May/June 2022

A government can use a range of supply-side policy measures to improve economic performance. Which policy measure would not meet one of the government’s macroeconomic aims?

Supply-side policy

A manufacturer of medical supplies gains from better road connections to its main markets. Which benefit will certainly happen as a result?

Firms’ costs, revenue and objectives

Which row identifies an essential characteristic of competitive markets and monopoly markets?

Market structure

A student has no plans for Friday evening. She takes out $5 from the $100 in her savings account and purchases a gift to bring to a party, where entry costs nothing. What does this involve?

Opportunity cost

As artificial intelligence is developed in machines, the productivity of capital increases. What effect will this have?

Firms and production

Which combination is required to build a consumer prices index?

Inflation and deflation

A government abolished the quota on goods brought into the country. What is the most likely outcome of this?

Globalisation, free trade and protection

What benefit does a country gain from having a market economic system with a large private sector?

Market economic system

State one example of a fiscal policy measure.

Fiscal policy

Why could a rise in the interest rate possibly result in lower inflation?

Monetary policy

Which government measure would not directly increase the number or the quality of human resources?

The factors of production

What might result in greater demand for a factor of production?

The factors of production

What is one possible cause of economic growth?

Economic growth

An economy goes into recession and shifts from full employment to 5% unemployment. Which movement from X to Y on the PPC diagram illustrates the effect on the economy?

Production possibility curve (PPC) diagrams

The table illustrates how three people, X, Y and Z, allocate their income. What is the most likely sequence of income, from the lowest to the highest, for these three people?

Households

Why do living standards decrease during a recession?

Living standards

What is the role of an economy’s production possibility curve (PPC)?

Production possibility curve (PPC) diagrams

Governments in low-income countries often permit foreign multinational companies (MNCs) to extract minerals within their countries. Which trade-off between benefit and cost could this create for the low-income countries?

The nature of the economic problem

The table presents several economic indicators. Which rise in the first indicator is most likely to cause a rise in the second indicator?

The macroeconomic aims of government

What does the term foreign exchange rate mean?

Foreign exchange rates

Which activity is matched correctly to the organisation that provides it?

Money and banking

Which topic does microeconomics not cover?

Microeconomics and macroeconomics

Which other components, besides Gross Domestic Product (GDP) per head, are used in the Human Development Index (HDI)?

Living standards

What is most likely to result in an immediate reduction in the size of the labour force?

Employment and unemployment

The US government imposes tariffs on steel imported from China. This raises the price of steel brought in from China. Whose income is likely to rise directly as a result?

Globalisation, free trade and protection

A government offers retraining to unemployed industrial workers so as to expand employment opportunities. This policy could have harmful consequences for other government macroeconomic objectives. Which term describes this situation?

Supply-side policy

The diagram illustrates the demand and supply for apples. How far is the market for apples out of equilibrium when the price is $\$2.50$ per kilo?

Price determination

The diagram illustrates a firm’s fixed costs, variable costs and total costs at output $S$. Which distance shows the firm’s variable costs?

Firms’ costs, revenue and objectives

The table presents the world output of iron ore and the average yearly price for four years. What conclusion can be drawn about the link between world output of iron ore and the average yearly price over the four years?

Price determination

A firm has a high price elasticity of supply for its product. What does this mean?

Price elasticity of supply (PES)

Give one example of a free good.

The nature of the economic problem

What factors might result in high profits in a monopoly market?

Market structure

A student has no plans for a Friday evening. She withdraws $5 from the $100 she keeps in a savings account and uses it to buy a gift to bring to a party, where admission costs nothing. What does this involve?

Opportunity cost

Which other components, besides Gross Domestic Product (GDP) per head, make up the Human Development Index (HDI)?

Differences in economic development between countries

What is most likely to lead to an immediate reduction in the size of the labour force?

Workers

The table presents several economic measures. Which rise in the first measure is most likely to cause a rise in the second measure?

The macroeconomic aims of government

In a fixed exchange rate system, the value of a currency is lowered. What term is used for this?

Foreign exchange rates

A government abolished the quota on goods brought into the country. What is the most likely outcome of this?

Globalisation, free trade and protection

What outcome is most likely if a country’s currency loses value when no other economic conditions change?

Foreign exchange rates

The diagram illustrates two production possibility curves for a country. What could bring about a move from point K to point L in the country’s production?

Production possibility curve (PPC) diagrams

Governments in low-income countries often permit foreign multinational companies (MNCs) to extract minerals within their borders. Which clash between benefit and cost could this create for low-income countries?

Opportunity cost

Which relationship would be examined by an economist who specialises in macroeconomics?

Microeconomics and macroeconomics

In recent years, a government has begun relying more heavily on the free market system. However, it is doing so very gradually in order to avoid the disadvantages that a free market system could create. What is one possible disadvantage of the free market system?

Market economic system

Which factor would make the demand curve for a good move to the right?

Demand

In the diagram, which demand curve shows perfectly elastic demand?

Price elasticity of demand (PED)

The table gives the demand and supply schedules for rice. The present price is $2.00 per kilo. What would occur if the price were lowered to $1.00 per kilo?

Price changes

The diagram illustrates the fixed costs, variable costs and total costs of a firm when output is S. Which distance indicates the firm’s variable costs?

Firms’ costs, revenue and objectives

Which factor is paired with the correct factor reward?

The factors of production

A cinema contains 500 seats. Its admission price was increased from $\$2$ to $\$5$, and its daily revenue rose from $\$800$ to $\$1500$. What conclusion may be drawn from this information?

Price elasticity of demand (PED)

What is one result of a competitive market?

Market structure

What factors could stop a person from selecting a particular occupation?

Workers

What could prompt a consumer to reduce spending and increase saving?

Households

The table presents the way three people, X, Y and Z, use their income. What is the most likely order of income, from the lowest to the highest, for these three people?

Living standards

Which activity is correctly matched with the organisation that provides it?

Money and banking

Which of the following is not normally regarded as a macroeconomic aim?

The macroeconomic aims of government

A government chooses to raise the indirect tax on petrol. Petrol has a price elasticity of demand that is inelastic. What outcomes are likely to follow?

Price elasticity of demand (PED)

In a country, the rate of interest is raised in order to reduce inflation. What kind of macroeconomic policy is this?

Monetary policy

A government raises its expenditure on education and training substantially over a number of years. What is the likely impact of this policy on the inflation rate in both the short run and the long run?

Supply-side policy

A student has no plans for a Friday evening. She takes $5 out of the $100 she holds in a savings account and purchases a gift to bring to a party, where entry costs nothing. What does this involve?

Opportunity cost

What might lead to a recession?

Economic growth

Why could the macroeconomic objective of full employment clash with the objective of stable prices?

The macroeconomic aims of government

In one country, inflation is $10\%$ while nominal interest rates stand at $7\%$. Which group would be most likely to gain from this situation?

Inflation and deflation

Which action is not undertaken by a government in its international role?

Globalisation, free trade and protection

Besides Gross Domestic Product (GDP) per head, which other components are used in the Human Development Index (HDI)?

Differences in economic development between countries

What is most likely to lead to an immediate reduction in the size of the labour force?

Employment and unemployment

The table presents some economic indicators. Which rise in the first indicator is most likely to cause a rise in the second indicator?

The macroeconomic aims of government

At what point are countries most likely to specialise and trade with one another?

International specialisation

A government abolished the quota on goods brought into the country. What is the most likely effect of this?

Globalisation, free trade and protection

A country records a surplus on the current account of its balance of payments. What change would be most likely to push the country into a deficit?

Current account of balance of payments

Which factors would cause a country's production possibility curve to move?

Production possibility curve (PPC) diagrams

Governments in low-income countries often permit foreign multinational companies (MNCs) to extract minerals within their borders. Which trade-off between benefit and cost could this create for the low-income countries?

Globalisation, free trade and protection

What subject area is examined in macroeconomics?

Microeconomics and macroeconomics

China is shifting towards a more mixed economic system and cutting back the role of the public sector. Which economic policy measure would be most suitable for achieving this?

Mixed economic system

The diagram illustrates supply and demand for a product. Suppliers have chosen to make $10\,000$ units and set a price of $6. What will this decision lead to in the short run?

Price determination

Which statement concerning price elasticity of demand (PED) is correct?

Price elasticity of demand (PED)

A producer of tinned beans introduces mechanisation to its assembly line. As a result, output rises by $30\%$ and labour falls by $20\%$. How and why will this change supply curve $S$?

Supply

The diagram illustrates the fixed costs, variable costs and total costs of a firm when output is $S$. Which distance represents the firm's variable costs?

Firms’ costs, revenue and objectives

Study the source material thoroughly before you answer Question 1. Source material: Cyprus Cyprus fact file Life expectancy (years): 2015 - 79, 2019 - 81 GDP per head: 2015 - $23334, 2019 - $27900 Population: 2015 - 1100000, 2019 - 1200000 Birth rate (per 1000): 2015 - 11.0, 2019 - 10.2 Cyprus is a small country with a relatively high HDI ranking in 2019. It exports a mix of goods and services, such as fruit, pharmaceuticals and clothing. Cyprus buys in most of the food it eats, although it grows most of its own grapes and potatoes. In 2019, poor weather affected the world grape harvest. Global grape production dropped by 35% and this created a shortage. Around 14% of Cyprus’s labour force works in the primary sector. The average age of Cyprus’s workers is rising and more people are now continuing to work beyond retirement age. This is especially true of highly qualified workers, who are usually well-paid, healthy and employed in jobs that do not depend on physical strength. Rising life expectancy and the higher cost of paying state pensions led some economists to propose increasing the retirement age. That change would affect the government’s budget balance. In 2019, the Cypriot government recorded a budget surplus. However, Cyprus had a deficit on the current account of its balance of payments. A country’s current account balance can be affected by its inflation rate. Fig. 1.1 shows selected countries’ inflation rates (%) and current account balances (% of GDP) in 2019. Fig. 1.1 Inflation rates (%) and current account balances (% of GDP) in selected countries 2019. Inflation rate (%) and current account balance as % of GDP for: Cyprus, Iceland, Kenya, Mongolia, Nepal, Slovenia. Cyprus had a very low interest rate in 2019. It was expected that this would affect the country’s investment. Since 2015, some firms in the country have become more capital-intensive. This has influenced Cyprus’s productivity and may have affected the quality of the products made. In 2019, two future concerns for Cyprus’s economy were that some of its agricultural land may become less productive and that some of its leading entrepreneurs may leave the country.

Population

Australia’s foreign exchange rate varies over time. The worth of Australia’s exports is often higher than the worth of its imports. Australia is Papua New Guinea’s chief trading partner. In 2019, the government of Papua New Guinea raised income tax to lower its inflation rate. It also used other policy measures to lift its economic growth rate.

Current account of balance of payments

In Sweden, trade union membership is far above the level seen in most other countries. During 2019, 70% of Swedish workers belonged to a trade union. Over 85% of Swedish workers work in the tertiary sector, whereas just 2% are in the primary sector. Swedish workers use their incomes to buy a range of products, some of which, for example sweets, are demerit goods. Sweden records the 7th highest consumption of sweets per head in the world.

Trade unions

Uganda concentrates on agricultural products and has a relatively small secondary sector. In the 1990s, the Ugandan government privatised most of its firms, including banks and railways. Some economists believed that this privatisation did not succeed, because poverty increased and unemployment stayed high. In more recent years, the Ugandan government has applied supply-side policy measures to reduce unemployment.

Supply-side policy

Singapore is a high-income country facing shortages of land and labour. It is commonly used as an example of a market economy. However, the Singaporean government still intervenes in the economy. For instance, it promotes the idea that people should eat two servings of fruit and two servings of vegetables per day.

Market economic system

Study the source material carefully before you answer Question 1. Source extract: Happiness Bhutan fact file (2018): Population 0.8m; GDP per head $3250; Government spending $450 m; Government tax revenue $380 m; World Happiness Index ranking 95th; Human Development Index ranking 134th. The United Nations has issued a World Happiness Index every year since 2012. This index places countries in order using life expectancy, freedom, social support, trust, generosity and GDP per head. In 2019, New Zealand was placed 8th in the World Happiness Index. The governments of both Bhutan and New Zealand now take into account several influences on the happiness of their populations. Although more than half of Bhutan’s labour force is employed in agriculture, most people in New Zealand work in the tertiary sector. Working conditions, working hours, the nature of work and pay are different in the primary and tertiary sectors. Productivity is higher in every sector in New Zealand than in Bhutan. This is partly because New Zealand invests more in capital goods and education. New Zealand also has a higher GDP per head. GDP per head ($) may affect net migration (number of people) as shown for selected countries in 2017 in Fig. 1.1. Fig. 1.1 GDP per head ($) and net migration (number of people) of selected countries 2017. The countries shown are Bhutan, Cyprus, Kenya, Mozambique, New Zealand and Slovenia. The diagram key shows net migration (number of people) and GDP per head ($). In its 2019 budget, the New Zealand government stated that it would measure progress not through rises in GDP but through improvements in the quality of people’s lives. To do this, it announced extra spending on some areas including mental health, child poverty and pollution. Some economists criticised this view. They argued that the best way for the government to improve living standards is to cut income tax rates. This cut could alter government spending and the quantity of products that people purchase, including cars. Tax revenue rose in New Zealand in 2019, partly because revenue from corporation tax increased. However, firms’ future profits were hard to predict. This was because of uncertainty about what would happen to its GDP and its corporation tax rates.

Differences in economic development between countries

Angola experienced a marked rise in its money supply during 2019. The National Bank of Angola was worried that inflation would stay above 17% and damage Angola’s producers. The Angolan government had been focusing on reducing unemployment, which fell from 10% in 2010 to 7% in 2019.

Money and banking

In 2019, France was producing within its production possibility curve (PPC). France exports a broad range of products. It is the world’s top exporter of luxury perfume and the 7th largest exporter of soap. Technological change influences the goods that people make and buy. The French government plans to improve infrastructure so that every household can have internet access.

Demand

The South Korean government believes that Japan is dumping steel. South Korean firms both trade with other countries and manufacture there too. Some South Korean multinational companies (MNCs) say they help to reduce poverty in their host countries. In 2019, South Korean firms were hit by a depreciation in South Korea’s foreign exchange rate. Some firms also faced a shortage of workers, and this was linked to the country’s very low birth rate.

Globalisation, free trade and protection

In Nicaragua, GDP fell by 4% in 2019 even though household spending increased. Bananas, which are a merit good, were one Nicaraguan product whose supply rose. The Nicaraguan government encouraged banana farmers and other producers to raise output. Changes in output can influence a firm’s average production costs.

Firms’ costs, revenue and objectives

Read the source material thoroughly before you answer Question 1. Source material: eSports sector in Malta The eSports fact file gives these figures: Worldwide total revenue in 2019: $1 billion European revenue in 2019: $300 million Total number of viewers worldwide: 454 million Increase in viewers compared with 2018: 15% eSports is now accepted as a sports contest, in the same way as other competitive games such as football and basketball. In eSports, people compete using video games either individually or as members of a team. eSports also draws large audiences who follow these online contests. eSports is expanding quickly, both in revenue earned and in viewer numbers. Demand has risen because incomes have increased and the cost of the technology needed to play or watch eSports has fallen. Changes in social attitudes have also raised female participation in eSports. The rapid expansion of this industry has encouraged investment from both the private sector and the public sector. Firms in the private sector sponsor different eSports teams and also promote their products during eSports competitions. Investment from the public sector has come from the governments of China, Denmark, Malaysia and Malta, mainly through development and training programmes for young eSports participants. The Maltese government, from a small island nation, wants Malta to become a major European centre for eSports in order to attract visitors to eSports events. The goal is for the eSports industry to add 1% to Malta's GDP, create 3000 more jobs and strengthen the current account of its balance of payments. Malta's service sector has long been significant and contributes roughly 90% of its GDP. Malta is an appealing tourist destination because of its mild climate. The island is also used as a setting for many films and TV series, which brings in further visitors who want to see the filming locations. However, to make growth sustainable, the government recognises the value of economic diversification and does not want the economy to become too specialised. To do this, the labour force must be adaptable and the government must invest in education and training. The government offers new scholarship schemes, arranges work placements and invites professionals from other countries to help train Maltese students. Even so, there are worries that these measures could be too costly and may take too long to make a major difference to the economy. Female participation in the labour force is also promoted. Table 1.1 shows the percentage of women in the labour force (%) and GDP per head ($) for selected countries in 2019.

Demand

Vorarlberg, which is a region in Austria, has the highest income and the best healthcare of any area in Austria. Its location close to Germany and Switzerland, together with free trade between these countries, is an advantage. Even so, Vorarlberg has only a small number of foreign multinational companies (MNCs), and its inflation rate is higher than that in most parts of Europe.

Globalisation, free trade and protection

Leading jewellery firms in Qatar and Ukraine have urged their governments to end trade protection between the two countries so that jewellery trade can grow. The jewellery businesses in Qatar and Ukraine make distinctive products and are improving in quality. They think that greater trade between the two countries will allow them to benefit from internal economies of scale in jewellery production.

Globalisation, free trade and protection

In 1982, Nauru recorded the world’s highest GDP per head. Its primary sector was large, and it exported phosphate, a natural fertiliser. Even so, this natural resource was exhausted after a short time. Nauru is now experiencing market failure because of pollution and unhealthy food imports. Although its imports of goods are greater than its exports of goods, it still shows a surplus on the current account of its balance of payments.

Differences in economic development between countries

Greater government expenditure creates opportunity costs. This was one of the issues confronting the president of France in 2017. After coming to power, he has concentrated on supply-side policy measures rather than monetary policy. Trade union membership in France has fallen in recent years.

Supply-side policy