May/June 2022

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

Supply-side policy

A producer of medical supplies gains from better road connections to its principal markets. Which benefit is guaranteed to occur as a result?

Firms' costs, revenue and objectives

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

Market structure

On Friday evening, a student has no plans. She takes out $5 from the $100 held in a savings account and uses it to purchase a present to bring to a party, where admission costs nothing. What is this an example of?

Opportunity cost

When artificial intelligence is built into machines, the productivity of capital rises. What effect will this have?

Production possibility curve (PPC) diagrams

What combination is required to construct 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

Give one example of a fiscal policy measure.

Fiscal policy

Why might an increase in the interest rate cause inflation to fall?

Monetary policy

Which government policy would not directly raise the number or the quality of human resources?

The factors of production

What might lead to a rise in demand for a factor of production?

The factors of production

What is one likely reason for economic growth?

Economic growth

The economy goes into a 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 sets out 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 decline during a recession?

Living standards

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

Production possibility curve (PPC) diagrams

The governments of 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?

Opportunity cost

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

What does the term foreign exchange rate mean?

Foreign exchange rates

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

Money and banking

Which topic is not covered in microeconomics?

Microeconomics and macroeconomics

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

Differences in economic development between countries

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

Workers

The US government places tariffs on steel brought in from China. This raises the price of imported Chinese steel. Whose income would be expected to rise as a direct result?

Globalisation, free trade and protection

A government provides retraining for unemployed industrial workers in order to raise employment opportunities. This policy could have harmful effects on other government macroeconomic aims. What example shows this situation?

The macroeconomic aims of government

The diagram illustrates the demand and supply of apples. To what degree is the apple market in disequilibrium when the price is $2.50$ per kilo?

Price determination

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

Firms' costs, revenue and objectives

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

Price determination

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

Price elasticity of supply (PES)

Give one example of a free good.

The nature of the economic problem

What factors could make profits high in a monopoly market?

Market structure

Which business is most likely to be regarded as a small firm in the tertiary sector?

Firms

Germany is regarded as a capital-intensive economy, whereas Indonesia is regarded as a labour-intensive economy. What is the meaning of this for the economies of Germany and Indonesia?

The factors of production

A bank keeps some branches open even though they make losses. Which objective is the bank seeking to achieve?

Firms' costs, revenue and objectives

The table illustrates the way in which three people, X, Y and Z, allocate their income. What is the probable sequence of income, from the lowest income to the highest income, for these three people?

Households

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

The role of government

The chart illustrates a government’s expenditure over one year. What was the total amount of government spending on public goods?

The role of government

A government imposes a specific tax on the supply of cigarettes. At the same time, it launches a campaign to explain the health risks of smoking cigarettes. Which diagram shows the effect on the demand and supply of cigarettes?

Price determination

A government wants to adopt an expansionary monetary policy. What action should it take?

Monetary policy

A government puts in place a range of economic measures. What is meant by a supply-side policy measure?

Supply-side policy

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

Opportunity cost

What does the term economic growth mean?

Economic growth

In a country’s retail trade, one region has unemployed workers while a different region has job vacancies. What might account for this?

Employment and unemployment

A country wants to bring down the rate of inflation. Which combination of policy measures will be the most effective?

Monetary policy

A government is aiming to cut both its budget deficit and the level of poverty within its country. Which fiscal policy measure is most likely to help achieve both of these objectives?

Fiscal policy

Besides Gross Domestic Product (GDP) per head, which components are part of the Human Development Index (HDI)?

Living standards

Which event is most likely to lead to an immediate fall in the size of the labour force?

Workers

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

The value of a currency in a fixed exchange rate system is lowered. What name is given to 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 to follow a fall in the value of a country's currency when nothing else in the economy changes?

Foreign exchange rates

The diagram illustrates two production possibility curves for a country. What might have caused the country’s production to move from point $K$ to point $L$?

Production possibility curve (PPC) diagrams

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

The nature of the economic problem

Which link would an economist who specialises in macroeconomics examine?

Microeconomics and macroeconomics

Over the last few years, a government has begun to rely more heavily on the free market system. Nevertheless, this change is being introduced gradually so that any disadvantages a free market system could cause are avoided. What is one possible disadvantage of the free market system?

Market economic system

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

Demand

On the diagram, which demand curve represents perfectly elastic demand?

Price elasticity of demand (PED)

The table presents the demand and supply schedules for rice. The present price is $2.00$ per kilo. What is likely to happen if the price falls to $1.00$ per kilo?

Price changes

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

Firms' costs, revenue and objectives

Examine the source material carefully before you answer Question 1. Source material: Cyprus Cyprus is a small country that had a comparatively high HDI ranking in 2019. It exports a mixture of goods and services, such as fruit, pharmaceuticals and clothing. Cyprus imports most of the food it eats, although it grows most of its own grapes and potatoes. In 2019, bad 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 a growing number now remain in employment beyond retirement age. This is especially true for highly qualified workers, who are often well-paid, healthy and employed in jobs that do not demand physical strength. Longer life expectancy and the growing cost of funding state pensions led some economists to propose increasing the retirement age. A move like this 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 displays selected countries’ inflation rates (%) and current account balances (% of GDP) in 2019. Cyprus had a very low interest rate in 2019. It was anticipated that this would affect the country’s investment. Since 2015, some firms in the country have become more capital-intensive. This shift has influenced Cyprus’s productivity and may have affected the quality of goods produced. In 2019, two possible future problems for Cyprus’s economy were that the quality of some agricultural land might deteriorate and that some of its leading entrepreneurs might leave the country.

Population

Australia’s foreign exchange rate changes over time. The value of Australia’s exports is usually above the value of its imports. Australia is Papua New Guinea’s chief trading partner. In 2019, the government of Papua New Guinea raised income tax to bring down its inflation rate. It also used other policy measures to lift its economic growth rate.

Foreign exchange rates

Relative to most other countries, Sweden has far higher trade union membership. In 2019, 70% of Swedish workers belonged to a trade union. Over 85% of workers in Sweden are employed in the tertiary sector, whereas only 2% work in the primary sector. Swedish workers spend their incomes on many different products, including some demerit goods such as sweets. Sweden ranks 7th in the world for per head consumption of sweets.

Trade unions

Uganda focuses mainly on agricultural products and has a comparatively small secondary sector. During the 1990s, the Ugandan government privatised most firms, including banks and railways. Some economists judged this privatisation to be unsuccessful, as poverty rose and unemployment stayed high. In more recent years, the Ugandan government has applied supply-side policy measures to cut unemployment.

Supply-side policy

Singapore is a prosperous country with limited land and labour. It is commonly used as an example of a market economy. Even so, the Singaporean government intervenes in the economy. For example, it encourages its population to eat two servings of fruit and two servings of vegetables each day.

Market economic system

Since 2012, the United Nations has issued a World Happiness Index each year. Countries are ordered in this index 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 Bhutan and New Zealand now take account of several factors that affect how happy their populations are. More than half of Bhutan’s labour force works in agriculture, whereas in New Zealand most workers are employed in the tertiary sector. Conditions at work, hours worked, the nature of the job and pay differ across the primary and tertiary sectors. Productivity is greater in every sector in New Zealand than in Bhutan. One reason is that New Zealand has invested more in capital goods and education. New Zealand also records a higher GDP per head. GDP per head ($) can affect net migration (number of people), as illustrated for selected countries in 2017 in Fig. 1.1. In its 2019 budget, the New Zealand government stated that progress would be judged not by rises in GDP, but by improvements in the quality of people’s lives. To do this, it announced extra spending in several areas including mental health, child poverty and pollution. Some economists said this was the wrong approach. They argued that the most effective way for the government to raise living standards would be to cut income tax rates. Such a cut could alter government spending and the amount of goods that people purchase, including cars. Tax revenue in New Zealand rose in 2019, in part because corporation tax revenue increased. Even so, firms’ future profits were hard to forecast. This was because it was uncertain what would happen to GDP and to corporation tax rates.

The factors of production

In 2019, Angola experienced a marked rise in the money supply. The National Bank of Angola worried that this would leave inflation above 17% and damage Angola’s producers. Meanwhile, the Angolan government had focused on cutting unemployment, which had dropped from 10% in 2010 to 7% in 2019.

Money and banking

In 2019, France operated within its production possibility curve (PPC). France sells a broad variety of products overseas. It is the world’s leading exporter of luxury perfume and the 7th biggest exporter of soap. Technological change affects the goods people make and purchase. The French government is planning to improve its infrastructure so that every household can get internet access.

Price elasticity of demand (PED)

The South Korean government believes that Japan is dumping steel. South Korean firms both trade in, and manufacture within, other countries. Some South Korean multinational companies (MNCs) argue that they help to reduce poverty in the countries where they operate. In 2019, South Korean firms were hit by a depreciation of South Korea’s foreign exchange rate. A number of firms also faced labour shortages, influenced by the country’s extremely low birth rate.

Globalisation, free trade and protection

In 2019, Nicaragua saw GDP fall by 4%, even though household spending increased. Bananas were one Nicaraguan product whose supply rose; bananas are a merit good. The Nicaraguan government urged banana growers and its other producers to raise output. When output rises, a firm’s average production costs can change.

Firms' costs, revenue and objectives