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1

What are most likely to be disadvantages found in a market economy?

3. Government microeconomic intervention (AS Level)  →  3.1. Reasons for government intervention in markets

4. The Macroeconomy (AS Level)  →  4.4. Economic growth

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2

The diagram shows the production possibility curve of an economy. O consumer goods capital goods Which statement explains the shape of this curve?

1. Basic economic ideas and resource allocation (AS Level)  →  1.5. Production possibility curves

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3

What is a correct statement about money?

9. The macroeconomy (A Level)  →  9.4. Money and banking

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4

What might shift an individual’s demand curve for petrol to the left?

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

4. The Macroeconomy (AS Level)  →  4.3. Aggregate Demand and Aggregate Supply analysis

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5

The diagram shows a consumer’s short-run and long-run demand curves for coconuts. Initially, the consumer purchases quantity Q0 at price P0. price quantity O V X Y W Z P0 Q0 If the price of coconuts increases from P0, the consumer’s short-run response is greater than his long-run response. If the price decreases from P0 his short-run response is smaller than his long- run response. What is the consumer’s short-run demand curve?

4. The Macroeconomy (AS Level)  →  4.3. Aggregate Demand and Aggregate Supply analysis

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

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6

The table shows a consumer’s expenditure on a range of goods at different levels of income. For which good does the consumer have an income elasticity of demand greater than zero, but less than one?

2. The price system and the microeconomy (AS Level)  →  2.2. Price elasticity, income elasticity and cross elasticity of demand

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7

The diagram shows the demand curve for a product. price quantity D O Which statement is correct?

2. The price system and the microeconomy (AS Level)  →  2.2. Price elasticity, income elasticity and cross elasticity of demand

2. The price system and the microeconomy (AS Level)  →  2.3. Price elasticity of supply

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8

The table shows the market demand for a product and the individual supply of the three firms X, Y and Z in the industry. price $ market demand (000) supply by X (000) supply by Y (000) supply by Z (000) What is the equilibrium market price?

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

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9

Domino Pizza, the largest US pizza chain, said that its profits had been reduced by price inflation on ingredients and by a reduction in consumers’ disposable income. How would these changes affect the demand and supply curve for its products?

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

4. The Macroeconomy (AS Level)  →  4.3. Aggregate Demand and Aggregate Supply analysis

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10

Which area in the diagram represents the amount of consumer surplus that would occur in a market if a government enforced an effective maximum price?

2. The price system and the microeconomy (AS Level)  →  2.5. Consumer and producer surplus

3. Government microeconomic intervention (AS Level)  →  3.2. Methods and effects of government intervention in markets

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11

Rising demand for oil from China and other countries is leading to concerns that there may be a world shortage of oil. How should a change in the price of oil prevent such a shortage developing?

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

2. The price system and the microeconomy (AS Level)  →  2.3. Price elasticity of supply

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12

In the diagram OS1 and OS2 are two straight-line supply curves. price O quantity S1 S2 As price increases, the elasticity of supply A decreases along both OS1 and OS2. B increases less rapidly along OS1 than along OS2. C increases more rapidly along OS1 than along OS2. D is constant along both OS1 and OS2.

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

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13

What is the most likely reason economists will give to explain why large hospital projects are often funded by governments?

3. Government microeconomic intervention (AS Level)  →  3.1. Reasons for government intervention in markets

7. The price system and the microeconomy (A Level)  →  7.4. Private costs and benefits, externalities and social costs and benefits

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14

How would net external benefit be calculated?

7. The price system and the microeconomy (A Level)  →  7.4. Private costs and benefits, externalities and social costs and benefits

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15

The table shows the expected costs and benefits from four government projects. The government can afford only one project. Which project should the government choose?

7. The price system and the microeconomy (A Level)  →  7.4. Private costs and benefits, externalities and social costs and benefits

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16

What will make it more likely that road tolls will reduce traffic congestion?

2. The price system and the microeconomy (AS Level)  →  2.2. Price elasticity, income elasticity and cross elasticity of demand

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17

In the diagram, S1S1 and DD represent the original supply and demand curves for an agricultural product. price quantity O S1 S2 P1 D Q1 Q2 Q3 S2 S1 D Bad weather then reduces supply to S2S2. The government does not allow the price to rise above OP1. How much of the product will the government have to supply from stocks if the price is to be maintained at OP1?

2. The price system and the microeconomy (AS Level)  →  2.1. Demand and supply curves

2. The price system and the microeconomy (AS Level)  →  2.4. The interaction of demand and supply

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18

Steel is produced in a number of countries, including China, Japan and the US. It is used in the manufacture of cars. The US protects its domestic steel industry by imposing high tariffs on foreign steel imports. Which two groups would benefit from the removal of the US tariffs?

6. International economic issues (AS Level)  →  6.1. The reasons for international trade

5. Government macroeconomic intervention (AS Level)  →  5.4. Supply-side policy

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19

The supply of an imported good is shown...

4. The Macroeconomy (AS Level)  →  4.3. Aggregate Demand and Aggregate Supply analysis

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20

What is found in a customs union but not a free trade area?

11. International economic issues (A Level)  →  11.6. Globalisation

6. International economic issues (AS Level)  →  6.1. The reasons for international trade

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21

The table shows how much rice and wheat two countries, X and Y, can grow when each country divides its resources equally between growing rice and wheat. country X country Y rice 900 m 100 m wheat 300 m 50 m Assume that each country now specialises according to comparative advantage and trades with the other country. Which terms of trade would benefit both countries?

6. International economic issues (AS Level)  →  6.1. The reasons for international trade

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22

What must fall when the rate of unemployment rises?

4. The Macroeconomy (AS Level)  →  4.5. Unemployment

9. The macroeconomy (A Level)  →  9.3. Employment/unemployment

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23

The table shows the percentage price changes in some items in the UK Consumer Price Index (CPin the year to 1 June 2006. item % change in price rents, electricity and gas 9.0 education 4.7 transport 4.0 restaurants and hotels 3.2 health services 2.9 The increase in the overall CPI over the same period was 2.5 %. What can be concluded from the data above?

4. The Macroeconomy (AS Level)  →  4.6. Price stability

2. The price system and the microeconomy (AS Level)  →  2.3. Price elasticity of supply

2. The price system and the microeconomy (AS Level)  →  2.2. Price elasticity, income elasticity and cross elasticity of demand

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24

In Year 1 the price of a barrel of oil increased from $60 to $110. In Year 2 there was a further increase to $115 a barrel. Assume that oil price changes have an immediate impact on the general level of prices. What will be the effect of the changes in the oil price on a country’s Consumer Price Index and on its inflation rate in Year 2 compared with Year 1?

5. Government macroeconomic intervention (AS Level)  →  5.3. Monetary policy

4. The Macroeconomy (AS Level)  →  4.6. Price stability

2. The price system and the microeconomy (AS Level)  →  2.5. Consumer and producer surplus

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25

A government has low reserves of foreign currency. When would it be likely to consider a deficit on current account to be a serious problem?

6. International economic issues (AS Level)  →  6.5. Policies to correct imbalances in the current account of the balance of payments

6. International economic issues (AS Level)  →  6.3. Current account of the balance of payments

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26

The diagram shows the number of US dollars ($) and Euros (€) which exchanged for one pound sterling (£) between 2002 and 2004. 1.8 1.7 1.6 1.5 1.4 1.3 € per £ $ per £ What happened to the exchange rate of the $ against the £ and € during this period?

11. International economic issues (A Level)  →  11.2. Exchange rates

6. International economic issues (AS Level)  →  6.4. Exchange rates

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27

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?

11. International economic issues (A Level)  →  11.2. Exchange rates

11. International economic issues (A Level)  →  11.1. Policies to correct disequilibrium in the balance of payments

6. International economic issues (AS Level)  →  6.1. The reasons for international trade

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28

Assume the Chinese monetary authorities are committed to maintaining the exchange rate of China’s currency the Yuan against the US$ between P1 and P2 on the diagram. price of Yuan (in US $) quantity of Yuan D1 D2 S P2 P1 O What might they do if demand changed from D1 to D2?

6. International economic issues (AS Level)  →  6.4. Exchange rates

11. International economic issues (A Level)  →  11.2. Exchange rates

11. International economic issues (A Level)  →  11.1. Policies to correct disequilibrium in the balance of payments

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29

In 2008 the Chinese government was under pressure from other countries to reduce its current account surplus on its balance of payments. Which combination of Chinese measures would help to reduce China’s current account surplus?

6. International economic issues (AS Level)  →  6.5. Policies to correct imbalances in the current account of the balance of payments

6. International economic issues (AS Level)  →  6.3. Current account of the balance of payments

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30

Copyright Acknowledgements: Question 26 © The Economist Newspaper Limited, London (2004) 30 What is the central problem for an economy?

10. Government macroeconomic intervention (A Level)  →  10.2. Links between macroeconomic problems and their interrelatedness

1. Basic economic ideas and resource allocation (AS Level)  →  1.1. Scarcity, choice and opportunity cost

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