Feb/March 2021

An American family must decide between four holiday destinations in Europe, and all four cost the same. The table gives the family’s preference ranking (Barcelona 1st; London = 3rd; Paris 2nd; Venice = 3rd). If the family chooses Barcelona, what is the opportunity cost of this decision?

Scarcity, choice and opportunity cost

What is the probable price elasticity of supply for highly perishable goods and goods with low stocks?

Price elasticity of supply

The diagrams illustrate the original demand curve D1 and supply curve S1 for steel in the European Union (EU). In 2018, European steel firms faced increasing energy prices. Which diagram indicates the likely effect of this?

Demand and supply curves

The wheat market is initially in equilibrium at price P, with supply standing at 40 million tonnes. Because a drought occurs during the growing season, supply drops to 20 million tonnes. What immediate action should be taken to keep the equilibrium price at P?

Maximum and minimum prices

Which calculation is applied to find price elasticity of demand?

Price elasticity of demand

Following several bad harvests, a government sets an effective maximum price for cereals. What would be a consequence of this policy?

Maximum and minimum prices

What does the term transfer payment mean?

Short-run costs

The government redistributes income by increasing the highest rate of income tax and then using the revenue collected to pay for extra benefits for students and unemployed people. Under which conditions will total spending in the economy rise by the greatest amount?

Fiscal policy

A government aims to increase the number of houses supplied. It offers a subsidy to brick manufacturers so that the supply of bricks rises to S2. The diagram illustrates the supply of and demand for bricks. Which per-unit subsidy is needed to raise supply to S2?

Maximum and minimum prices

Why does the government provide national defence?

Government intervention in markets

Which of the following statements about an increase in the general price level in a country is correct?

Balance of payments

The diagram presents two production possibility curves for an economy. Which combination of movements correctly shows these changes in production?

Production possibility curves

A country’s terms of trade changed from 100 to 95. Which of the following is most likely to have caused this change?

6.3

A country changes from a floating exchange rate system to a managed floating exchange rate system. Which statement is correct?

6.4

What immediate impact will a devaluation of an economy’s foreign exchange rate have?

6.4

A country is experiencing a deficit on the current account of its balance of payments. What could assist the country in reducing this deficit?

6.5

The diagram illustrates the impact of abolishing a tariff on imports of good X into country Y. What is the volume, in million units, of the additional international trade generated by removing the tariff?

Protectionism

Which item ought to be entered in the financial account of a country’s balance of payments?

Labour market

The table gives a country’s consumer prices index (CPI) for March and April 2018 (March 151.3; April 148.6). Which statement accurately describes the change between these two months?

Balance of payments

The diagram illustrates how the rate of inflation changes over time in four countries. Which country shows a real value of money that is increasing over time?

Balance of payments

The table presents the consumer prices index (CPI) for an economy as index numbers (2016 100; 2017 103; 2018 101; 2019 97). Which action is the government most likely to take in order to achieve price stability?

Monetary policy

If all other factors stay the same, what is most likely to fall when labour productivity decreases?

Unemployment

How does the very long run differ from the long run?

Unemployment

A government uses public funds to construct more schools. How would this be classified? (columns: fiscal policy; supply-side policy; monetary policy)

Fiscal policy

Which of the following is a positive statement?

Economic methodology

Which of the following would not lead to a shift in an individual’s demand curve for good Z?

Demand and supply curves

The diagram illustrates the sugar market, which is first at equilibrium with a price of OP. A government then sets a maximum price at OP1. What will be the outcome?

Maximum and minimum prices

The table presents a competitive market at equilibrium across two periods (period 1: price 50 cents quantity 10 000; period 2: price 60 cents quantity 12 000). What might account for the shift from period 1 to period 2?

Income elasticity of demand

Which example of consumer behaviour would result in consumer surplus?

Cross elasticity of demand

A manufacturer cuts the price of its goods after creating a more efficient manufacturing process. It produces leather belts that compete with belts made from artificial material. What outcomes are likely to result from the change in the manufacturing process?

Income elasticity of demand

Calculate the rate of inflation in Japan from 2014 to the estimate in 2019.

Monetary policy

Use production possibility curve (PPC) diagrams to illustrate the effect on an economy’s output of

Production possibility curves

Explain how you would use the concept of cross-elasticity of demand to measure the effect on the demand for cars when the price of fuel for cars rises and when the price of public transport rises.

Price elasticity of demand

Explain what is meant by equilibrium price and quantity in the market for a good and how price and quantity will be affected by both a rise in the wage rate paid to the workers producing the good and a rise in wages paid to all workers in the economy.

Income elasticity of demand

As time passes, a firm’s average total cost curve falls. What form of efficiency does this show?

Behavioural economics

A firm holding more than 50% of the market joins with its chief rival to create a single large company. From the firm's perspective, what is the most likely reason that the merger will be unsuccessful?

7.7

The diagram presents a monopolist’s cost and revenue curves. The monopolist alters its price from P1 to P2 and its output from Q1 to Q2. Which shift in objective is shown by the movement from P1 to P2?

7.8

The diagram illustrates the demand curve for a firm’s product. Which diagram shows the shape of the firm’s matching total revenue (TR) curve?

Price elasticity of demand

A government is trying to achieve allocative efficiency in a nationalised industry. What action will the government take?

Law of diminishing returns

In the diagram, a sign is placed beside a busy road. What kind of example is this?

7.4

Recent research has indicated that eating some foods may be harmful. A government committee is considering how to intervene in markets. Which intervention is most likely to cut consumption of these foods without lowering income equality?

Maximum and minimum prices

Under which conditions is a poverty trap least likely to occur?

Trade unions

What factor would be most likely to make the demand for labour in an industry inelastic?

Long-run costs and economies of scale

Which factor is least likely to encourage sustainable economic growth in a developing economy?

Monopoly

Governments want statistics about the standard of living. They assess the value of material goods and services. Non-material characteristics that influence the standard of living are not easy to measure. What is an example of a non-material characteristic?

National income statistics

The diagram illustrates the private and social marginal cost and benefit curves for the antibiotics market. The market equilibrium is located at point X. Why does market failure arise?

7.4

The diagram presents Lorenz curves for a developed economy. Which combination of supply-side policies would move the Lorenz curve from X to Y?

Supply-side policy

Two members of the Hernandez family have recently lost their jobs. Mariana has lost her job at the local factory, which has shut because of competition from cheaper imports. Alfonso has lost his job as a shop assistant because sales have fallen during a recession. How would an economist categorise these job losses?

Price stability and inflation

Which mix of fiscal, monetary and supply-side policies is most likely to lower unemployment?

Externalities

Which combination of policies will cut national income by the largest amount?

Fiscal policy

In a closed economy, the marginal propensity to save is 0.1 and the marginal propensity to pay taxes is also 0.1. Both of these remain constant and do not change as income changes. What will be the increase in national income if $100 million is injected into the circular flow?

Aggregate demand and aggregate supply

Which combination agrees with liquidity preference theory?

Oligopoly

What do Keynesians assume?

Economic growth

Which row correctly shows the injections into a country’s circular flow of income?

Perfect competition

Which policy from developed economies would bring the greatest benefit to developing economies?

11.5

An economy has a natural rate of unemployment of 5%. What will occur if a government continues attempting to reach a 3% target rate of unemployment through expansionary monetary policy?

Monetary policy

The table presents the outcomes of a cost-benefit analysis for building a new airport. What is the total value, in US$ million, of all the externalities generated by the construction of the new airport?

7.4

What does the term reflationary fiscal measure mean?

Fiscal policy

One utility-maximising consumer has a given income and may choose between good X and good Y. The diagram presents her budget line together with several consumption combinations (F, G, H, J, K and L) for products X and Y. Which consumption combinations are available to her at this point?

Indifference curves and budget lines

Romesh, a rational consumer, spent 90 rupees on herb X and spice Y. Each costs 10 rupees per gram. How much of each should he buy?

Indifference curves and budget lines

In the diagram, TC represents a firm’s short-run total cost curve. Which statement is correct?

7.5

Which statement about cartels is correct?

7.6

In the short run, when output rises, which statement is true?

7.5

The diagram depicts a competitive industry with constant marginal and average costs. In equilibrium, its output is OQC and its price is OPC. A sequence of horizontal mergers produces economies of scale and results in a monopoly within the industry. The revised equilibrium output is OQM and the price is OPM. Which area shows the producer surplus after these mergers?

Cross elasticity of demand

Explain what is meant by ‘a free market organises economic resources for the benefit of everyone’.

Behavioural economics

‘Smoking cigarettes creates negative externalities, and negative externalities lead to market failure, which can be resolved only through government intervention.’ To what extent do you agree with this view?

7.4

‘A firm in a perfectly competitive market can make either a supernormal profit or a loss in the short run but will only make normal profit in the long run.’ Assess whether this statement is true.

7.6

Distinguish between transfer earnings and economic rent. Using diagrams, explore the connections between transfer earnings, economic rent, the elasticity of supply of labour and an individual worker’s wage rate.

Long-run costs and economies of scale

Distinguish between productivity and the level of production, then discuss why productivity is likely to be lower in a developing economy than in a developed economy.

Trade unions

Explain why an economy may be in equilibrium at a level of output below full employment, and critically assess alternative policy options that could be used to raise output to full employment.

Price stability and inflation

‘Economic growth ought to be the most important macroeconomic aim.’ Discuss this view.

Efficiency