Basic economic ideas and resource allocation (AS level)

Multiple choice questions by topic with answers

Table of contents

• Scarcity choice and opportunity cost

• Economic systems
• Normative and positive statements
• Factors of production
• Money
• Classification of goods and services
• PPC curve

ECONOMICS!
Scarcity choice and opportunity cost
A farmer is able to grow three crops, X, Y and Z, on his land.
The farmer decides to grow at most two crops in any year.
The table shows six possible combinations of units of output of the three crops.

output

X 0 0 80 40 40 0
Y 0 60 0 30 0 30
Z 40 0 0 0 20 20

What is the opportunity cost of 1 unit of X?

A 1.33 units of Y

B 1.5 units of Y

C 0.5 units of Z

D 2.0 units of Z

Answer c

The diagram is from a chapter on ‘The Economic Problem' in an Economics textbook. It should
contain the terms opportunity cost, scarcity and choice in the order that identifies the economic
problem.

What is the correct order for the terms to appear in the diagram?

A choice -> opportunity cost -> scarcity

B choice —» scarcity —» opportunity cost

C scarcity -> choice -» opportunity cost

D scarcity -> opportunity cost -> choice

Answer C

1 What is correct about scarcity?

A Scarcity affects low income earners only.

B Scarcity forces individuals to make choices.

C Scarcity is removed by periods of falling prices.

D Scarcity will be abolished by advances in technology.

Answer B

3 From 1995 to 2000 each of the countries listed below moved towards a market economy through
privatisation programmes.

Which country made the slowest rate of transition?

private sector share of GDP

(ratio of private enterprise earnings to GDP)

1995 2000

A Czechia 70 80
B Hungary 60 70
C Romania 45 60

D Slovakia 60 80

Answer A

ECONOMICS!
 What is generally considered to be one of the advantages of using the price mechanism as a
rationing device?

A It ensures that goods are allocated in accordance with the wants of consumers.
B It ensures that suppliers cannot make excessive profits.
C No one can be prevented from consuming a good if they are willing and able to pay the market
price.
D The allocation of goods is determined by consumers' wealth.

Answer C

What is not a function of the price mechanism?

A to act as a signal to firms when allocating resources

B to maximise consumer surplus

C to provide an incentive to firms to produce goods

D to ration scarce resources

Answer B

1 To overcome the problem of scarcity, countries with few natural resources need to concentrate
on the quality of human resources.

Which set of policies would be most appropriate?

natural resources policy human resources policy

A develop renewable energy supplies improve education and training

B plan the allocation of resources discourage automation

C protect land resources protect jobs in manufacturing

D restrict imports of raw materials restrict influx of skilled migrants

Answer A

Scarcity means that goods need to be rationed between competing consumers.

Which basis for rationing is the most likely to result in the most equal distribution of goods?

A consumer preference

B market price

C political decision

D seller preference

Answer C

A student buys a flute for $80 but then is unable to learn to play it. It has a resale value of $50, while the shop retail price of the same type of
flute has risen to $95. What is the present opportunity cost to the student of keeping the flute?
A $30
B $50
C$80
D $95

Answer B

ECONOMICS!
Economic systems

In which aspect is the planned economy likely to offer more than the market economy?

A competition

B incentive

C innovation

D security

Answer D

What is likely to be introduced in the market for bus travel if an economy moved from a mixed
economy to a market economy?

A allowing companies to bid for bus routes

B free bus travel for school children

C maximum prices for bus travel
D subsidies to bus operators

Answer A

From 1990 to 2000 each of the countries listed below changed towards a market economy
through privatisation programmes.

private sector share (% of GDP)

(ratio of private enterprise earnings to GDP)
1990 1995 2000

Czechia 10 70 80
Hungary 20 60 80
Romania 15 45 60
Slovakia 10 60 80

What can be concluded about the rates of privatisation?

A Czechia initially made the fastest change.

B Hungary made the least overall change.
C Romania made the greatest overall change.
D Slovakia made the steadiest change.

Answer A

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ECONOMICS!
Normative and positive statement
Which is a normative economic statement?

A Money is the least liquid form of wealth.

B Some firms are subsidised by the government.
C Some workers earn more than others.
D Taxes are the best way to discourage smoking.

ANSWER D

Which statement by a company is normative?

A In the past three years we have carried out the biggest merger acquisition in the group's history.
B The business has fallen behind competitors and needs to improve its ethical standards.
C The growth of the business has been in retail and financial services.
D The structure of the business has been simplified

ANSWER B

What is always true of a positive statement?

A It is based on statistical data.

B It is possible to test its validity.

C It is the only basis for economic policy.

D It overrides any normative statement.

Answer B

A teacher asks four students to fill in the gaps in the following sentence.

‘A positive economic statement is1 statement that 2 be tested using factual

evidence, whereas a normative economic statement is3..................................statement that4 be
tested using factual evidence.’

The students’ answers are shown in the table.

Which student is correct?

1 2 3 4

A an objective can a subjective cannot

B an objective cannot a subjective can

C a subjective can an objective cannot

D a subjective cannot an objective can

Answer A

What is correct for a normative statement?

A It is objective and based on fact.

B It is objective and can be proved correct.

C It is subjective and based on opinion.

D It is subjective and can be reliably tested.

ANSWER C

ECONOMICS!
Factors of production

Which outcome depends upon the division of labour?

A. a decrease in boredom at work

B. a decrease in comparative advantage

C. a decrease in efficiency

D. a decrease in opportunity cost

Answer D

A production possibility curve for a country is shown

What would cause the shift from PP to P1P1?

A application of more machinery used in manufacturing

B productivity decreases

C scientific methods applied to farming

D switch from production of consumer goods to capital goods

Answer B

What would be a determinant of a country's production possibility curve boundary?

A the capital invested in infrastructure

B the level of price and wage inflation

C the level of unemployed labour

D the volume of imports and exports

Answer A

What is most important for the effective operation of the division of labour in a modern
economy?
A. a supply of money
B. finance from the government
C. highly qualified entrepreneurs
D. integrated transport systems

Answer A

ECONOMICS!
Money

What is most likely to severely affect the ability of money to act as a medium of exchange?

A a devaluation of a country’s rate of exchange for foreign currency

B an increase in the money supply

C a very high rate of inflation

D a very high rate of interest

Answer C

Four students are given the following list of assets.

• a three bedroom house

• banknotes and coins in a purse

• money in a bank savings account

• shares in a public limited company

The students are asked to order the assets from the most liquid to the least liquid and the table
shows their choices.

Which student is correct?

most liquid --------------------- ► least liquid

A notes and coins savings account shares house

B notes and coins savings account house shares

c notes and coins shares savings account house

D savings account notes and coins shares house

Answer A

In Zimbabwe there was hyperinflation.

Which two functions of money might the Zimbabwe dollar be most likely to have still performed
during this hyperinflation?

A medium of exchange and store of value

B standard for deferred payments and unit of account

C store of value and standard for deferred payments
D unit of account and medium of exchange

Answer D

ECONOMICS!
Classification of goods and services
PPC curve

What justifies government intervention in the provision of a merit good such as education?

A People who pay for education value it more than those who cannot pay.

B Private schools have more merit than state schools.

C Social costs of providing education outweigh social benefits of education.

D Some consumers do not fully recognise the value of education.

Answer D

'An increase in consumption by one person leaves the benefits available to others undiminished'. Which good does
this statement define?

A a demerit good

B a merit good

C a private good

D a public good

Answer D

The Bureau of Alcohol, Tobacco, Firearms and Explosives is a branch of the United States Government which
regulates markets. What does its name imply is most likely to be its main responsibility?

A to prevent harm from demerit goods

B to provide subsidies for essential goods
C to raise revenue from goods in elastic demand
D to safeguard employment in manufacturing industry

Answer A

Despite much opposition, the local government in a popular tourist resort built a leisure centre and swimming pool
which is open to everyone. Many tourists visit the centre. Local residents are charged a lower entry fee than the fee
charged to the tourists. How would economists classify this service?

A It is a demerit good because some people objected to the development.

B It is a merit good because the entry fee is reduced for local residents.
C It is a private good because there is an entry fee for all users.
D It is a public good because it is open to everyone and provided by the local government.

Answer C

ECONOMICS!
 A good's defining quality is that its consumption by one person prevents its consumption by someone else. How is
this good classified?

A a free good
B a non-excludable good
C a non-rival good
D a private good

Answer D

A businesswoman sets up a charity to provide toys for young children of low income families.
Which term most accurately describes these toys?

A free goods
B merit goods
C private goods
D public goods

ANSWER C

Why might governments provide free education for children aged 4 to 16 years old?

A Consumers are not fully aware of the benefits of education.

B Education in a free market system would be over consumed.
C Education is a public good and there would be many free riders.
D The private costs of education exceed the private benefits in a free market.

Answer A

ECONOMICS!
PPC curve
The diagram shows a production possibility curve for a farmer. The original posit
farmer switches some of his land from producing pears to producing apples, whi
represents his new position?

Answer B

The diagram shows a production possibility curve for an economy that produces capital goods
and consumer goods.

goods

Why is the production possibility curve drawn concave to the origin?

A Capital goods are a more labour intensive output than consumer goods.

B Consumers always seek to maximise their satisfaction from consumption.

C Profit maximisation for firms always ensures efficiency in production.

D Some resources are more efficient in production of some goods than others.

Answer D

The diagram shows a production possibility curve for an economy that is producing at point P.

Which quantity of X is given up to produce the quantity of Y shown?

A 40 B 50 C 100 D 110

Answer B

ECONOMICS!
Which labels might be used on a production possibility curve diagram?

Y (vertical) axis X (horizontal) axis

A capital input labour input

B cost of production quantity produced

C output of rice labour input

D output of rice output of sugar

ANSWER D

Economy X uses its resources in the labour-intensive production of wheat and wooden furniti
as shown by the production possibility curve FW.

With the help of new strains of wheat seeds, X increased yields and shifted to a new producti
possibility curve.

Which diagram depicts this change?

furniture furniture

furniture furniture

ANSWER C

Line XX is the production possibility curve (PPC) of a worker picking peas and beans in a 10 hour
working day.

What would cause the worker’s PPC to shift to the line YY?

A a machine that increases the worker’s pea picking productivity only

B a new work schedule where the worker spends 6 hours per day picking peas and only
4 hours picking beans

C a reduction in working hours to 8 per day and a machine that increases the worker’s pea
picking productivity

D a reduction in working hours to 8 per day only

ANSWER C

ECONOMICS!
Government microeconomic intervention (AS level)

Multiple choice questions by topic with answers

Table of contents
• maximum and minimum prices
• maximum and minimum prices
• government intervention
• Taxes and subsidies
• transfer payments
Maximum and minimum prices

A government intends to introduce a minimum price for rice, a maximum price for heating oil and
a tax on chewing gum.

Who. in each market, is meant to benefit from these policies?

market for rice market for heating oil market for chewing gum

A consumers government producers

B government producers government
C producers producers consumers
D producers consumers government

Answer D

Which benefit is most likely to result from a rise in the minimum price of labour (wage rate)?

A a reduction in costs of production

B a reduction in income inequality
C a reduction in the level of unemployment
D a reduction in the rate of inflation

Answer B

The government fixes a maximum price for wheat flour below the market equilibrium price.
After the maximum price is imposed, which statement is not correct?

A Producers' revenue is increased.

B Some consumers may encourage illegal sales.
C The quantity supplied of flour will decrease.
D There will be an excess demand for flour.

ANSWER A

A government introduces a maximum price above the market

price. What will be the effect on consumer and producer surplus?

consumer surplus producer surplus

A fall rise

B rise fall

C rise unchanged

D unchanged unchanged

ANSWER D
After a series of poor harvests, a government imposes an effective maximum price on cereals.

What would be a consequence of this policy?

A Both rich and poor people would satisfy their demands equally.

B Illegal buying and selling through a black market would be prevented.

C Rationing would be necessary to ensure a fair distribution of cereals.

D The market would fail to clear leaving a surplus of cereals.

ANSWER C

In 2014 some supermarkets reduced the price they were willing to pay farmers for milk to below
what was then the market equilibrium price. They passed the lower price onto the consumers in
order to try and encourage them into the store.

The government then fixed an effective minimum price which the supermarkets had to pay the
farmers.

These two actions are shown in the diagram.

What would be the outcome after the supermarket action and then the government action?

after supermarket action after government action

A a shortage of 5000 litres a surplus of 4000 litres

B a shortage of 5000 litres a surplus of 7000 litres

C a shortage of 13000 litres a surplus of 4000 litres

D a shortage of 13000 litres a surplus of 7000 litres

Answer D
Government intervention

Too much sugar causes an increase in a consumer's weight. A government has introduced a
'sugar tax' on the consumption of soft drinks that have a high sugar content. How might this policy
help to reduce the number of overweight people?

A Consumers switch to cheaper brands of soft drink with a high sugar content.

B Consumers switch to other high-sugar substitute goods, such as alcohol or sweets.

C The price elasticity of demand for soft drinks is inelastic.

D The tax revenue is spent on education about the dangers of soft drink consumption.

Answer D

What is the major problem associated with a government directly providing the correct amount of
a public good?

A competition from private producers

B estimation of demand

C increased trade diversion

D rivalry in consumption

Answer B

There have been recent calls for the UK government to nationalise its railways.
What would not be a reason for nationalising the railways?

A Private rail companies often charge high ticket prices.

B Private rail companies may exploit monopoly power.
C Railways are an essential part of national infrastructure.
D Railways should be treated as a public good.

Answer D

The diagram shows an initial market equilibrium for an agricultural product of $6 and 800 units.

How much will the government have to spend to increase the market price to $10?

A $1600 B $2400 C $3200 D $4000

Answer D
 What does not happen when price acts as a means to allocate resources?

A Price determines the supply of public goods.

B Price operates in the markets for both goods and factors of production.

C Price recognises consumers' ability to pay rather than consumers’ needs.

D Price signals to producers which goods are most profitable.

Answer A

The diagrams show UK Government total spending and welfare spending in £ billions between
2005 and 2014.

total spending United Kingdom welfare spending United Kingdom

What can be concluded from the diagrams about UK Government spending during the period
2005 to 2014?

A Both forms of spending were cut in 2014.

B Both total and welfare spending have risen continuously.

C In 2005 welfare spending made up a quarter of total spending.

D Non-welfare spending has always exceeded welfare spending.

Answer D

Health services in an economy are provided by private clinics that charge high fees. The
government decides health services should be provided for everyone, not based on ability to pay.

Which direct action should it take?

A Build government clinics to compete in the market.

B Close private clinics where provision by the market is inadequate.

C Increase the taxes on profits made by private clinics.

D Nationalise private clinics and remove charging.

Answer D

A local government is deciding whether to increase parking charges and provide more lanes for
bus use only.

One official said that the increase in parking charges should cause more bus travel.

A second official said that an increase in the frequency of bus services will not cause demand for
bus travel to rise.

Are these official statements correct or incorrect?

first statement second statement

A correct correct
B correct incorrect
C incorrect correct What would supporters of a nationalised public transport service expect to be most likely
outcome from the privatisation of train and bus services?
D incorrect incorrect A fewer destinations served by trains and buses
B lower fares
C more frequent services to all destinations
Answer B
D more people employed in public transport services

Answer A
What is an example of direct public provision of goods and services?

A a charity hospital funded by public donations that offers free treatment to the rural poor

B a mobile government library that travels to rural villages offering access to books

C a pharmacy in a local shopping centre that provides treatment direct to the public

D a private school that offers free places to children of low income families

Answer B

What would supporters of a nationalised public transport service expect to be the most likely
outcome from the privatisation of train and bus services?

A fewer destinations served by trains and buses

B lower fares
Taxes and subsidies

What describes a regressive tax?

A All taxpayers pay the same proportion of income in taxes.

B High-income earners pay a lower proportion of income in taxes than low-income earners.

C High-income earners pay less in taxes than low-income earners.

D High-income earners pay more in taxes than low-income earners.

Answer B

A government wishes to raise the incomes of farmers without raising the price of food to
consumers. Which policy should it use?

A a maximum price below the market price for food

B a minimum price below the market price for food

C a payment of a subsidy to farmers to produce food

D a release of government food stocks onto the market

Answer C

What describes a regressive tax?

A low income earners pay a higher proportion of their income in tax than high income earners

B marginal tax rates exceed average tax rates

C the cost of collecting the tax exceeds the revenue raised

D the marginal rate of tax is higher for high income earners than for low income earners

Answer A

The diagram shows the equilibrium price and quantity of good X.

The initial market equilibrium is shown by point E.

What might cause the market equilibrium to move to point F?

A a decrease in the costs of producing good X

B a decrease in the demand for good X

C an increase in the price of a substitute good

D the imposition of a specific sales tax on producers of good X

Answer D
 The table shows the demand and supply schedules for a product before and after the
government pays a subsidy of $4 per unit to the producers.

quantity quantity supplied quantity supplied

price
demanded before subsidy after subsidy
$
(units) (units) (units)

6 250 50 150

8 200 100 200

10 150 150 250

12 100 200 300

14 50 250 350

Assuming that any extra sales are to new consumers, how much do the original consumers of the
product save as a result of the subsidy?

A $300 B $600 C $900 D $1500

Answer A

The income tax structure of a country has two elements.

1 The first $20 000 of earned income is not taxed.

2 Any income earned above $20 000 is taxed at 20%.

What would be a correct description of this tax structure?

A a progressive tax on incomes of more than $20 000

B a progressive tax throughout the whole income range
C a proportional tax on incomes of more than $20 000
D a regressive tax throughout the whole income range

Answer A

In 2014 Egypt reduced subsidies on fossil fuels such as gasoline and diesel.
The diagram shows the initial equilibrium at point X.

What will be the new equilibrium after the reduction of subsidies?

Answer B

A government increased a specific tax on shoes. The resulting increase in the price of shoes was
paid mainly by the consumer and not by the producer.

What must be true for this to happen?

A The price elasticity of demand was less than the price elasticity of supply.
B The price elasticity of demand was unitary.
C The price elasticity of supply was less than one.
D The price elasticity of supply was inelastic while the price elasticity of demand was elastic.

ANSA
The diagram shows three possible tax schemes.

What can be concluded about these tax schemes?

A X is more progressive than Z.

B X, Y and Z are all proportional.

C Y is the only proportional tax

D Z is more regressive than Y.

Answer B

A subsidy is given to the producers of a good with perfectly elastic demand.

What will be the outcome?

A Consumer and producer receive equal amounts of subsidy.

B There will be no change in price; the incidence of the subsidy will fall on the producer.
C There will be a large increase in quantity consumed; the incidence of the subsidy will fall on the
consumer.
D There will be no change in the quantity consumed; the incidence of the subsidy will fall on the
consumer.

ANSWER B

A government decides to subsidise farms producing milk in its country.

Which question about this decision is a normative question rather than a positive question?

A How much will milk production increase?

B How should essential products, such as milk, be produced?

C How will employment in the milk industry change?

D How will milk prices change?

Answer B

The diagram shows the demand and supply curves of a commodity before and after a specific tax
is removed.

What is the tax per unit of output and what is the price after the removal of the tax?

price after the

tax per unit
removal of the tax

A 6 6
B 6 8
C 4 6
D 4 8

Answer A
 The diagram shows the market for heating oil.

If the government introduces a production subsidy, how will the financial benefit be shared
between consumers and producers?

A It will be shared equally between producer and consumer.

B It will go entirely to the producer.

C The majority will go to the consumer.

D The majority will go to the producer.

Answer D

A specific tax is placed on the sale of bottles of lemonade. In the diagram, SS is the supply curve
before imposition of the tax and S(St is the supply curve after tax.

Which distance represents the specific tax on each bottle?

A UT B WT C WU D WX

Answer B

A market is in equilibrium at point X. The government then subsidises both consumers and
producers by direct payments.

What will be the new equilibrium position?

Answer C

Which is a transfer payment?

A an annual allowance paid by an individual to a grandchild

B a one-off bonus paid to an employee for a special contribution to a firm’s profits

C a payment made by a parent to a regular child-minder

D the monthly salary of an employee of a local authority

Answer A
Transfer payments
Which of the following is a transfer payment?

A the advertising expenditure of a firm

B the allowance given by a parent to their child while at school

C the rent paid to a land owner by a tenant farmer

D the wage paid to a worker in the government service

Answer B

Money is paid by the government to an unemployed worker in the form of a benefit. Why is this
called a transfer payment?

A The payment is from taxes paid by employed workers.

B The payment is made from government savings not current income.

C The payment is made without the production of goods and services taking place.

D The payment must be spent as directed by the government.

Answer C

Which statement about transfer payments is correct?

A Transfer payments are intended to reward productive economic activity.

B Transfer payments are only financed by government.

C Transfer payments may result in a disincentive to work.

D Transfer payments will include the sales of new cars.

Answer C

What is an aim of a transfer payment?

A It allows the government to alter the final distribution of income.

B It provides a ceiling for levels of income across the economy.
C It removes the need for state subsidies.
D It rewards the activity of a factor of production.

Answer A

The table identifies items of government annual spending.

$ million

army pay 35
civil servants’ salaries 125
farming subsidies 15
pension payments 75
welfare benefits 50

What is the total government expenditure on transfer payments?

A $50m B $125m C $175m D $300m

Answer B
Macroeconomic policy (AS level)

Multiple choice questions by topic with answers

Table of contents

• Types of policies , fiscal policy , monetary policy and supply side policy

• Policies to correct balance of payment disequilibrium

• Policies to correct inflation and deflation

Which action might be part of an expansionary economic policy?

A reducing the budget deficit

B reducing the level of government spending
C reducing the money supply
D reducing the rate of interest

Answer D

Which action is classified as a fiscal policy measure?

A fixing a currency to another country's currency

B managing changes in the level of government debt
C providing guidance to industry and the public
D tightening reserve asset requirements for financial institutions

Answer B

Which type of policy would have the most immediate effect in dealing with a
deflationary economic downturn?

A increasing the government's budget surplus

B increasing liquidity by assisting banks to lend more
C investing in projects to improve transport networks
D switching the burden of taxation from earning to spending

Answer B

What is an example of a supply-side policy?

A an import quota to restrict the supply of goods

B a rise in interest rates to encourage the supply of savings
C a specific tax on the supply of goods to raise revenue
D a subsidy to businesses to promote the supply of training courses

ANSWER D
Which policy would assist in reducing a deficit within the balance of payments?

A increasing interest rates

B increasing the money supply

C reducing subsidies to exporting industries

D reducing the level of direct taxation

Answer A

What would be increased by an expansionary fiscal policy?

A budget deficit

B exchange rate

C money supply

D rate of direct taxation

Answer A

Which policy mix is most likely to be effective in the short run for reducing inflation in a closed economy?

fiscal policy monetary policy

A decreasing the budget surplus increasing the interest rate

B decreasing the budget surplus increasing the money supply
C increasing the budget surplus increasing the interest rate
D increasing the budget surplus increasing the money supply

Answer C
In its recent budget a government reduced total expenditure while increasing the amount spent
on training to increase the productivity of the workforce. The initial equilibrium point is shown by X
on the aggregate demand (AD) and aggregate supply (AS) diagram.

What would be the equilibrium point after these changes?

ANSWER A

Monetary policy can be used to increase the level of business activity.

Which action illustrates this?

A curbing consumption through controls on credit

B lowering reserve requirements of banks to increase lending

C reducing government spending to achieve a budget surplus

D stimulating company investments by increasing interest rates

Answer B

The government of a country plans to raise income tax rates. The initial equilibrium for the
country is represented by point X on the diagram.

Which new equilibrium point would an economist predict as the result?

Answer D
The macroeconomy (AS level)

Multiple choice questions by topic with answers

Table of contents
• Aggregate demand and aggregate supply

• Inflation, economic growth and employment

• Balance of payments

• Absolute and comparative advantage

• Protectionism

• Exchange rates

• Terms of trade

ECONOMICS!
Aggregate demand and aggregate supply

The diagram shows an aggregate supply curve, and aggregate demand curves.

What would cause a decrease in aggregate demand from AD, to AD2?

A an increase in income tax

B an increase in the price of electricity

C an increase in the tax on goods

D an increase in wage rates

Answer A

The diagram shows aggregate demand (AD) and aggregate supply (AS) in an economy. The
initial equilibrium is at point E.

What causes shifts in the aggregate supply curve from AS to ASi and from AS to AS2?

shift from AS to ASi shift from AS to AS2

A change in AD from E to W change in AD from E to X

B increase in price level from P to Pi decrease in price level from P to P2
C increase in productivity of capital fall in the returns to capital
D shortages of skilled labour improvements in training of workforce

Answer D

ECONOMICS!
 An aggregate demand curve slopes downwards from left to right. One reason for this is that
reduction in the average price level will lead to

A a decline in the country's international competitiveness.

B an increase in interest rates.

C an increase in the real value of money balances.

D the expectation of further price falls

Answer C

In the diagram an economy is initially in equilibrium at point X.

The government increases spending on education. This coincides with an increase in wage rate
inflation.

Which point shows the most likely short-run equilibrium of the economy?

Answer C

The diagram shows the AD/AS curves for an economy

Which policy would reduce the price level from PT to P2 as shown?

A depreciating the currency to make imports more expensive

B imposing tariffs on imports to encourage expenditure switching

C increasing labour productivity through training

D raising sales taxes on goods to discourage consumption

Answer C

ECONOMICS!
 The diagram shows a shift in the aggregate demand curve, from AD! to AD2.

What might have caused this shift?

A a fall in the budget surplus

B a fall in the trade surplus

C a rise in imports

D a rise in the interest rate

Answer A

The diagram shows the original aggregate demand curve, ADi, and original aggregate supply
curve, ASi. The original equilibrium is at X.

What would cause the new equilibrium to be at Y?

A an increase in export prices

B an increase in government spending on education

C an increase in import prices

D an increase in the money supply

Answer C

ECONOMICS!
In February 2016 the Organisation for Economic Cooperation and Development (OECD) urged
major economies such as the US and Japan to increase government spending

How would this affect the aggregate demand (AD) curve in these countries?

A a move left along the AD curve

B a move right along the AD curve

C a move to the left of the AD curve

D a move to the right of the AD curve

Answer D

The diagram shows a shift in the aggregate demand curve of an economy from ADi to AD2.

What could have caused this shift?

A an increase in expenditure on imports

B an increase in government tax rates

C an increase in the international trade deficit

D an increase in the money supply

Answer D

ECONOMICS!
 Inflation, economic growth and employment
How can a change in consumption that increases unemployment be illustrated on an aggregate
demand and aggregate supply diagram?

effect on the aggregate demand curve effect on the aggregate supply curve

A movement down the demand curve shift outwards

B movement up the demand curve shift inwards
C shift inwards movement down the supply curve
D shift inwards movement up the supply curve

Answer C

An economy is experiencing a period of deflation. What must be

happening?

A The average price level is falling.

B The output of the economy is falling.

C The rate of inflation is falling.

D The real value of money is falling.

Answer B

A government is faced with rising inflation. It wishes to reduce inflationary

pressure while avoiding a fall in output. Which action is most likely to meet its
needs?

A an increase in laws to promote competition

B an increase in taxation

C an increase in the budget surplus

D an increase in the exchange rate

Answer A

During one year the national output of a country valued in terms of money
prices increased by 8% while the index of the prices of all goods and services
produced in the country increased by 3%. By how much did the real national
output increase?

A 3%

B 5%

C8%

D 11%

Answer B

ECONOMICS!
 The table shows the CPI rate of inflation (%) in the United States from 2006 to 2013.

2006 2007 2008 2009 2010 2011 2012 2013

2.5% 4.1% 0.1% 2.7% 1.5% 3.0% 1.7% 2.0%

What can be concluded from the figures about the period 2006 to 2013?

A There was one year of constant prices.

B There were three years of deflation.

C There were only four years of inflation.

D There were eight years of rising living costs.

Answer D

An economy is currently in the position PY shown on the diagram

price
level

real GDP

Which short-run effects is government spending on education likely to have on unemployment

and inflation?

unemployment inflation

A fall fall

B fall rise

C rise fall
D rise rise

answerB

ECONOMICS!
 The table shows the consumer price index (CPI) and national output at current prices in 2014 and
2015 for an economy.

national output
year CPI
at current prices

2014 100 100

2015 120 110

What can be concluded when 2015 is compared with 2014?

A Money national output decreased by 10%.

B Money national output increased by 20%.

C Real national output fell.

D Real national output increased.

; ANSC

The table shows the annual percentage increases in a country’s consumer prices index (CPI).

year % change

2015 8.3
2016 6.0
2017 6.0
2018 1.0

Which statement is correct?

A Consumer prices, on average, fell throughout the period

B Consumer prices, on average, remained the same in 2016 and 2017.

C The general level of consumer prices was at its highest in 2015.

D The general level of consumer prices was at its highest in 2018.

Answer D

The table shows the retail prices index for four countries for years 2 and 3.
(Year 1 index = 100 for all countries.)

Which country had a higher rate of inflation in year 2 than year 3?

country year 2 index year 3 index

A 100 115

B 110 132

C 120 144

D 130 150

ECONOMICS!
 Which statement about changing price levels is correct?

A Anyone on a fixed income has rising real income during deflation.

B Government revenue from indirect taxes falls during inflation.

C Producers prefer deflation to inflation.

D Savers prefer index-linked savings when there is deflation rather than inflation.

Answer A

Which combination of events is most likely to cause inflation?

exchange rate direct taxes money supply

A falling falling falling

B falling falling rising

C rising rising rising

D rising rising falling

Answer B

An economy is currently operating close to its full employment level of national income.

Which combination of macro-economic policies would be most likely to have net deflationary
effects?

A a 10% cut in the standard rate of income tax and a 5% devaluation of the currency

B a 10% cut in the standard rate of income tax and a 5% revaluation of the currency

C a 10% rise in the standard rate of income tax and a 5% devaluation of the currency

D a 10% rise in the standard rate of income tax and a 5% revaluation of the currency

Answer D

ECONOMICS!
Balance of payments

What is not an item in a country's current account of its balance of payments?

A exports of primary commodities

B money received from banking services

C overseas investment

D profits sent back by companies overseas

A British citizen buys a house in the US which he rents to American citizens in order to receive an
income for himself.

Where will the initial purchase and then the rent be recorded on the UK balance of payments?

initial purchase rent

A capital account export current account import

B capital account import current account export
C current account export capital account import
D current account import capital account export

Answer c

Why may a government seek to reduce a current account surplus on the balance of
payments?

A to lower inflation
B to lower unemployment
C to raise the economic growth rate
D to raise the exchange rate

Answer A

In 2014 Australia and China negotiated a trade agreement. This removed Chinese tariffs on 95%
of Australian exports in exchange for greater access to the Australian economy for Chinese
investors.

How would the agreement be expected to affect the Australian balance of payments in the
short run?

current account financial account

A greater inflow greater inflow

B greater inflow greater outflow
C greater outflow greater inflow
D greater outflow greater outflow

Answer A

ECONOMICS!
 A country has a deficit on the current account of the balance of payments. Which
policy would be expected to increase the deficit?

A an appreciation of the exchange rate

B an increase in domestic productivity
C an introduction of import quotas
D a rise in subsidies to domestic firms

Answer A

A country with a balance of trade deficit raises interest rates.

How may this help to reduce the deficit in the short run?

A by increasing the inflow of foreign direct investment

B by lowering the foreign exchange rate
C by raising the level of domestic capital investment
D by reducing the level of domestic aggregate demand

Answer D

Which item is not included in the current account of a country's balance of

payments?

A exports of services
B interest on foreign loans
C profits from foreign investments
D the purchase of foreign assets

Answer D

In a country the Marshall-Lerner condition for an improvement in the trade balance is satisfied in
the long run, but quantities of imports and exports are slow to respond to price changes.

The government devalues its currency to reduce its trade deficit.

Which curve indicates the probable behaviour of the trade balance?

ANSWER B
 Primary income' and secondary income’ are components of the current account of the balance
of payments

What do these represent?

primary income secondary income

A capital flows financial flows

B goods balance services balance
C income flows current transfers
D private flows government flows

Answer C

A foreign government pays a UK university to educate its students.

How would this be recorded on the balance of payments current account of the UK?

current account
money flows
component

A secondary income inflow

B secondary income outflow
C trade in services inflow
D trade in services outflow

Answer C

What does the current account of the balance of payments include?

A government reserves and foreign aid

B government revenue and government spending

C imports and exports of goods and services

D inflows and outflows of trade and capital

Answer C

When will a country's balance of payments current account deficit be reduced?

A when it lowers tariffs on its imports

B when it raises its rate of income tax

C when it removes export subsidies

D when it revalues its currency

Answer B

ECONOMICS!
 The diagram shows four possible aggregate supply curves and an equilibrium point X. A
government employs deflationary fiscal policy in order to reduce the rate of inflation in its
economy. This shifts aggregate demand to AD2.

With which AS curve would this policy be most effective?

Answer A

The table gives information about the trade between Singapore and New Zealand during 2001,
the first year after they signed a free trade agreement. The values are given both in Singapore
dollars (S3) and New Zealand dollars (NZ$).

percentage change
S$m NZ$m
from 2000

Singapore exports to New Zealand 508 618 +20%

Singapore imports from New Zealand 331 403 -17%

What can be concluded from the table?

A New Zealand gained more than Singapore from the trade agreement.

B New Zealand’s trade position with Singapore improved in 2001.

C Singapore had a trade surplus with New Zealand in 2001.

D The exchange rate in 2001 was approximately NZ$ 1 = S$ 1.2.

Answer C

ECONOMICS!
Absolute and comparative advantage

ECONOMICS!
 Countries M and N produce the world supply of machines and textiles. The table shows what
each country produces when it divides its resources equally between the two products.

machines textiles

country M 1000 500

country N 900 300
total 1900 800

What should happen according to the principle of comparative advantage?

A Country M should produce both machines and textiles.

B Country M should specialise in the production of machines, country N should specialise in

production of textiles.

C Country M should specialise in the production of textiles, country N should specialise in

production of machines.

D Country N should produce both machines and textiles.

Answer C

Which type of import control allows a country to develop a potential comparative

advantage in a particular good?

A | quota that protects jobs in a depressed region

B a short-term tariff that protects an infant industry
C a tariff that improves an industry's terms of trade
D an embargo on goods with negative externalities

Answer B

The table shows the production possibilities of cloth and food in four countries using all of their
resources.

cloth food
country
(million units) (million units)

V 40 or 8

X 28 or 4

Y 8 or 2

Z 5 or 5

If the world exchange rate is 1 unit of food for 6 units of cloth, with whom is V likely to trade?

A X and Y B X only C Y and Z D Z only

Answer B

ECONOMICS!
 Country X forms a customs union with country Y.

X then ceases to produce its own cars and instead imports cars from Y. Country Y diverts some
of its car exports to X from country Z.

How is this likely to affect car prices in X and Z?

country X country Z

A decrease decrease
B decrease increase
C increase decrease
D increase increase

Answer B

The table shows the ability of two countries to produce two commodities when they use all of their
resources for that product.

maximum output maximum output

country
of rice of wheat

X 2000 2000
Y 4000 2000

Which statement is correct?

A Country X has an absolute advantage in wheat.

B Country Y has an absolute advantage in wheat.

C Country X has a comparative advantage in wheat.

D Country Y has a comparative advantage in wheat.

Answer C

The table shows the ability of two countries, P and Q, to produce two goods, Y and Z.

production of good Y production of good Z

per person per person

country P 1800 2800

country Q 1500 2000

Which statement is correct?

A P has an absolute advantage in Y and Q has an absolute advantage in Z.

B P has an absolute advantage in Z and Q has a comparative advantage in Y.

C P has a comparative advantage in Y and Q has a comparative advantage in Z.

D P has a comparative advantage in Z and Q has an absolute advantage in Y.

Answer B
 Protectionism
A country decides to remove an its tariTTs ana engage in Tree international trade.
What will be the final decision the country has to make before free trade takes
place?

A deciding which resources to allocate to the production of goods and services for
international trade

B deciding which goods and services should be provided for international trade

C identifying the opportunity costs of production of goods and services which

might be used for international trade

D setting an appropriate exchange rate for the international trade of goods and
services

Answer D

The diagram shows the imposition of an import tariff.

Sw is world supply.

Sw + tax is world supply after the tariff is imposed.

price

Which statement is not correct?

A Domestic demand will fall from q4 to q3.

B Imports will change from q,q4 to q2q3.

C Imports will fall from q4 to q3.

D Supply of domestic goods will increase from q, to q2.

Answer C

In the diagram Sd is the domestic supply of a product, Sw is the world supply and Dd is the
domestic demand for the product.
 In the diagram Sd is the domestic supply of a product, Sw is the world supply and Dd is the
domestic demand for the product.

After operating a free trade system the country bans all imports.

What will be the effect on the revenue of domestic producers and world producers of the ban?

domestic producers world producers

$m $m

A gain 120 lose 50

B gain 120 lose 90

C gain 160 lose 50

D gain 160 lose 90

Answer B

Two countries trade with one another without any forms of protection. They also
impose a common external tariff on the imports from all other countries. What
have these two countries formed?

A a customs union
B a free trade area
C a monetary union
D an economic union

Answer A

ECONOMICS!
 What is present in a customs union but not in a free trade area?

A a common external tariff with the rest of the world

B a common monetary system
C a common system of taxation
D the free movement of all goods, services and factors of production

Answer A

ECONOMICS!
 Which argument in favour of protectionism is not generally regarded as
economically valid?

A It increases the standard of living of the population in general.

B It prevents heavily-subsidised imports from competing unfairly against domestic
goods.
C It provides time for the protected industry's workers to be retrained for other
work.
D Once the protected industry becomes established, it will produce efficiently.

Answer A

The diagram shows the domestic and world demand and supply for a good.

The government imposes a tariff on imports of the good.

What will happen to the quantity imported?

A It will fall from QIQ3 to Q2Q3.

B It will fall from Q1Q5 to Q2Q4.

C It will fall from Q2Q5 to Q3Q4.

D It will fall from OQ5 to OQ4.

ANSWER B

What is not an example of protectionism?

A the European Union (EU) requiring goods imported into member states to meet safety
standards

B the Pakistan government increasing the rate of goods and services tax, GST, on some
exported goods from 2% to 5%

C the Nigeria government banning the import of packaged sugar

D the US imposing a 35% tariff on tyres imported from China

ANSWER B

ECONOMICS!
In 2014, Poland was the world’s largest exporter of apples. 55% of the crop went to Russia. Then
Russia banned the imports.

What would not have prevented the revenue of the Polish apple farmers falling dramatically?

A The apple farmers found new markets in other countries.

B The apple farmers were able to store the harvest for sale later.
C The Polish Government placed a ban on imports of food from Russia.
D The Polish Government established a scheme to buy apples and supply them to charities.

ANSWER C

Which government policy could be considered as a protectionist policy?

A an imposition of controls on capital outflows from the economy

B foreign exchange intervention to prevent a devaluation of the country's currency

C pollution charges imposed on domestic producers

D subsidies paid to domestic producers of a tradeable good

ANSWER D

What is an example of an expenditure-dampening policy?

A an increase in income tax rates

B an increase in the level of import tariffs

C an upward revaluation of the exchange rate

D the introduction of import quotas

ANSWER A

ECONOMICS!
ECONOMICS!
Exchange rates

ECONOMICS!
 Turkey can produce a good but also imports some of the good from Egypt. The Turkish currenc
depreciates against the Egyptian currency.

How is this most likely to affect production of this good in Egypt and in Turkey?

production in Egypt production in Turkey

A decrease decrease
B decrease increase
C increase decrease
D increase increase

Answer B

Under a system of floating exchange rates, what determines the foreign

exchange value of a currency?

A the overall supply of and demand for a currency on currency markets

B the purchasing power of the currency relative to the purchasing power of
foreign currencies
C the surplus or deficit on the balance of payments on current account
D the differential between domestic and foreign interest rates

answer A

I Between June and the end of July 2016 the UK pound sterling depreciated by 11% against a
basket of currencies of the UK’s major trading partners.

The diagram shows the original aggregate demand curve AD, and the original aggregate supply
curve AS, for the UK economy before June 2016. The equilibrium is at X.

What will be the new equilibrium for the UK economy as a result of the depreciation of the pound sterling?

Answer A

ECONOMICS!
A government wishes to raise the value of the external exchange rate of its
currency.

What should it do?

A discourage inward foreign direct investment

B raise interest rates
C raise the level of aggregate demand in the economy
D remove quotas on imported products

Answer A

Country X conducts 60% of its trade with country Y and 40% of its trade with
country Z. The initial value of the trade-weighted exchange rate index of
country X is 100.

What will be its new trade-weighted exchange rate index value if its currency
falls in value by 20% against the currency of country Y and rises by 10% against
the currency of country Z?

A 84
B90
C92
D 116

Answer C

Which aim would be consistent with a government’s decision to buy its own currency in foreign
exchange markets?

A an appreciation under a freely floating exchange rate system

B an appreciation under a managed float exchange rate system
C a depreciation under a fixed exchange rate system
D a devaluation under a managed float exchange rate system

Answer B

An economy’s current account on the balance of payments is in surplus. The exchange rate is
revalued by the government. Assume the Marshall-Lerner condition holds.

Which diagram shows the impact on the current account balance?

current B

Answer A
 Assume the Chinese monetary authorities are committed to maintaining the exchange rate
China’s currency, the Yuan, against the US$ between PT and P2 on the diagram.

price of Yuan
(in USS)

What might they do if supply changed from ST to S2?

A introduce controls on Chinese investment overseas

B lower interest rates

C remove tariffs on imports from USA

D sell Yuan on the foreign exchange markets

Answer A

In the UK in July 2014, £1 = US $1.71.

By the end of August 2014, £1 = US $1.65.

What is most likely to explain this?

A an increase in UK exports

B an increase in UK interest rates

C increasing profitability of UK companies

D increasing size of UK national debt

Answer D

Country X conducts 60% of its trade with country Y and 40% of its trade with country Z. The initial
value of the trade weighted exchange rate index of country X is 100.

What will be its new trade weighted exchange rate index value if its currency rises in value by
20% against the currency of Y and falls by 10% against the currency of Z?

A 84 B 92 C 108 D 116

Answer C

ECONOMICS!
In the diagram Di and Si are the initial supply and demand curves of the pound sterling (£) on the
foreign exchange markets.

What will cause the demand curve to shift to D2 and the supply curve to S2?

A a depreciation of the pound sterling

B a decrease in UK interest rates

C an increase in the price levels of other countries

D an increase in the level of UK import tariffs

MJ 17

Answer C

The diagram shows the value of the Nigerian naira against the US dollar between June 2015 and
June 2016.

naira per 260-

dollar

197
i
June June
2015 2016

Which term is used for the change in the value of the naira in June 2016?

A appreciation

B depreciation

C devaluation
D revaluation

Answer C

ECONOMICS!
ECONOMICS!
Terms of trade

ECONOMICS!
 What will definitely lead to an improvement in the terms of trade?

A Export prices fall whilst import prices rise.

B Export prices rise by the same amount as import prices.
C Export prices rise slower than import prices.
D Export prices rise whilst import prices stay the same.

Answer D

The terms of trade of a developing country fell from 90 in 2010 to 80 in 2015.

Assuming the index of its import prices remained constant at 110 between these
two years, what happened to its index of export prices?

A fell by 10
B fell by 11
C increased by 10
D increased by 30

Answer B

The table shows the terms of trade for Saudi Arabia.

date terms of trade

2000 100

2010 105

2015 137

What can be concluded from the table for Saudi Arabia?

A Export prices rose relative to import prices.

B The balance of trade surplus increased.

C The volume of exports exceeded the volume of imports.

D The volume of exports rose faster than the volume of imports.

Answer A

The index for a country's terms of trade changed from 100 in year 2015, to 104 in
year 2016.
What could have caused this change?

A a fall in export prices with import prices unchanged

B a fall in revenue from the export of services
C an appreciation of the country's currency
D a rise in the value of imports

ANSWER C

ECONOMICS!
The tables show changes over a period in the average prices of a country’s exports and imports
They are expressed as index numbers, with year 0 as 100

index of export prices index of import prices

year 0 year 1 year 2 year 0 year 1 year 2

100 115 125 100 120 125

What is the change in the country’s terms of trade index between years 1 and 2?

A It improves by about 10%.

B It improves between 4% and 5%.
C It stays the same
D It worsens between 4% and 5%.

ANSWER B

Which formula is used to calculate a country’s terms of trade?

A index of export prices - index of import prices

B index of import prices - index of export prices

C index of export prices Y ^QQ

index of import prices

index of import prices

D-------------------------------------100
index of export prices

ANSWER C

25 A country’s terms of trade currently stands at 150 (base year 2000 = 100).

Since 2000 the average price the country has received for its exports has increased by 20%.

What has been the change in the average price it has paid for its imports?

A -25% B -20% C +20% D +25%

ANSWER B

ECONOMICS!
The price system and the microeconomy (AS level)

Multiple choice questions by topic with answers

Table of contents

• Elasticity of demand
• Demand and supply curves
• Price elasticity of supply
• Market equilibrium
• Consumer and producer surplus

ECONOMICS!
Elasticity of demand
What follows if the income elasticity of demand for a good has a value of-0.2? A theatre increases the price of its tickets from $10 to $15. As a result, its total receipts decrease
from $10 000 to $6000. Within what range does the price elasticity of demand for theatre tickets
A When income rises less of the good is bought. lie?

B When income rises more of the good is bought. A 0.2 to 0.5

C When price falls more of the good is bought. B 0.6 to 1.0

D When price rises less of the good is bought. C 1.1 to 1.4

D 1.5 to 2.0

Answer A

Answer C

The diagram shows the demand curve for a normal product.

The table shows Shanaz's and Sunil's price elasticity of demand for restaurant meals and theatre
tickets

Shanaz Sunil

restaurant meals -0.8 -1.2

theatre tickets -1.3 -0.7

There is a rise in the price of restaurant meals and a fall in the price of theatre tickets. What can
be concluded after these price changes?

A Restaurant owners will receive more income.

B Shanaz will spend more money on both theatre tickets and restaurant meals.
C Sunil will spend more money on both theatre tickets and restaurant meals.
D Theatre owners will receive less income.

nswer B
*
Which two points indicates a move from a price inelastic point to a less inelastic point? A W to X
DB X to W C Y to Z D Z to Y
The diagram shows how the quantity demanded of four goods changes as income changes.
Answer D
Which good has an income elasticity of demand which is always +1?

quantity
of good
demanded The price elasticity of demand for a firm's product is equal to one for all price changes. What
would be the result of this?

age increase in price will cause demand to fall by a larger percentage.

B A percentage increase in price will cause demand to increase by the same percentage.
C Quantity demanded will always be the same whatever the price.
|D The firm's revenue will always be the same whatever the price.

Answer C March 2017 a7 ans D

Answer D I

Good X has a substitute, good Y, and a complement, good Z. The price of good Y decreases and D,D, shows an individual's initial demand curve for public transport.
the price of good Z increases.

Why might the equilibrium price of good X remain unchanged?

A Producers of good X adopt new technology.

B Producers of good X receive a subsidy.

C Some firms stop production of good X.

D The tax on the production of good X is cut.

Answer c

Two goods X and Y have a positive cross-elasticity of demand and upward-sloping supply curves.

What would cause the demand curve to shift to D2DJ?

What will be the effect of a reduction in the price of good Y?
A The cost of running the individual's car rises.
A The demand for good X will increase. B The individual is banned from driving.
B The demand for good Y will decrease.
C The price of public transport rises.
C The price of good X will decrease.
D The quantity of good X supplied will increase. D The quality of public transport declines.

ANSWER D
ANSWER C

ECONOMICS!
 D, and Si are the initial demand and supply curves for a normal product. They then change to D2
The table shows changes in a consumer's expenditure on various goods when her income and S2.
increases from $20000 to $24000.

income income
$20000: $24000:
good amount spent amount spent
on good on good
($) ($)

W 100 96
X 100 100
Y 200 224
Z 200 248

Assuming all else remains unchanged, for which goods is the consumer's income elasticity of
demand greater than 1.0? Which pair of changes would result in the market equilibrium for the product changing from Xi to
X2?
A W, Y and Z
A a fall in the price of a raw material used in the manufacturing and a decrease in the price of a
B W and Z only complementary good

C W only B an increase in average consumer incomes and an increase in the level of an indirect tax
imposed
D Z only
C an increase in the price elasticity of demand for the product and a fall in its price elasticity of
supply
D a rise in the population and an increase in the price of labour used in manufacturing
Answer D

| Answer A |

Goods X and Y are complements and have upward-sloping supply curves.

What will be the effect on the equilibrium price and quantity of good X of an increase in the supply The table gives a set of price and cross-price elasticities for four commodities, W, X, Y and Z.
of good Y?
elasticity of demand
quantity of X price of X with respect for commodity
to price of
A decrease decrease W X Y Z

B decrease increase W -0.3 -0.5 +0.7 -1.3

C increase decrease X -0.7 -1.2 +0.8 +1.6

D increase increase Y +1.3 +1.7 -3.6 +0.8

Z -2.7 +2.6 +1.7 -0.7

Which pairs of commodities are complements?

ANSWER D
A W and X; W and Z
B W and Y; X and Y
C W and Z; X and Z
D X and Y; X and Z
In which situation is the demand for a product said to be price elastic?
Answer A
A The quantity demanded responds to a change in price.
B An increase in price brings about a decrease in the quantity demanded. The price elasticity of demand for a product is constant and equal to unity.

C An increase in price induces consumers to spend more on the product. Which curve in the diagram shows the relationship between total expenditure on the product and
its price?
D A decrease in price brings about an increase in revenue.

Answer D

The diagram shows the market for a normal good.

9 A bottle making business announced it had introduced a new production system. As a result the
quantity produced per week could be increased or reduced much more easily when the price of
bottles changed.

What term describes this change?

What is likely to cause both demand and supply curves to shift to the right?
A a less elastic demand
A a fall in the price of the good and a fall in the rate of indirect tax on the good
B a less elastic supply
B a rise in the price of a complementary good and an increase in the number of firms in the
industry C a more elastic demand

C a rise in the price of a substitute good and a fall In the price of a raw material used in the D a more elastic supply
production of the good
D an improvement in production techniques and a fall in the incomes of consumers
Answer D

Answer C

ECONOMICS!
Demand and supply
The diagram shows a supply curve for beef.

What would cause a movement along Di for good X and not a shift to either D2 or Dj?

A advertising of good X increases sales

B consumer incomes rise

C price of good X falls

D price of other goods falls

What explains why the supply curve for beef slopes upwards?

A An increase in the demand for beef will bring about an increase in supply. ANSWER C
B Farmers’ productivity rises as the price rises.

C Increased production leads to a reduction in costs. What would not affect the position of the demand curve for wigs?

D The cost of additional beef production rises as output increases. A an increase in incomes
B a reduction in the price of hairdressing
Answer D C an increase in wigs worn by television celebrities
D a reduction in the price of wigs

ANSWER D
In the diagram, the supply of a product increases while the demand curve does not shift.

Prices of gold, silver and copper fell considerably in 2011 and again in 2015. The fall in 2011 was
said to be because miners increased production. The fall in 2015 was because demand,
especially from China, decreased.

Assuming that the equilibrium before 2011 was X, how would these movements in 2011 and
subsequently in 2015 be shown on the demand and supply diagram?

price

Which row correctly identifies the resulting impact on consumer and producer surplus?

O quantity
consumer surplus producer surplus

A has fallen has fallen initial 2011 2015

equilibrium equilibrium equilibrium
B has fallen has risen
A X Q R
C has risen has fallen B X R Q
D has risen has risen c X S R
D X T S

Answer D

ANSWER A

The diagram shows the market demand and supply for a good. Which statement is not valid?

Consumer X is the largest of five consumers and buys 50% of sales.

The table shows the quantity of the good demanded by consumer X and the market supply of the
good.

price demand from

market supply
$ consumer X

4 20 28
6 16 32
8 12 40
10 10 45

What would be the market equilibrium price?

A $4 B $6 C $8 D $10

A At price 0P1, UV represents the market surplus.

B At price OP3, P3X represents the quantity that consumers would like to buy.
C If price were to fall from OP1 to OP3, the extra quantity demanded would be equal to the extra
quantity supplied. ANSWER B
0 Price OP2 is the market equilibrium price.

Answer C

ECONOMICS!
 A bottle making business announced it had introduced a new production system. As a result the
quantity produced per week could be increased or reduced much more easily when the price of
The diagram shows the demand and supply of rice. Supply increases from S, to Sj bottles changed.

What term describes this change?

price of A a less elastic demand

rice per B a less elastic supply
kg (cents)
C a more elastic demand

D a more elastic supply

ANSWER D

The supply function for a good can be written as Q = 2P ♦ 10, where Q is the quantity supplied in
kilos and P is the price per kilo in dollars.

The price falls from $15 to $10 per kilo.

The value of price elasticity of supply for this price change lies in a range from

A 1 to 1. B | to 1. C f to |. D 1 { to 11.

What is the change in sales revenue received by the rice farmer?

A 24 cents
ANSWER C
B 60 cents

C 600 cents

D 700 cents

Answer A

In 2016 car drivers bought more fuel (gas) because the price of oil from which it was
made had fallen. Which diagram represents this change in the market for fuel?
The diagram represents the market for diamonds.

What could have caused price to change from P, to P2?

A a fall in the price of substitute gems

B a fall in the tax on diamonds

C a rise in the productivity of diamond miners

D a rise in the wages of diamond miners

Answer D Answer D

On a demand and supply diagram, other things remaining the same, a fall in the price
of a commodity will normally shift

A the demand curve for a substitute to the right.

B the demand curve for the commodity to the right.
C the supply curve for a jointly produced commodity to the left.
In 2014. in an attempt to find new uses tor seven sites previously used to bury rubbish, the
D the supply curve for the commodity to the left. Hong Kong government announced it would allow private companies to bid to redevelop the
sites.
March 2017 q 5
Which diagram shows the change in the market for these sites?

Answer C

quantity
In the diagram D1D1 is a straight line demand curve and D2D2 is a rectangular hyperbola curve.

Answer C

What will happen to an industry's supply curve if new firms enter the industry?

A It will shift to the left at any given price.

B It will shift to the right at any given price.
C There will be a downward movement along the supply curve.
D There will be an upward movement along the supply curve.

ON18Q5

Which statement is correct? ANSWER B

A D2D2 is more elastic than D,Di at point M.
B D2D2 is more elastic than DIDT at point N.

C The elasticity of demand increases on moving down both curves.

D The elasticity of demand is inelastic at point M on both curves.

ANSWER B
Price elasticity of supply

The cross elasticity of demand between two products, X and Y, is negative. What would be the
immediate effect of a rise in the price of product Y?

A Quantity demanded of product X will fall.

B Supply of product X will rise.

C The cross elasticity of demand will rise.

D The price of product X will rise.

Answer A

3 Which combination of events is most likely to leave the demand curve for a normal good in the
same position?

A a decrease in consumer incomes and an increase in the price of a substitute good

B a decrease in consumer incomes and an increase in the price of the good

C an increase in consumer incomes and an increase in the price of a substitute good

D an increase in consumer incomes and an increase in the price of the good

Answer A

For which supply curve is the value of price elasticity of supply not the same at all points on the
curve?

A SI BS2 C S3 D S4

Answer C

ECONOMICS!
 The table shows three different prices and quantities supplied per week of two products, X and Y.

price of X quantity price of Y quantity

($) supplied of X ($) supplied of Y

10 80 30 60

15 100 40 64

20 110 50 80

Which statement about price elasticity of supply (PES) is correct?

A The PES of X is elastic for a fall in its price from $15 to $10.

B The PES of X is unitary for a rise in its price from $15 to $20.

C The PES of Y is elastic for a fall in its price from $40 to $30.

D The PES of Y is unitary for a rise in its price from $40 to $50.

Answer D

Which change will lower the price elasticity of supply of a product?

A It becomes easier to store the product.

B Output of the product nears full capacity.
C The production process becomes less complex.
D Workers become more mobile.

ANSWER C

Over a four year period, as the price of new houses increases, the price elasticity of supply for
new houses falls, as shown. All new houses were sold.

supply of new price of new price elasticity

houses houses ($) of supply

year 1 10000 100000 -

year 2 10250 110000 0.25
year 3 10450 125000 0.13

year 4 10600 140000 0.12

What shows price elasticity of supply became more inelastic from year to year?

A Dollar revenues to house builders declined each year.

B Each year, the government released more land for house building.
C The proportionate price change was greater than the proportionate supply change.

D The proportionate price change was the same as the proportionate supply change.

ANSWER C

ECONOMICS!
 [ Market equilibrium i
1 I
The market demand for a product is made up of the demand from three firms, X, Y and Z.

The table shows the demand from each firm and the market supply.

price $ demand from X demand from Y demand from Z market supply

7 3300 3300 3300 3300

8 3100 2900 3100 6200

9 2800 2500 2900 8200

10 2500 2100 2700 10000

What is the equilibrium price in the market?

A $7 B $8 C $9 D $10

Answer c

The diagram shows the market for air travel in Asia. The initial market equilibrium is at X.

What will be the new equilibrium if the price of aviation fuel rises and incomes are falling in Asia?

ANSWER A

The diagram shows supply and demand for a good. The original equilibrium is X.

What will be the new equilibrium if subsidies are given to firms for new machinery?

ANSWER D

The diagrams relate to the markets for four different products.

In which market would a 10% decrease in demand and simultaneously a 10% increase in supply
definitely result in both a fall in equilibrium price and a rise in equilibrium quantity?

ANSWER A

ECONOMICS!
 What is most likely to cause an increase in the consumer surplus in the market for a normal good? I
A an increase in consumer incomes ; Consumer and producer
B an increase in the number of substitute goods I surplus
C an increase in the price of a complementary good

D an increase in the price of the good

Answer A

Producer surplus is the difference between

A the consumer surplus from the good and the producers' total cost of supplying the good.

B the highest price that the consumer would be willing to pay for the good and the price the
producer actually sold it for.

C the lowest price that the producer would accept for the good and the price the producer
actually sold it for.

D the quantity that the producers manufacture in a week and the amount sold to consumers in
that week.

Answer C

At first, a television service is available at no charge. The television company then charges
viewers $6 per hour to watch its programmes. The demand curve is D.

hours viewed

What is the value of the loss in consumer surplus and what value of consumer surplus remains
after the introduction of the hourly charge?

lost consumer remaining consumer

surplus ($) surplus ($)

A 9000 4000

B 9000 16000

c 21000 4000

D 21000 16000

answer C

The diagram shows the European airline market.

New entrants have come into the market, shifting supply from Si to S2.

Which area represents the new producer surplus?

A GMJ B HNF C HNK D KNTO

Answer C

ECONOMICS!
 The diagram shows a competitive market in equilibrium with price P and quantity Q sold.

Which area represents the producer surplus?

A OPWQ minus OUWQ

B OPWQ minus UPW

C OVWQ minus OPWQ

D OVWQ minus PVW

Answer A

The price of a ticket for an international athletics tournament was $50. All tickets were sold.

Which area on the diagram represents consumer surplus?

Answer C

What is meant by consumer surplus?

A the amount of money that remains after consumers have made their purchases

B the difference between how much a consumer is willing to pay for a good and the amount
paid

C the difference between the amount of a good that’s bought by a consumer and the amount
consumed

D the difference between the price paid for a good and the cost of producing it

Answer B

ECONOMICS!
13 A well-known clothes retailer decides to have a summer sale in its shops. As a result the number
of people who use the shops increases.

Which areas measure the change in consumer surplus for the customers who would have bought
the clothes anyway and the surplus for the new customers?

existing new
customers customers

A J+K L
B J+K+M L+N
Answer C
C K L
D M N

15 The initial market for a product is represented by the demand and supply curves Di and Si
respectively. A subsidy is then introduced, represented by the shift of S, to S2 (+ subsidy).

What is the incidence of the subsidy for the consumer and producer?

consumer producer

A PN NA
B QR TR
C QT QB
D TR QR

Answer B

ECONOMICS!
 In the diagram, Si is the original supply curve and D is the original demand curve.

quantity

If supply shifts to S2, which area represents the change in consumer surplus?

A PQVT B PQW C PRVT D TVW

Answer A

The diagram shows the demand and supply curves for a good during a certain period. The
market price is shown by P and the quantity traded by point M.

Which area indicates producer surplus?

A AXB B AXMO C AXP D PXB

Answer D

ECONOMICS!