Feb/March 2024

Why is there a production possibility curve for every economy?

Production possibility curves

Butter is a normal good. It is jointly demanded with bread and jointly supplied with buttermilk. Demand for butter rises because consumer incomes have increased. What effects will this rise have on the prices of bread and buttermilk?

Income elasticity of demand

The diagram illustrates a competitive market in equilibrium at price P and quantity Q sold. Which area shows the producer surplus?

Cross elasticity of demand

A policy intended to lessen the extent of income inequality will also lower the level of employment in a country. Which policy is most likely to do this?

Long-run costs and economies of scale

What causes the underconsumption of merit goods?

Behavioural economics

In a country, an income tax is applied so that the first $10 000 of earnings is tax-free, the following $20 000 is taxed at 20% and any earnings above $30 000 is taxed at a maximum rate of 40%. In addition, a sales tax of 10% is charged on most goods. Which mix of tax changes would be most likely to produce a more equal income distribution in the country?

Taxes and subsidies

The table presents real GDP as an index number for each quarter of 2021 (2020 = 100). Q1 99.4; Q2 99.3; Q3 100.1; Q4 100.4. What conclusion can be drawn from the table?

National income statistics

Which factor is least likely to bring about a simultaneous rise in demand-pull and cost-push inflation?

Economic growth

In the circular flow of income, what would be the immediate effect of a rise in the value of a country's exports?

Aggregate demand and aggregate supply

To work out the unemployment rate, the number of unemployed people is compared with

Price stability and inflation

Aggregate demand in an economy may fall due to a rise in

Economic growth

Which of the following is a normative statement?

Economic methodology

A government’s budget is balanced. It chooses to raise its spending by 10%. Which rise in government revenue would create a budget surplus?

Fiscal policy

An economy records an unemployment rate of 8%, which is 2% higher than in the previous year. At the same time, the current account deficit increased from 3% of GDP to 4% of GDP. What would be most likely to lower both unemployment and the current account deficit?

Labour market

The diagram illustrates aggregate demand (AD) curves for an economy. Which combination is most likely to have led to the movement from AD1 to AD2?

Economic growth

What may be regarded as an expansionary supply-side policy?

Supply-side policy

The table shows the factor inputs needed to produce wheat and cars in countries X and Y. Units of factor inputs needed to produce one tonne of wheat: country X 4, country Y 8. Units of factor inputs needed to produce one car: country X 2, country Y 6. What enables both countries to gain from trade?

International trade and free trade

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

6.5

At what point do a country’s terms of trade have to change?

6.3

The table provides an extract from one country's balance of payments: trade in goods exports $150bn, imports $200bn; trade in services exports $70bn, imports $50bn; primary (investment) income exports $120bn, imports $100bn; secondary (transfer) income exports $15bn, imports $20bn. What is the current account balance?

6.3

The table lists a country's goods balance and services balance in selected years. 2015 goods +120 services –30; 2016 goods +110 services –30; 2017 goods +50 services –10; 2018 goods +130 services –60; 2019 goods +140 services –50. Between which years was the change in the combined goods and services balance greatest?

6.3

The diagram illustrates the market for domestic and imported computers in an economy. The world price is p1. Which government policy would result in a price of p2?

Protectionism

Which combination best characterises the fundamental economic problem?

Scarcity, choice and opportunity cost

Which of the following is not a probable reason for a deficit on the current account of the balance of payments?

6.3

What is the principal reason why an economy is unlikely to depend entirely on market forces to allocate resources?

Government intervention in markets

What is the opportunity cost for a person of using $20 to purchase a new pair of sports shoes?

Scarcity, choice and opportunity cost

How is effective demand defined?

Economic growth

Good X has a price elasticity of demand of –2.4, an income elasticity of demand of –0.4 and a cross elasticity of demand with good Y of +0.8. Which description best fits good X?

Price elasticity of demand

The diagram illustrates two straight-line demand curves, X and Y. Which statement about curves X and Y is correct?

Price elasticity of demand

The price elasticity of the supply of yoghurt is estimated at +1.5. If demand for yoghurt increases and the price goes up by 20%, by what amount will market supply rise?

Price elasticity of supply

Compare the change in projected real GDP growth of Japan with that in the US between 2022 and 2025, using the information in Table 1.1.

Unemployment

Using a demand and supply diagram, explain the impact of introducing an indirect tax on market equilibrium and assess how far the tax burden will be passed on to consumers.

Maximum and minimum prices

Using a formula, explain the meaning of income elasticity of demand and assess the extent to which a rise in income will raise the consumption of all goods and services.

Price elasticity of demand

Explain what is meant by a depreciation of the exchange rate and assess whether a depreciation is likely to raise domestic real output.

6.4

Using an aggregate demand and aggregate supply diagram, explain how a fall in interest rates could generate economic growth and consider whether economic growth will always lead to inflation.

Economic growth

A person purchases two pairs of socks. What result does the purchase of the second pair of socks produce?

Utility and rational consumer behaviour

An industry contains two firms. Firm X must make a choice. It may either operate on its own or cooperate with its competitor. If it operates on its own, its profit might be $900 a week, but depending on the competitor’s action it might instead be only $400 a week. If it cooperates with its competitor, the combined profit of both firms would be $1400, which is $700 each. It has no information about what policy the competitor will follow. Which concept is used to describe this situation?

7.6

A government wants to use market forces to eliminate a negative externality in the consumption of a good. Which policy is most likely to be the most effective?

Maximum and minimum prices

A government chooses to substitute a private company with a company it owns to carry out household waste collection. Why might this decision be justified?

Government intervention in markets

What does a failure of government microeconomic intervention mean?

Maximum and minimum prices

Which factor would cause the marginal revenue product curve for workers making electric vehicles to move rightward?

Long-run costs and economies of scale

The diagram illustrates a perfectly competitive firm’s average product of labour (APL) and marginal product of labour (MPL) curves. At a wage of W, how many workers will the firm hire?

Long-run costs and economies of scale

Which change is most likely to cause a fall in the demand for money?

Oligopoly

Which set of factors is most likely to cause structural unemployment to decrease?

Price stability and inflation

What reasons could explain why country X has a higher natural rate of unemployment than country Y?

Price stability and inflation

During a 1-year period, nominal national income rose by 2%, inflation was 3% and population grew by 1%. Which statement is correct?

National income statistics

What is indicated by an indifference curve?

Indifference curves and budget lines

Which policy is most likely to be the most effective in reducing inflation that results from a sharp increase in import prices?

Monetary policy

Which macroeconomic policy objective would not be relevant to a government in a closed economy?

Government macroeconomic policy objectives

A government raises its budget deficit in order to fund spending on infrastructure development. It pays for this by creating money. How is this policy likely to influence the government’s principal macroeconomic policy objectives?

Efficiency

The government raises interest rates to lower the inflation rate. What else will this action cause?

Monetary policy

The diagram illustrates the connection between the income tax rate and tax revenue. Which statement is correct?

Fiscal policy

In which situation is currency devaluation most likely to lead to inflation?

6.4

In a country where most raw materials used as factor inputs are imported, which policy would be most likely to keep cost-push inflation under control?

Supply-side policy

Germany, which is among the world’s most powerful trading nations, recorded a current account surplus in the balance of payments in 2021–2022. Which income flow would not have been counted in Germany’s current account calculation?

6.3

A country pegs its foreign exchange rate to the United States dollar within a narrow band that can be adjusted over time. What type of exchange rate is this?

6.4

The Lorenz curves shown in the diagram illustrate different distributions of income and wealth. Initially, income in a country is distributed more evenly than wealth. Over a period, the income distribution becomes less equal, while the wealth distribution becomes more equal. Which movement would represent the effects of these changes on the country's distribution of income and wealth?

Short-run costs

The table gives the total amount that consumers are prepared to pay for different quantities of good X, together with the total external benefits created by the consumption of X. What is the value of the marginal social benefit when 5000 units are consumed?

7.4

What is likely to occur in a developing country as it becomes more developed?

11.4

The statement and the table give details about a production function. A production function shows the quantity of ......1...... that can be achieved from each pairing of ......2...... and may be used to provide information about ......3...... . Which words correctly fill gaps 1, 2 and 3?

Factors of production

Two firms that produce and sell the same kind of product decide that merging would be more efficient. Which combination shows how the merged firm’s average production costs and demand curve are likely to change?

7.7

The diagram illustrates a firm’s costs and revenues in an imperfect market. At present, the firm is producing at the output level that maximises profit. It wants to produce at the output level that maximises sales. What change would there be in its output?

7.8

Within which market structure is dynamic efficiency least likely to arise?

7.6

Which type of employment contract is most likely to solve the principal agent problem?

7.8

Company R makes steel. Company S builds ships. Company T runs oil tankers. Company V runs cruise liners. Which statement is correct?

1.6

Identify what caused the rise in the electricity prices and explain whether the article shows that the price rise was an example of market failure.

Behavioural economics

Using a diagram, assess how effective a government’s intervention in the price mechanism is in dealing with the causes of climate change.

Maximum and minimum prices

The addition of a trade union into a perfectly competitive labour market will always result in higher wage rates and a higher level of unemployment. Using a diagram, evaluate this statement.

Long-run costs and economies of scale

Using a diagram, assess how effective government policies may be in reducing cost-push inflation.

Supply-side policy

Globalisation will contribute to economic growth in high-income economies, and this will automatically raise living standards. Evaluate this statement.

11.6