Professional Documents
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AS ECONOMICS
QuestionBank
2005
Introduction
About QuestionBank 2005
There are over 650 multiple-choice and true-false questions in this edition of the AS Economics
QuestionBank. They are designed to cover the key aspects of the AS Economics specifications of
all the major examination boards. The questions are organised into sub-sections so that you
can test your knowledge and understanding of key concepts and topics as you work through
your course. All the questions are individually and sequentially numbered.
On the following page there is a blank worksheet for you to use to record your answers to each
quiz. Your teacher may ask you to try certain questions or to work through a complete section.
Print out and use this worksheet to note down the questions you have attempted, your answer
and the correct answer.
You will find the answers to each section directly after the questions (but on a separate page!).
Best wishes
Geoff Riley
Head of Economics
Eton College
http://www.tutor2u.net
Answer sheet
Name
Total score
1 Revision Tests
1. Which one of the following is NOT an example of the use of government fiscal policy? A change in
2. Which one of the following would cause an outward shift of the long run aggregate supply
curve? An increase in
3. The chart below shows real consumer spending in the UK for each year from 1987 to 2003. From
the chart it can be seen that
General LRAS
Price Level
P2
P1
AD2
SRAS1
AD1
4. The change in aggregate demand shown in the diagram above could have been caused by all of
the factors below except
5. Which of the following is likely to decrease short run aggregate supply in an economy?
7. The chart above provides information on house prices in the UK from data published by the
Halifax and the Nationwide, two of Britain's leading mortgage providers. From the data it can be
seen that
8. Other things being equal, a rise in interest rates in the UK is most likely to
9. Which one of the following is a supply-side policy to reduce the level of unemployment?
10. If the short run aggregate supply curve is drawn as perfectly inelastic, an increase in aggregate
demand will lead to an increase in
a) Inflation
b) Real national output
c) Both inflation and real national output
d) Real national output and employment
11. In the short run an increase in the governments budget deficit is most likely to reduce
12. A decision by the Bank of England to cut UK interest rates at a time when the value of the UK
exchange rate is falling is most likely to lead to an increase in
13. The chart above shows the household savings ratio for the UK for each year from 1990 to 2004.
From the data shown in the chart above we can say that
14. Other factors remaining the dame, a 10 per cent fall in the UK exchange rate is most likely to
lead to
a) Aggregate demand
b) The rate of inflation
c) Wage rates
d) Productive capacity
16. Which one of the following would not be regarded as a macro-economic government objective?
18. The diagram above shows the annual rate of growth of real GDP for the Euro Zone countries and
the UK. From the data it can be seen that
a) The UK has grown faster than the Euro Zone throughout the period shown
b) Unemployment has fallen in both the Euro Zone and the UK since 1997
c) Both the Euro Zone and the UK economy experienced a recession in 2001
d) The UK economy experienced an upturn in economic growth in 2003
19. Which one of the following is most likely to lead to an increase in the rate of consumer price
inflation?
20. A government wishes to increase the rate of economic growth and reduce a deficit on the
balance of payments. Which of the following mix of policies would be most likely to achieve
these objectives?
1. (b)
2. (d)
3. (b)
4. (d)
5. (a)
6. (b)
7. (d)
8. (b)
9. (c)
10. (a)
11. (b)
12. (d)
13. (c)
14. (d)
15. (d)
16. (b)
17. (c)
18. (d)
19. (d)
20. (c)
23. In 2000, the money national income of a country was $500 billion. In 2001 the money value of
national income had grown to $550 billion but the price level had risen to 102. The approximate
value of real national income in 2001 is
a) $550 billion
b) $539 billion
c) $525 billion
d) $510 billion
24. One of the advantages of an appreciation in the UK exchange rate against other currencies is
that
25. The Monetary Policy Committee of the Bank of England decides to reduce interest rates over a
period of time from 6% to 4%. Other things being equal, this is likely to lead to
General
Price Level LRAS
P2
P1
SRAS2
SRAS1
AD
27. The most likely cause of the shift in the short run aggregate supply curve shown in the diagram
above would be
28. The chart above shows the UK (sterling)exchange rate and the annual trade balance in goods for
the UK for each year since 1990. The rise in the exchange rate during the years 1996 - 2001 is
likely to have caused a larger trade deficit because
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AS Economics QuestionBank 2005
29. An increase in the rate of valued added tax would other things remaining equal lead to
31. Which one of the following types of unemployment would be associated with a decline in
employment in the pharmaceuticals industry due to a global economic slowdown?
a) Structural unemployment
b) Cyclical unemployment
c) Frictional unemployment
d) Seasonal unemployment
32. A country experiences a persistent deficit in its balance of payments and falling unemployment.
Which one of the following policies would suggest that the Government's main objective is to
reduce the balance of payments deficit?
a) A lower income earner pays less in tax than a higher income earner
b) A lower income earner pays a lower percentage of their income in tax than a higher income earner
c) A lower income earner pays a higher percentage of their income in tax than a higher income earner
d) A higher income earner pays a higher percentage of their income in tax than a higher income earner
35. The chart above shows the index of the level of output in Manufacturing and Service industries.
From the data contained in the table it can be seen that
a) Manufacturing has grown more quickly than services over the period
b) Manufacturing industry was in recession in 1989
c) Manufacturing industry has grown more slowly than the service sector
d) UK manufacturing has become less competitive against other countries
36. A government wishing to reduce the level of unemployment through the use of fiscal policy
would be most likely to
38. A cut in interest rates will give a boost to aggregate demand if it leads to an increase in
a) Saving
b) The value of the pound
c) Consumer borrowing and spending
d) Imports
39. A multiplier effect occurs when an initial change in government spending leads to a larger
change in the level of
a) Investment
b) National income
c) Prices
d) Saving
40. Real income may be obtained from data on money income by allowing for
21. (c)
22. (d)
23. (b)
24. (d)
25. (a)
26. (b)
27. (b)
28. (a)
29. (c)
30. (c)
31. (b)
32. (d)
33. (c)
34. (b)
35. (c)
36. (c)
37. (b)
38. (c)
39. (b)
40. (c)
42. The price mechanism helps to allocate scarce resources efficiently because
a) It will always ensure that competition between firms prevents excessive profits being earned
b) When the supply of non-renewable resources such as coal nears depletion, the market price will increase,
putting downward pressure on demand
c) It will lead to a distribution of output amongst consumers on the basis of greatest need rather than ability to pay
d) It results in lower wages being paid to workers when the demand for the good or service they produces increases
44. A manufacturer of kitchen equipment reduces the prices of their standard models by 8% and, as
a result, the volume of sales of new kitchens rises by 6%. The price elasticity of demand for the
good is
a) -1.33
b) -0.66
c) -0.75
d) -0.50
45. An advertising campaign aimed at differentiating a product from its only substitute was
successful. What is likely to have happened to the price elasticity of demand for the product and
the cross price elasticity of demand of the substitute?
46. When the price of a new pre-recorded DVD is 15 per DVD, 20,000 DVDs are demanded. If the
price elasticity of demand is (-) 2.5, how many DVDs would be demanded if its price fell to 12
per DVD?
a) 30,000
b) 28,000
c) 27,500
d) 25,000
47. The price elasticity of demand for digital cameras will be influenced by
Price S2
S1
F
C
A
E D
B
D1
I
J
G H Quantity
48. The diagram above shows the demand and supply curves for a product following the
introduction of an ad valorem tax. As a result of the shift in the supply curve from S1 to S2, the
level of consumer surplus falls by
a) ACF
b) ABEC
c) CED
d) ABDC
49. If the supply curve of a commodity is positively sloped, a fall in the price of the commodity
caused by an inward shift of demand results in
51. Given a rise in real income, the demand curve for an inferior good will, other things being equal
Price S2
S1
F
C
A
E D
B
D1
I
J
G H Quantity
52. The diagram above shows the effect of a tax on producers introduced by the Government. As a
result of the tax, the total tax revenue going to the government equals area
a) ACEB
b) CID
c) ACIJ
d) FAC
53. The demand curve for lobster is downward sloping. If the demand for lobster is price inelastic a
reduction in its price (other things remaining equal) must result in
55. Which one of the following statements referring to the price mechanism is correct?
Price of
Good S Demand
56. The relationship in the diagram above illustrates that the two goods S and T are
a) Complementary goods
b) Inferior goods
c) Normal goods
d) Substitute goods
Demand
Price
Supply (post tax)
Supply (pre tax)
P2
P1
Q1 Quantity
57. The diagram above shows the effect of a tax on petrol to reduce road congestion and pollution
from road use. It can be deduced from the diagram that
58. A product has a price elasticity of supply of +1.2. If its price rises from 6.00 to 8.50 then its
supply will
a) Rise by 25%
b) Rise by 50%
c) Fall by 50%
d) Fall by 20%
59. Which one of the following measures is designed to deal with divergences between private and
social costs?
60. When the economy is operating on its production possibility frontier, an increase in the
production of public goods will
41. (a)
42. (b)
43. (d)
44. (c)
45. (d)
46. (a)
47. (a)
48. (d)
49. (a)
50. (c)
51. (a)
52. (c)
53. (b)
54. (c)
55. (d)
56. (d)
57. (b)
58. (b)
59. (c)
60. (b)
61. The opportunity cost to the government of a decision to construct five new by-passes for a
selection of towns would be
63. If an economy is operating at full capacity, the most likely effect of an increase in the output of
capital goods is that the output of consumer goods will
All Other
Operations
Heart Operations
64. The diagram above shows an economy with a production possibility boundary producing heart
operations and other health treatments. The economy is able to expand output from the
combination shown by point A to the combination shown by point C if
a) There is an increase in the productivity of all resources available to provide health treatments
b) Wage costs increase in the National Health Service
c) Technological improvements in providing heart operations only reduce the cost of such procedures
d) There is a reduction in the number of people employed in the NHS
M
World Price
Pw
Domestic Demand
65. The diagram above shows the domestic demand and supply for a commodity and also the world
supply both before and after the introduction of an import tariff. The shaded area in the diagram
labelled by the letter M represents
Price
S1
S2
P1
P2
D1
Q1 Q2 Quantity
66. The change in the supply curve shown in the diagram might have been caused by
67. If, when income changes, the quantity demanded of a commodity remains the same, its income
elasticity of demand is equal to
a) Infinity
b) Zero
c) +1
d) -1
Price
S1 S2
P1
P2
Demand
Q2 Q3 Quantity
68. The diagram above shows the effect of an increase in market supply for a commodity. The shaded
area in the diagram represents
69. If, when the price of product S rises by 20%, the demand for product W falls by 4% and the
demand for product T rises by 5%, then we can say that
Price Supply
Pe
Demand
A B C D Quantity
70. The diagram above shows a market where the government has introduced a statutory maximum
price of P max. As a result of the maximum price, the output that will be supplied onto the
market will be
a) A
b) B
c) C
d) D
Price
Supply
P1
C D
Demand
Q1 Quantity
71. The diagram above shows a market in equilibrium at price P1 and output Q1. Which area, A, B, C
or D shows the level of producer surplus in the market at this price and output?
a) A
b) B
c) C
d) D
72. The effect of a government imposing a minimum price for cereals above the free market
equilibrium price will result in
73. If the supply curve of a commodity is positively sloped, a fall in the price of the commodity
brought about by an inward shift of demand results in
Price of Supply of
Lamb Lamb
P2
P1
D1 D2
Q1 Q2 Quantity of Lamb
74. The change in the market demand for lamb shown in the diagram above might have been caused
by
Price
Supply pre
subsidy Supply + Subsidy
D A
C
E
F B
Demand
Q1 Q2 Quantity
75. The diagram above shows the effect of a government subsidy to producers of cereals. Following
the subsidy, the total amount that the government will pay to producers as part of the subsidy
arrangement is equal to area.
a) GDA
b) GFB
c) DABF
d) ECBF
76. A producer estimates that the price elasticity of supply for his product is +1.5. As a result of an
increase in market price from 30 to 45 following an outward shift of the producer's demand
curve, we could expect the producer to expand supply by
a) 50%
b) 70%
c) 75%
d) 100%
77. The government wishes to increase economic welfare by introducing policies that create
external benefits as well as internal ones. It should
78. A government believes that consumers derive greater benefit from a good than consumers
themselves perceive. To which category does the good belong?
a) Merit good
b) Collective good
c) Superior good
d) Public good
79. Which one of the following statements referring to a market economy is correct?
a) Monopolists never take account of consumer preferences they just charge the maximum price a consumer is
willing to pay
b) Prices in markets do not always reflect externalities
c) Efficiency is always indicated by high producer profits
d) Large firms are always more efficient than smaller firms
80. Which one of the following would be included in the economists definition of physical capital?
a) A concert musician
b) Timber from forests
c) Fish stocks in the North Sea
d) Computer aided design technology used in car manufacturing
61. (c)
62. (a)
63. (d)
64. (a)
65. (d)
66. (c)
67. (b)
68. (c)
69. (d)
70. (a)
71. (b)
72. (d)
73. (a)
74. (b)
75. (c)
76. (c)
77. (d)
78. (a)
79. (b)
80. (d)
2 Microeconomics
81. True or False: According to the basic model of competition in a market, firms seek to maximise
profits
a) True
b) False
82. True or False: Economics cannot claim to be a science since the subject cannot make use of
controlled laboratory experiments to test a theory
a) True
b) False
83. True or False: The following statement is an example of a normative statement: the cost of fruit
and vegetables should be subsidised by the government to encourage healthy eating
a) True
b) False
a) They save a proportion of their monthly income rather than spend it all
b) They wont take a job that pays low wages
c) They weigh up the costs and benefits of each choice they make
d) They will always buy the products in the market that are cheapest
86. Allocating scarce products such as cup final tickets by using ballot or a lottery is an example of
88. Which of the following is not a factor of production as the term is used by economists?
a) Farmland
b) Cash in a bank account
c) Buildings and machinery
d) Labour
a) State-owned industries
b) Consumers
c) Governments
d) Entrepreneurs
102. A student works for a book shop during the holidays. She is offered the alternative of
being paid 100 per week in cash of choosing 150 worth of books from the shelves. What is the
opportunity cost to the student of choosing the books?
a) 50
b) 150
c) 100
d) The alternative use to which her time could have been put
a) Equal amounts of land, labour and capital have been used in producing a good or service
b) Firms are maximising their sales and profits
c) All consumers have equal amounts of goods and services
d) It is impossible to increase the output of one good without reducing the output of another good
105. The workers in a factory currently earn 240 for a 40 hour week. The management offers
them a choice between either a straight 10 per cent wage increase or an increase in the weekly
wage to 260 along with a reduction in hours from 40 to 39 hours. Disregarding the value of
leisure time, what is the opportunity cost to each worker of opting for the 39 hour week?
a) 4
b) 6
c) 20
d) 24
81. (a)
82. (b)
83. (a)
84. (b)
85. (c)
86. (b)
87. (a)
88. (b)
89. (b)
90. (c)
91. (a)
92. (c)
93. (d)
94. (d)
95. (d)
96. (d)
97. (b)
98. (c)
99. (a)
100. (b)
101. (d)
102. (c)
103. (d)
104. (d)
105. (a)
106. True or False: Combinations of goods and services that lie within the production
possibility curve show an inefficient allocation of scarce resources
a) True
b) False
107. True or False: A fall in the size of the available labour supply, other factors remaining
constant, will cause an outward shift of a production possibility curve
a) True
b) False
108. True or False: A movement along the frontier of a production possibility curve can only
be achieved if the economy successfully reduced unemployment
a) True
b) False
109. The production possibility schedule for vans and lorries is as follows
Vans Lorries
16 0
15 1
14 2
13 3
11 4
9 5
7 6
0 7
a) 1
b) 2
c) 7
d) 14
Output of
consumer
goods
and
services
110. Which economic concept is illustrated by the shape of the production possibility
frontier shown in the diagram above?
a) Shows the amount of two or more goods that a society can produce
b) Is normally drawn as a concave curve rather than a straight line
c) Shows allocations of two or more goods that are allocative efficient
d) All of the above
113. The production possibility frontier for a country producing two goods is shown in the
diagram above. The opportunity cost of increasing the output of MP3 players from 80 to 100 (a
movement from A to B) on the PPF is
114. Which of the combinations of output of DVD players and MP3 players are feasible given
the PPF that a country faces a PPF shown in the diagram above?
a) A, B and C
b) A, B, C and D
c) E only
d) A, B, C, D and E
115. In the diagram above, what is happening to the marginal opportunity cost of producing
extra MP3 players as a country reallocates resources from combination A to B and then to C?
B
C2
A
C1
116. A reallocation of resources within an economy from A to B shown in the PPF diagram
above is likely to lead to
a) A short term rise in production of consumer goods and a fall in demand for investment goods
b) A short term fall in production of consumer goods but a long term rise in an economy's productive potential
c) A decrease in demand for workers employed in producing capital goods
d) An increase in the demand for consumption goods
118. If the United Kingdom has a comparative advantage in the production of a good, then
All Other
Operations
PPF1 PPF1
Heart Operations
120. The diagram above shows a production possibility frontier for health services. The
outward shift of the PPF might have been caused by
a) An increase in the efficiency of labour and capital providing heart operations only
b) A fall in new capital investment in the health service
c) An increase in the number of heart surgeons employed by the NHS
d) Improvements in medical technology available to provide a full range of health services
121. Which combination of output shown in the PPF above would represent a preference
within this economy to increase consumption of goods and services in future time periods?
a) A
b) B
c) C
d) D
All Other
Goods and
Services C
A E
B
PPF2
D
PPF1 G
Motor Cars
122. The diagram above shows the effects of a shift in a production possibility frontier. Which
points shown in the diagram above indicate an efficient use of scarce resources after an
economy has grown?
a) A and B
b) D and E
c) C and G
d) C, G and F
106. (a)
107. (b)
108. (b)
109. (a)
110. (a)
111. (d)
112. (b)
113. (c)
114. (b)
115. (b)
116. (b)
117. (a)
118. (c)
119. (d)
120. (d)
121. (c)
122. (c)
123. True or False: In a market economy, prices provide incentives to help the economy use
scarce resources efficiently
a) True
b) False
124. True or False: As price falls, quantity demanded for a normal good will fall
a) True
b) False
125. True or False: A change in consumers' income will normally cause a shift in the demand
curve
a) True
b) False
126. True or False: A decrease in the price of a complement will shift the demand for the good
in question to the left
a) True
b) False
127. True or False: A fall in the price of a substitute good will cause an inward shift in the
demand for a product
a) True
b) False
130. As the market price rises, the quantity demanded decreases along the market demand
curve because
Price
per unit
D1 D2
Quantity demanded
131. The shift of the demand curve from D1 to D2 in the diagram above could have been
caused by
133. As consumers have become more concerned about the amount of saturated fat in their
diet, the demand for chicken has increased whilst the demand for beef has fallen. The result of
this is likely to be
134. Which one of the following is NOT a cause of a shift in the market demand for a product?
135. The market demand curve for overseas holiday cruises will NOT shift when there is a
136. All other factors held constant a decrease in market demand for new cars will lead to
137. Suppose that a 20% increase in the price of good Y results in an increase in the
consumption of good X of 8%. This is an example of
a) A shift in supply
b) The substitution effect
c) The real income effect
d) A higher demand for all goods and services in general
138. If the price of a digital camera falls from 500 to 300 during a period when the general
price level rose by 10 per cent, then the relative price of the camera has fallen by
a) 40 per cent
b) 50 per cent
c) 60 per cent
d) 100 per cent
139. When the price of one of the products that you buy increases, your purchasing power
decreases. Thus you are likely to buy less of all normal goods. This is known as:
140. If consumers expect that the price of cocoa will increase in the future, what will happen
to equilibrium price and quantity of cocoa now?
141. Which one of the following would be expected to cause an inward shift in the market
demand for UK produced cheese?
142. Tom graduates from university with a degree in Economics and his income increases by
10,000 a year. Other things remaining the same, he decreases the quantity of donuts he buys.
For Tom, donuts _______.
143. Chicken and fish are assumed to be substitutes for each other. If the price of chicken
increases, demand for fish will
a) Not change but there will be a movement along the demand curve for fish
b) Decrease and the demand curve for fish will shift to the left
c) Increase and the demand curve for fish will shift to the right
d) Increase or decrease, but there will be no change in demand for chicken
144. Other factors remaining the same, a large rise in the price of using bus transport will
lead to
145. Demand for a good or service is said to be effective only when it is associated with
123. (a)
124. (b)
125. (a)
126. (b)
127. (a)
128. (a)
129. (d)
130. (c)
131. (c)
132. (d)
133. (d)
134. (a)
135. (c)
136. (a)
137. (b)
138. (b)
139. (b)
140. (a)
141. (b)
142. (c)
143. (c)
144. (c)
145. (b)
146. True or False: A change in the price of a good will cause a shift in its supply curve
a) True
b) False
147. True or False: A poor cocoa crop will result in higher prices for chocolates, other things
being equal
a) True
b) False
148. True or False: The introduction of a 17.5% value added tax on aviation fuel must lead to
a 17.5% rise in the average cost of a flight for air travellers
a) True
b) False
Price
per unit Supply
P2
P1
Q1 Q2 Quantity
supplied
149. The diagram above illustrates the market supply curve for fitted kitchens. The upward
slope of the market supply curve can be explained by the argument that at higher prices
151. The market supply of canned peaches at a given price will shift inwards when there is
152. If the supply curve for a good is positively sloped, a rise in the price of the good results
in
Price
S1
S2
Quantity supplied
153. The change in the supply curve from S1 to S2 in the diagram above could have been
caused by
154. Which one of the following would not cause a shift in the market supply of new cars?
155. An improvement in technology lowers the cost of producing coffee. At the same time,
consumers change their preferences away from tea towards coffee. We would expect the
quantity traded of coffee to
156. A shift to the right of the supply curve for a product can be caused by
157. There is a sharp fall in the market supply of fresh haddock. The fall in market supply
might have been caused by:
158. On a supply and demand diagram, other things remaining the same an increase in
production costs will normally shift
159. Which one of the following would cause the market supply curve for new wool suits to
shift to the right?
Price
per
unit S2
S1
Quantity supplied
160. The change in supply curve of the product from S1 to S2 shown in the diagram above
could have been due to
161. On a demand and supply diagram, other things remaining the same, a fall in production
costs will normally shift
a) An increase in the output of one product is accompanied by a decrease in the output of the other product
b) An increase in demand for one product reduces demand for the other product
c) An increase in the output of one product is accompanied by an increase in the output of the other product
d) An increase in the demand for one good causes producers to stop producing the other product
146. (b)
147. (a)
148. (b)
149. (a)
150. (d)
151. (b)
152. (a)
153. (b)
154. (a)
155. (c)
156. (a)
157. (a)
158. (d)
159. (a)
160. (b)
161. (a)
162. (c)
163. True or False: The price elasticity of demand is greater for goods that have several rather
then fewer close substitutes
a) True
b) False
164. True or False: Total spending on a product decreases as price falls when the demand
curve is price elastic
a) True
b) False
165. True or False: A vertical demand curve can be described as perfectly elastic
a) True
b) False
166. True or False: When the demand curve for a product is elastic, relatively more of a tax on
the production of the good will be borne by producers
a) True
b) False
167. True or False: Demand for a product will tend to less price elastic in response to a price
change in the long run compared to the short run
a) True
b) False
168. True or False: If the demand for a product is perfectly inelastic, a rise in market supply
will only cause a fall in market price and no change in production
a) True
b) False
169. Suppose that the price elasticity of demand for a product is estimated to be 0.6. The
demand for the good is
a) Perfectly elastic
b) Inelastic
c) Elastic
d) Perfectly inelastic
170. Suppose that price of Good X rises by 30 per cent and demand for Good X falls by 10 per
cent. Elasticity of demand is
a) -3
b) -30
c) -0.33
d) -1.33
171. The demand for a product will tend to be elastic when:
A B
Price Price
Demand
Demand
Quantity Quantity
Price C Supply Price D
Demand
Demand
Quantity Quantity
172. Which one of the diagrams above, A, B, C or D shows a demand curve that is perfectly
inelastic?
a) A
b) B
c) C
d) D
173. The demand for orange juice is found to have a price elasticity of demand equal to -1.8.
If there is a severe frost which destroys large quantities of oranges we expect to see
174. Ratko loves chocolate truffles. As the market price of a truffle increases from 50p to
60p, Ratko continues to buy a dozen truffles every week to satisfy his wants. Ratko's demand for
chocolate truffles is therefore
a) Elastic
b) Unit elastic
c) Perfectly inelastic.
d) Illustrated by a horizontal demand curve.
175. When the price of a DVD version of a new film is 12 per unit, 180,000 DVDs are
demanded each week. The manufacturer estimates that the price elasticity of demand is (-) 1.4.
If the price of the DVD were cut by 3, how many DVDs would be demanded at the new price?
a) 200,000
b) 215,000
c) 220,000
d) 243,000
176. EasyJet cuts its fares on average by 14% and finds that the volume of passengers
demanding flights on their services rises by 25%. As a result, the total revenue of EasyJet will
177. A manufacturer reduces the price of his washing machines by 5% and, as a result, the
volume of sales of washing machines rises by 4%. The price elasticity of demand for the good is
a) -1.25
b) -0.8
c) -1.0
d) Indeterminate from available information
178. A supermarket reduces the price of oranges from 20 pence each to 16 pence each. The
weekly sales increase from 8,000 to 12,000. The price elasticity of demand is
a) -0.4
b) -0.6
c) -2.0
d) -2.5
179. In 2001, export prices of coffee in Ethiopia fell by half - from 79 cents per pound in
2000 to 39 cents. If the demand for Ethiopian coffee is assumed to be price inelastic, the fall in
price will cause
180. Vodafone estimates the price elasticity of demand for text messages to be -2.0. If the
business cuts the price of text messages by 20%, demand could be expected to
a) Expand by 20%
b) Expand by 30%
c) Expand by 40%
d) Expand by 10%
181. If you earn 50,000 a year and acquiring a cable TV service costs you 360 per year, your
demand for cable television is likely to be
a) Perfectly inelastic
b) Perfectly elastic
c) Inelastic
d) Elastic
182. The local multiplex cinema discovered that when it charged 5 for the matinee, it took
in 450 per showing, but when it lowered the price to 3, it took in 500 per showing. This
implied that the elasticity of demand is
a) Price inelastic
b) Price elastic
c) Unit elastic
d) Perfectly elastic
183. When consumers only have a limited time period to respond to price changes, demand
becomes
184. If the price elasticity of demand for beans is estimated to be -0.4, then a 20% increase
in price will _______ the quantity demanded by ____ %
a) Increase, 8%
b) Decrease, 14%
c) Increase, 16%
d) Decrease, 8%
185. Which of the following products would you expect to have the most inelastic demand
following a price change in the short term?
186. Which of the following products would you expect to have an elastic demand following a
price change?
a) Fresh vegetables
b) Water
c) Cigarettes
d) Airline tickets for a short city break in Europe
163. (a)
164. (a)
165. (b)
166. (a)
167. (b)
168. (a)
169. (b)
170. (c)
171. (c)
172. (c)
173. (b)
174. (c)
175. (d)
176. (c)
177. (b)
178. (d)
179. (b)
180. (c)
181. (c)
182. (b)
183. (a)
184. (d)
185. (b)
186. (d)
187. True or False: If two products are complements, the cross-price elasticity of demand is
likely to be positive
a) True
b) False
188. True or False: An inferior good is one that has been badly manufactured by poorly
trained workers
a) True
b) False
189. True or False: The income elasticity of demand for prime rump steak will be lower than
for own label cereals
a) True
b) False
190. Fish and chips and pizzas are assumed to be substitute products for consumers. Other
things remaining equal, a rise in the price of takeaway fish and chips will cause the demand
curve for takeaway pizzas to
191. Suppose we find that the cross-price elasticity of demand for two products is a negative
number. We know that
192. If the cross price elasticity of demand between two products is +3.5, then
193. The demand for fresh bread from a bakery is estimated to have an income elasticity of +
0.3. Following a 15% rise in consumers real incomes (other factors held constant) we predict
that demand for fresh bread will
a) Rise by 3%
b) Rise by 4%
c) Rise by 4.5%
d) Rise by 15%
194. The price of Toyota cars falls by 8% and in the following time period, the demand for
Nissan cars declines by 2%. The cross price elasticity of demand for Nissan cars is
a) +2.0
b) +0.25
c) +0.5
d) -0.25
195. The price of fresh pasta increases by 30% and as a result the demand for red wine falls
by 3%, we can conclude from this information that
196. Suppose that the demand for ink jet printers increases by 15% following a 30% decline
in the market price of home computers, we can conclude from this information that
197. Evidence suggests that the cross elasticity of demand between private and public
transport, whilst positive, is low. Therefore it follows that
a) A fall in the demand for private transport would cause a small rise in the demand for public transport
b) A rise in the price of private transport would cause a slight fall in the demand for public transport
c) A fall in the demand for private transport would cause a small rise in the price of public transport
d) A rise in the price of private transport would cause a small rise in the demand for public transport
198. A normal good can be distinguished from an inferior good because a normal good has
199. Given a fall in real income caused by an economic recession, the demand curve for a
normal good will, other things being equal,
201. Which of the following would be expected to increase market demand for foreign
holidays?
202. Good X is an inferior good. A rise in consumers' income is likely to lead to:
203. Under what circumstances would an increase in the price of product X result in a fall in
the demand for product Y?
204. The table below shows the price and quantity for two goods X and Y. The cross price
elasticity of demand for X and Y when the price of X falls from 10 to 9 is
10 20 30
9 24 42
a) -4
b) +2
c) -2
d) +4
205. If the cross price elasticity of demand for hot chocolate resulting from changes in the
price of tea is +0.8, what will be the percentage change in demand for hot chocolate if the
market price of tea rises from 1.60 to 2.00 per kilo?
a) 40 per cent
b) 30 per cent
c) 20 per cent
d) 8 per cent
206. The diagram below shows the income-consumption curves for four goods. Which good
has an income elasticity of demand will is always +1?
Income of C
consumer
B
a) A
b) B
c) C
d) D
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AS Economics QuestionBank 2005
207. It was estimated in 2002 that milk has an income elasticity of demand of -0.2. What can
be deduced about milk from this information?
187. (b)
188. (b)
189. (b)
190. (a)
191. (a)
192. (b)
193. (c)
194. (b)
195. (d)
196. (a)
197. (d)
198. (a)
199. (c)
200. (c)
201. (a)
202. (c)
203. (d)
204. (a)
205. (c)
206. (b)
207. (d)
208. True or False: The quantity supplied will be more elastic when stocks of products are low
a) True
b) False
209. True or False: The elasticity of supply for agricultural products in the short run is often
very low because of the length of time involved in the production period
a) True
b) False
210. If the price elasticity of supply of UK produced coal is +0.6, an increase in the price for
30 to 33 per tonne will increase the quantity produced each week from 400,000 tonnes to
a) 420,000 tonnes
b) 422,000 tonnes
c) 424,000 tonnes
d) 430,000 tonnes
211. The long run elasticity of supply is higher than the short run elasticity of supply because
a) In the long run, the stock of machinery and buildings can change
b) In the long run, new firms can enter the market if demand increases
c) In the long run, firms can change the scale of their production
d) All of the above
212. Suppose that market supply is perfectly elastic. If the demand curve shifts to the left,
then
213. The price elasticity of supply for PVC doubled-glazed windows is estimated to be +1.5. If
there is a 20 per cent increase in market price due to a rise in demand, then
A B
Price Price
Supply
Supply
Quantity Quantity
Price C Supply Price D Supply
Quantity Quantity
214. Which of the diagrams above shows a supply curve that is perfectly elastic?
a) A
b) B
c) C
d) D
215. Which of the following statements about price elasticity of supply is correct?
217. A firm estimates that the elasticity of supply is +0.8. Its current level of output is 20,000
units per month. Following a price increase of 10%, we expect output to rise to
a) 21500 units
b) 21600 units
c) 22000 units
d) 22600 units
218. A product is found to have a price elasticity of supply of + 2.0 If its price falls from
2.00 to 1.50, supply will
a) Decrease by 25%
b) Increase by 50%
c) Increase by 10%
d) Decrease by 50%
208. (b)
209. (a)
210. (c)
211. (d)
212. (b)
213. (c)
214. (a)
215. (b)
216. (b)
217. (b)
218. (d)
219. True or False: The market equilibrium price is always set by the firm that has monopoly
power in the market
a) True
b) False
220. True or False: When the current market price is above the equilibrium price, there will
tend to be excess supply
a) True
b) False
221. True or False: The equilibrium price in a market cannot be influenced by the government
a) True
b) False
223. The table below shows the market demand and supply for a product at each price level.
The equilibrium price is
15 700 1300
14 800 1250
13 900 1200
12 1000 1150
11 1100 1100
10 1200 1050
a) 11
b) 12
c) 13
d) 14
224. A rise in consumer incomes causes market demand for the product in the table below to
rise by 200,000 at each price level. The effect of this change in demand, other factors remaining
constant, is to change the equilibrium price to
15 700 1500
14 800 1400
13 900 1300
12 1000 1200
11 1100 1100
10 1200 1050
a) 10
b) 12
c) 14
d) 15
225. When excess demand occurs in a freely functioning market, there is a tendency for
227. Which one of the following statements referring to the price mechanism is correct?
a) High prices can ration demand for scarce goods and services
b) Firms are unable to influence the market demand for their products
c) High prices are always associated with high profits for producers
d) Producers and consumers take account of externalities
Price Supply
P2
P1
D1 D2
Q1 Q2 Quantity
228. The change in demand shown in the diagram above might have been caused by
S1
Price
S2
P2
P1
P3
D1 D2
Q1 Q2 Q3 Quantity
229. The change in equilibrium price brought about by the shifts in supply and demand
shown in the diagram above might have been caused by
S2
S1
Price
of
Bricks
P2
P1
D2 D1
Q2 Q1 Quantity of Bricks
230. The diagram above shows the supply and demand curves for bricks used in the
construction industry. The change in equilibrium price from P1 to P2 and quantity from Q1 to Q2
following the shift in supply and demand shown in the diagram might have been caused by
a) An increase in the demand for bricks from the main construction companies plus a fall in labour costs in the
brick industry
b) A recession in the construction industry and an increase in the costs of materials used in producing bricks
c) A fall in mortgage interest rates and technological improvements in the brick industry
d) A rise in the price of concrete blocks (a substitute for bricks) and a fall in labour costs used in producing bricks
231. "Pepper prices are soaring, thanks to poor rains in the major producing nations of India
and Indonesia, industry experts have warned. The price of the spice is being further supported by
growing consumption in India." Source: The Independent, 6 December 2002. Which one of the
following best explains the reasons behind the changing price of pepper outlined in the passage
above?
a) The market demand for pepper has shifted inwards and the market supply of pepper has shifted inwards
b) The market demand for pepper has shifted outwards and the market supply of pepper has shifted outwards
c) The market demand for pepper has shifted outwards and the market supply of pepper has shifted inwards
d) The market demand for pepper has remained the same and the market supply of pepper has shifted inwards
232. Which one of the following is not held constant when a demand curve is drawn?
Price of Supply of
DVD DVD
players players
P2
P1
D1 D2
Q1 Q2 Quantity demanded
233. The diagram above relates to the market for DVD players. Which one of the following
could explain the shift in the demand curve from D1 to D2?
234. A government report states that the average price of British beef has fallen by 10%
during the past year and that the quantity bought and sold has fallen by 4%. From this
information we can deduce that
235. A rise in the equilibrium prices of new houses available to buy in a small town might
have been explained by
236. New technology makes it possible to produce more of a product at every given price.
What effect will this have on the equilibrium price and output in the industry?
Price Output
a) Decrease Decrease
b) Decrease Increase
c) No change No change
d) Increase Increase
a) Is perfectly inelastic
b) Is perfectly elastic
c) Is inelastic in the short run
d) Is more inelastic in the long run
219. (b)
220. (a)
221. (b)
222. (c)
223. (a)
224. (b)
225. (b)
226. (d)
227. (a)
228. (d)
229. (a)
230. (b)
231. (c)
232. (c)
233. (d)
234. (c)
235. (a)
236. (b)
237. (c)
238. True or False: A price ceiling set below the equilibrium price will have no effect on the
market
a) True
b) False
239. True or False: A minimum price set below the equilibrium price will have no effect on the
market
a) True
b) False
240. True or False: When labour demand and labour supply is elastic, the introduction of a
national minimum wage set above the free market equilibrium wage level may lead to a rise in
unemployment
a) True
b) False
241. True or False: If the government introduces a maximum price on the cost of car
insurance, then the demand for insurance will shift to the right
a) True
b) False
242. True or False: The introduction of rent controls on housing had the effect of creating a
shortage for rental housing as the market supply of rented properties declined in the long run
a) True
b) False
Supply
Price
A B
P min Price Floor (Guaranteed)
Pe
Demand
Q3 Q2 Q1 Quantity
243. The diagram above shows the demand for and supply of pepper. The government offers
a guaranteed minimum price (P min) to pepper producers. If the government imposes this
minimum price, then in the market there is likely to be
244. The table below shows the demand for and supply of labour in an industry. The effect of
the government introducing a minimum wage rate of 7 per hour would be to
8 850 1800
7 1000 1500
6 1200 1200
5 1450 1000
4 1800 900
3 2300 850
245. The table below shows the market demand and supply for a product. If a maximum price
of 50 per unit is imposed on the market by the government, then
50 130 200
40 160 160
30 190 120
20 220 80
Price of
wheat Supply
P1
Demand
Q1 Quantity of wheat
246. The diagram above shows the free market equilibrium for wheat. The government aims
to keep the price of wheat stable at price P1. If there was an inward shift of market supply due to
a poor harvest, to keep the price at P1, the government could
247. The annual demand and supply schedules for an agricultural good are shown in the
table below. The government fixes the minimum price at 18 per tonne to be maintained by
intervention. How much will such an action cost the government each year?
a) 180,000
b) 144,000
c) 108,000
d) 72,000
238. (b)
239. (a)
240. (a)
241. (b)
242. (a)
243. (c)
244. (c)
245. (d)
246. (b)
247. (d)
248. True or false: Consumer surplus is zero when demand is perfectly elastic
a) True
b) False
249. True or false: Producer surplus will be zero when supply is perfectly elastic
a) True
b) False
250. True or false: An indirect tax reduces the level of producer surplus but increases the
level of consumer surplus at the new equilibrium price
a) True
b) False
252. The table below shows the price that a student is willing to pay for a number of visits to
a theme park during the course of the summer holidays. If the admission price to the theme park
is 12, how many visits will the consumer make during the summer, and what will be the total
level of consumer surplus?
253. An ice-cream manufacturer would be willing to sell 1000 tubs of ice-creams for 3 each.
The tubs of ice-creams are popular and so the actual market price that the producer can charge
is 3.80 per tub and all 1,000 tubs are sold. This means:
a) The opportunity cost of each bar is less than the consumer surplus
b) The total consumer surplus is 800
c) The total producer surplus is 3,800
d) The total producer surplus is 800
254. Which of the following is a true statement about the effect of a government-imposed
minimum price floor when the price set is above the normal free market price?
a) Price elastic
b) Price inelastic
c) Income elastic
d) Income inelastic
256. An increase in market demand for a normal good other things being equal will lead to
257. Most of the benefits to agricultural support schemes such as the European Common
Agricultural Policy go to
a) Consumers
b) Producers
c) The Government
d) Everyone gains equally from price supports
258. In 1999, the high street retailers Our Price and WH Smith typically charged 12.99 for a
compact disc, whereas Amazon, the internet retailer, charged 9.99 per disc. The short run
effect of Amazon's pricing strategy is likely to
259. When there is an increase in demand, other factors remaining constant, and the market
supply curve is upward sloping, then
260. In the diagram below, the demand curve for bus transport in a local town is shown.
Initially the bus fare is P1 and the number of passenger journeys per day is Q1. If the bus
company abolishes fares for a month and the number of passenger journeys increases to Q0,
how will consumer surplus change?
Bus Fare
P1
B C
Demand
P0
Q1 Q0
a) From A to B + C
b) From A to A + C
c) From A to A + B + C
d) From A + B to A + B + C
248. (a)
249. (a)
250. (b)
251. (c)
252. (b)
253. (d)
254. (d)
255. (b)
256. (a)
257. (b)
258. (c)
259. (b)
260. (c)
261. True or False: The government may choose to subsidise an industry in order to prevent
rising unemployment
a) True
b) False
262. True or False: An indirect tax on producers causes an inward shift of the market demand
curve for a product
a) True
b) False
263. True or False: A 4 per packet excise duty on cigarettes is an example of an ad valorem
tax
a) True
b) False
264. A tax on producers of alcoholic lemonade (other factors remaining equal) would cause
Price S2
S1
F
C
A
E D
B
D1
I
J
G H Quantity
265. The consumer burden of a tax equal to vertical distance CI shown in the diagram above
is equal to
a) FAC
b) ABEC
c) BJIE
d) CED
266. Which one of the following is likely to result from an increase in government subsidies
paid to local bus companies?
267. The imposition of a specific duty on producers of mobile phones will cause
Price
Supply pre
subsidy Supply + Subsidy
D A
C
E
F B
Demand
Q1 Q2 Quantity
268. The diagram shows the effect of a government subsidy on producers, as a result of the
subsidy the total level of consumer surplus increases by
a) GEC
b) DABF
c) DECA
d) ECBF
a) Income tax
b) National insurance contributions
c) Air passenger duty
d) Corporation tax
270. The benefit of an increase in a government subsidy to milk producers will go mainly to
consumers in the form of a lower price when
P2
P1
Demand
Q2 Q1 Quantity
271. The diagram above shows the effects of an indirect tax applied by a government to
producers of a good. As a result, the majority of the burden of the tax will be paid by
a) Consumers because demand is elastic
b) Producers because demand is elastic
c) Consumers because demand is inelastic
d) The burden will be shared equally between producers and consumers
Price
Supply post tax Supply pre tax
P1 Demand
Q2 Q1 Quantity
272. The diagram above illustrates the effect of an indirect tax on a product. The burden of
the tax will be paid by
a) Producers only
b) Consumers only
c) The burden will be shared equally between producers and consumers
d) The government will receive no tax revenue in this example
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AS Economics QuestionBank 2005
261. (a)
262. (b)
263. (b)
264. (a)
265. (b)
266. (b)
267. (b)
268. (d)
269. (c)
270. (c)
271. (b)
272. (a)
a) True
b) False
274. True or False: The introduction of a large import tariff on imported steel, other things
remaining constant will reduce the quantity demanded of new cars
a) True
b) False
275. True or False: A fall in the cost of building materials will, other things remaining
constant increase the price of new houses
a) True
b) False
277. Chicken and fish are substitutes. If the price of chicken increases, the demand for
chicken will
a) Not change but there will be a movement along the demand curve for fish.
b) Decrease and the demand curve for fish will shift leftward.
c) Contract and the demand for fish will shift outwards
d) Increase or decrease but the demand curve for fish will not change.
279. An increase in the wage rate paid to workers in the popcorn industry will ________
popcorn and the equilibrium quantity of popcorn will __________
a) Selling from a buffer stock when output is high, and buying into the stock when output unexpectedly falls short
b) Buying stock when output is high, and selling stock when output unexpectedly falls short
c) Buying stock when output is low, and selling stock when output is unexpectedly high
d) Selling stock when output is high, and selling stock when output unexpectedly falls short
281. A car rental firm rents its cars on weekdays to business users and to holidaymakers at
weekends. An increase in demand for rentals on weekdays leads the firm to increase the size of
its car fleet. Which of the following will be the most probable effect on the price of car rentals?
282. An increase in the market demand for computers and an increase in the number of
producers of computers will
Supply
Price
Pe
Demand
A B C Quantity
283. If the government introduces a minimum price into diagram above, the effect will be
284. Which one of the following would be the most probable consequence of a fall in the
market supply of coffee, the supply curve of tea remaining unchanged?
285. Given that the household demand for water is price inelastic, a change from flat-rate
charges to the metering of supplies (i.e. a charge for each litre used) is likely to
286. An increase in the rate of indirect tax applied to a product will have no effect on its
market price if the
287. The Common Agricultural Policy of the European Union has resulted in over-production
of agricultural goods within the European Union leading to a build up of farm surpluses. Those
who benefit financially from the CAP include
a) EU farmers
b) Taxpayers within the EU
c) Farmers in developing countries seeking to export to EU markets
d) Consumers within the EU
288. The table below refers to price and output in a market during two successive periods
1 60 1.2
2 68 1.5
Other things remaining constant, what change might explain the price and output data?
289. The table below refers to price and output in a market during two successive periods
1 140 2.8
2 110 2.4
Other things remaining constant, what change might explain the price and output data?
273. (a)
274. (a)
275. (b)
276. (b)
277. (c)
278. (b)
279. (d)
280. (b)
281. (d)
282. (d)
283. (c)
284. (b)
285. (d)
286. (b)
287. (a)
288. (c)
289. (b)
290. True or False: A bakery employs 20 workers and finds that total output is 3000 loaves
per day. As a result of adding another worker to the labour-force, total output rises to 3100
loaves per day. The average productivity of adding a worker has increased
a) True
b) False
291. True or False: Depreciation in the value of capital equipment due to wear and tear
during production is an example of a fixed cost
a) True
b) False
292. True or False: An increase in the stock of new capital machinery used by a business will
always increase the productivity of the workforce
a) True
b) False
294. The table below shows the output of potatoes on a farm in relation to labour inputs
a) 80 tonnes
b) 50 tonnes
C) 30 tonnes
d) 10 tonnes
297. The table below shows the output of strawberries that is produced as extra units of
labour are added to a fixed amount of land and capital. At what level of labour input do
diminishing returns to labour start to set in?
0 0
1 200
2 450
3 830
4 1160
5 1400
6 1580
7 1700
298. If 12 people are employed to produce a total product of 900 units then the average
product is
a) Unknown
b) 70 units
c) 75 units
d) 90 units
299. Which diagram below shows the relationship between total fixed costs and its level of
output in the short run?
A B C D
Costs Costs Costs Costs
a) A
b) B
c) C
d) D
300. Which of the following is not a variable cost in the short run?
a) Raw materials
b) Capital spending on new technology
c) The labour costs of part time workers employed by the hour
d) Energy costs
a) 60 units
b) 72 units
c) 90 units
d) It cannot be calculated without information about business revenue
302. When average cost per unit declines as a result of a merger or integration of two
businesses that are not producing the same type of product, the new firm experiences
a) Economies of scale
b) Economies of scope
c) Economies of hope
d) Economies of expectation
303. The break-even point or output for a business in both the occurs when _____________
a) Royalties paid by a radio station to a recording company every time it plays one of its records
b) Costs of raw materials and components paid by a manufacturer of children's toys
c) Interest charges paid by an airline company on a bank loan to buy a new fleet of aircraft
d) The cost of materials used in the production of double-glazing
306. In economy theory, the short run differs from the long run in that, in the short run
307. A printing firm can produce greetings cards at the following rates:
250 175
500 200
1000 250
2000 350
290. (b)
291. (b)
292. (b)
293. (b)
294. (c)
295. (a)
296. (d)
297. (c)
298. (c)
299. (b)
300. (b)
301. (c)
302. (b)
303. (c)
304. (c)
305. (c)
306. (d)
307. (b)
308. True or False: A technical economy of scale can be exploited when production can take
place in integrated plants
a) True
b) False
309. True or False: if, in the long run, a firm finds that reducing its output leads to a fall in
long run average cost, then it is likely that the firm has been experiencing diseconomies of scale
a) True
b) False
310. True or False: Economies of scale can only be exploited by businesses with a large share
of their market
a) True
b) False
a) Volume car producers can use high productivity and expensive unit of capital equipment
b) National supermarket chains can employ specialist managers to reduce inefficiency and raise productivity
c) A company quotes on the stock market can raise extra funds more cheaply than an owner-run business
d) A multinational company can afford to spend huge sums on advertising and marketing
312. In the production of personal computers (PCs) external economies of scale arise when
a) Benefits accrue to all PC users and not only to the owners of PCs
b) Specialised component suppliers of components locate and develop close to PC manufacturers
c) Output is sold in international markets
d) An expansion of production by the industry raises the costs of individual producers of PCs
314. When a firm's long-run average cost curve exhibits internal economies of scale in the
long run
a) Labour shortages
b) A limited size of market
c) Difficulties in co-ordinating production when a business becomes large
d) An increase in the market prices of important raw materials
317. Diseconomies of scale are likely to occur in the long run when
318. If a producer's long-run average cost rises as its scale of operations increases, the
producer is experiencing
a) Diminishing returns
b) Diseconomies of scale
c) Economies of scale
d) Falling profits
a) A computer firm locating in a science park to take advantage of specialised support services from other computer
firms.
b) An expanding firm which directly employs specialist accountants, lawyers and retail managers
c) A motor vehicle manufacturer spreading its research and design costs over a large output
d) A major supermarket gaining bulk discounts on the purchase of food.
308. (a)
309. (a)
310. (b)
311. (c)
312. (b)
313. (b)
314. (a)
315. (c)
316. (a)
317. (c)
318. (b)
319. (a
320. True or False: A farmer tips chemical waste into a river because he can do so at no cost
to itself is an example of a positive externality
a) True
b) False
321. True or False: People may not know what is in their own best interests and thus may
under- consume certain goods or services such as education and health care
a) True
b) False
322. True or False: Government failure cannot happen if the government has the support of
consumers and producers when it decides on its policies
a) True
b) False
323. The list below shows the estimated costs and benefits of building a new factory
a) Once the good has been supplied to one consumer, there is no extra cost in supplying it to others
b) It is always provided free of charge to low-income consumers
c) It may not be provided by the market in sufficient quantities
d) It tends to be provided by the government because of the problem of non-excludability
325. An argument for the government providing merit goods such as state education and the
National Health Service free of charge to consumers is that
a) Firms are unable to earn high profits and have to lay-off workers
b) Imports take a rising share of total market demand
c) Positive externalities exist in consumption of goods and services
d) Costs increase as a firm expands production
327. Given that the market demand for heroin is inelastic, how will a reduction in market
supply affect total revenue of those selling this drug (other things equal)?
329. Market failure results in a misallocation of scarce resources. This may be corrected by
the government
330. Road space throughout the world is becoming increasingly scarce as the demand for
motor transport increases each year. Which one of the following policies would represent an
attempt to use command and control techniques to reduce the problem of road congestion?
a) The introduction of a congestion charge for all major towns and cities
b) Banning cars from parking in city centres
c) Raising the excise duty applied to petrol and diesel
d) Offering a subsidy to users of bus and rail services
331. "Well designed environmental taxes and other economic instruments can play an
important role in ensuring that prices reflect environmental cost and discouraging behaviour that
damages the environment" (Source: Environmental taxation in the UK, Treasury paper,
November 2002). The use of taxation to correct for market failure is an example of the
332. Which one of the following would be treated as an external cost arising from the
growing volume of cars on Britain's roads and increasing levels of car congestion?
335. Which one of the following statements referring to a free market economy is correct?
336. When a minimum price which is above the free-market equilibrium price is imposed on a
good by the government
338. Government intervention in the market to improve economic welfare may fail because
a) It only produces private goods and does not produce public goods
b) All externalities are eliminated
c) All firms experience economies of scale
d) The economy operates on its production possibility curve
340. The government wishes to increase economic welfare by introducing policies that create
external benefits as well as internal ones. It should:
341. Which one of the following arguments provides support for a government policy of
offering grants to students in higher education?
342. Government intervention in the economy to correct a market distortion may fail because
344. Which of the following can be efficiently allocated between competing uses by the price
mechanism?
a) Private goods
b) Public goods
c) Free goods
d) Negative and positive externalities
320. (b)
321. (a)
322. (b)
323. (a)
324. (c)
325. (d)
326. (c)
327. (d)
328. (c)
329. (a)
330. (b)
331. (b)
332. (c)
333. (a)
334. (d)
335. (b)
336. (a)
337. (d)
338. (b)
339. (d)
340. (d)
341. (c)
342. (d)
343. (b)
344. (a)
345. (b)
346. (d)
347. (d)
348. True or False: Technological advances can sometimes allow new firms to compete with a
monopoly supplier by enabling the production of close substitutes
a) True
b) False
349. True or False: A competitive market will always be more efficient in the allocation of
resources than a market dominated by a few big suppliers / firms
a) True
b) False
351. Assume that a competitive industry is in equilibrium. If market demand increases (other
things being equal) which of the following will occur?
352. Large economies of scale, such as those involved in the production of gas and
electricity, result in a(n)
353. Why are monopolistic markets thought to lead to an inefficient allocation of resources?
a) Because they will always have higher costs than competitive firms
b) Because they are much less likely to use new technologies
c) Because they redistribute income from producers to consumers
d) Because they restrict output and charge a higher price creating a loss of economic welfare
356. Comparing a monopoly and a competitive firm, the monopolist will, other things
remaining constant ____________
357. A monopoly market such as the market for pharmaceuticals may be self-perpetuating in
the long run because profits may be used for
358. An industry is made up of seven firms. Firm A has a market share of 12 percent, B has 28
percent, C has 15 percent, D has 8 percent, E has 4 percent, F has 9 percent, and G has 24
percent. The four-firm concentration ratio (%) for this industry is ____________________.
a) 75%
b) 79%
c) 80%
d) 85%
348. (a)
349. (b)
350. (b)
351. (d)
352. (c)
353. (d)
354. (d)
355. (c)
356. (b)
357. (d)
358. (b)
360. Which one of the following would most likely be classified as a pure public good?
361. Which one of the following could be an argument for the government providing health
care in the UK?
a) The private benefit from health care is less than the social benefit
b) Health care cannot be provided by the free market
c) Health care is both a merit good and a public good
d) The policy allows for the provision of health care to be maximised
a) Which is provided exclusively by the public sector at prices below opportunity cost
b) Which is provided exclusively by the private sector at prices below the market price
c) The consumption of which does not deny its consumption by others
d) The production of which involves no opportunity cost
363. Public goods can often present problems for the efficient allocation of resources in a
market economy because
364. An argument for the State providing merit goods and services free of charge is that
365. Merit goods are under-provided through the free working of the price mechanism
because
368. Common resources such as the oceans and skies are similar to public goods because
they are both ________________
a) Non-excludable in consumption
b) Non-rival in consumption
c) Non-excludable and non-rival in consumption
d) Excludable and rival in consumption
369. Which of the following would you NOT expect to see as a result of the existence of a
common property resource?
370. Market failure arises in the case of pure public goods because of
a) The large financial cost associated with providing public goods such as national defence systems and flood relief
schemes
b) Negative and positive externalities
c) Government inefficiency
d) The absence of well defined property rights for common resources which leads to over exploitation of the
resource
372. Which of the following goods is neither non rival and non-excludable?
a) An online catalogue
b) A public telephone in a shopping centre
c) A bowl of cherries
d) An office photocopying machine
373. _____ is necessary for a good to be produced by a firm for sale on the market
a) Exclusivity
b) Excludability
c) Desirability
d) Anonymity
374. When an economy is operating on its production possibility frontier, an increase in the
production of public goods will
359. (d)
360. (d)
361. (a)
362. (c)
363. (b)
364. (c)
365. (a)
366. (a)
367. (b)
368. (c)
369. (a)
370. (d)
371. (c)
372. (a)
373. (b)
374. (d)
375. True or False: A cigarette smoker creating air pollution when smoking in a restaurant is
an example of an external costs of consumption
a) True
b) False
376. True or False: A airline that drops aviation fuel into the oceans is an example of an
external benefit of production
a) True
b) False
377. True or False: The monetary value of a human life can never be calculated
a) True
b) False
379. Which of the following is an externality arising from an open-air music festival?
a) Individual consumers are not the best judges of their own well-being
b) Output is below the socially optimal level
c) There is a divergence between private and social costs
d) Producers decide not to maximise profits
383. A tax or charge equal to the spill-over cost per unit of industrial or commercial waste is
known as
a) An external benefit
b) A pollution tax
c) A marketable pollution permits system
d) A command and control policy
384. The main aim of the London Congestion Charge introduced in February 2003 was to
385. If the production of output from the UK farming industry creates negative externalities:
386. If the government imposes a pollution tax on a market where externalities are present
388. Which one of the following is a cause of government failure when trying to deal with the
effects of externalities?
390. The table bellows shows the estimated costs and benefits of building a new factory in a
town
391. Consumers can create externalities when they consume different goods and services.
Examples include noise and air pollution from cars and motorbikes and the externalities created
by smoking and alcohol abuse. Negative consumption externalities lead to a situation where
the
392. Positive externalities create external benefits beyond the people directly consuming a
good or service. This means that the
393. The diagram below illustrates the market for a product which incurs external costs. The
distance AB shown in the diagram represents
Social
Costs
Cost
Benefits
A
Private
Cost
Demand
Q1 Q2
Output (Q)
a) External benefit
b) External cost
c) Social benefit
d) Profit for the business
394. The diagram below illustrates the market for a product which creates positive
externalities when consumed.
Costs
Benefits
Supply
Social benefit
Private benefit
Q1
Output (Q)
The difference between the social and private benefit curve at output Q1 is
a) External cost
b) External profit
c) Consumer surplus
d) External benefit
Externalities - Answers
375. (a)
376. (b)
377. (b)
378. (b)
379. (d)
380. (c)
381. (d)
382. (d)
383. (b)
384. (c)
385. (c)
386. (d)
387. (c)
388. (d)
389. (d)
390. (a)
391. (b)
392. (d)
393. (b)
394. (d)
395. True or False: The Government is willing to make transfer payments to certain
households through the benefits system even though nothing is expected from those
households in return.
a) True
b) False
396. True or False: Air and noise pollution from a paper mill is an example of an externality in
the consumption of paper.
a) True
b) False
397. True or False: A government subsidy to businesses designed to reduce the costs of
training is designed to increase the social costs of production
a) True
b) False
398. Distortions in the market which may require government intervention may be caused by
399. When a the production and consumption of a good generates an externality in the
market
401. In a market economy which is free of government intervention, the market mechanism
can achieve all the following except
402. When a minimum price which is above the free-market equilibrium price is imposed on a
good by the government
403. Without government intervention, which one of the following is most likely to be under-
produced in a free market economy?
a) Normal goods
b) Merit goods
c) Luxury goods
d) Inferior goods
406. If an effective minimum price is imposed by the government, what would be expected to
occur?
407. All of the following are appropriate government policies in solving pollution problems
EXCEPT
408. In 2001 the government of Majorca and Ibiza proposed a tax of 1.25 per tourist for
every night spent in hotel accommodation. The government would be most likely to justify this
in terms of
410. Following the introduction of a national minimum wage, the level of employment in a
country increased. Which one of the following could account for this result?
a) There were unemployed resources and the national minimum wage increased the level of aggregate demand in
the economy
b) There were unemployed resources and the national minimum wage reduced the international competitiveness of
the countrys industries
c) The government adjusted the way that the unemployment figures were measured
d) The demand for labour and the supply of labour were both completely price inelastic
395. (a)
396. (b)
397. (b)
398. (d)
399. (b)
400. (c)
401. (c)
402. (a)
403. (b)
404. (a)
405. (a)
406. (b)
407. (d)
408. (b)
409. (c)
410. (a)
411. (b)
3 Macroeconomics
412. True or False: It is impossible to have falling inflation and falling unemployment at the
same time
a) True
b) False
413. True or False: The official measure of Gross Domestic Product understates the true level
of national income because of the existence of the shadow or informal economy
a) True
b) False
414. True or False: Since the early 1990s, the British economy has avoided a recession
a) True
b) False
415. Which one of the following is a major macroeconomic objective of the government?
a) Full employment
b) A reduction in environmental pollution
c) A period of sustained economic growth
d) Price stability
417. The money value of goods and services produced in a year within the geographical
boundaries of a country is known as
418. In the commonly accepted definition of a recession, the level national output
419. If national output in one year is measured at Euro 300 billion and a year later it is
measured at Euro 315 billion, then the rate of growth in that year is
a) 2 per cent
b) 5 per cent
c) 10 per cent
d) 15 per cent
421. If prices and wages rise at the same rate, the real purchasing power of the average
worker will
a) Fall
b) Rise
c) Stay the same
d) Rise or fall depending on what happens to the level of interest rates
422. Which of the following is the most accurate indicator of a nation's standard of living?
423. Which of the following categories would be included as part of gross fixed capital
investment in the UK economy?
425. Which of the following items of expenditure are included as part of current government
spending in the UK national income accounts?
426. For the year 2004, in the British economy the percentages of consumption spending,
gross investment, government purchases, and net exports (X-M) as a share of GDP were
approximately as follows:
427. Per capita GDP is a baseline measure of the standard of living. It equals
a) GDP divided by the total number of people employed in the economy + the unemployed
b) GDP divided by the number of taxpayers
c) GDP divided by the total population
d) GDP divided by the adult population (i.e. those people aged 16+)
428. Which one of the following is the best guide to the likely trend rate of economic growth
for a country? An increase in
a) Consumer Spending
b) Net Exports
c) Labour and Capital Productivity
d) Government Spending on Welfare
430. Real GDP is not a good indicator of economic welfare because it __________
a) Excludes the value of income and spending in the shadow or "black" economy
b) Does not make an adjustment for the external costs and benefits created by externalities
c) Measures the value of time spent working in producing goods and services but not the value of leisure time
d) All of the above
431. In a small regional farming sector in a given year, farmers sell potatoes to factories for
10m Factories then manufacture and sell frozen chips and crisps to supermarkets for 17m.
Supermarkets sell these frozen chips and crisps to consumers for 21m. From this information
we can conclude that
432. In country X in a given year the money value of national output is estimated to be
300m at current prices. If the GDP deflator (index of prices) is found to be 120, then real
national output measured at constant base year prices will be
a) 200m
b) 250m
c) 300m
d) 320m
433. The chart above shows the annual rate of real GDP growth for the UK and the USA for
each year since 1998. From the data shown in the chart we can deduce that
a) The USA has grown faster than the UK throughout the period since 1990
b) The USA has a higher standard of living than the UK
c) The USA experienced an economic slowdown in 2001
d) The UK had a more volatile cycle than the US over the years shown
412. (b)
413. (a)
414. (a)
415. (d)
416. (b)
417. (c)
418. (c)
419. (b)
420. (b)
421. (c)
422. (c)
423. (c)
424. (c)
425. (b)
426. (a)
427. (c)
428. (c)
429. (a)
430. (d)
431. (d)
432. (b)
433. (c)
434. (b)
435. True or False: If the index of GDP rises from 114 in 2003 to 119 in 2004, then the rate of
growth for 2004 is 5 per cent
a) True
b) False
436. In terms of her gross domestic product (GDP), the UK is the largest economy inside the
European Union
a) True
b) False
437. The general price level in the base year is calculated to be 150.0. If, over the course of a
year it rises to 170.0, what is the annual rate of inflation?
a) 20 per cent
b) 13 per cent
c) 50 per cent
d) 10 per cent
438. From the information contained in the chart above, we can deduce that
439. The chart above shows the annual rate of consumer price inflation for the UK since
January 1989. From the information contained in the chart we can deduce that
440. Which one of the following would best indicate economic growth? An index of
a) Share prices
b) Retail prices
c) Export volumes
d) Gross domestic product
441. Which one of the following is most likely to lead to a rise in a country's potential growth
of real GDP in the long term?
a) Increase exports
b) Increase consumer spending
c) Increase unemployment
d) Increase the external value of the exchange rate
443. Assuming that all the main objectives of national economic performance are of equal
importance, which one of the following countries is most successful in achieving the main
objectives?
Country Inflation rate (%) Rate of growth of real GDP Rate of unemployment (%)
(%)
A 7 3 6
B 3 3 2
C 5 3 7
D 4 4 3
a) A
b) B
c) C
d) D
444. Which one of the following can lead to a rise in inflation? An increase in
a) Unemployment
b) The exchange rate
c) Interest rates
d) Costs of production
435. (b)
436. (b)
437. (b)
438. (c)
439. (d)
440. (d)
441. (a)
442. (b)
443. (B)
444. (d)
445. (a)
446. True or False: An annual average economic growth rate of just 3 per cent per year leads
to the level of real national output doubling in less than 25 years
a) True
b) False
447. True or False: Sustained economic growth cannot occur unless there is immigration of
labour into an economy to boost the size of a countrys labour force
a) True
b) False
448. True or False: An increase in capital investment spending can lead to higher levels of
productivity and growth as workers have more capital to work with in their jobs
a) True
b) False
449. True or False: For developing countries to experience growth, they must introduce
import controls to protect their domestic markets
a) True
b) False
450. In 2002, the US economy experienced a brief recession. Which one of the following is
most likely to have helped cause the recession?
452. The table below shows the level of real national output for a country over the years 1999
2004. In which year was the annual rate of growth the highest?
a) 2000
b) 2001
c) 2002
d) 2003
453. In 1999 the market price of a mobile phone was 160. By the end of 2003, the market
price of the same mobile phone was 90. Over the same time period, the general level of prices
has risen by 15%. From this information we can deduce that
454. If aggregate demand is constant, a leftward (inward) shift in the LRAS curve will
a) Aggregate demand
b) The inflation rate
c) Wage rates
d) The economy's supply-side capacity
456. Which one of the following is the most likely of the determinants of long run aggregate
supply?
457. Which one of the following is most likely to lead to an increase in national income
without an increase in the rate of inflation?
a) An increase in exports
b) A reduction in interest rates
c) An increase in manufacturing and service sector investment
d) An increase in consumer spending
a) Fastest rate of growth the economy can achieve over a ten year period
b) The average rate of growth achieved during an economic boom
c) The rate of economic growth that can be sustained in the long run
d) The rate of economic growth that can be maintained without a balance of payments deficit
459. If the rate of growth of aggregate demand becomes greater than the trend rate of
economic growth of output then in the short run the economy is likely to experience
461. If an economist wishes to make a distinction between real and money national income,
which one of the following would have to be considered?
462. The chart above shows the annual change in real national output and real investment
spending in the British economy during the period 1990-2003
a) The rate of growth of the economy has more stable than the rate of growth of investment
b) The rate of growth of the economy has more volatile than the rate of growth of investment
c) Real spending on capital investment fell in 1999
d) Real spending on capital investment increased in 1992
463. The chart shows GDP per hour worked employed for three countries Germany, Japan and
the United States. The base figure for the index is the level of GDP per hour worked in the UK in
each of the years shown. From the chart, it may be deduced that
464. Which one of the following is most likely to cause firms to decrease the amount of
investment they undertake?
465. The government is concerned that, without any change to its current economic policy,
the rate of growth of the economy will fall below the trend rate. Which of the following policy
changes is most likely to prevent this from happening?
466. The table below shows GDP per head data for two countries
467. The chart above shows the annual rate of growth of real GDP for the United States
economy. From the data it can be seen that
a) Economic growth in the United States slowed during 2000 and 2001
b) The United States economy experienced a recession in 2001
c) The United States economy has a trend rate of growth close to 4 per cent
d) Unemployment in the USA must have increased in between 2000 - 2003
446. (a)
447. (b)
448. (a)
449. (b)
450. (b)
451. (c)
452. (b)
453. (d)
454. (c)
455. (d)
456. (b)
457. (c)
458. (c)
459. (c)
460. (c)
461. (d)
462. (a)
463. (c)
464. (b)
465. (c)
466. (d)
467. (a)
468. True or False: If a country is running a trade surplus, the net effect is to reduce the level
of aggregate demand, because goods and services are being sold to other countries instead
a) True
b) False
469. True or False: Exports from the UK economy now account for nearly 30% of our national
output
a) True
b) False
470. True or False: A recession in the European Union economy would tend, other things
remaining constant, to cause a fall in aggregate demand in the UK economy
a) True
b) False
471. The diagram below shows a movement down the aggregate demand curve from A to B.
The movement down the AD curve is caused by
General
Price Level
AD
Real National
Income
a) A rise in government spending
b) A rise in investment spending
c) A fall in aggregate supply
d) A fall in the general price level
a) A decrease in unemployment
b) A fall in the demand for imported goods and services
c) A fall in government expenditure on defence and transport
d) A rise in productivity
a) Exports
b) Government spending
c) Employment
d) Household spending
474. Which one of the following is most likely to increase the rate of capital investment in an
economy?
General
Price Level
AD1
AD2
475. In the diagram above, the shift in the curve from AD1 to AD2 might have been caused by
476. Other things being equal, a rise in interest rates is likely to cause a fall in
a) Tax revenues
b) Savings
c) The money supply
d) Household (consumer) spending
479. Which one of the following is most likely to cause a fall in aggregate consumer
spending?
480. Which one of the following is most likely to decrease the level of aggregate demand?
a) Unemployment
b) Aggregate supply
c) Inflation
d) Imports
482. Other things being equal, the aggregate demand curve is most likely to shift
RIGHTWARD following
484. The table below shows the growth of real disposable income and consumer spending.
From the data it can be seen that
a) Consumer spending has grown more quickly than income in each year
b) Real disposable income has increased in each year
c) The household savings ratio rose in 2002
d) Most of the increase in consumption has gone on imported products
485. The level of capital investment spending by private sector businesses tends to vary ____
with interest rates and ______ with business confidence
a) Positively, positively
b) Positively, negatively
c) Negatively, positively
d) Negatively, negatively
486. The level of consumer spending tends to vary ____ with the rate of growth of house
prices and ______ with the rate of interest
a) Positively, positively
b) Positively, negatively
c) Negatively, positively
d) Negatively, negatively
487. The level of size of the government budget deficit tends to vary ____ with the rate of
growth of GDP and ______ with the level of unemployment
a) Positively, positively
b) Positively, negatively
c) Negatively, positively
d) Negatively, negatively
468. (b)
469. (a)
470. (a)
471. (d)
472. (c)
473. (c)
474. (b)
475. (b)
476. (b)
477. (c)
478. (d)
479. (d)
480. (c)
481. (a)
482. (c)
483. (a)
484. (b)
485. (c)
486. (b)
487. (c)
488. True or False: The short run aggregate supply curve would shift inwards if there was a
fall in wage costs, other things remaining constant
a) True
b) False
489. True or False: Short term increases in demand can often be met by an increase in
workers overtime and a reduction in stocks rather than increased investment in new plant and
machinery
a) True
b) False
490. True or False: An outward shift in the long run aggregate supply curve is equivalent to
an outward shift in the production possibility curve
a) True
b) False
491. Which one of the following is likely to decrease aggregate supply in the economy?
a) Improvements in technology
b) Increased occupational and geographical labour mobility
c) A rise in the price of raw materials and components
d) A reduction in the rate of corporation tax and income tax
492. The short run aggregate supply curve is drawn on the assumption that
General
Price Level LRAS
SRAS2
SRAS1
National Income
493. The shift in the SRAS curve shown in the diagram might have been caused by
494. Which one of the following would cause a rightward shift in the long run aggregate
supply curve? An increase in
495. The position of the long run aggregate supply curve for an economy depends upon
497. Which one of the following is likely to result in a rightward shift of the short run
aggregate supply curve?
498. Most economists believe that the long-run aggregate supply curve is vertical because
a) In the long run, the level of output is determined by resources and technology rather than changes in the price
level
b) Actual output can never exceed, even temporarily the trend rate of output
c) A vertical long-run supply curve indicates the maximum level of output that an economy can ever achieve
d) A vertical long-run supply curve indicates that an increase in aggregate demand will lead to a larger real output
but not a larger nominal output.
499. The position of an economy's long-run aggregate supply curve might be determined by
all of the following EXCEPT
500. As a result of a rise in the sterling exchange rate, fewer tourists visit the UK. Other
things remaining the same, the likely effect of this is
488. (b)
489. (a)
490. (a)
491. (c)
492. (a)
493. (b)
494. (b)
495. (d)
496. (d)
497. (a)
498. (a)
499. (d)
500. (b)
501. True or False: An inward shift of the aggregate demand curve normally causes an inward
shift of the long run aggregate supply curve
a) True
b) False
502. True or False: If the actual level of GDP is less than potential GDP, then prices across the
economy will start falling because of excess supply
a) True
b) False
503. True or False: A ten per cent rise in UK house prices has more of an effect on aggregate
demand than a ten per cent rise in share prices
a) True
b) False
504. The table above shows the aggregate demand and aggregate supply schedules for an
economy. What is the equilibrium level of national income?
a) 90 billion
b) 100 billion
c) 110 billion
d) 120 billion
505. Which of the following will NOT cause an increase in the equilibrium level of GDP?
506. Which of the following will not cause a fall in the equilibrium level of GDP?
508. If the aggregate supply curve is perfectly inelastic, an increase in AD will lead to an
increase in
LRAS
General
Price Level
Pe
P2
SRAS
AD1
AD2
509. The change in equilibrium national output shown in the diagram above would be likely
to lead to
LRAS1 LRAS2
General
Price Level
Pe
SRAS
AD2
AD1
510. The diagram above shows the long run aggregate supply curve and AD curves for a
country over a period of time. The main cause of the shift in the long run aggregate supply curve
from LRAS1 to LRAS2 might have been
General LRAS
Price Level
P3
P2
P1
AD3
SRAS
AD2
AD1
511. The increase in aggregate demand from AD1 to AD3 shown in the diagram above is likely
to lead to
512. If the aggregate supply curve is perfectly elastic, an increase in aggregate demand
brought will cause an increase in
514. The process by which an initial change in aggregate demand can lead to a larger final
effect on local or national income is known as
515. Because of the multiplier effect, if UK exports rise by 600 million per year then UK
equilibrium GDP will rise by
a) Nothing
b) Less than 600 million per year
c) 600 million per year
d) More than 600 million per year
516. Which of the following, if increased, would have an expansionary effect on the UK
economy?
a) Direct taxation
b) Overseas investment by UK companies
c) Imports of goods and services
d) Investment in new plant and machinery in the UK
General SRAS1
Price Level
SRAS2
A
P1
B
P2
AD
Y1 Y2 Real National
Income
517. The shift in the short run aggregate supply curve shown in the diagram above might
have been caused by
518. "The UK economy grew 0.9% in the final quarter of 2003. That suggests there was quite
a lot more momentum in the economy at the end of last year than most commentators thought."
Which one of the following factors might have explained the stronger than expected growth in
the UK economy?
519. "Shortages of skilled labour suggest that wages in the service sector and manufacturing
sector are set to pick up in coming months." The main result of this rise in wage rates would be
520. In 2004, Country Xs potential GDP is Euro 210 billion per year. Its actual GDP is Euro
225 billion per year. The difference between potential and actual GDP is
LRAS
General
Price Level
P1
SRAS1
AD
Y1 Real National
Income
521. The current level of equilibrium national income in the diagram above is Y1. At this level
of national income
522. In which diagram would an increase in exports of goods and services leave the general
price level unchanged?
A B
Price Price
Level AS Level
AD AS
AD
GDP GDP
Price C Supply Price D AS
Level Level
AS
AD
AD
GDP GDP
a) A
b) B
c) C
d) D
523. A government decides to pursue a more reflationary fiscal policy and the central bank
decides to pursue a more deflationary monetary policy. Which of the following is consistent
with this policy change?
524. Over the last year, the rate of inflation for foreign holiday prices has fallen
significantly. In the year to December 2002, prices rose 11.1%. By contrast, in the year to
December 2003, they fell 2.4%. Which of the following might explain this price trend?
525. The US government increases its spending. At the same time, the US Federal Reserve
announces a cut in US interest rates. All other things being equal, the most likely outcome for
the US economy is that
a) Aggregate supply will increase but economic growth will remain the same
b) Aggregate demand will rise and inflationary pressures will increase
c) The US current account deficit will reduce and inflation will fall
d) Inflation will fall but unemployment will rise
501. (b)
502. (b)
503. (a)
504. (b)
505. (d)
506. (a)
507. (b)
508. (a)
509. (d)
510. (b)
511. (b)
512. (b)
513. (c)
514. (b)
515. (d)
516. (d)
517. (d)
518. (a)
519. (a)
520. (b)
521. (b)
522. (b)
523. (d)
524. (b)
525. (b)
526. True or False: The rate of interest is the only factor that determines the level of capital
investment spending by privately owned businesses
a) True
b) False
527. True or False: Monetary policy and fiscal policy changes affect aggregate demand
through different routes, but they tend to have similar effects on the level of demand, output
and prices
a) True
b) False
528. True or False: It can take up to two years for the full effects of an interest rate change
from the Bank of England to have its full effects on the macroeconomy
a) True
b) False
529. The major objective of monetary policy being pursued by the Bank of England is to
achieve
530. In recent years, the UK and the United States has seen a period of low interest rates.
Other things being equal, which of the following combinations represents the most likely
outcome of cuts in interest rates?
The demand for consumer The exchange rate The rate of growth of real
credit GDP
a) Fall Fall Rise
b) Rise Fall Fall
c) Rise Rise Rise
d) Rise Fall Rise
531. "Higher interest rates normally reduce the growth of demand in an economy, initially
through consumer confidence and the housing market." The policy measure described above is
an example of
532. The Bank of England can reduce inflationary pressure in the economy if an increase in
interest rates leads to a decrease in
a) Savings
b) The exchange rate
c) Consumer borrowing
d) Unemployment
533. "The level of consumption and the housing market will fall back once interest rates start
to rise. Which one of the explanations below best describes the effects of higher interest rates
on the consumer?
a) Consumers will have less disposable income when interest rates rise
b) Consumer confidence will increase when interest rates rise
c) The government will reduce taxation if interest rates rise
d) The demand for housing will fall if interest rates rise
534. From the data in the chart above it can be seen that
a) The Bank of England has tightened monetary policy on three occasions since it was made independent in May
1997
b) The level of real interest rates in the UK has been on a downward trend
c) Since 1997 the Bank of England has managed to keep the rate of inflation within target
d) Interest rates in the UK have remained higher than in the Euro Zone
535. If there were a large outflow of sterling from the UK, which of the following would you
expect to occur?
536. Other factors remaining constant, a sustained rise in interest rates in the United States
is likely to result in
537. If one pound initially buys Euro 1.30 which of the following represents a subsequent
depreciation of the pound?
a) 1 = Euro 1.45
b) 1 = Euro 1.30
c) 1 = Euro 1.25
d) 1 = Euro 1.50
538. The chart above shows the average weekly exchange rate between sterling and the US
dollar from January 2001 to April 2004. From the chart we can deduce that
539. Which one of the following is most likely to lead to an increase in the underlying rate of
inflation?
540. The chart above shows the sterling exchange rate index and the balance of trade in
goods for the UK since 1990. The data in the chart shows that
a) The UK economy has run a trade surplus in goods in each year since 1990
b) The sterling exchange rate has depreciated since 1996
c) UK exports of goods have fallen since 1996
d) The sterling exchange rate has appreciated against other currencies in the period since the start of 1996
541. What would result from a depreciation of the pound on the foreign exchange market?
542. What will be the effect of the value of the pound sterling changing from 2000 to 2500
Italian lire over the course of a year?
a) British tourists travelling to Italy will see a decrease in their real purchasing power
b) UK exports to Italy will become cheaper
c) Italian exports to the UK will become more expensive
d) The Italian lire will be cheaper in terms of the pound
543. If the pound rose in value against other currencies, what would be likely to happen?
544. The economics news on the television reports that the dollar has strengthened relative
to the Japanese yen. This means that;
545. Other factors remaining constant, a period of rising interest rates will
a) Raise consumption
b) Lower consumption
c) Leave consumption unchanged
d) Reduce the savings ratio
547. Between 1995 and the second quarter of 1998 the sterling effective exchange rate
index increased from 84.8 to 105.4. Which one of the following would be likely to result?
548. The consequence of the European Central Bank raising interest rates for countries inside
the Euro Zone when the Euro is appreciating against other currencies is likely to be an increase
in
549. In the summer of 2003, the Bank of England cut interest rates to 3.5%. One justification
for this might have been the MPCs concern over
526. (b)
527. (a)
528. (a)
529. (a)
530. (d)
531. (d)
532. (c)
533. (d)
534. (a)
535. (b)
536. (c)
537. (c)
538. (b)
539. (d)
540. (d)
541. (a)
542. (d)
543. (b)
544. (c)
545. (b)
546. (d)
547. (b)
548. (a)
549. (a)
550. True or False: As people earn higher incomes, they tend to pay a rising percentage of
that income in taxation to the government
a) True
b) False
551. True or False: The majority of tax revenues for the UK government comes from
businesses in the form of Corporation Tax and National Insurance Contributions
a) True
b) False
552. True or False: A cut in direct taxation may have little effect on aggregate demand if
consumer confidence is low and consumers want to build up their savings
a) True
b) False
553. Which of the following would an economist classify as a pure public good?
a) Health care
b) Public libraries and museums
c) Seat belts in cars
d) Street lighting
558. If the Chancellor raised the income tax allowance by 500 leaving the basic rate at 20%,
what would the effect on annual disposable income be?
a) Raise it by 200
b) Raise it by 100
c) Lower it by 100
d) Leave it unchanged
559. A government faces falling tax revenues and rising benefit payments. This is likely to be
due to
560. Stuart earns 20,000 per year and pays 4,000 in income tax. Steve earns 30,000 and
pays 8,000 in income tax. Sylvie earns 10,000 and pays 1,500 in tax. The income tax system
is
a) Regressive
b) Proportional
c) Progressive
d) Flat rate
561. If an economy moves into an unexpected recession and the government has already
planned a budget deficit, planned tax revenues will
563. A decision by the government to introduce an expansionary fiscal policy would be less
likely to succeed in reducing unemployment if a country had
564. Which of the following is not an automatic stabiliser of national income during a time of
economic slowdown or recession?
565. Suppose a drop in consumer and business confidence results in a recession. In order to
move the economy out of the recession, an expansionary fiscal policy would include
566. Which of the following is NOT an example of the use of fiscal policy?
567. All other things being equal, a government would be undertaking a deflationary fiscal
policy if it reduced
a) Government expenditure
b) Interest rates
c) Taxation
d) The exchange rate
568. Which one of the following changes in fiscal policy is most likely to explain a rightward
shift of an economy's aggregate demand curve?
569. According to Keynesian economists, for which one of the following types of
unemployment might an increased budget deficit be the most appropriate remedy?
a) Frictional
b) Structural
c) Technological
d) Cyclical
570. A rightward shift in the AD curve is brought about by various fiscal policy decisions.
Among these might be
550. (a)
551. (b)
552. (a)
553. (d)
554. (c)
555. (a)
556. (c)
557. (c)
558. (b)
559. (c)
560. (c)
561. (d)
562. (d)
563. (a)
564. (a)
565. (b)
566. (b)
567. (a)
568. (d)
569. (d)
570. (b)
571. True or False: A cut in income tax will boost the incentive to work longer hours for all
workers
a) True
b) False
572. True or False: The time lags between a change in supply-side policies and their effects
on the macroeconomy tend to be longer than changes in monetary and fiscal policies
a) True
b) False
573. True or False: The introduction of labour-saving technology inevitably destroys more
jobs than it creates leading to rising unemployment
a) True
b) False
574. True or False: Other things remaining constant, a sharp rise in world oil prices has
inflationary consequences for prices but deflationary effects on the level of real national output.
a) True
b) False
575. All of the following are examples of government policies aimed at improving 'supply-
side' economic performance and increasing the trend rate of economic growth except
LRAS1 LRAS2
General
Price Level
SRAS1
SRAS2
YFC1 YFC2
Real National Income
576. The diagram shows the long run aggregate supply curves for a country over a period of
time. The shift in the long run aggregate supply curve from LRAS1 to LRAS2 is most likely to have
resulted from
578. According to a supply-side economist, which one of the following would be likely to
reduce the 'natural' rate of unemployment?
579. Which one of the following would be a supply-side measure designed to improve the
international competitiveness of domestic producers in world markets?
580. The long-run average or "trend" growth rate of real UK GDP is about
581. The main factor determining changes in our living standards from one generation to the
next is
582. In country Z the underlying trend rate of growth is 3.0%. The table below shows the
actual rate of growth in real national income over four successive years.
571. (b)
572. (a)
573. (b)
574. (a)
575. (b)
576. (d)
577. (a)
578. (c)
579. (d)
580. (b)
581. (c)
582. (c)
583. (a)
3.10 Inflation
584. True or false: Inflation reduces the purchasing power of people on fixed incomes
a) True
b) False
585. True or false: A fall in the rate of inflation means that prices are now falling
a) True
b) False
586. True or false: The Bank of England must raise interest rates if inflation starts to rise
a) True
b) False
587. True or false: An inflationary gap occurs when aggregate demand exceeds aggregate
supply at the full-capacity level of national income
a) True
b) False
588. True or false: If the general price index for an economy rises from 144 in 2003 to 162 in
2004, then the approximate rate of inflation between 2003-04 is 12 per cent
a) True
b) False
590. Which one of the following could lead to an increase in the rate of inflation?
591. During a year, there has been a rise in national income of 7% and a rise in the retail
price index of 4%. The population remained stable. The approximate change in real income per
head is?
a) -3%
b) +4%
c) +3%
d) +11%
593. A country experiences a rate of inflation twice that of its main international
competitors. At the same time its currency appreciates in value. Which of the following is most
likely to occur?
a) A rise in exports
b) A rise in business confidence
c) A rise in investment
d) A rise in business failures
594. Which of the following would be an attempt by the government to introduce direct
controls to reduce inflation?
595. Weights are used in calculating the index of consumer prices to reflect the different
a) Amounts of money relative to their budget spent by consumers on each good and service
b) Levels of prices for each good
c) Numbers of people buying each good
d) Rate of change in price of each good over time
596. The table below shows consumer price indices for two countries over a four year period
597. If the government wishes to reduce the rate of inflation, it is most likely to increase
598. Suppose that currently the average inflation rate is 5% per year; however, business
firms and labour anticipate that the general price level will increase by substantially more than
the 5% over the next two years. Other things constant, these expectations can cause
599. In an economy already at full-employment, which one of the following policies will be
least suitable for the control of inflationary pressure in the economy?
600. A group of workers receives a pay increase of 10%. Also over this same time period the
Retail Price Index rises 10 points to 510. It can be concluded that real wages have
a) Remained unchanged
b) Risen by approximately 8%
c) Risen by approximately 10%
d) Fallen
601. Between June 1997 and September 1998 the Bank of England's Monetary Policy
Committee increased interest rates by 1.5% to try to curb inflationary pressures. An increase in
interest rates might be expected to help reduce inflation because a rise in interest rates is likely
to
Wage
Inflation (%)
P3
P2
P1
602. The diagram above shows a relationship between unemployment and wage inflation.
We can deduce from the chart that
603. Which one of the following can lead to a rise in inflation? An increase in
606. Suppose the nominal interest rate is 9%. The rate of inflation is 6%. The real interest
rate is
a) + 3%
b) - 3%
c) + 15%
d) + 1.5%
607. The chart above shows the annual rate of consumer price inflation for the UK since
1989. From the information in the chart we can deduce that
Inflation - Answers
584. (a)
585. (b)
586. (b)
587. (a)
588. (a)
589. (c)
590. (a)
591. (c)
592. (c)
593. (d)
594. (a)
595. (a)
596. (c)
597. (b)
598. (a)
599. (c)
600. (b)
601. (a)
602. (c)
603. (b)
604. (c)
605. (b)
606. (a)
607. (d)
608. True or false: The labour force includes those people registered as unemployed
a) True
b) False
609. True or false: Structural unemployment includes those unemployed who are out of work
because of a fall in demand during a recession
a) True
b) False
610. True or false: When the economy experiences an upturn in the business cycle, cyclical
unemployment should fall
a) True
b) False
611. True or false: Unemployment cannot fall providing a country continues to enjoy steady
economic growth
a) True
b) False
612. True or false: Full employment is achieved when the rate of unemployment reaches zero
a) True
b) False
613. If the government wishes to achieve a fall in unemployment, which of the following
policies should it adopt?
a) Raise VAT
b) Reduce government spending on capital projects
c) Reduce the real value of income tax free allowances
d) Seek to achieve a depreciation in the exchange rate
614. In a population of 50 million, 26m are employed and 2m unemployed. The labour force
is
a) 50 million
b) 28 million
c) 26 million
d) 2 million
615. Which unemployment occurs if an aircraft engine works closes because of recession?
a) Frictional
b) Seasonal
c) Technological
d) Cyclical
a) Slow growth may mean job losses in some industries where labour is occupationally immobile
b) Rising productivity may mean that the extra national output can be produced using fewer workers
c) Companies may decide to substitute capital for labour in a bid to become more efficient
d) All of the above
618. Unemployment is high but many vacancies are unfilled. Which is the most likely
explanation?
a) An ageing population
b) Excessive wage claims by people in work
c) Occupational immobility of labour
d) The increased use of capital machinery
619. An individual who has just finished a period of training and is now searching for a job is
part of the
620. The number employed in manufacturing has declined over the last two decades. Which
best explains this trend?
621. Which of the following would lead to more jobs in a region with high unemployment?
622. Which of the following is the best measure of the economic cost of higher
unemployment?
623. Students who leave school in the spring and look for work are one source of
a) Frictional Unemployment
b) Cyclical Unemployment
c) Structural Unemployment
d) Hidden Unemployment
624. The number of jobs in the textiles industry decreases, but the number of jobs in the
travel industry increases. Initially, there will be
a) Full employment
b) A shortage of workers in both sectors
c) Structural unemployment
d) Cyclical unemployment in both sectors
625. A government wishing to reduce the level of unemployment through the use of an
expansionary fiscal policy would be most likely to
626. Which of the following are likely to be the main economic consequences of a period of
rising unemployment?
627. A fall in export demand is an exogenous demand shock for a country. Other factors
remaining constant, this shock is likely to result in
a) An increase in the general level of prices as businesses attempt to restore their profitability
b) Rising unemployment
c) Improved profits for importing firms
d) Higher real wages for people working in other countries
608. (a)
609. (b)
610. (a)
611. (b)
612. (b)
613. (d)
614. (b)
615. (d)
616. (d)
617. (a)
618. (c)
619. (b)
620. (c)
621. (d)
622. (b)
623. (a)
624. (c)
625. (b)
626. (d)
627. (b)
628. True or False: Britain runs a large trade surplus in manufactured goods
a) True
b) False
629. True or False: Spending by Japanese tourists on hotels, restaurants and flights whilst on
holiday in Britain would be counted as a credit item on the UK balance of payments
a) True
b) False
630. True or False: Other things remaining equal, the introduction of an import tariff
stimulates consumer spending on domestically produced goods and services
a) True
b) False
631. True or False: A fall in the exchange rate, other things remaining equal, will lead to an
increase in the demand for imported goods and services
a) True
b) False
632. From the information contained in the chart above it can be seen that
a) Japan has been growing more quickly than the United States
b) The UK had on average, a smaller current account deficit than the USA
c) The value of the US dollar must have risen against the Japanese yen
d) The US government has been running a budget deficit since 1990
634. An economist might argue that a current account deficit can be consistent with a
healthy economy
635. Which one of the following would appear as a credit item in the UK balance of
payments?
636. With reference to the data in the chart above it can be inferred that
a) The UK has reduced its demand for imported services over the period shown
b) The UK economy has developed a stronger comparative advantage in trade in services
c) The UK must have been running a current account surplus for each of the years shown
d) The UK economy has become more dependent on travel and tourism as a source of net export earnings
637. Which one of the following is a debit item on the current account of the UK's Balance of
Payments?
638. A government may seek to improve the current account of the balance of payments by
introducing either expenditure-reducing or expenditure-switching policies. Which of the
following is an expenditure-reducing policy?
639. "Increase in imports causes the UK's current account deficit to worsen by 4 billion".
Which of the following is most likely to have caused the situation described in the headline? An
increase in the UK's
a) Exchange rate
b) Aggregate supply
c) Level of taxation
d) Rate of productivity growth
640. Which one of the following items would appear as a credit item on the UK balance of
trade in goods?
641. The table below shows the balance of payments data for a hypothetical country in a
given year
$ Billion
Exports of services 75
Exports of goods 200
Net transfers from /to abroad -5
Imports of goods 220
Imports of services 60
Net investment income +14
From the data provided, the current account balance for this country is
a) - $10 billion
b) + $14 billion
c) - $5 billion
d) - $20 billion
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AS Economics QuestionBank 2005
628. (b)
629. (a)
630. (a)
631. (b)
632. (b)
633. (d)
634. (d)
635. (d)
636. (b)
637. (d)
638. (a)
639. (a)
640. (c)
641. (b)
642. True or False: Consumers in the UK economy have a high propensity to purchase
imported goods and services when their disposable income grows
a) True
b) False
643. True or False: Manufactured goods now comprise the majority of products exported from
developing countries to the developed world
a) True
b) False
644. True or False: Countries will tend to specialise in producing those goods and services
where unit labour costs are highest relative to other nations
a) True
b) False
645. If Geoff can make 400 cards or 80 Pencils in one week, while James can make 180 cards
or 60 Pencils in one week, which of the following statements is true?
646. If Ben can make 100 Pots or 30 Watercolours in one year, while Adrian can make 90 Pots
or 20 Watercolours in one year, which of the following statements is true?
647. Japan has a comparative advantage over Germany in the production of cars if
650. The European Union might impose tariffs on goods from outside the EU in order to
a) Only trade if each country has an absolute advantage in at least one product
b) Seek to become self sufficient
c) Only trade if the opportunity costs of production differ between countries
d) Diversify as much as possible
652. The law of comparative advantage implies that trade between two countries
2000
1600
1000
Dishwashers Dishwashers
653. The diagram above shows the various combinations of two goods, freezers and
dishwashers, which can be produced in two countries, A and B from a given set of resources. If
trade takes place on the basis of comparative advantage
2000
1500
1500 1500
Good S Good S
654. The diagram above shows the production possibility frontier for two countries each
producing two goods, Y and S. From the diagrams we can conclude that
655. Which one of the following types of import control would have a direct effect on
decreasing imports by a specific amount?
Price Domestic
Supply
A B
P2 World Price + Tariff
E F World Price
P1
D C
Domestic
Demand
G
H
Q3 Q1 Q2 Q4 Quantity
656. In the diagram above, P1 is the world supply price for a product which is imported into a
country. After a tariff is imposed on imports of the product, the world supply curve shifts
upwards and the goods are imported at price P2. Which area represents the revenue to the
government from the imposition of the tariff?
a) AGHB
b) ADCB
c) EAD
d) BCF
Price Domestic
Supply
A B
P2 World Price + Tariff
E F World Price
P1
D C
Domestic
Demand
G
H
Q3 Q1 Q2 Q4 Quantity
658. In the diagram above, P1 is the world supply price for a product which is imported into a
country. After a tariff is imposed on imports of the product, the world supply curve shifts
upwards and the goods are imported at price P2. Which area in the diagram represents the loss
of consumer surplus due to the imposition of the tariff?
a) BCF
b) EAD
c) ADCB
d) EFBA
659. Which one of the following measures would reduce competition from abroad?
a) A reduction in tariffs
b) The elimination of existing import quotas
c) The removals of subsidies to domestic producers
d) A depreciation of the domestic currency
660. "The UK economy has a positive marginal propensity to import goods and services".
This statement implies that,
662. If both countries specialise according to the principle of comparative advantage for the
two goods W and X shown in the diagram above, then
Good W
1000
750
250 500
Good X Good X
663. Both countries could gain from specialisation and trade using the example shown in the
PPF diagrams above if trade takes place at the following terms of trade
642. (a)
643. (a)
644. (b)
645. (d)
646. (a)
647. (b)
648. (b)
649. (a)
650. (b)
651. (c)
652. (c)
653. (a)
654. (b)
655. (d)
656. (b)
657. (c)
658. (a)
659. (d)
660. (b)
661. (b)
662. (b)
663. (d)