Oct/Nov 2019

Which of the following is true of a normative statement?

Economic methodology

The cross elasticity of demand between two goods, X and Y, is +1.8. Good Y has an income elasticity of demand of –0.6. If consumers’ incomes rise and the price of good Y also rises, which combination of effects will occur?

Price elasticity of demand

What does price elasticity of supply mean?

Price elasticity of supply

What is meant by the assumption ‘ceteris paribus’ when economists study how the quantity demanded of a good varies?

Demand and supply curves

Under what situation is the demand for a product described as price elastic?

Price elasticity of demand

Which product is most likely to be supplied only by the government?

1.6

What term is used for income earned by a person that has no matching contribution to output?

Short-run costs

A government policy benefits older people while disadvantaging younger people. Which measure would be most likely to correct this imbalance?

Short-run costs

A government provides a subsidy to a producer of a product. What is likely to happen as a result?

Maximum and minimum prices

Which reason is the most appropriate for why a natural monopoly remains under government ownership?

Government intervention in markets

In what circumstances will a country’s introduction of a tariff on the goods and services imported from its main trading partners lower its spending on imports?

Protectionism

What information is shown by a production possibility curve?

Production possibility curves

In what way will higher government spending on infrastructure influence aggregate demand and aggregate supply?

Economic growth

The table indicates the quantity of good X or the quantity of good Y that country R and country T can produce when each country uses all its resources. What conclusion can be drawn from the table?

Production possibility curves

Which factor is most likely to cause a persistent surplus in a country’s current account of its balance of payments?

6.3

The diagram presents Australia’s terms of trade by quarter from Q2, 2014 to Q1, 2017. During which period did Australia’s terms of trade fall and then rise again?

6.3

The diagrams illustrate a country’s aggregate demand (AD1) and aggregate supply (AS1) curves. Following the world economic downturn (2007–2008), some governments cut labour costs and kept interest rates unchanged. How is this most likely to be represented on a diagram?

Economic growth

At time T, an economy changes its exchange rate. According to the J-curve diagram, what happens at T and after T?

6.4

What invariably occurs when the Consumer Price Index rises?

Balance of payments

Which item would not be recorded in Germany’s balance of payments accounts?

6.3

An economy is experiencing a balance of payments surplus that it wants to remove. To meet this aim, which mix of policies would be most suitable?

Labour market

The diagram illustrates the possible connection between the degree of central bank independence and the inflation rate. Which relationship indicates that central bank independence is an effective means of lowering inflation?

Monetary policy

During hyperinflation in Zimbabwe, which two functions of money would the Zimbabwe dollar have been most likely to continue performing?

Oligopoly

Which alteration in economic conditions is most likely to cause a fall in the rate of domestic inflation in an economy?

Balance of payments

The diagram illustrates two production possibility curves, XX and YY. What would bring about a movement from XX to YY?

Production possibility curves

The table presents market demand and supply for bananas across one year. When the market price is 8 cents per kg, the market is in disequilibrium. What action would the government need to take in order to reach market equilibrium at a price of 8 cents per kg?

Maximum and minimum prices

When calculating a firm's short-run supply schedule, what is assumed not to change?

Demand and supply curves

The graph illustrates the demand and supply curves for an industry. What would lead to the supply curve moving from S1 to S2?

Demand and supply curves

The diagram illustrates what happens when a landowner, who has previously allowed motorists to park in his field free of charge, starts charging $1 for parking. What is the resulting loss of consumer surplus?

Cross elasticity of demand

The diagram illustrates the market for a good. If the government sets a minimum price at OP1 and a maximum price at OP2, what would happen?

Maximum and minimum prices

Which statement about scarcity is correct?

Scarcity, choice and opportunity cost

A government raised a particular tax on shoes. The subsequent increase in shoe prices was paid mainly by consumers rather than by producers. What must be true for this to occur?

Price elasticity of demand

The diagram illustrates supply and demand for a good. The starting equilibrium is X. If firms receive subsidies for new machinery, what will the new equilibrium be?

Demand and supply curves

The diagram illustrates the market for a normal good. What would most likely make both the demand and supply curves move to the right?

Income elasticity of demand

The diagrams show the markets for four different products. In which market would a 10% decrease in demand and, at the same time, a 10% increase in supply certainly lead to both a lower equilibrium price and a higher equilibrium quantity?

Income elasticity of demand

For what reasons might governments offer free education to children aged 4 to 16 years old?

Government intervention in markets

The diagram illustrates three possible tax schemes.

Maximum and minimum prices

The diagram illustrates an initial market equilibrium for an agricultural product at $6 and 800 units. What amount will the government need to spend to raise the market price to $10?

Maximum and minimum prices

The table lists categories of annual government spending. $ million: army pay 35; civil servants’ salaries 125; farming subsidies 15; pension payments 75; welfare benefits 50. What is the total amount of government spending on transfer payments?

Aggregate demand and aggregate supply

A subsidy is paid to the producers of a good that has perfectly elastic demand. What outcome will follow?

Maximum and minimum prices

‘Primary income’ and ‘secondary income’ are parts of the current account in the balance of payments. What do these terms mean?

6.3

What labels could be shown on a production possibility curve diagram?

Production possibility curves

The diagram illustrates the initial aggregate demand curve, AD1, together with the initial aggregate supply curve, AS1. The initial equilibrium is at X. Which change would result in the new equilibrium moving to Y?

Economic growth

Which of the following is not an example of protectionism?

Protectionism

The table gives the year-on-year percentage rises in a country’s consumer prices index (CPI). year: 2015 % change 8.3; 2016 6.0; 2017 6.0; 2018 1.0. Which statement is correct?

Balance of payments

The table gives the factor inputs needed to make wheat and cars in countries X and Y. units of factor inputs to produce one tonne of wheat / units of factor inputs to produce one car: country X: 4, 2; country Y: 8, 6. What is it that allows both countries to gain from trade?

International trade and free trade

In February 2016, the OECD called on large economies such as the US and Japan to raise government expenditure. How would this influence the aggregate demand (AD) curve in these countries?

Economic growth

A foreign government makes a payment to a UK university so that its students can be educated there. How should this be shown on the UK balance of payments current account?

6.3

The tables present how the average prices of a country’s exports and imports changed across a period. These figures are given as index numbers, using year 0 as 100. export price index: year0 100, year1 115, year2 125. import price index: year0 100, year1 120, year2 125. By how much does the country’s terms of trade index change from year 1 to year 2?

6.3

Which objective would align with a government’s decision to purchase its own currency in the foreign exchange market?

6.4

What policy could be used to cut a deficit in the balance of payments?

6.5

An economy’s current account within the balance of payments is showing a surplus. The government then revalues the exchange rate. Suppose the Marshall-Lerner condition is satisfied. Which diagram illustrates the effect on the current account balance?

6.4

A product has the key characteristic that if one person consumes it, no one else can consume the same unit. Into which category is this product placed?

1.6

What would rise under an expansionary fiscal policy?

Fiscal policy

Which of the following is a normative economic statement?

Economic methodology

A ticket for an international athletics tournament cost $50. Every ticket was sold. On the diagram, which area shows consumer surplus?

Cross elasticity of demand

Demand curves for a market usually slope downwards. They can also move from D1 to D2 or D3. What could lead to a movement along D1 for good X rather than a shift to D2 or D3?

Demand and supply curves

Which option is not one of the functions of the price mechanism?

Income elasticity of demand

A government sets a maximum price above the market price. What effect will this have on consumer and producer surplus?

Cross elasticity of demand

The diagram illustrates the market for air travel in Asia. The starting market equilibrium is at X. If the price of aviation fuel increases and incomes in Asia are decreasing, what will the new equilibrium be?

Income elasticity of demand

Which one is a positive statement?

Economic methodology

A US study, published in July 2014, advised teenagers to cut down on the quantity of fizzy drink that they consume. One can of fizzy drink contains the full daily sugar allowance for an adult. If this advice were followed, how could the effect be shown on demand and supply diagrams for fizzy drinks and for sugar?

Income elasticity of demand

A government decides to impose a tax on a good. Under which price elasticity conditions would most of the tax be borne by the consumer?

Price elasticity of demand

The diagram illustrates the income tax system used by a country. What are the average and marginal rates of tax as incomes increase from Y1 towards Y2?

Maximum and minimum prices

What is most likely to fall if the government gives a subsidy to the producers of a product?

Maximum and minimum prices

The government brings in a new transfer payment to help low-income households pay for housing. What effects will this have in the housing market?

Maximum and minimum prices

A per-unit tax is imposed on every bottle of perfume that is sold. On the diagram, SS is the supply curve before the tax, and StSt is the supply curve after the tax. Which region shows the portion of the tax revenue borne by producers?

Maximum and minimum prices

In every diagram, the original supply is S1 and the supply after the subsidy is S2. The subsidy is the same in all cases. Which diagram shows the greatest share of the subsidy being passed on to consumers?

Maximum and minimum prices

Which statement is incorrect?

Economic methodology

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

Maximum and minimum prices

Singapore brings in nearly all of its raw materials, and exports make up a high proportion of its GDP. The price elasticity of demand for exports and the price elasticity of demand for imports are both less than 1. What would be the most likely effect of a depreciation of the Singapore dollar?

6.4

Which option is nearest to a public good?

Behavioural economics

The diagram illustrates the initial aggregate demand curve, AD1, together with the initial aggregate supply curve, AS1. The initial equilibrium is at X. What will the new equilibrium be if private sector investment rises and government spending on training courses increases?

Economic growth

From the graph, the rate of inflation for seven countries is shown for 2015 and 2016. What conclusion can be drawn from this graph?

Balance of payments

The diagram illustrates how a tariff affects a product. Using this diagram, what determines the benefit that the tariff creates for domestic producers?

Protectionism

The European Union is made up of countries that trade freely with one another and apply a common external tariff to trade with countries outside the group. What would make the customs union work less effectively?

Protectionism

Which change is most likely to cause a deterioration in a country’s balance of payments?

6.3

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

Balance of payments

What is the most probable effect of an increase in the value of the Malaysian ringgit?

6.4

In what circumstances will an appreciation of a floating exchange rate lead to the greatest deterioration in the current account of the balance of payments?

6.4

An economy is affected by cost-push inflation. Which mix of policies would be most suitable for the economy to use to reduce cost-push inflation?

Supply-side policy

A government lowers the tax rate that firms pay on land and buildings. How would this probably change the economy’s price level and real output?

Supply-side policy

An individual has a dental appointment. He can either drive there by car, or leave the car at home and go by bus followed by train. The journey costs are shown below. Using this information, what is the opportunity cost to the individual of going by car instead of by bus and train?

Scarcity, choice and opportunity cost

A government introduces a more expansionary fiscal policy together with a more deflationary monetary policy. Which combination of policy instrument changes would match this?

Fiscal policy

In the diagram, the initial production possibility curve is LM. What might make the curve move to NP?

Production possibility curves

The diagram illustrates the supply curve for bananas. What is the price elasticity of supply when the price increases from $5 to $6?

Price elasticity of supply

What factors make the market supply curve for an agricultural crop such as wheat inelastic?

Price elasticity of supply

Travellers may cross the English Channel either through the Channel Tunnel or by travelling by sea. The table shows the numbers of passengers, in thousands, who used these services from 2005 to 2015. From 2005 to 2015, the price of the Channel Tunnel decreased while the price of sea journeys increased. What pattern does the data indicate?

Income elasticity of demand

The diagrams show the demand curves for three goods X, Y and Z. They have been drawn on the same scale and may be used to illustrate the price elasticity of each good. The three goods are lamb only, all meat and all food. Which arrangement of goods is most likely to match lamb only, all meat and all food?

Price elasticity of demand

The diagram illustrates the European diesel fuel market, with the initial equilibrium located at M. Because Europeans prefer low-emission cars, the demand for diesel fuel has fallen from D1 to D2. Which area shows the new producer surplus for firms supplying diesel fuel?

Cross elasticity of demand

Explain whether a cheque ought to be treated as money.

Oligopoly

Explain, with the help of a diagram, how a free market would react if a minimum price that had been fixed above equilibrium were removed.

Maximum and minimum prices

Explain, with the help of a diagram, the effect of a subsidy and its incidence in a market for essential transport.

Maximum and minimum prices

Discuss whether supply-side policies are likely to be effective in raising employment in an economy.

Economic growth

(i) Suggest two reasons that could explain why Ethiopia’s current account balance is different from its balance of trade in goods and services in 2015, as shown in Table 1.1.

6.3

Explain, with the help of a diagram, the way in which the equilibrium price and equilibrium quantity of a good change when there is an improvement in the technology used to produce that good.

Income elasticity of demand

Explain how knowing the price elasticity of demand for a good can assist businesses in judging how price changes will affect their total revenue.

Price elasticity of demand

Explain how changes in an economy’s exchange rate will affect its terms of trade.

6.4

Explain one possible aggregate demand reason and one possible aggregate supply reason for the different inflation rates in the BRICS economies since 2012.

Economic growth

Reports indicate that global demand for chocolate is rising at a time when the supply of cocoa beans, the raw material needed to make chocolate, is lower than expected. Explain, with the aid of a diagram, the likely effects of these changes on the world market for chocolate products.

Income elasticity of demand

In March 2017, the Indian government announced a new five year programme of investment in the country’s nationalised railway system. Explain, with the aid of an aggregate demand and aggregate supply diagram, how this investment is likely to influence India’s output, prices and employment.

Economic growth

Explain the likely causes of a deficit on the current account of the balance of payments for an economy that depends heavily on agricultural products.

6.3

Which situation would show that an externality is present?

7.4

Which assertion about the ‘kinked demand curve’ model of oligopoly is not correct?

7.6

As firm X becomes larger, it focuses on a more limited product range. Which economies of scale will the firm be less able to gain from?

7.7

What do economists agree ought to be the objective of any healthcare system?

Law of diminishing returns

A manufacturer of a product generates pollution. In which situation will a specific tax on producing the product be most effective at lowering output?

Maximum and minimum prices

Governments frequently seek to narrow income inequalities. The diagram illustrates the effects of applying taxation and benefits in an attempt to reach this objective. What can be concluded about the effects of taxes and benefits from the diagram?

Taxes and subsidies

Which government policy would not count as regulation?

Maximum and minimum prices

The diagram illustrates the starting position of a labour market. The government raises the number of statutory paid holidays workers are entitled to from 10 days a year to 15 days a year. What effect will this have on the supply and demand curves shown in the diagram?

Long-run costs and economies of scale

The diagram shows the demand for and supply of labour in a competitive industry. What is true of unit of labour L when it is paid wage W?

Long-run costs and economies of scale

Which set of characteristics is usually linked with a developing country?

11.4

Which description most accurately defines sustainable economic development?

Monopoly

Constructing a hospital involves a social cost of $200 million. The social benefit amounts to $240 million; the external benefit is $150 million. What can be concluded from this information?

7.4

The table shows the percentages for youth unemployment and total unemployment in France and the UK in 2001 and 2005. What conclusions can be drawn from the table?

Price stability and inflation

Which alteration in the labour market could result in inflation if the government introduced an expansionary fiscal policy?

Long-run costs and economies of scale

Which assumption is not included in the Keynesian model of national income and employment determination?

Economic growth

An economist once remarked, “if people are paid to stay out of work and taxed when they take a job, it should not come as a surprise if unemployment results”. What is this an example of?

Long-run costs and economies of scale

The table shows the external debt as a percentage of Gross National Income (GNI) for four countries in 2010 and 2015. What conclusions can be drawn from the table?

6.3

The figures below relate to Pakistan and are for 2016: GDP growth 5.7%; population growth 2.0%; inflation rate 3.8%. What was the approximate growth rate of real GDP per head for Pakistan in 2016?

Unemployment