Oct/Nov 2022

The government of China is worried about how widespread poverty is and about the need for extra resources in the country’s low-income areas. Consequently, it is raising spending in these areas while cutting it in the high-income areas. Which economic concept is shown by this government policy?

The role of government

What advantage do coins possess that makes them more suitable than paper banknotes for use as money?

Money and banking

Which statement concerning the different income groups is correct?

Households

A musician can decide between performing with an orchestra in either Germany or England. Which pairing of income and cost of living would be most likely to make her select the German orchestra? The table shows a comparison of incomes and cost of living in Germany and England.

Living standards

A country’s central bank lowers interest rates in order to support the economy during a recession. What effect is this reduction in interest rates most likely to have on saving and borrowing with the country’s commercial banks?

Monetary policy

Which consequence of greater specialisation by firms and workers is most likely to create difficulties for an economy?

Firms and production

When small firms are compared with large firms, which statement is true?

Firms

Which two items are part of a government budget?

Fiscal policy

The table sets out the rate of income tax paid across different income levels. What type of tax is this?

Fiscal policy

A central bank cuts interest rates. Which of the following would not result from this action?

Monetary policy

The diagram illustrates a country’s economic growth rate across a $5$-year period. What conclusion can be drawn from the diagram?

Economic growth

An airline requires both people and equipment. These may be grouped into factors of production. Which item is matched with the correct factor of production?

The factors of production

A person chooses to hire a professional decorator instead of purchasing the materials and decorating her house on her own. Why would this choice lead GDP to increase?

Economic growth

What is meant by the unemployment rate?

Employment and unemployment

What is most likely to lead to inflation?

Inflation and deflation

The table illustrates changes in economic growth and inflation. Which changes are most likely to have been caused by increasing unemployment?

Employment and unemployment

The table presents the percentage changes in earnings and consumer prices for four countries over one year. Which country is most likely to have had the largest rise in real income during that year?

Inflation and deflation

Which components are included in the Human Development Index (HDI)?

Living standards

The greatest reduction in absolute poverty can be achieved by lowering

Poverty

The table presents some information from a country’s balance of payments. The country has no secondary income (current transfers). What is the country’s balance on its current account?

Current account of balance of payments

Companies in Vietnam purchase insurance from companies based in the US. In which section of the Vietnamese balance of payments would this transaction be entered?

Current account of balance of payments

What is a limit placed on the quantity of imports called?

Globalisation, free trade and protection

The diagram presents a production possibility curve (PPC) together with several possible output combinations of tea and coffee. Which combinations of tea and coffee can the economy produce at present?

Production possibility curve (PPC) diagrams

Which mix of factors would encourage a multinational company (MNC) that manufactures smartphones to set up operations in a low-income country?

Globalisation, free trade and protection

What is one drawback of a market economy?

Market economic system

Workers receive a pay increase, yet their productivity does not rise. The workers themselves do not purchase the product they make. How would this change be represented on a demand and supply diagram for the product?

Supply

The diagrams illustrate changes in market conditions. Which diagram indicates a shortage at price $P$?

Price determination

How is price elasticity of demand defined?

Price elasticity of demand (PED)

In order to reduce traffic congestion, a government plans to construct a new road. A toll charge will be applied to the new road. What is the main purpose of this government intervention?

Market failure

Which organisations are able to provide finance directly for the expansion of firms?

Firms

The Chinese government is worried about the extent of poverty and the requirement for more resources in the country’s low-income regions. Consequently, it is raising spending in those regions and cutting it in the high-income regions. Which economic concept is shown by this government policy?

Poverty

Which benefit do coins have that means they are more suitable than paper banknotes for serving as money?

Money and banking

Which of the following statements about different income groups is correct?

Living standards

A musician can choose to perform with an orchestra in either Germany or England. Which pairing of income and cost of living is most likely to lead her to pick the German orchestra?

Living standards

A trade union says that its members have seen their real income fall over the last five years. What would have had to occur for this to be the case?

Workers

A firm offers a personal service to its customers. It prefers to stay labour-intensive instead of switching to production that is more capital-intensive. Which aspect of being labour-intensive would justify this decision?

The factors of production

Why would one oil-drilling company making a profit want to acquire another oil-drilling company that is also making a profit?

Firms' costs, revenue and objectives

A government chooses to stimulate the economy by using a budget deficit. Which target should it select to achieve this aim?

Fiscal policy

A government chooses to apply a fiscal policy measure. What would be one example of this?

Fiscal policy

What would the government cut back on in order to lower inflation?

Fiscal policy

A country wants to promote economic growth. Which policy measure is most likely to achieve this aim?

Economic growth

An airline requires people and equipment. These may be classified as factors of production. Which item is assigned to the correct factor of production?

The factors of production

How is a country’s Gross Domestic Product usually measured?

Economic growth

What is the most probable result of an increase in unemployment?

Employment and unemployment

Why might deflation be harmful to an economy?

Inflation and deflation

For what reason does a government supply public goods?

Market failure

The table presents the percentage changes in earnings and consumer prices for four countries over a single year. Which country is most likely to have had the largest rise in real income during that year?

Inflation and deflation

Which mix of government measures is most likely to improve the living standards of lower-income groups in an economy?

Living standards

What is the normal impact of net immigration on a high-income country?

Population

The table gives selected information from a country’s balance of payments. The country records no secondary income (current transfers). What is the balance on the country’s current account?

Current account of balance of payments

Vietnamese companies purchase insurance from firms in the US. In Vietnam's balance of payments, how should this transaction be entered?

Current account of balance of payments

Country X manufactures cars and also brings in cars from overseas. Which group is least likely to gain from the introduction of an import tariff on cars?

Globalisation, free trade and protection

The diagram illustrates production possibility curves (PPC) for an economy making two goods, sweet potatoes and onions. At the start, the economy is functioning on PPC$_1$. Which pair of changes could move PPC$_1$ to PPC$_2$?

Production possibility curve (PPC) diagrams

What could be a disadvantage for the country where it is based when a multinational company (MNC) grows into overseas markets?

Globalisation, free trade and protection

A government decides to shift towards a market economy by selling state-owned enterprises. What could be one motive for this?

Market economic system

The diagrams illustrate the demand curves of the only two buyers in a market. What shape will the market demand curve for the good take?

Demand

In a country, shoppers become concerned about a sudden and harmful increase in air pollution, so they purchase more food in case they need to remain indoors. As the air pollution becomes more widespread, supermarket workers become ill and supermarkets find it hard to keep their shelves stocked with food. X was the original equilibrium in the supermarket food market. What will be the new equilibrium resulting from this situation?

Price determination

Which factor might affect the price elasticity of supply for a product?

Price elasticity of supply (PES)

What is one possible result of market failure?

Market failure

Which organisations are able to provide direct funding for firms’ growth?

Firms

Read the source material with care before you answer Question 1. Source material: Bank mergers During 2019, a merger involving three Nigerian commercial banks created Nigeria’s largest commercial bank. Also in 2019, two US commercial banks combined to form the US’s 6th largest commercial bank. In the US, the three biggest banks held 32% of the market. In both the US and Nigeria, the major banks responded by opening additional branches, running advertising campaigns and upgrading online banking. Bank mergers can mean that some bank employees lose their jobs. Unemployment did rise in Nigeria in 2019. This is likely to have influenced the government’s budget because both government tax revenue and government spending would have changed. Most commercial bank workers are well educated. The number of years of education people receive can influence a country’s birth rate. Fig. 1.1 shows average years of schooling and the birth rate in selected countries in 2019. In both Nigeria and the US, some households spend more than they earn, so they borrow from commercial banks. In Nigeria, some children in low-income households do not get enough to eat because food is expensive. A government subsidy for farmers could be used to help low-income Nigerian households. The subsidy could also help to reduce the deficit on the current account of its balance of payments. Whether this happens will depend on Nigeria’s inflation rate compared with other countries and on incomes at home and overseas. In the US, almost 35% of children are overweight. One cause of this is eating and drinking items with a high sugar content. The US government could set a minimum price for such products, including chocolate. A minimum price could move the market closer to the point where social benefit equals social cost. However, some consumers think it would be unfair and some firms think it would cut profits. A minimum price may also create a cost for the government, and how successful it is would depend on how high the minimum price is set.

Market structure

The economic problem creates choices and opportunity cost. People must decide which job to take and where to live. Over recent years Australia has hired teachers from several countries, including Canada, the UK and the US. Most of these teachers specialise in one subject.

Opportunity cost

In 2019, Russia recorded an unemployment rate of $4.6\%$. Russia has experienced full employment before. The government aims to bring unemployment down further. During 2018, the Russian government reduced spending, which may have pushed poverty higher. In both 2018 and 2019, the government left its income tax rate unchanged. Russia uses a proportional tax rate system.

Employment and unemployment

Developments in technology have altered the ways trees (wood) are felled, moved and then turned into furniture, for example tables. Wood has inelastic supply. Wood may be supplied under every economic system. By contrast, public goods are not provided in a market economic system.

Price elasticity of supply (PES)

Although 15% of US exports go to Mexico, 80% of Mexico’s exports go to the US. In 2019, the US government introduced some protectionist measures to cut imports from Mexico. This US action led to a drop in Mexico’s foreign exchange rate. Even with a higher inflation rate, Mexico’s central bank cut the rate of interest from 7.75% at the end of 2019 to 6.5% in March 2020.

Globalisation, free trade and protection

Oil accounts for a third of Ecuador’s exports. Ecuador has, however, chosen to produce less oil and a wider range of other goods and services. This choice has changed the way output is made in Ecuador. For instance, luxury textile output, such as luxury scarves and jumpers, uses fewer capital goods than oil production. Tourism depends on natural resources, including sunshine and beaches. One reason the Ecuadorian government has pushed for less dependence on oil is the large swings that often occur in the oil market. From 2014 to 2016, demand for Ecuador’s exports dropped, which caused a major fall in export revenue. This fall, together with a reduction in government spending, led to a decline in the country’s output. From 2016 to 2019, Ecuador’s economy improved a little. Incomes and household spending rose and more cars were bought. Table 1.1 shows GDP per head ($) and car ownership (per 1000 people) in selected countries in 2019. Ecuador’s government borrowed from China in order to pay for the construction of more roads. Building these roads increased employment and was expected to affect transport costs in the long run. From 2016 to 2019, Ecuador’s textile industry gained from the better road network. Even with tough competition from foreign textile firms, Ecuador’s textile firms increased the scale of production. Wages in the textile industry did not rise much. A very small wage increase can influence trade union activity and immigration. Some Ecuadorian workers leave the country to look for jobs elsewhere, especially in Italy, Spain and the US. These workers have a variety of skills and are employed in many different jobs overseas, some of which offer training. Many, though not all, workers send money back to their families.

Differences in economic development between countries

Washington State is the US state that produces the highest number of apples. In 2019, apple output rose in Washington State, yet the market was still in disequilibrium. Apple farming is labour-intensive because apples are harvested by hand. The US apple market is competitive.

Price determination

Romania’s indirect tax rate stood at 19% from 2017 to 2019. A large share of foreign multinational companies (MNCs), especially US MNCs, are based in Romania. MNCs have raised productivity in Romania and cut its unemployment rate. MNCs can also bring advantages to their home countries.

Employment and unemployment

Poland is the world’s leading exporter of toothpaste, which has inelastic demand. In 2019, some Polish firms making toothpaste were considering a horizontal merger. Also in 2019, dentists’ wages rose across the globe. The rise was especially large in the UK, where dentists were paid, on average, 25% more.

Price elasticity of demand (PED)

Palau is a small island state in the Pacific Ocean. It has benefited from substantial financial aid from the US. Living standards are believed to be lower in Palau than in the US. Palau applies some of the highest tariffs in the world. These trade tariffs influence Palau’s current account of its balance of payments. During 2019, commercial bank lending to firms and households in Palau rose.

Current account of balance of payments