Oct/Nov 2020

Why do economic agents make choices?

The nature of the economic problem

The table illustrates how household spending varies as income rises. What is the minimum income level at which savings become positive?

Households

What can a central bank raise in order to cut consumer borrowing?

Monetary policy

The table presents the output and total costs of a small firm. What is the average fixed cost when 10000 units are produced?

Firms' costs, revenue and objectives

A firm has fixed costs of $1000. The table gives the variable cost at different levels of output. If the goods are sold for $500 each, what profit will be earned from the sale of 4 units?

Firms' costs, revenue and objectives

Firm X sells bricks and chooses to merge with firm Y, which also sells bricks. What type of merger has occurred?

Market structure

Who has ownership of a public sector organisation?

Mixed economic system

What are two objectives that a government usually seeks to achieve when it manages the overall performance of the economy?

The macroeconomic aims of government

Which responsibility is most likely to belong to a central government?

The role of government

The table illustrates the tax an individual would pay at various levels of disposable income. Which type of tax is shown in the table?

Fiscal policy

The government aims to cut the consumption of cigarettes. Which policy would be most likely to achieve this?

Market failure

Which pairing of a factor of production with its factor income is incorrect?

The factors of production

Which group ought to be excluded from the measurement of unemployment?

Employment and unemployment

The table presents the unemployment rate and real GDP growth for an economy in 2014 and 2018. Which mix of policy measures would be most effective in bringing the economy back to the 2014 level of economic activity?

Fiscal policy

An economy is facing increasing prices. Which government policy would help to lower consumer spending?

Fiscal policy

Some goods make up a larger proportion of a typical household’s overall expenditure than others. How is this reflected when a consumer prices index is constructed?

Inflation and deflation

In countries experiencing absolute poverty, low incomes can trigger a cycle that perpetuates low incomes. What stages does this cycle involve?

Poverty

Which factor in the world’s low-income countries restricts their economic development?

Differences in economic development between countries

The table gives the proportion of employment in the primary, secondary and service sectors for four countries. Which country is most likely to be the most developed?

Differences in economic development between countries

What factors lead to a country’s birth rate falling?

Population

If a country wants to raise its current account surplus on the balance of payments, what action should it choose?

Current account of balance of payments

The table gives figures for a country's exports and imports. What was the country's balance of trade in goods and services?

Current account of balance of payments

The diagram illustrates a production possibility curve (PPC) for a country. The country shifted from position X to position Y on the PPC. What is the most likely explanation for this change?

Production possibility curve (PPC) diagrams

The diagram illustrates a country's exports and imports of goods by value over five years. During which pair of years did the country experience a rise in the value of imports and an improvement in its balance of trade in goods?

Current account of balance of payments

Give one example of a macroeconomic aim?

The macroeconomic aims of government

Why may a market economy not succeed in making the most efficient use of scarce resources?

Market failure

The diagram illustrates the world market for copper, where the equilibrium point is X. Which point shows the new equilibrium after the copper producers’ costs increase and global economic growth accelerates?

Price determination

The diagram illustrates the supply curve for a good. What is the price elasticity of supply when the price increases from $10$ to $12$?

Price elasticity of supply (PES)

Which activity is not one of a trade union’s functions?

Trade unions

What has no impact on wages in a free market economy?

Workers

Why must consumers decide how to spend their income?

The nature of the economic problem

The table illustrates how household expenditure varies as income rises. What is the minimum income level at which savings are positive?

Households

What can a central bank raise to cut consumer borrowing?

Monetary policy

The table gives firm X’s total cost at each output level. At what level of output does total variable cost become greater than total fixed cost?

Firms' costs, revenue and objectives

A firm has fixed costs of $1000. The table gives the variable cost at different output levels. If the goods are sold for $500 each, what profit will be earned from selling 4 units?

Firms' costs, revenue and objectives

Which combination is normally present in a monopoly?

Market structure

What is usually regarded as an advantage for a firm when it uses division of labour?

Firms and production

What are two objectives that a government usually seeks when it manages the performance of the entire economy?

The macroeconomic aims of government

Which duty is a central government most likely to be responsible for?

The role of government

A government reduced the tax applied to all goods manufactured within its own country. What is the most likely effect of this?

Supply

Which government policy measure would lead to an increase in a country’s supply of labour?

Workers

What is the main function of an entrepreneur?

The factors of production

Because the number of retired people has increased, demand for certain government expenditure has risen. Which type of government expenditure is most likely to be affected directly?

Fiscal policy

The diagrams illustrate Italy’s unemployment rate and GDP per head. At what time do Italy’s unemployment rate and GDP per head increase together?

Employment and unemployment

An economy is facing increasing prices. Which government policy will help lower consumer expenditure?

Fiscal policy

Some goods represent a larger proportion of a typical household’s overall spending than others. How is this allowed for when a consumer prices index is constructed?

Inflation and deflation

One measure of living standards is the Human Development Index (HDI). What is excluded when the HDI is calculated?

Living standards

Which factor in the world’s low-income countries restricts their economic development?

Differences in economic development between countries

The table presents the percentage of employment in the primary, secondary and service sectors for four countries. Which country is most likely to be the most developed?

Differences in economic development between countries

What would not be recorded in the current account of the balance of payments?

Current account of balance of payments

Which factor is most likely to reduce an economy’s incentive to specialise internationally and trade?

International specialisation

Many low-income countries depend on multinational companies (MNCs) for economic development. What is one disadvantage of this for the low-income country?

Differences in economic development between countries

The diagram illustrates the production possibility curve (PPC) for an economy that is operating at point X. What is the opportunity cost of moving away from point X so that only consumer goods are produced?

Opportunity cost

The diagram illustrates the value of a country’s exports and imports of goods across five years. Between which two years did the country experience a rise in the value of imports and an improvement in its balance of trade in goods?

Current account of balance of payments

Economics is split into two branches: microeconomics and macroeconomics. statement 1: If the price of oil decreases, demand expands. statement 2: The Organization of the Petroleum Exporting Countries (OPEC) is able to affect the price of oil. Which option correctly identifies these two statements?

Microeconomics and macroeconomics

What is one drawback of a market economic system?

Market economic system

The diagram illustrates the demand curve for coffee in the US. Why did the quantity demanded shift from $Q_1$ to $Q_2$?

Demand

In an African country that contains extensive tropical desert regions, the price elasticity of demand for salt is very inelastic. As a result, consumer spending on salt will rise when the price changes from $P_1$ to $P_2$. Which diagram shows this situation?

Price elasticity of demand (PED)

In which occupation would wages usually rise?

Workers

Which row identifies a characteristic of money together with a function of money?

Money and banking

Read the source material thoroughly before answering Question 1. Source material: Forest destruction in Indonesia Indonesia is the world’s biggest producer of palm oil. The expenses of producing palm oil include land rent, fertiliser, palm oil seeds, upkeep of irrigation systems and casual labour. Forests are cleared by setting fires so that palm oil plantations can be created. These fires wipe out the homes of many wildlife species and put harmful gases into the air. Since 2011, the Norwegian government has paid Indonesia to conserve its forests. Although Indonesia is the largest producer of palm oil, it ranks third for rice production. Indonesia sells 85% of its palm oil overseas but sometimes needs to bring in rice to satisfy domestic demand. Trade in palm oil and rice is affected by movements in the foreign exchange rate. The value of the Indonesian currency, the rupiah, dropped in 2017. Rice farming also adds to air pollution. After harvest, rice farmers burn the stubble left in the fields to clear them and to improve soil fertility so that they can grow more rice. Some environmentalists say that stubble burning ought to be outlawed. Both the Indonesian economy and the world economy keep expanding. Economic growth may create pollution. It can also influence a country’s GDP per head ranking and Human Development Index (HDI) ranking, as Table 1.1 shows. Indonesia has net emigration. Some Indonesians work overseas and transfer money back to their families. People also arrive from abroad to work in Indonesia, including some in relatively well-paid jobs in the country’s growing tourism industry. At present, Indonesia attracts fewer tourists than its neighbours, Singapore and Malaysia. Even so, it has many natural tourist attractions and is currently competitively priced.

Market failure

Mexico has a long record of trade deficits. The government is steering the economy nearer to free trade in an effort to improve macroeconomic performance. In 2017 it was forecast that Mexico’s economy would see a slight increase in unemployment. In 2017, inflation in the economy stood at 6.6%, the highest level since 2001. Several policy tools could be used to bring inflation down, including raising the rate of income tax.

Globalisation, free trade and protection

Hungary has the highest obesity rate in Europe. Hungarians consume fewer vegetables than most Europeans and eat more foods that may be classed as demerit goods. In 2017, the Hungarian government brought in a tax on unhealthy food called the chips tax. This tax has had some success in shifting demand towards healthier foods. Some economists argue that governments ought to use price controls as well as taxes to influence the food market.

Market failure

Italy is the location of the world’s oldest bank and also some of the world’s oldest car manufacturers. On the international stage, both sectors are encountering several difficulties. Pay for bank employees and car workers is rising. Demand for bank loans and for cars is shifting, partly because population size is changing. It is forecast that the price elasticity of demand (PED) for cars will also alter in the future.

Money and banking

Recently in Kazakhstan, wage rate growth has risen, yet the pace of economic growth has fallen. One reason is a decrease in exports. To raise the economic growth rate, the government has boosted spending on investment. In August 2015, it introduced a floating foreign exchange rate system in an effort to strengthen the country’s macroeconomic performance.

Foreign exchange rates

Study the source material closely before you answer Question 1. Source material: Traffic jams in the Philippines Manila, the capital city of the Philippines, has a very high population density and almost no unused land available for development. It is famous for its traffic jams (congestion). People may spend hours travelling only a short distance. The Philippine government is worried that traffic congestion could harm people’s health, put multinational companies (MNCs) off setting up in the country and slow economic growth. It will also prevent the country from reaching full employment and will lower labour productivity. Entrepreneurs and workers frequently arrive at their firms feeling stressed and exhausted. More Philippine workers are relocating to Manila to take jobs in the expanding computer, retail and education industries. One benefit of the Philippine economy is its young, well-educated population. Improvements in the skills of Philippine workers are making it easier for workers to move from shrinking industries to expanding ones. Growth in the country’s population is raising the number of cars on Philippine roads. Driving is also made more attractive by cheap parking and easy access to parking spaces, together with the poor standard of public transport. Manila has too few trains but too many buses. By 2017, deregulation had raised the number of bus companies in the city to more than $1100$. Taxes in the Philippines are fairly high but disposable income has increased. Consequently, consumer spending, including spending on cars, has risen. Some of the cars bought are imported. Table 1.1 shows consumer expenditure and imports in selected countries in 2017.

Market failure

Shifts in tobacco production and consumption may create both microeconomic and macroeconomic consequences. Tobacco plants are cultivated in at least $124$ countries at varied stages of development. A larger share of the poor than of the rich use tobacco products. The cigarette market, which uses tobacco, is changing, and demand for cigarettes and some other demerit goods is falling in many countries.

Market failure

Russia’s birth rate decreased by $11\%$ in 2017, reaching its lowest level for a decade. Over the next $30$ years, Russia’s population is predicted to drop from $144$ million to $107$ million. The government introduced measures intended to halt this population decline. In 2017, it also set out privatisation plans and policies designed to stop a fall in investment, which could result in a reduction in the quantity of capital goods. Privatisation can weaken monopoly power in a market.

Production possibility curve (PPC) diagrams

The introduction of supply-side policy measures, such as deregulation, is pushing China nearer to a market economic system. Some supply-side policies, including education and subsidies, may also lift a country’s economic growth rate. China became a member of the World Trade Organisation in $2001$ and has since abolished some import quotas and cut some import tariffs. These changes may affect the size of its current account surplus.

Supply-side policy

In November 2016, it was declared that 500 and 1000 rupee banknotes would no longer be accepted in shops in India. They were then replaced by the central bank, an institution that makes extensive use of division of labour. In India, cash remains an important medium of money in economic transactions. The replacement of banknotes increased pressure on banking employees and other workers in the tertiary sector, and it influenced the general price level.

Money and banking