May/June 2019

India is not achieving its full economic potential because its rail, road and electricity infrastructure is weak, and there are too few skilled civil engineers. Which factors of production must be increased?

Factors of production

What does cross elasticity of demand mean?

Price elasticity of demand

Consumers experience a rise in their incomes. Under which circumstances would the quantity of the product sold rise by the greatest amount?

Price elasticity of demand

If a market is in an unstable disequilibrium, it does not move back to its initial equilibrium point after being disturbed from equilibrium. The diagram illustrates a market with two equilibrium points. PO/QO shows the initial market equilibrium. Which price places the market in an unstable disequilibrium?

Income elasticity of demand

The table gives the amount of a product supplied at two price levels by four firms, A, B, C and D. Which firm has a price elasticity of supply of 1 when the price drops from $10 to $8?

Price elasticity of supply

In order to strengthen its financial position, a government chose to cut spending on public sector investment. Even so, economic growth did not decline. What was the most likely result of the government’s decision?

Fiscal policy

An economy faces a 20% shortage of housing. The government constructs 10% more homes for lower-income families and sets the rent below the market equilibrium. What effect will this direct provision have on the market?

Maximum and minimum prices

Which of the following statements about nationalised and privatised industries is correct?

Maximum and minimum prices

Which statement about subsidies is not correct?

Maximum and minimum prices

What is not likely to happen as the supply of public goods increases?

Behavioural economics

The diagram illustrates the aggregate demand and aggregate supply curves for an economy. What might cause aggregate demand to shift from AD to AD1?

Economic growth

The basic economic problem is how unlimited wants can be satisfied with scarce resources. State one example of scarce resources.

Scarcity, choice and opportunity cost

Which factor would shift the short-run aggregate supply curve without shifting the long-run aggregate supply curve?

Economic growth

Which effect of inflation is referred to as redistributive?

Balance of payments

In what situation will a country’s terms of trade deteriorate?

6.3

Countries X and Y, both industrialised, trade with one another. Country X places a general tariff of 20% on imports from country Y. Under which circumstances would introducing the tariff be disadvantageous for country X?

Protectionism

The diagram illustrates the aggregate supply and aggregate demand curves for an economy. What factor would result in a shift from X to Y?

Economic growth

The table shows how a country's population, price level and Gross Domestic Product (GDP) changed. What changes occurred in real GDP and real GDP per head between year 1 and year 2?

National income statistics

The table presents chosen balances from a country’s balance of payments account in 2016. What was the country’s current account balance in 2016?

6.3

What does the Marshall-Lerner condition say has to exist for a depreciation of a currency to lead to an improvement in the current account balance?

6.4

What is most likely to rise when a policy increases direct taxes and cuts government spending?

Fiscal policy

In order to motivate people to work, a government raises the minimum income threshold at which income tax begins to be paid. Which kinds of macroeconomic policy are being used in this case?

Fiscal policy

Which of the following statements is not a positive economic statement?

Economic methodology

In a country where unemployment is low and the exchange rate is managed by floating, the balance of payments shows a current account deficit that continues over time. Which policy aimed at cutting this deficit is most likely to leave unemployment low, but lead to inflation?

Labour market

The diagram illustrates a production possibility curve (PPC). It shows the different combinations of consumer goods and capital goods that an economy can produce when all its resources are fully used. What is indicated by position X?

Production possibility curves

As the tariff on Indian goods imported into the US drops from 10% to 5%, what is the most likely effect on producer surplus and consumer surplus in the US?

Protectionism

The diagram illustrates the demand for, and supply of, carrots. What is correct at price P1?

Income elasticity of demand

The diagram illustrates the market for hand-made furniture. Which region of the diagram indicates the producer surplus?

Cross elasticity of demand

In a competitive market, how is the market supply of a product derived?

Demand and supply curves

The diagram illustrates the demand curve for luxury cars. The change in the demand curve from D1 to D2 can be explained by

Demand and supply curves

A production possibility curve for a country is shown. What would bring about the shift from PP to P1P1?

Production possibility curves

The diagram illustrates how price (P) and demand (D) are related for a normal good G. What would lead to a shift to D1?

Demand and supply curves

Which change is most likely to raise consumer surplus in the market for a normal good?

Cross elasticity of demand

The cross elasticity of demand for products X and Y is negative. What is the immediate impact if the price of product Y increases?

Price elasticity of demand

Which pair of events is most likely to keep the demand curve for a normal good unchanged in its original position?

Demand and supply curves

Which one of the following counts as a transfer payment?

National income statistics

Excess sugar leads to a rise in a consumer’s weight. A government has introduced a ‘sugar tax’ on the consumption of soft drinks with a high sugar content. How might this policy help to reduce the number of overweight people?

Maximum and minimum prices

A government plans to set a minimum price for rice, a maximum price for heating oil and a tax on chewing gum. In each of these markets, which group is intended to gain from these policies?

Maximum and minimum prices

A government in Southern Africa was uneasy about the market power of a large producer and wanted to assume control of the company. What could be the outcome of this?

Maximum and minimum prices

What is meant by a regressive tax?

Short-run costs

A country operates a fixed exchange rate. Which pairing of problems would be most likely to lead the country’s government to cut taxation and reduce interest rates?

Price stability and inflation

A government aims to shift its economy from central planning towards a market economy. Which policy would fit this objective?

Resource allocation in different economic systems

How can a change in consumption that results in higher unemployment be shown on an aggregate demand and aggregate supply diagram?

Economic growth

Which of the following is not included in a country’s current account of its balance of payments?

6.3

A country chooses to abolish all tariffs and participate in free international trade. What final decision must the country make before free trade can begin?

Protectionism

What is taken to remain unchanged when an aggregate demand curve is drawn?

Economic growth

The diagram illustrates the introduction of an import tariff. SW represents world supply. SW + tax shows world supply after the tariff has been introduced. Which statement is incorrect?

Protectionism

An economy is going through a phase of deflation. What has to be occurring?

Balance of payments

A British citizen purchases a house in the US and rents it to American citizens so that he can earn income for himself. On the UK balance of payments, where would the original purchase and then the rent be entered?

6.3

Under a floating exchange rate system, what factors set the foreign exchange value of a currency?

6.4

A country that has a balance of trade deficit increases interest rates. In what way might this help to cut the deficit in the short term?

6.5

At present, the economy is located at PY on the diagram. In the short run, what effect is government spending on education likely to have on unemployment and inflation?

Fiscal policy

Which factor would determine the boundary of a country’s production possibility curve?

Production possibility curves

The diagram illustrates the AD / AS curves for an economy. Which policy would lower the price level from P1 to P2, as shown?

Monetary policy

What reasons support government intervention in supplying a merit good such as education?

Government intervention in markets

The diagram illustrates the supply of limestone from quarry X and quarry Y at two different prices. What is the measure of supply responsiveness as the price rises from P1 to P2?

Price elasticity of supply

The diagram illustrates the demand for and supply of cream. The initial equilibrium is point X. Strawberries and cream are complementary goods. If the price of strawberries falls while the cost of producing cream rises, which point shows the new equilibrium?

Income elasticity of demand

Hunters in Mozambique are trying to obtain wild honey from beehives. To locate the beehives, they follow birds called honeyguide birds, which are after the beeswax that is also present in the beehives. What does this suggest?

International trade and free trade

What does it mean if the income elasticity of demand for a good is –0.2?

Price elasticity of demand

What opportunity cost does a person face by spending $20 on a new pair of sports shoes?

Scarcity, choice and opportunity cost

The table sets out the demand schedule for avocados in a market on a specific day. On that day, the supply of avocados was fixed. Which statement is correct?

Income elasticity of demand

The diagram illustrates the demand and supply curves for a normal good (X). Q1P1 is the starting equilibrium. Assuming all other factors remain constant, what might lead to the market equilibrium changing to Q2P2?

Income elasticity of demand

The diagrams illustrate the supply curves for four separate markets. In which market is the price elasticity of supply always equal to one?

Price elasticity of supply

The diagram shows the market for electric cookers. What is the most likely reason for the equilibrium shifting from point X to point Y?

Income elasticity of demand

The diagram illustrates how a change in government policy affects the market for rice by shifting the supply curve from S to S1. What does the area JKLM show?

Maximum and minimum prices

Which statement is not a reason used to support the process of privatisation?

Law of diminishing returns

Public authorities aim to cut the financial pressure created by transfer payments in economies facing an ageing population. Which policy would support this goal?

Short-run costs

Doctors are worried about the harmful health impacts of sugary drinks. Under what circumstances would a tax on sugary drinks be least effective in improving health?

Price elasticity of demand

The diagram shows how aggregate demand (AD) and aggregate supply (AS) change in an economy over a year. What accounts for the increase in the general price level?

Economic growth

How would an inflation rate that is below expectations be likely to affect lenders and borrowers in an economy?

Balance of payments

Which one of the statements is correct?

Economic methodology

A country lowers the value of its currency in the hope that a deficit on the current account of the balance of payments will fall. What must occur for this to happen?

6.5

Nigeria’s balance of payments current account balance moved from US$899 m in 2014 to US$ –15 763 m in 2015. If all other factors remain unchanged, what is likely to happen in 2015 to GDP and to the exchange rate in Nigeria?

6.3

Australia’s aggregate demand fell over the previous year. What may have caused this?

Economic growth

The diagram illustrates what happens when an import quota is imposed in the market for good X. What is the change in domestic supply and how large is the import quota?

Protectionism

Country X becomes part of a customs union with country Y and is going to abolish the tariff on its imports of good M from country Y. Under which conditions would trade creation in country X be the smallest?

Protectionism

An Australian family buys a holiday to New Zealand, while an Australian mining company exports coal to China. Four students, A, B, C and D, are asked to say where these transactions are recorded in the current account of Australia’s balance of payments. Which student is correct?

6.3

Which is likely to be the least effective store of value during a period of rapid inflation?

Balance of payments

Which change would cause the aggregate demand curve in an economy to shift to the right?

Economic growth

A country’s balance of payments current account is in deficit. What measures could bring it back to equilibrium, assuming the Marshall-Lerner condition holds?

6.5

Monetary policy does not usually take effect at once. Which time lag is likely to worry a government least if its main aim is a quick domestic effect?

Monetary policy

What is true at any point on an economy’s production possibility curve?

Production possibility curves

Which of the following is the most appropriate example of an expansionary supply-side policy?

Supply-side policy

‘The local government of Tokyo should apply a policy of taxation to cut traffic congestion in the city centre.’ What can be concluded from this statement and the type of economic policy?

Maximum and minimum prices

Which statement about market disequilibrium is right?

Income elasticity of demand

In the diagram, D1 and S1 show the demand for and supply of luxury watches. The original equilibrium is at point X. The cost of the raw materials used to make watches increases. At the same time, the incomes of the rich rise. Which point on the diagram would be most likely to show the new equilibrium?

Income elasticity of demand

For a product, the quantity demanded (QD) is given by QD = 400 – 20P, where P is the price in dollars, and the quantity supplied (QS) is QS = 100 + 40P. What conclusion can be drawn about the market at a price of $5?

Income elasticity of demand

In which situation would the supply curve of a car manufacturing firm be most likely to be price elastic?

Price elasticity of supply

The diagram illustrates a market for wheat. What happens to the demand for and supply of wheat when the price of wheat falls from P2 to P1?

Demand and supply curves

Describe, using Fig. 1.1, the way the yuan’s value against the US dollar changed from 2014 to 2017.

6.4

Explain, with the help of diagrams, how (i) constant and (ii) increasing opportunity costs influence the shape of an economy’s production possibility curve.

Production possibility curves

Explain, with the help of a diagram, the disadvantages for consumers when a maximum price is introduced in a market for an essential food item.

Maximum and minimum prices

Explain, with the help of a diagram(s), how changes in aggregate demand and aggregate supply can cause inflation in an economy.

Economic growth

(i) How did Egypt’s current account balance change between 2014 and 2016?

Balance of payments

Explain how economists use the idea of elasticity to tell inferior goods and necessary goods apart when consumer incomes change.

Price elasticity of demand

Distinguish between regressive and progressive taxes and explain whether an income tax or a specific indirect tax would be used to make post-tax incomes more equal.

Short-run costs

Explain, using examples, what is meant by ‘protectionism’ and, with the aid of a diagram, show how export subsidies may be regarded as a form of protectionism.

Protectionism

Describe, using Fig. 1.1, how oil production in Nigeria changed between 2015 and 2016.

Demand and supply curves

Using examples, explain why merit goods are regarded as under-consumed and demerit goods as over-consumed.

7.4

Explain how the causes of cost-push inflation differ from those of demand-pull inflation.

Balance of payments

Explain the benefits of free trade as indicated by the principle of comparative advantage.

International trade and free trade

At what point can an economy be described as economically inefficient?

Behavioural economics

In the long run, what characteristic does monopolistic competition have, but perfect competition does not?

7.6

At present, a small European airline operates at point X on its long-run average cost curve. It aims to gain a larger share of the European airline market and plans to merge with another small European airline. The combined business would operate at point Y on the long-run average cost curve, as shown. Why might the combined business be able to produce at point Y?

7.7

A firm sells its product to consumers in two different markets, M and N. In which circumstances would a policy of price discrimination across the two markets be most profitable for the firm?

Price elasticity of demand

A community depends on a private firm for its electricity supply, and this electricity is generated by a coal-fired power station. The station produces air pollution, creating an external cost that is shown in the diagram. The government decides to levy a tax on the electricity company in order to correct market failure. Which option represents the tax?

7.4

Some employees in a low-paid job choose to work more hours in order to raise their disposable income. Yet this choice cuts the state-provided benefits they receive, so they are no better off. What does this describe?

Long-run costs and economies of scale

Which policy is most likely to be the least effective way of creating a more equal income distribution among households?

Short-run costs

The table presents the principal features of employment in two occupations. What may be concluded with certainty from the table?

Long-run costs and economies of scale

The data table presents a firm with four alternative production methods for producing its intended output. Each method involves a different cost and results in a different level of pollution. Government regulations require polluting firms to purchase pollution permits costing $90 each. Each permit gives the firm permission to release 1 tonne of pollution. Pollution may not be emitted unless a permit has been bought. Which method of production has the lowest total cost?

Maximum and minimum prices

If GDP at factor cost is already known, how is GDP at market prices calculated?

National income statistics

Which features of the population, together with the size of the informal economy and the inflation rate, would make Gross Domestic Product (GDP) likely to be a fairly accurate way of comparing the standard of living over time?

National income statistics

The diagram illustrates the cost and benefit curves for a good in a free market. Which combination is correct?

7.4

The table shows the percentage of employment in the primary, secondary and tertiary sectors for four countries. Which country is most likely to be a developed country?

11.4

The diagram displays the number of unemployed persons (in millions) in the European Union from 2000 to 2016. In which period did unemployment rise at the fastest rate?

Price stability and inflation

A large coal mine has to shut down because demand for coal falls as consumers move to fuels that pollute less. The government arranges retraining courses and recruitment events for the coal mine workers. Which type of unemployment is the government trying to reduce?

Price stability and inflation

Economists have suggested that the most effective policy for encouraging development is ‘trade not aid’. What does this proposal imply?

Trade unions

The table presents the values of selected macroeconomic variables during a time period. What is the multiplier value?

Economic growth

What is most likely to rise if an economy moves into a negative output gap?

Price stability and inflation

In what circumstances would a Keynesian expansionary fiscal policy be most likely to pull an economy out of recession without creating too much inflation?

Fiscal policy