May/June 2020

As centrally planned economies moved to market economies, the mix of output changed considerably. What was one immediate result of this shift?

Resource allocation in different economic systems

How could a firm make the price elasticity of supply of its product higher?

Price elasticity of supply

Shoe manufacturers often use leather when producing their most expensive shoes. Because there is a global shortage of leather, its price has increased. What effect will this price change have?

Income elasticity of demand

The diagram shows the market for a good. Which statement is correct?

Income elasticity of demand

An economics department at a university estimates that the price elasticity of demand for a local business’s products is between –1.1 and –1.3. Which decision could be supported by this research?

Price elasticity of demand

A specific tax is levied on a product whose elasticity of supply is zero. Which statement is correct?

Maximum and minimum prices

The diagram illustrates a market in which the government has fixed a minimum price at OM. What conclusion can be drawn from the diagram?

Maximum and minimum prices

What outcome would supporters of a nationalised public transport service most likely anticipate from the privatisation of train and bus services?

Maximum and minimum prices

A teenager was given a $50 cheque by her parents for her birthday. She deposited the cheque into her savings account at the bank. Why does this gift count as a transfer payment?

National income statistics

What essential characteristic must a public good have?

Behavioural economics

What is least likely to cause a change in an advanced industrialised economy’s terms of trade?

6.3

Which statement is accurate?

Economic methodology

The diagram illustrates the aggregate demand (AD) and aggregate supply (AS) curves for an economy. Which of the following situations would not lead to a movement from AD1 to AD2?

Economic growth

Which combination of changes is most likely to cause the aggregate price level and the level of real output to rise?

Economic growth

Country W does 50% of its trade with country X, 30% with country Y and 20% with country Z. The starting value of country W’s trade-weighted exchange rate is 100. Country W’s currency rises by 10% against the currency of country X, falls by 10% against the currency of country Y and stays the same against the currency of country Z. What is the new trade-weighted exchange rate?

6.4

The table presents a country's goods balance and services balance in selected years. During which pair of years did the combined goods-and-services balance alter the most?

6.3

Which of the following is not an example of protectionism?

Protectionism

How does an expenditure-switching policy aim to reduce a country's balance of payments deficit?

6.5

The diagram illustrates aggregate demand (AD) and aggregate supply (AS) in an economy. Which alterations in subsidies and indirect taxes could have caused the shift in AS shown?

Economic growth

In a recent budget, a government raised defence expenditure and also the amount allocated to training, which improved the productivity of the workforce. The original equilibrium position is marked by X on the aggregate demand (AD) and aggregate supply (AS) diagram. Which equilibrium point would result after these changes?

Economic growth

A rise or fall in exchange rates may happen in both a floating exchange rate system and a fixed exchange rate system, but the terminology used differs in each case. What is the correct terminology?

6.4

During 2018, the United States (US) government lowered direct taxes for consumers and businesses. What effects are likely to result from these changes on consumption, investment and national output?

Fiscal policy

Since consumers have imperfect information about the product, they do not consume enough of it to maximise their private benefit. How would an economist classify this product?

Behavioural economics

A country saw a large decrease in unemployment, yet its inflation rate stayed low. What might account for this?

Market failure

What does the term division of labour mean?

Factors of production

What does a market supply curve describe?

Demand and supply curves

In the diagram, D represents the demand curve for Indian tea exports, while S1 shows the supply curve when a tax is imposed on tea exports. The Indian government abolishes the tax, causing the supply curve to move to S2. Which areas on the diagram show the consequent decrease in tax revenue for the Indian government and the consequent increase in consumer surplus?

Maximum and minimum prices

In which market would equilibrium fail to be reached at point E if price were above Op?

Income elasticity of demand

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

Income elasticity of demand

An indirect tax is charged on a product in a competitive market. In which situation is the value of consumer surplus most likely to stay the same?

Maximum and minimum prices

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

Government intervention in markets

A good has a price elasticity of supply of 2.0. At a market price of $20 per unit, the quantity supplied is currently 300 units per week. The firm increases the price to $25 per unit. What will the quantity supplied be per week now?

Price elasticity of supply

What is an important role of the price mechanism?

Resource allocation in different economic systems

The diagram illustrates the supply curve for a product. The government levies a specific indirect tax of $5 on the product. How will the product's price elasticity of supply change?

Price elasticity of supply

For a market for a good, the quantity supplied (QS) and quantity demanded (QD) are defined by QS = P – 30 and QD = 240 – 2P, where P = price in dollars. If a tax change on the good causes QS to become QS = P – 36, what effect will this have on the equilibrium price?

Income elasticity of demand

What conclusion can be drawn from the diagram? (Diagram: privatisation transactions and revenue for the EU 1981–2012, with revenues from PO and PS and the number of transactions shown.)

Law of diminishing returns

The diagram illustrates the market demand and supply curves for rice. What would happen if a government set a maximum price of $10?

Maximum and minimum prices

A government chooses to take over household waste collection by substituting a private company with one of its own enterprises. Why might this decision be justified?

Government intervention in markets

Which measure would not be included in a government subsidy designed to protect domestic producers from competition?

Protectionism

At present, a country’s railways are operated by private firms. It has been proposed that the government should nationalise the railways. What could be one reason for this?

Government intervention in markets

Which factor is likely to lead to a decrease in aggregate demand?

Economic growth

Which of the following would not count as a barter transaction?

Resource allocation in different economic systems

A country keeps its foreign exchange rate against the United States dollar within a narrow, though adjustable, band. What type of exchange rate is this?

6.4

Which items form part of the financial account in the balance of payments? (The options show whether to include or exclude the balancing item, foreign direct investment, and interest/profits/dividends.)

6.3

Which argument would an importer be most likely to use to win consumers’ support for free trade?

International trade and free trade

Using US Consumer Prices Index (CPI) statistics, a good identical to one that cost $100 in 1913 would have cost $2359.60 in 2013. What was the approximate cumulative inflation rate over this period?

Balance of payments

If an unexpected balance of trade surplus arises, which short-run policies should the government use to preserve the economy’s existing equilibrium? (Diagram: economy in full-employment equilibrium with LRAS and AD.)

6.5

For what reason is a country’s terms of trade value not given in monetary units?

6.3

The statements below concern possible gains from a rise in free trade. Which gain is least likely to occur in the short run?

International trade and free trade

When the interest rate in an economy is 4% per annum, inflation drops from 5% to 3% per annum. What would be one benefit of this decrease?

Balance of payments

Which combination correctly identifies an expansionary fiscal policy measure and the effect it has on a budget deficit?

Fiscal policy

In 2018, the United States (US) government imposed tariffs on a broad range of imports from China. What type of policy was the US government following?

Protectionism

A factory sets up an automated production line to make use of division of labour. What is most likely to rise?

Factors of production

If deflation was thought to result from falling asset prices that reduced wealth and confidence, which policy ought the US government to have adopted in order to eliminate the deflation, and which diagram shows the policy’s desired result?

Fiscal policy

Which statement is a normative one?

Economic methodology

How much must the demand curve move for farm incomes to stay the same? (Diagram: demand curve D; supply changes from S1 to S2 following a good harvest.)

Income elasticity of demand

A producer gradually lowers the selling price of a product. The table summarises the effect of this policy. price ($): 10, total revenue (000s $) 750; price 9 TR 750; price 8 TR 750. Find the price elasticity of demand for the product.

Price elasticity of demand

How is consumer surplus affected when the product price goes up? (Diagram: consumer demand curve showing price rises of $5.)

Cross elasticity of demand

After a 10% rise in car parking charges in a city centre was introduced, the number of bus journeys into the city each day increased from 800 to 1000. What was the cross elasticity of demand for bus journeys in relation to car parking charges?

Price elasticity of demand

An economy is experiencing a shortage of housing. Demand for housing keeps increasing as real incomes rise and more construction firms enter the market to build additional houses. Which diagram shows this situation?

Income elasticity of demand

An economist knows the present position where an economy is operating on its production possibility curve. What can the economist infer about the economy from this information?

Production possibility curves

Which pairing of a good’s classification and a market change would make the demand curve for the good move to the right?

Demand and supply curves

The supply (S) of a product is given by the equation S = 10 + 10P, where P represents the product’s price in $. What is the product’s price elasticity of supply when the price increases from $1 to $2?

Price elasticity of supply

The table shows estimated price elasticities and cross elasticities of demand for bus and rail travel. What change would be expected in the amount of rail travel if bus fares rose by 1%?

Price elasticity of demand

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

Price elasticity of demand

What is the most likely result when the government privatises public sector organisations?

Law of diminishing returns

The diagram illustrates the market for bus services both before and after a government subsidy. Which area on the diagram represents the incidence of the subsidy for consumers?

Maximum and minimum prices

The diagram illustrates the market for eye tests. Which policy would allow the government to raise the quantity of eye tests from OQ1 to OQ2?

Maximum and minimum prices

In November 2017, the Scottish government put in place a minimum price for alcohol due to the harmful health consequences of drinking alcohol. Which combination of actions is most likely to lead to a failure in reducing the harmful effects of alcohol consumption?

Maximum and minimum prices

Give one example of direct provision by a government.

Maximum and minimum prices

The graph illustrates the yearly percentage variation in service prices and goods prices from 2007 to 2012. What may be deduced from the graph?

Balance of payments

Abdul receives $50 000 a year as a teacher. He owns a house worth $250 000 and holds shares valued at $20 000. His current bank account has a balance of $1500, and he carries $200 in his wallet. In his house, there is a jar containing $100 that he has put aside for spending on his upcoming holiday. Calculate the value of Abdul’s liquid assets.

Oligopoly

A government chooses to devalue the country’s currency in order to eliminate the deficit on the current account of the balance of payments. What is the most likely reason that this would fail to work?

6.5

What quantity will rise when aggregate demand increases and aggregate supply is perfectly elastic?

Economic growth

A country uses a floating exchange rate. What would lead to the demand curve for that country’s currency shifting to the left in the foreign exchange market?

6.4

The table presents the relative price of exports in relation to imports, shown as an index number for an economy (2013 = 100). Which statement about the period 2013–2015 is correct?

6.3

The table gives an extract from a country’s balance of payments. What is the current account balance? (exports/imports: trade in goods $150/$200; services $70/$50; primary income $120/$100; secondary income $15/$20)

6.3

What might have led to a 3% decrease in a country's real national income?

Unemployment

An economy that has long imposed substantial barriers to trade decides to move to completely free trade. Which outcome is most likely to rise in the short term?

Protectionism

Why can a balance of payments deficit be a potential problem for an economy operating a fixed exchange rate?

Labour market

What positive effect could reducing a direct tax on personal income have on an economy's growth in the short run?

Fiscal policy

Which pairing of fiscal and monetary policies is most likely to work effectively in the short run to deal with deflation in a closed economy?

Fiscal policy

What kind of good is healthcare?

1.6

Which policy measure counts as an expenditure-switching measure intended to lower a current account surplus?

6.5

Which one is a normative statement?

Economic methodology

In a free market, there is a surplus of a good. Which change would bring the market to equilibrium?

Income elasticity of demand

Which factor is most likely to raise the quantity of houses supplied?

Demand and supply curves

The diagram illustrates two demand curves together with two supply curves for a product. Which equilibrium point is most likely to indicate the market’s long-run equilibrium?

Income elasticity of demand

The equilibrium price of a product is $10. The government sets an effective minimum price of $12 for the product. In which condition will the producer surplus rise by the greatest amount?

Maximum and minimum prices

Diesel engines are a significant source of air pollution in cities. A city authority introduced a charge for diesel taxis entering the city. What would be the most likely effects on the demand and supply of taxi journeys into the city?

Maximum and minimum prices

Calculate the percentage of Nigeria’s national output accounted for by Lagos.

Supply-side policy

Explain, with the help of a production possibility curve (PPC) diagram, why scarcity makes choice unavoidable for firms and why every choice has an opportunity cost.

Production possibility curves

Explain, with the help of a demand and supply diagram, two reasons why the demand for foreign holidays may rise.

Demand and supply curves

Explain, with the help of a diagram, one demand factor and one supply factor that could lead to depreciation of a foreign exchange rate.

6.4

State what the upward trend shown in Fig. 1.1 means has happened to the value of the peso between 2016 and 2018.

6.4

Use production possibility curve diagram(s) to show the difference between economic growth and a decrease in the amount of unused resources in an economy, and explain one reason that could bring about each one.

Production possibility curves

Explain whether you would expect the price elasticity of supply of water to be relatively elastic or relatively inelastic.

Price elasticity of supply

Explain, using examples, how private goods differ from public goods and why public goods are not supplied by private enterprise.

1.6

Explain why a plastic bottle may be regarded as both a private good and a demerit good.

7.4

Explain price elasticity of supply and suggest why these estimates are different.

Price elasticity of supply

Explain the most likely effects of this change on consumers and firms.

Monetary policy

Explain why the theory of comparative advantage may not provide an accurate picture of the benefits of free trade.

International trade and free trade

A medical team working in a refugee camp gives children vaccinations to help stop an outbreak of an infectious disease. Why could this be called a positive externality?

7.4

Which diagram illustrates a monopolistically competitive firm operating in long-run equilibrium?

7.6

At what point would a cartel find setting the market price of its product most difficult?

7.6

The diagram presents the cost and revenue curves for a monopoly. What objective does the firm have if it produces output OX?

7.8

Which policy is not intended to deal with a market failure?

Behavioural economics

A chemical company releases poisonous fumes, which create costs for society. The diagram below shows the firm’s product at the free market equilibrium, P1Q1. The government places a tax of XY on the firm. How would this lead to better resource allocation?

7.4

The amount of benefit paid to someone receiving a means-tested benefit is determined by that person’s

Short-run costs

The diagram displays two Lorenz curves. If the Lorenz curve moves from L1 to L2, which of the following is least likely to have brought this about?

Short-run costs

A firm is functioning in a perfectly competitive market. Why does the marginal revenue product of a factor of production used by the firm decrease as larger quantities of the factor are employed?

7.5

Labour from developing countries often migrates to developed countries and obtains employment. What effect would this movement of labour probably have on economic growth and on the pressure for wage increases in the developed country?

Long-run costs and economies of scale

The African Union is made up of 55 developing countries. They decide to use a free-trade model to increase trade among member countries. In theory what do free-trade models tend to ignore?

International trade and free trade

The diagram illustrates a firm's average cost curves. If the firm were to move from point X to Y, what is most likely to occur to this firm's productive efficiency and x-inefficiency?

Behavioural economics

It is particularly hard for young workers to obtain a job when the economy is in recession. A government sets up a transfer payment for people looking for work and also gives details of available vacancies. What would be a beneficial result of this policy for people looking for work?

Long-run costs and economies of scale

The diagram illustrates the yearly percentage (%) changes in employment and output in the UK private sector from 2000 to 2012. In which year did labour productivity rise the most?

Unemployment

The table presents the levels of consumption expenditure and savings for the family incomes given. Across the disposable income range shown, as income increases the marginal propensity to consume

National income statistics

Over one year, a country’s national income measured in money terms rose by 3%, prices rose by 4% and total population rose by 1%. Approximately how much did real income per head change?

National income statistics

What is explained by the accelerator principle?

Unemployment

A person’s demand curve for an active money balance will shift to the left if there is a rise in the

Oligopoly