Feb/March 2025

Which statement about a market economy is incorrect?

Resource allocation in different economic systems

The quantity demanded for a product is QD = 400 – 10P, where P represents the price in dollars. The supply of the product is set at 100 units. If the price is $20, what will be the market outcome?

Income elasticity of demand

When the quantity demanded of a product falls, sales revenue also falls by the same proportion. Which statement about its price elasticity of demand is correct?

Price elasticity of demand

A government may employ a variety of methods to intervene in a market in order to influence both demand and supply. What is one method that will move the demand curve for a good?

Maximum and minimum prices

In order to promote price stability, the government in country F runs a buffer stock scheme, with a minimum price of P1 and a maximum price of P2. The present demand and supply in the market are shown. What should the government do to make the scheme effective?

Maximum and minimum prices

Why is an individual’s wealth more difficult to measure than their income?

Taxes and subsidies

The table gives the Gini coefficient for income in three countries. What conclusion can be drawn from this data?

Short-run costs

Governments may regard price stability as a macroeconomic objective. What does price stability mean?

Balance of payments

In country S, frictional unemployment has fallen, whereas in country T, structural unemployment has risen. What are possible reasons for these changes?

Monopolistic competition

The diagram depicts aggregate demand (AD) and long-run aggregate supply (LRAS), with X marking the starting equilibrium. Which pairing of policy and new final equilibrium point is correct?

Economic growth

A country’s money income increases by 10% while its population decreases by 10% over one year. What is likely to occur to the national income per head?

National income statistics

For higher output, a firm in industry X must install capital equipment, whereas a firm in industry Y must carry out research and launch a new technology. Which time periods do these examples show?

7.7

Periods of high economic growth are often linked with a deterioration in the current account of the balance of payments. Which explanation for this trend is not valid?

6.3

A government reduces income tax. Why could this be regarded as a supply-side policy?

Supply-side policy

Which fiscal policy combination would lower both the inflation rate and income inequality?

Fiscal policy

A country’s central bank chooses to lower the extent of credit regulation. What is this an example of?

Monetary policy

A government chooses supply-side policy to raise long-run aggregate supply (LRAS). Why is it most likely that this policy instrument will not cause the price level to decrease?

Supply-side policy

How is a progressive tax defined?

Short-run costs

Country X trades with country Y. What are the terms of trade for country X?

International trade and free trade

At what point is a country’s exchange rate most likely to decline?

6.4

A country is recording a growing trade deficit while, at the same time, its current account is in surplus. Which mix of events could account for this?

6.3

The diagram illustrates the production possibilities for barley and wheat in countries Q and R. What conclusion can be drawn?

Production possibility curves

The production possibility curve represents the highest possible output of apples and pears that an economy can achieve with its existing resources. Which pair of positions shows one efficient outcome and one inefficient outcome?

Production possibility curves

The diagram illustrates the effect of a government introducing an export subsidy for its domestic producers of oil. How will this export subsidy affect how the domestic market operates?

Maximum and minimum prices

The price of a good increases by 5% and the quantity demanded of it increases by 3%. At the same time, consumer incomes for the good rise by 4%. In this situation, the law of demand seems not to apply. What is the most likely explanation?

Price elasticity of demand

In what circumstances is division of labour likely to work most effectively?

Factors of production

Which factors will affect the value of the price elasticity of supply of a good?

Price elasticity of supply

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

Income elasticity of demand

The diagram illustrates the effect on equilibrium of a rise in the costs of production. The initial price is $72. The price elasticity of demand is –2.0. What is the revised equilibrium price, P2?

Income elasticity of demand

What is more likely to influence an individual demand curve than a market demand curve?

Demand and supply curves

Using Fig. 1.1, calculate the percentage change in the world price of olive oil from May 2022 to January 2023.

Demand and supply curves

Using a production possibility curve (PPC) diagram, explain scarcity and choice, and judge the extent to which every choice has an equal opportunity cost.

Scarcity, choice and opportunity cost

Explain the difference between a public good and a private good (economic good), and assess the extent to which a beach can be regarded as a public good.

Behavioural economics

With the help of a formula, explain two reasons for an improvement in the terms of trade and consider how far an improvement in the terms of trade will benefit an economy.

Protectionism

Using an AD/AS diagram, explain what is meant by an expansionary fiscal policy and assess how far an expansionary fiscal policy will always raise the level of aggregate demand.

Fiscal policy

Which cost keeps falling as a firm’s output rises in the short run?

7.5

Which of the following is not a reason for levying a tax on producers according to the level of pollution created during the production process?

Government intervention in markets

A government put in place a tax on soft drinks that contain sugar. It was predicted that this tax would generate £520m each year for the government. In fact, the amount of tax collected was only £240m. What is the most likely explanation for why the tax revenue was below the forecast?

Price elasticity of demand

A government wants to lower real wage rates. Which policy should it adopt to do this?

Long-run costs and economies of scale

How is marginal revenue product determined?

Long-run costs and economies of scale

A teacher is now paid $30000. She would be prepared to keep working in that teaching job if she were paid at least $25000. In addition, she would prefer to stay as a teacher rather than switch to her next best alternative occupation as an accountant, where she could earn $40000. Which statement is correct?

Scarcity, choice and opportunity cost

What is explained by the accelerator principle?

Economic growth

The diagram illustrates an economy’s production possibility curve. What brings about a movement from point X to point Y?

Production possibility curves

Within the quantity theory of money equation, MV = PT, V is taken to mean the income velocity of circulation. Which change would be likely to lower the value of V?

Oligopoly

What would be most likely to increase the occupational mobility of labour?

Long-run costs and economies of scale

The diagram represents a closed economy without government intervention. It starts in equilibrium when national income is $1000 million. If full employment national income is $800 million, what is the size of the inflationary gap?

Economic growth

Give one example of market failure.

Behavioural economics

If prices rise in country X while remaining unchanged in country Y, what is the most likely effect on the internal and external value of money in country X?

Balance of payments

Which policy might raise economic growth without leading to inflation?

Supply-side policy

The current account in the balance of payments has gone into deficit. What could be one reason for this?

6.3

Which policy would not cause a rise in the value of a country’s currency?

6.4

In an economy where there are unemployed resources, the marginal propensity to consume is 0.2. The government raises its budget deficit and covers it by selling bonds to the non-bank private sector. What is the most likely result?

Fiscal policy

What components make up the current account and the financial account of the balance of payments?

6.3

The graph shows the Gini coefficient alongside GDP per head for three countries, X, Y and Z. What conclusion can be drawn from the graph?

Short-run costs

Which of the following is least likely to result in an increase in optimum population?

Trade unions

Which item is excluded from the weighted poverty indicators used in the Multidimensional Poverty Index (MPI)?

Trade unions

Which function is carried out by the World Bank but not by the International Monetary Fund (IMF)?

Trade unions

What factor is most likely to stop an effective cartel from developing in an industry?

7.6

A number of economists maintain that there is little evidence that aid improves economic development in less-developed countries. Which situation would support this claim?

Trade unions

The diagram illustrates a firm’s cost and revenue curves. The firm alters its objective from profit maximising to revenue maximisation. Which area on the diagram will indicate the rise in total revenue?

7.8

Which statement correctly describes the downward-sloping demand curve for an inferior good?

Demand and supply curves

The diagram illustrates the private and social costs and benefits of production in a free market, which leads to market failure. What change in output would be needed to remove this market failure?

7.4

A profit-maximising monopoly earns abnormal profit and chooses to reinvest part of that profit to raise its capital stock. What outcomes are most likely to follow from this change?

7.6

Which of the following is not an example of government failure?

Maximum and minimum prices

At what point does income become more evenly distributed?

Short-run costs

Explain what the term optimum population means.

Trade unions

Oligopolies may avoid price competition and still keep supernormal profits in the long run. Evaluate this statement.

7.6

With the help of a diagram, evaluate the effects of introducing an effective minimum wage on employment and wage levels in a monopsony labour market.

Long-run costs and economies of scale

Using a diagram, assess the effectiveness of government policies that could be used to reduce demand-pull inflation.

Fiscal policy

Using a diagram, evaluate how effective expenditure-switching policies are in reducing a current account deficit on the balance of payments.

Labour market