cost

World oil supplies fall because of war in some of the supplying countries, while winter in some importing countries is far colder than normal. The diagram indicates the initial equilibrium price, P. What will be the equilibrium price of oil in these circumstances?

Income elasticity of demand

Good X acts as a substitute for good Y and as a complement to good Z. What would occur following a decrease in the price of good X?

Price elasticity of demand

A government places a specific indirect tax on a product. In which situation will this tax lead to the largest fall in consumer surplus for the product’s buyers?

Maximum and minimum prices

The table gives the highest amount that three students would each be prepared to pay for a taxi to take them home from a nightclub. Assume that they split the taxi fare as set out in the table below. Which shows how much each of them should pay so that they all gain the same consumer surplus?

Cross elasticity of demand

A government sets a floor price for a service. What result will this policy produce?

Maximum and minimum prices

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

Maximum and minimum prices

The diagram illustrates the demand curve, D1, and the supply curve, S1, for a good. The government chooses to give producers a fixed subsidy for every unit they supply to the market. Which curve represents the new effective demand or supply curve?

Maximum and minimum prices

Estimated planned UK government spending for the fiscal year 2016 is £760 billion. The table lists the five largest spending categories. What total amount is shown in the table for transfer payments?

Fiscal policy

What is likely to happen when the government privatises public sector monopolies?

Law of diminishing returns

In a closed economy, aggregate demand must rise if output in the country is to increase. What is needed to bring about this increase in output in the economy?

Economic growth

What is likely to happen to bus travel in the market if an economy changed from a mixed economy to a market economy?

Resource allocation in different economic systems

The diagram illustrates the long-run aggregate supply (LRAS) curve for an economy. At which equilibrium level of national income is a balance of trade surplus most likely to lead to the largest inflationary rise for the economy?

Economic growth

A government manages to turn a current account deficit into a current account surplus. Why might this current account surplus raise the country’s inflation rate?

6.3

The diagram illustrates Greece’s trade position with the EU and Russia from 2005 to 2014. What conclusions can be drawn about the period 2005 to 2014?

6.3

If the exchange rate of the US$ rises, which option would result in the biggest increase in the US current account deficit?

6.4

From 2000, a country’s export prices rose by an average of 50% and its import prices rose by 25%. What is the country’s present terms of trade figure (2000 = 100)?

6.3

Each diagram presents the production possibility curves for the two economies, X and Y, as they make food and clothes. In which diagram would both economies gain if they specialised in the good in which they have comparative advantage and traded at an exchange rate of 1 unit of clothes to 1.5 units of food?

Production possibility curves

There are four countries, A, B, C and D, that trade with one another internationally. In the diagram, each circle shows a free trade area made up of the countries inside that circle. A country may be part of more than one free trade area. Any country outside a circle meets trade barriers. Which country has the best chance of gaining from free international trade?

International trade and free trade

A small trading country chooses a policy of import substitution by making goods domestically. What is the most likely reason for this policy?

Protectionism

The diagram illustrates a government’s revenue and expenditure over three years. What can be concluded from the diagram?

Fiscal policy

A country operating a fixed exchange rate has a surplus on its current account within the balance of payments. Which action is most likely to cut this surplus?

Labour market

The diagram indicates that the production possibility frontier for maize and beans has shifted from PPF1 to PPF2. What change has occurred in the opportunity cost of maize and in the returns to factors producing beans?

Production possibility curves

During recent years, an economy has seen its price level change as illustrated. Which government policy would be the most effective in reversing the trend in the price level shown?

Monetary policy

An individual purchases a ticket to enter a government-owned art gallery. How would an economist classify this visit?

1.6

The diagram illustrates a change in a firm’s supply curve from S1 to S2. What may have led to the shift from S1 to S2?

Demand and supply curves

When the price of a good changes, the quantity of that good demanded rises. What kind of good must it be, and in which direction must price have moved, for this outcome to be guaranteed?

Demand and supply curves

Which combination is most likely to make the demand for a product highly price elastic?

Price elasticity of demand

A producer raises the price of his product from $4 in order to boost total revenue. The table sets out the result of this policy.

Price elasticity of demand

A firm finds that the price elasticity of supply for its product is 0.3. What is likely to be true about the firm?

Price elasticity of supply

Scarcity means that goods have to be allocated among competing consumers. Which basis for rationing is most likely to produce the most equal distribution of goods?

Scarcity, choice and opportunity cost

A product’s supply function may be expressed as Q = 2P + 10, where Q is the quantity supplied, measured in kilos, and P is the price per kilo in dollars. The price drops from $15 to $10 per kilo. The value of price elasticity of supply for this price change falls within a range from

Price elasticity of supply

A local government is considering raising parking charges and adding more lanes reserved for buses only. One official stated that higher parking charges ought to lead to more bus travel. Another official stated that increasing how often buses run will not make demand for bus travel increase. Are these officials’ statements correct or incorrect?

Price elasticity of demand

What would stop the market mechanism from carrying out its rationing function?

Maximum and minimum prices

The diagram illustrates the demand and supply curves for a good over a particular period. Market price is represented by P and the quantity traded by point M. Which area shows producer surplus?

Cross elasticity of demand

A specific tax is charged on the sale of bottles of lemonade. On the diagram, SS shows the supply curve before the tax is introduced, and StSt shows the supply curve after the tax. Which distance shows the specific tax on each bottle?

Maximum and minimum prices

The market starts off in equilibrium at point X. The government then subsidises both consumers and producers through direct payments. Where will the new equilibrium be located?

Maximum and minimum prices

Which one counts as a transfer payment?

Short-run costs

Give one illustration of direct public provision of goods and services.

Maximum and minimum prices

From the privatisation of train and bus services, what result would supporters of a nationalised public transport service be most likely to anticipate?

Behavioural economics

The diagram illustrates the aggregate demand curve for an economy moving from AD1 to AD2. What might have brought about this change?

Economic growth

In which area is the planned economy likely to provide greater benefits than the market economy?

Resource allocation in different economic systems

Which statement about variations in price levels is correct?

Balance of payments

Which pair of events is most likely to lead to inflation?

Balance of payments

The table shows details of trade between Singapore and New Zealand in 2001, the first year after they signed a free trade agreement. The figures are shown in both Singapore dollars (S$) and New Zealand dollars (NZ$). What conclusions can be drawn from the table?

6.3

Country X carries out 60% of its trade with country Y and the other 40% with country Z. At the start, the trade weighted exchange rate index of country X is 100. What will its new trade weighted exchange rate index be if its currency rises in value by 20% against the currency of Y and falls by 10% against the currency of Z?

6.4

The diagram shows D1 and S1 as the original demand and supply curves for the pound sterling (£) in the foreign exchange markets. What would cause the demand curve to move to D2 and the supply curve to move to S2?

6.4

At present, a country’s terms of trade is 150 (base year 2000 = 100). Since 2000, the average price that the country has obtained for its exports has risen by 20%. What change has occurred in the average price it has paid for its imports?

6.3

The table sets out the capability of two countries, P and Q, to make two goods, Y and Z. Which statement is correct?

Scarcity, choice and opportunity cost

Which government policy might be regarded as a protectionist policy?

Protectionism

The government in a country intends to increase income tax rates. On the diagram, the country’s starting equilibrium is shown at point X. Which different equilibrium point would an economist expect to result?

Fiscal policy

State one example of an expenditure-dampening policy.

Fiscal policy

Line XX shows the production possibility curve (PPC) for a worker who picks peas and beans during a 10 hour working day. What would make the worker’s PPC move to line YY?

Production possibility curves

The economy is presently functioning at a level of national income close to full employment. Which mix of macro-economic policies would be most likely to produce net deflationary effects?

Fiscal policy

Four students are presented with this set of assets: a three bedroom house; banknotes and coins in a purse; money held in a bank savings account; shares in a public limited company. They must rank the assets from the most liquid to the least liquid, and the table gives their answers. Which student is correct?

Oligopoly

In what way would an economist determine the market demand curve for a private good?

Demand and supply curves

D1 and S1 denote the starting demand and supply curves for a normal product. They later shift to D2 and S2. Which combination of changes would cause the market equilibrium for the product to move from X1 to X2?

Income elasticity of demand

The table shows a set of price and cross-price elasticities for four commodities, W, X, Y and Z. Which commodity pairs are complements?

Price elasticity of demand

The price elasticity of demand for a product stays constant at unity. Which curve in the diagram illustrates the relationship between total expenditure on the product and its price?

Price elasticity of demand

A bottle-making firm said that it had adopted a new production system. Because of this, the amount made each week could be increased or decreased much more easily whenever bottle prices changed. What term is used to describe this change?

Price elasticity of supply

Give one example of ceteris paribus in use.

Economic methodology

In a free market that is out of equilibrium, which price and quantity combination will cause price to decrease and output to contract until equilibrium is reached?

Income elasticity of demand

If market conditions shift so that supply falls, the price of the product rises. The product has a downward-sloping demand curve. What must happen as a result of this higher price?

Income elasticity of demand

The soap industry includes a number of firms. Firm X accounts for a small share of total output. What is most likely to make the supply curve for firm X move to the right while the market supply curve moves to the left?

Income elasticity of demand

D1 and S1 show the original demand and supply curves for a product. D2 and S2 indicate the corresponding curves after market conditions change. What are the resulting changes in consumer and producer surplus?

Cross elasticity of demand

The diagram illustrates a market where a maximum price is imposed. What would occur if the maximum price were taken away?

Maximum and minimum prices

The diagram shows the effect of a government intervention that moves S1 to S2. What does the area of rectangle WXYZ indicate?

Maximum and minimum prices

The table sets out the demand and supply schedules for a product both before and after the government provides the producers with a subsidy of $4 per unit. What is the total amount the government spends on the subsidy?

Maximum and minimum prices

Which government transaction counts as a transfer payment?

Short-run costs

Once deregulation has taken place, state-owned enterprises in an economy are to be privatised. Which outcome is least likely?

Maximum and minimum prices

Starting from the equilibrium position illustrated, government spending on goods and services rises while overall efficiency in producing goods and services falls at the same time. Which outcome is most likely for the economy?

Economic growth

Which characteristic is always true of a positive statement?

Economic methodology

What information is represented by an aggregate demand curve?

Economic growth

The table presents the year-on-year percentage changes in a country’s consumer price index between 2009 and 2015. Which statement about the price level is correct?

Balance of payments

An Indian multinational earns profits from factories located in the UK. It then acquires a UK-based firm owned by a US company. In India’s balance of payments, how would these two transactions be recorded?

6.3

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

6.4

An economy’s terms of trade declined from 100 in the base year to 90. What movements in the export price index and the import price index could have led to this?

6.3

Kenya grows some of the highest-quality teas, much of which is exported. Its climate is not as suitable for growing olives, but olives can be sold for a higher price per sack. What would certainly happen if a Kenyan company used some of the land on which tea is grown to plant olive trees?

Scarcity, choice and opportunity cost

The diagram indicates that imposing a tariff increases a good’s world price from $10 to $14. What impact did this have on total expenditure on the good?

Protectionism

Which government policy would decrease protectionism?

Protectionism

What does the term deflationary fiscal measure mean?

Fiscal policy

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

Labour market

The diagram illustrates a production possibility curve for an economy operating at point P. Which amount of Y must be sacrificed in order to make the amount of X shown?

Production possibility curves

The US Federal Reserve has a stable price (2% inflation) target and a full employment (5 to 5.2% unemployment) target. The diagram presents the inflation rate and unemployment rate recorded between 2007 and 2014. What can be inferred about the success of Federal Reserve economic policy, 2007 to 2014?

Efficiency

Which statement correctly describes the various types of goods?

1.6

Why does an individual’s demand curve usually slope downwards from left to right?

Demand and supply curves

Ethiopia is Africa’s biggest producer of coffee. S1 and D1 are the initial supply and demand curves for Ethiopian coffee. D2 is a fresh demand curve. What would have led to the change shown in the diagram?

Demand and supply curves

The diagram illustrates the link between total expenditure and price for three products, 1, 2 and 3. Which curves show the products that have price elastic demand and unitary price elastic demand?

Price elasticity of demand

A firm faces a perfectly elastic supply curve at the market price of $10. Which statement about the firm is true?

Price elasticity of supply

A good’s supply function may be expressed as Q = 2P + 10, where Q denotes the quantity supplied in kilos and P denotes the price per kilo in dollars. The price increases from $10 to $15 per kilo. The value of price elasticity of supply for this price increase is in the range from

Price elasticity of supply

Using production possibility curve diagram(s), explain how the ‘peace dividend’ might help to increase the growth of Colombia’s economy.

Economic growth

With examples, explain how a merit good differs from a public good. Explain why one of these goods can be supplied profitably, whereas the other cannot.

1.6

Explain how a successful advertising campaign for a normal good affects equilibrium price and equilibrium quantity, and how these changes allocate resources.

Income elasticity of demand

Explain how a fall in an economy’s foreign exchange rate can cause both cost-push and demand-pull inflation.

6.4

Use production possibility curves to compare the output changes in the RoI and Iceland shown in Fig. 1.

Production possibility curves

Explain the role of the factor enterprise in allocating resources in a market economy when the demand for a good rises. Use a diagram to support your response.

Factors of production

Explain how economists use the concept of elasticity to tell apart substitute goods and complementary goods.

Price elasticity of demand

Explain how fiscal policy differs from monetary policy. Show how each can be used to raise aggregate demand.

Fiscal policy

Explain how the fall in China’s demand for copper is likely to affect each component of aggregate demand in Zambia.

6.4

Use the concept of income elasticity of demand to explain the effect of a rise in incomes on demand for an inferior good and for a necessary good.

Price elasticity of demand

Explain the function of profit in an economy in which the price mechanism is used to allocate resources.

Resource allocation in different economic systems

Explain how the functions of money are changed when an economy experiences a high rate of inflation.

Oligopoly

What is one example of market failure?

Behavioural economics

A firm is producing at the highest point on its average product curve. What must therefore be true?

Factors of production

The leading firm in an oligopoly establishes a research institute to undertake new product development. Which two features of oligopoly are shown in this project?

7.6

What is the key feature of nudge theory?

Maximum and minimum prices

The diagram illustrates a firm’s marginal revenue curve. Which total revenue curve matches this firm’s marginal revenue curve?

7.5

To reduce the cost of living, governments have sometimes set a maximum price for certain goods at a level below the free market price. What is often an unwanted side effect of these policies?

Maximum and minimum prices

The diagram illustrates how the introduction of a national minimum wage, WM, affects an occupation in which employees are hired by a profit-maximising monopsonist. What happened to the total wages received by the workers in the occupation?

Long-run costs and economies of scale

How is ‘the payment made to a factor of production over and above that necessary to keep the factor in its present use’ defined?

Factors of production

The table gives the Gini coefficient values for several countries in 2007. Based on the information above, which statement is correct?

Taxes and subsidies

The table provides information on the carrying capacity and the number of British licensed registered ships over 100 tons from 2010 to 2014. What conclusion can be drawn about British shipping between 2010 and 2014?

International trade and free trade

Which curve is represented in the diagram?

Demand and supply curves

What is one essential condition for achieving productive efficiency?

Behavioural economics

If all other factors remain unchanged, what would cause the level of national income in an economy to fall?

Aggregate demand and aggregate supply

If higher government spending is funded by borrowing from the central bank, and all other things remain unchanged, what effect will this have on the money supply?

Oligopoly

The diagram illustrates the output gap, expressed as a percentage of potential GDP, for the US between 1960 and 2014. In which year was the output gap most likely to cause inflation?

Balance of payments

The diagram presents data on several features of four countries. Which country is most likely to be the most developed?

11.4

The diagram illustrates quarterly changes in Japan’s GDP between 2010 and 2015. How many recessions took place in Japan over this period?

Unemployment

The method for finding the working-age population is shown below. ● ......1...... + ......2...... = labour force ● labour force + ......3...... = working-age population. Which row gives the right terms to fill gaps 1, 2 and 3?

Monopolistic competition