May/June 2018

What could count as an opportunity cost of economic growth in an economy?

Scarcity, choice and opportunity cost

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

Income elasticity of demand

Demand for houses in London has pushed house prices up a great deal over the past five years. Many people are now unable to afford to purchase a house. What can be concluded from this?

Income elasticity of demand

A fixed tax is charged on every bottle of perfume that is sold. In the diagram, S shows the supply curve before the tax is introduced and St shows the supply curve after the tax. Which area indicates the tax revenue collected by the government?

Maximum and minimum prices

The diagram illustrates the demand curve and the supply curve for a product. Which area shows producer surplus?

Cross elasticity of demand

Which of the following statements about maximum and minimum prices is correct?

Maximum and minimum prices

The diagram illustrates the impact on the market for a product when a government subsidy is introduced. What is the outcome of the subsidy payment?

Maximum and minimum prices

Explain why pensions paid to retired citizens count as a transfer payment.

Short-run costs

Which of the following is certainly a feature of a nationalised industry?

Maximum and minimum prices

Which government measure would be recognised as the direct supply of goods and services?

Maximum and minimum prices

In its 2016 budget statement, the South African government proposed stimulating business activity by removing regulations. It also said that government expenditure was expected to rise by 7.1%. The diagram illustrates aggregate demand (AD) and aggregate supply (AS) in the South African economy. X marks the initial equilibrium position. Which new equilibrium would follow from these changes?

Economic growth

A ««1«« economic statement is an objective claim that ««2«« be checked with factual evidence, whereas a ««3«« economic statement is a subjective claim that ««4«« be checked with factual evidence. Which words should fill gaps 1, 2, 3 and 4?

Economic methodology

What would be guaranteed to bring about a drop in a country’s cost of living?

Balance of payments

The table shows data on household spending in the UK economy from 2008 to 2010. What conclusion can be drawn from the data?

Economic growth

The table presents trade in goods and services for a range of countries in 2005 and 2014. What conclusion can be drawn from the table about the balances of trade in goods and services?

6.3

A newspaper headline said that the Australian car industry has been impacted by the strength of the Australian dollar. Which of the following would not be an effect of a strong and rising Australian dollar?

6.4

A country's terms of trade have improved. Which combination of price movements would have led to this?

6.3

The graphs illustrate the production possibilities for commodities X and Y in two countries, M and N. What would happen if M and N agreed to trade the commodities at an exchange rate of 1Y for 3X?

International trade and free trade

In the diagram, D shows a country’s demand curve for an imported good. The government of the country introduces an import tariff equal to PWPC on this good. Which areas show the resulting fall in consumer surplus and the resulting rise in government revenue?

Protectionism

A country’s exports face price-elastic demand. What impact would the introduction of export subsidies have on its balance of trade and on its terms of trade?

Protectionism

A government chooses to raise funds from the general public to pay for its additional spending on apprenticeship training schemes. Which kinds of macroeconomic policy are being applied?

Fiscal policy

Which policy is least likely to help in reducing a balance of payments deficit?

Labour market

What is most likely to be seen as an advantage for producers and a disadvantage for consumers in a planned economy?

Resource allocation in different economic systems

A country has an inflation target of 2.5% and has recently seen the actual rate increase to 6%, while unemployment has dropped to very low levels. Which policy option is most likely to be implemented?

Monetary policy

The diagram shows that a country is able to make manufactured goods and agricultural products. Using this information, which statement is certainly correct?

Production possibility curves

The diagram illustrates a demand curve for a good. Which statement describes the nature of this demand curve?

Demand and supply curves

The diagram illustrates how the price is related to the total expenditure on a good. Which statement is correct?

Price elasticity of demand

During the past ten years, the price elasticity of demand for tea in many countries has increased. What is the most likely reason for this change in price elasticity?

Price elasticity of demand

If the price of cell (mobile) phones goes up from US$100 to US$110 and the quantity supplied rises from 200 to 250, what is the price elasticity of supply?

Price elasticity of supply

A product shows a high price elasticity of supply. What could account for this?

Price elasticity of supply

The statements relate to the plan to construct an additional runway at London’s Heathrow airport. Which statement is normative?

Economic methodology

Under what conditions does the price mechanism cease to operate as a system for allocating goods?

Behavioural economics

In one period, 10 000 units of a normal good are sold at a price of US$20. In a later period, 12 000 units are sold at a price of US$22. What might account for this change?

Income elasticity of demand

A free market is out of equilibrium and there is a shortage of a product. As the market adjusts towards equilibrium, what happens to the price, the quantity demanded and the quantity supplied?

Income elasticity of demand

On the diagram, D and S show the domestic demand and supply curves for a product. Sw shows world supply of the product at the world price of Pw. The product’s original domestic market equilibrium is at E1. If foreign trade were to be prohibited entirely, the domestic market equilibrium would move to E2. What would be the fall in consumer surplus if all foreign trade were prohibited?

Protectionism

A government wants to levy a tax on a product so that most of the tax burden falls on the producer rather than the consumer. Which kind of elasticity should the good have to make this happen?

Price elasticity of supply

The diagram illustrates how a government subsidy affects the supply curve for a product. What conclusion can be drawn about the subsidy as the quantity supplied rises?

Maximum and minimum prices

Which of the following is not an example of a transfer payment?

National income statistics

During 2016–2017, a government allocated $135 billion to the health service. The diagram illustrates healthcare provision in that country. What can we infer about healthcare provision in the country if it were available at zero price?

Income elasticity of demand

The government sells off the telecommunications industry. What is least likely to increase?

Law of diminishing returns

The diagram illustrates short-run aggregate supply and demand in an economy, with the initial equilibrium located at S. What is most likely to bring about a movement from S to T?

Economic growth

YX shows the production possibility curve (PPC) for an economy. Its equation is qY = 1000 – 2qX. What is the opportunity cost of making one additional unit of good X?

Production possibility curves

The diagrams illustrate how the inflation rate changes over time in four countries. Which country has a cost of living that decreases throughout the period?

Balance of payments

A government statistical office calculated the changes in income from employment, pensions and benefits, then deducted income tax and welfare contributions and made an adjustment for inflation. What did the resulting figure represent?

National income statistics

The table lists every entry in a country’s current account within its balance of payments. $ million exports of goods 143 imports of goods 156 exports of services 75 imports of services 72 net transfers +5 What is the current account balance?

6.3

After a prolonged fall in the value of the US$, the monetary authorities in both the US and the UK increased their domestic interest rate. What would happen to the exchange rate of the US$ against UK£?

6.4

Country P exports goods and also imports goods. In year 1, both export prices and import prices are given an index value of 100. The table below gives the matching price indices for years 2 and 3. year 2 year 3 export price index 120 132 import price index 110 121 Which of the following statements is correct?

6.3

In the diagram, MN represents the production possibility curve for a country that has a comparative advantage in producing good Y. What could allow the country to consume the quantities of X and Y shown by point R?

Production possibility curves

How does a customs union differ from a free trade area?

International trade and free trade

Which option about trade protection is correct?

Protectionism

Give one example of expansionary monetary policy.

Monetary policy

In 2012, China recorded a current account surplus of US$155 billion. Which mix of policies could the Chinese Government adopt to cut this surplus?

Labour market

In 1 hour, a farmer harvests 10 kg of strawberries. The farmer is twice as efficient at harvesting raspberries. Which diagram represents the farmer’s daily production possibility curve when they work for 8 hours a day?

Production possibility curves

In an economy, prices are increasing. The government wants to prevent prices from rising any further. Which policies would it probably use?

Monetary policy

Governments supply public goods. What is one example of a public good?

1.6

India ranks among the world’s biggest producers of tractors. S1 and D1 represent the original supply and demand curves for tractors in India. What would lead to the supply curve shifting to S2?

Demand and supply curves

The diagram illustrates the demand curve for a product. Which of the following statements is correct?

Demand and supply curves

The cross-elasticity of demand between two goods will be larger

Price elasticity of demand

A good has a price elasticity of supply of +2. Its initial quantity supplied was 200 units. The price then rises by 30%. What will the quantity supplied be after this rise in price?

Price elasticity of supply

The diagram illustrates S1 and D1, the initial supply and demand curves for fast food in an economy. Point X indicates the initial equilibrium. Fast food is an inferior good. Where would the new equilibrium be after a tax is placed on fast food and real income falls?

Income elasticity of demand

XY shows the production possibility curve (PPC) for a firm making desks and chairs. What are the opportunity costs of producing the 4th and 5th desks for the firm?

Production possibility curves

The diagrams present some data about oil (world oil production and brent crude price for 2013–2015). Which diagram shows how the oil market changed between 2013 and 2015?

Income elasticity of demand

Under what set of circumstances do prices have no influence on how resources are allocated between alternative uses, yet still act as a rationing mechanism?

Resource allocation in different economic systems

What condition must hold for consumer surplus to be zero?

Cross elasticity of demand

A local government plans to provide residents with a card that cuts entry charges by 50% for visits to local museums. The diagram displays the demand curve for a resident who currently takes 3 museum visits. What change would occur in the resident’s consumer surplus once the card is issued?

Cross elasticity of demand

For a product, the demand and supply functions are quantity demanded = 1500 + 50P and quantity supplied = 300P – 2000, where P = price. Because of government regulation, the market price now stands at $15. What may be inferred about the type of price regulation and the state of demand and supply in this market?

Demand and supply curves

Which feature of a tax and benefits system is regressive?

Short-run costs

A government chooses to promote apple consumption after a report says that eating apples is beneficial for health. It provides a subsidy to apple growers. The diagram illustrates the market for apples. What size of subsidy would be needed to move the market equilibrium quantity from Q1 to Q2?

Maximum and minimum prices

Which item is not a transfer payment?

National income statistics

A government lets one firm fail, nationalises a second firm, and persuades a foreign government to make a large investment in a third firm. Which government action has taken place?

Maximum and minimum prices

Which statement is both valid and consistent with the features shown in the diagram (AS/AD)?

Economic growth

A government plans to introduce a road congestion charge that would make private motorists pay a toll for using the roads. Which statement about the proposal is normative?

Economic methodology

An average consumer splits expenditure on food, clothing, accommodation and transport in the ratio 2 : 1 : 4 : 3. Over one year, the price of food decreases by 2%, the price of clothing rises by 4%, the price of accommodation rises by 10% and the price of transport stays unchanged. If the weights in a price index are based on the spending pattern of the average consumer, by how much does the index rise over the year?

Balance of payments

The table gives an extract from the current account of a country's balance of payments accounts. If export of services is 204,465 and total exports of goods and services are 511,275; imports of goods are 417,006 and imports of services are 126,369; trade in goods = –110,196 and total trade in goods and services = –32,100, what are the values of export of goods, G, and the balance of trade in services, H?

6.3

During June 2016, the UK voted to leave the European Union. The table sets out how the value of the pound sterling changed before and after the vote: June £1 = $1.48; Sept £1 = $1.32. The UK is a significant trading nation. What short-term effect is most likely to result from changes in the value of the pound sterling on the UK economy?

6.4

What is the J curve effect directly associated with?

6.3

The terms of trade for the major oil-exporting country of Saudi Arabia declined from 223 in 2013 to 205 in 2014. What might be a probable reason for this decrease?

6.3

A certain good sold in the Barbados market might be provided by domestic producers, or by producers in Trinidad and Tobago, or by producers in the United States (US), at the prices listed in US dollars: Barbados $1.00; Trinidad and Tobago $0.85; US $0.75. At first, Barbados imposed a 20% ad valorem duty on imports from Trinidad and Tobago and the US. Barbados then entered a customs union with Trinidad and Tobago, using a common external tariff, also of 20%. From which countries would Barbados import the good before the customs union was created, and after the customs union was created?

Protectionism

What would lower an economy’s protection from car imports?

Protectionism

A country is not involved in international trade, and its domestic market price is Pd. It then chooses to enter free trade, causing the market price to move up to the world price (Pw). What effect does this have on consumer surplus and producer surplus when the economy enters free trade?

International trade and free trade

A government raises the basic income tax rate in order to fund extra spending on apprenticeships and training. Which kinds of macroeconomic policy are being used?

Fiscal policy

If an economy has a continuing balance of trade deficit, it may decide to impose tariffs on imports of manufactured goods. Under what conditions could tariffs eliminate a balance of trade deficit in the long term?

Labour market

A firm alters the kind of product that it makes. What could restrict the firm’s capacity to apply division of labour?

7.7

Bulgaria’s Consumer Price Index recorded an annual change of –2.2% in April 2016. In May, the annual change was –1.4%. Which fiscal policy and monetary policy would be most suitable in the short run to bring back price stability?

Fiscal policy

A party of tourists is left stranded on a desert island. They choose to create their own money system. Which statement about their choice of money is correct?

Oligopoly

What factor is likely to shift the demand curve for tickets to pop concerts, but not the supply curve?

Demand and supply curves

The demand curve in the diagram shows how many passenger journeys by train are made each week on a route. At first, the fare is OP, but it is then lowered by PW. Which area shows the expenditure on the additional journeys caused by the lower fare?

Demand and supply curves

The diagram presents the demand curve for a product. If rectangle OLMN has the same area as rectangle OPQR, which statement is correct?

Price elasticity of demand

If the supply of a good falls, the equilibrium price does not change. What is the price elasticity of demand of that good?

Price elasticity of demand

The curve shown in the diagram illustrates the link between the price and the quantity of a product. No label has been attached to it. Which description of the curve is correct?

Demand and supply curves

Explain, using a demand and supply diagram, how the fall in the price of a barrel of oil helped to reduce the value of the rouble.

6.4

Explain why both merit goods and demerit goods are instances of private goods.

1.6

Explain the factors that can influence the price elasticity of demand for a product.

Price elasticity of demand

Explain the characteristics that money must possess so that it can carry out its functions effectively.

Oligopoly

(i) Calculate the size of aggregate demand in Thailand in 2014.

Economic growth

Explain the different methods by which resources are allocated in a market economy and a mixed economy.

Resource allocation in different economic systems

Using diagrams, explain how the price elasticity of demand for a product affects the way an indirect tax is borne on that product.

Maximum and minimum prices

Explain how a high rate of inflation and a rise in an economy’s exchange rate can each lead to a deficit on the current account of the balance of payments.

6.3

Use Table 1.1 to help you answer parts (i), (ii) and (iii).

International trade and free trade

Using an example of each, explain the differences between direct progressive taxes and indirect regressive taxes.

Maximum and minimum prices

State and explain two factors of production required for the manufacture of chocolate. Explain the benefits of specialisation in the manufacture of chocolate.

Factors of production

Explain the chief reasons for changes in the general price level in your country, or in another country you know well.

Balance of payments

A government carries out an assessment of the costs and benefits of permitting a leisure company to build a holiday resort in an area of natural beauty. Under what circumstances should the government permit this development to go ahead?

7.4

What does the observation that an industry is contestable suggest?

7.6

What is likely to encourage the expansion of large firms in an economy?

7.7

A firm switches its aim from profit maximisation to producing at the allocatively efficient output. Under which market structure would this lead to the smallest change in economic welfare?

7.6

Which government policy aims to correct ‘market failure’?

Government intervention in markets

The chart indicates how employment changed by sector in a country from 2010 to 2016. Which statement about the period 2010 to 2016 must be true for this country?

Monopolistic competition

An engineer receives $100 000 each year. The best alternative paid job she could obtain is a teaching position paying $60 000 a year. What are her transfer earnings and her economic rent?

Factors of production

What would inevitably make the labour supply curve in a specific industry shift to the right?

Long-run costs and economies of scale

A café owner close to a beach had five employees and paid each one $10 an hour. In the holiday season, two further employees were required. To attract the extra workers, the employer had to raise the hourly wage for every employee to $12 an hour. What was the marginal cost per hour of employing two additional staff?

7.5

The diagram illustrates an economy’s production possibility curve. What leads to a shift from point X to point Y?

Production possibility curves

In an economy, real national output rises more quickly than employment. What might explain this?

Unemployment

What is one example of market failure?

Behavioural economics

The table illustrates how three economic indicators changed over a two-year period in a country. In which year would GDP have been the most precise indicator of the standard of living in that country?

National income statistics

What assumption is made in the explanation of cyclical unemployment?

Price stability and inflation

What indicates net injections into a country’s circular flow of income? (Statements: I > S; X < M; G < T)

Aggregate demand and aggregate supply

In JM Keynes’s view, monetary policy can at times be ineffective. The central bank is assumed to control the supply of money (MS). The demand for money is LP, and real income in the economy has increased. On the diagram, which position would render monetary policy ineffective?

Monetary policy

The US economy depends strongly on international trade both to acquire raw materials and to export products, and it is currently in equilibrium at point X. If the value of the US$ decreases, what will the new equilibrium point be?

6.4

Out of any extra national income, 20% is used for imports, 25% is paid as taxes, 5% is saved and the remainder is spent on domestically produced goods. Using the multiplier effect, if exports rise by $100 million, what will be the ultimate increase in residents’ spending on domestically produced goods?

Aggregate demand and aggregate supply