MULTIPLE CHOICE QUESTIONS - ECONOMICS
ECO1
Question 1. Which of the following statements about factors of production is false?
a) The term 'factors of production' is another term for
resources.
b) The factor of production termed labour means human resources.
c) The factor or production termed land means natural
resources.
d) The factor of production termed capital means the
money which the owners of firms need in order to set their firms up.
Question 2. Which of the following statements about the use of resources is not one of
the key questions in economics?
a) How are resources used? b) Where are resources used?
c) For what are resources used? d) For whom are resources used?
Question 3. Which of the following statements
about producers is false?
a) Households produce many goods and services for
themselves
b) People set up some producers who do not aim to make
profits.
c) All the goods and services consumed in any country are
produced by its own producers.
d) Governments arrange the production of some goods and
services.
Question 4. Which of the following statements
is true?
a) Despite the problem of scarcity, people do not always
want producers to use the most efficient production methods.
b) The problem of scarcity would disappear if the world's
population grew to ensure more labour was available.
c) A producer who uses no more resources than it needs
must display productive efficiency.
d) The world's economies were as integrated 50 years ago
as they are today
Question 5. What is meant by intermediate
goods and services?
a) The same as capital goods, such as plant, buildings,
vehicles and machinery.
b) Products which one firm buys off another and then uses
up in its own products.
c) All inputs bought by firms, including labour and raw
materials.
d) Imports.
Question 6. What is meant by the term final
goods and services?
a) The same as the term intermediate goods and services.
b) The same as the term consumer goods and services.
c) All goods and services except those traded second hand.
d) Goods and services which are finished as far as the
economy is concerned.
Question 7. Which of the following statements
is false?
a) Purchases of capital goods are called investment
b) GDP equals the total value of wages received by
households.
c) In a simple economy with just households and firms,
the value of investment equals the value of saving.
d) In a simple economy with just households and firms,
the value of investment plus consumers' expenditure equals GDP.
Question 8. Which of the following statements
is false?
a) GDP measures the value of all the goods and services
produced in the economy.
b) GDP stands for gross domestic product.
c) GDP excludes intermediate goods and services.
d) GDP equals wages plus trading profits.
Question 9. Which of the following statements
is true?
a) Microeconomics is concerned chiefly with the economy
as a whole.
b) Macroeconomics is concerned chiefly with individual
markets.
c) Governments have no influence over market prices.
d) When economists study the price in a market, their
chief aims are to understand why the price is what it is and why it may change.
Question 10. Which of the following statements
is false?
a) An economic model is a theory based on key variables
and expressed in formal terms.
b) An economic model is tested by seeing how accurate its
predictions are.
c) Testing economic models is rarely tricky.
d) The words 'ceteris paribus' mean other things
remaining the same.
Correct answer:
1.D
2.B 3.C 4.A
5.B 6.D 7.B
8.A 9.D 10.C
EXPLANATION
1. Only statement d is a false statement about factors of
production. The term capital is one which people use in a variety of ways, and
it is true that firms might often say they need to raise capital in order to
set their firms up or expand them. But as a factor of production, capital
always means the capital goods such as plant, buildings, vehicles, and
machinery which producers use in producing goods and services.
2. Only statement b is not one of the key questions in
economics. It is not a key question, because as far as the problem of scarcity
is concerned, it does not matter where resources are used to produce goods and
services. Admittedly, some people are deeply concerned by this question: for
example people who are unemployed in one country might prefer resources to be
used there rather than in another, to give them the chance of a job. But from a
scarcity point of view, it does not matter where the resources are used.
3. Only statement c is a false statement about producers:
this is because some of the goods and services which people in any economy
consume are produced by producers in other countries and imported. The only
economy of which it could be said that there are no imports from outside is the
global economy.
4. Only statement a is true. People may not want
producers to use the most efficient methods if, for example, these involve
unacceptable damage to the environment, or cruelty to animals. Statement b is
false because a rise in population will lead to yet more wants as well as more
resources. Statement c is false because a producer who uses no more resources
than necessary will still be inefficient if the resources are more valuable
than others which might have been used instead. Statement d is false because
economies were far less integrated 50 years ago.
5. Only statement b is true. Statement a is false because
capital goods are not used up in production, even though they are used.
Statement c is false because labour is not an intermediate good or service,
which has to be bought from another producer. Statement d is false because not
all imports are used up in production - for example if you as a consumer buy an
imported book over the internet, this book is not used up in production by any
firms or other producers in your country.
6. Only statement d is true. Statement a is false because
final goods do not include intermediate goods and services. Statement b is
false because final goods include capital goods as well as consumer goods and
services. Statement c is false because it would include intermediate goods and
services.
7. Only statement b is false. GDP does not equal wages
alone, but rather equals wages plus trading profits.
8. Only statement a is false. This is because GDP covers
only final goods and services, and excludes intermediate goods and services.
9. Only statement d is true. Note that statement a
explains macroeconomics and statement b explains microeconomics.
10. Only statement c is false. Testing economic models is
often very tricky, partly because economists can rarely conduct experiments and
partly because it is often hard to isolate the effects of any particular event.
ECO2
Question 1. Which of the following is not
required for a country to be producing at a point on its production possibility
frontier?
a) Full employment of labour. b) All producers using the latest
technology.
c) Stable prices. d) All
producers having productive efficiency.
Question 2. Which of the following statements
is true?
a) The production possibility frontier is steeper at the
right end than the left because some resources are better suited to making some
products than others.
b) The production possibility frontier is straight
because some resources are better suited to making some products than others.
c) The production possibility frontier is steeper at the
left end than the right because some resources are better suited to making some
products than others.
d) The production possibility passes the point which
represents total wants in the economy.
Question 3. Which of the following will not
shift a country's production possibility frontier?
a) A fall in unemployment. b) An increase in the age
at which people retire.
c) The introduction of improved technology. d) Purchases of new capital by firms.
Question 4. Which of the following types of
economy describes the economy of the UK?
a) A command economy.
b) A market economy. c) A mixed
economy. d) A planned economy.
Question 5. All the following government
policies are likely to increase the quantity of some products that are
produced. But with one policy, this effect is a side-effect rather than the
aim. Which policy is that?
a) A policy intended to improve efficiency. b) The introduction of subsidies on some
products.
c) A policy intended to reduce unemployment.
d) The introduction of taxes on the rich and transfers to
the poor.
Question 6. Which of the following policies
would increase production by taking it to a point closer to the production
possibility frontier, but would not shift the frontier?
a) A policy that encouraged firms to buy more industrial
plant.
b) A policy that encouraged firms to develop and
introduce improved technology.
c) A policy that encouraged firms to buy more machinery.
d) A policy that encouraged firms to adopt better
technologies that are already available.
Question 7. Suppose a country is currently
producing at a point on its production possibility frontier, and undertakes no
trade with other countries. Then trade is opened up. Which of the following
would not occur as a direct result?
a) Its production possibility frontier would shift.
b) Its production would shift to another point on its
production possibility frontier.
c) The pattern of products that the country produced would
differ from the pattern that its consumers consumed.
d) Consumers would be able to consume at a point outside
the production possibility frontier.
Question 8. Which of the following policies is
not classed as a stabilization policy?
a) A policy aimed at reducing unemployment.
b) A policy aimed at reducing the number of people in
poverty.
c) A policy aimed at reducing the rate of inflation.
d) A policy aimed at shifting the production possibility
frontier outwards.
Question 9. Which of the following statements
is a positive statement?
a) Bankers' bonuses should be taxed.
b) The eurozone ought to allow member countries in
difficulty to stop using the euro and use currencies of their own instead.
c) One of the largest industries in the UK is the financial services
industry.
d) The UK
government ought to split up some of the largest UK banks to promote more
competition in the banking industry.
Question 10. Suppose you buy Economics by David
King. What is the opportunity cost of your purchase?
a) The money you paid for the book.
b) Whatever you would have spent the money on if you had
not bought the book.
c) The cost of producing the book.
d) The time you spend studying the book.
ANSWERS
1.C
2.A 3.A 4.C
5.D 6.D 7.A 8.
B 9.C 10.B
EXPLANATION
1. Only c gives a condition that is not required for a
country to be on its production possibility frontier. For example, the economy
in Figure 2.2 on page 22 could be at point y, producing 35,000 bricks and
70,000 loaves each day. It could be there if prices were stable, or rising at
5% a year, or even 5% a day, or even if prices were falling. But it could not
be there unless there was full employment of labour, full productive
efficiency, and the use of the latest technology by all producers.
2. Only statement a is true. The frontier is flat at the
left end because if a country initially produced only the product on the
vertical axis, and then shifted some resources into the product on the
horizontal axis, if would initially take resources little suited to the former
and well suited to the latter, so output of the former would fall little while
output of the latter would rise greatly. Total wants are at a point way outside
the frontier.
3. Only statement
a concerns an event that will not shift the frontier. If there is a fall in
unemployment, then a country will move from a point inside the frontier to one
closer to it.
4. Only statement c describes the situation in the UK, where the UK government seeks to influence
the use of resources rather than leave their use to market forces, as applies
in a market economy, or to control their use, as applies in a command or
planned economy.
5. Only policy d
does not intend to increase the output of some products, so that any increase
is a side-effect. This side-effect is likely to arise, because the products
which the poor consume more when the transfers are introduced may differ from
the products which the rich consume less when the taxes are introduced.
6. Only statement
d concerns a policy that would not shift the production possibility frontier.
That is because if firms are not using the best available technology, then
production is inside the frontier, because the economy is producing less than
it is currently possible for it to produce. Each other policy would allow the
economy in future to produce more than it is possible for it to produce at
present.
7. Only statement
a concerns an effect that would not occur as a direct result of trade. Trade
does not of itself shift the frontier because it does not of itself give a
country any more resources or allow the country to use its resources more
productively. But trade is likely to encourage the country to shift its pattern
of production to products which it is relatively good at making. Also, by
promoting exports and imports, trade leads to the pattern of products which is
consumed differing from the pattern which is produced. Finally, trade does
allow consumption to be at a point outside the production possibility frontier.
Production, of course, is as always constrained to be at a point on or inside
the frontier, which is why the frontier gets its name.
8. Only statement
b concerns a policy which is not a stabilization policy. Instead, this is a
redistribution policy.
9. Only statement
c is a positive statement which concerns a fact; incidentally, the fact is
true, but this does not affect whether the statement is a positive one. The
other statements are all normative statements about what the person making the
statements believes should happen.
10. Statement b
gives the correct answer because it relates to the best alternative you went
without in order to buy the book.
ECO3
Question 1. The supply and
demand model applies when three of the following four conditions are met. Which
condition is not required?
a) There must
be many buyers.
b) There must be many sellers.
c) The buyers
and sellers must trade an identical item.
d) The item traded must be a product.
Question 2. Which of the
following predictions is not made by the supply and demand model?
a) If there is
excess demand, the price will rise.
b) If there is
excess supply, the price will fall.
c) If there is
no excess demand or excess supply, the market will be in equilibrium.
d) A market
which is out of equilibrium will always move rapidly to the equilibrium,
Question 3. Suppose there
is excess supply in a market and the price decreases. Which of the following
combinations of events will occur?
a) There will
be a fall in quantity supplied and a rise in quantity demanded.
b) There will
be a fall in quantity supplied and a rise in demand.
c) There will
be a fall in supply and a rise in quantity demanded.
d) There will
be a fall in supply and a rise in demand.
Question 4. Suppose there
is a decrease in supply in a market where the supply curve slopes upwards and
the demand curve slopes downwards. Which of the following would not occur?
a) An excess
supply. b) A fall in
price. c) A fall in supply. d) A fall in the equilibrium level of
expenditure.
Question 5. Suppose a
market is in equilibrium, and then the demand increases. Which of the following
would be shown on a graph that illustrated the effects?
a) An excess
demand at the initial equilibrium price.
b) An excess
demand at the new equilibrium price.
c) An excess
supply at the initial equilibrium price.
d) An excess
supply at the new equilibrium price.
Question 6. Suppose there
is an increase in demand in a market where the supply curve slopes upwards and
the demand curve slopes downwards. Which of the following might not occur?
a) An excess
supply. b)
A fall in price.
c) A rise in
the quantity traded. d) A fall
in the equilibrium level of expenditure.
Question 7. Which of the
following might not lead to an increase in the demand for a product that can be
stored?
a) A fall in
the price of a complement.
b) A rise in consumer incomes.
c) An increase
in the number of buyers. d)
An expected rise in price.
Question 8. Which of the
following might not lead to a decrease in the demand for a type of labour?
a) A decrease
in the number of firms using the labour.
b) An increase
in the productivity of the labour.
c) A fall in
the price of a substitute input.
d) A decrease
in the demand for the produce or products which the labour is used to produce.
Question 9
Which of the
following would not lead to a decrease in the supply of a product that can be
stored?
a) An increase in the demand for a joint
product.
b) A rise in
the price of another input.
c) A decrease
in the number of firms supplying the product.
d) An expected
rise in the price of the product.
Question 10
Which of the
following could not lead to an increase in price combined with an increase in
the quantity traded?
a) An increase
in demand combined with unchanged supply.
b) An increase
in demand combined with a decrease in supply.
c) A decrease
in demand combined with an increase in supply.
d) An increase
in demand combined with an increase in supply.
Correct answer:
1.D 2.D
3.A 4.C 5.A
6.D 7.B 8.B
9.A 10.C
EXPLANATION
1. Condition d
is not required. The item traded could be labour, which is used in many
examples in the chapter. It could also be something different, such as a
currency, or shares in a large company.
2. Prediction d
is not made by the model. The model argues that a price which is away from
equilibrium will move towards equilibrium, but the exact reasons and speed of
movement will vary between markets, so the model makes no general claim about
the speed of change.
3. The
combination given in a will occur. This would be shown in a diagram by a move
up the supply curve and a move down the demand curve. Note that the supply and
demand curves will not shift, so there is no change in supply or demand, merely
a change in the quantities supplied and demanded.
4. The event in
statement c would not occur. The excess supply will lead to a fall in price,
and this will lead to a fall in the quantity supplied: but this is shown by a
move along the supply curve. The supply curve itself does not shift, so there
is no change in supply.
5. Statement a
shows what would be shown on a graph. Statement b is incorrect because there
will be no excess demand, or indeed an excess supply, at the new equilibrium
price. Statements c and d are incorrect because there will be no excess supply.
6. The event in
statement d might not occur. If the fall in price is modest and the increase in
quantity traded is substantial, then spending will increase.
7. Event b, a
rise in consumer incomes might not lead to an increase in demand. Instead, if
the product is inferior, there could be a decrease in demand.
8. Event b, an
increase in the productivity of the labour, might not lead to firms wanting
less. The increase in the productivity of the input would allow firms to reduce
the price of their output, and if there was then a large increase in the
quantity demanded, firms might actually want more labour than before.
9. Event a, an
increase in the demand for a joint product, would not lead to firms supplying
less of the product concerned in the question. Instead, they would want to
supply more of the joint product whose demand has increased, and as result
would supply more of the product concerned in the question.
10. The event
in c could not lead to an increase in price because the supply curve shifts
right and the demand curve shifts left.
ECO4
Question 1
A student club
wants to raise just enough income to cover its costs. Its income comes partly
from membership fees and partly from selling tickets for its nightly discos.
Attendance at the discos currently leads to overcrowding of the club's room.
The demand for membership is price inelastic and the demand for discos is price
elastic. To reduce the crowding without changing its total income, what should
the club do?
a) Raise both
the disco ticket price and the membership fee.
b) Lower both
the disco ticket price and the membership fee.
c) Raise the
disco ticket price but lower the membership fee.
d) Lower the
disco ticket price but raise the membership fee.
Question 2
Suppose the
price of a product increases from Rs.12 to Rs.20 and the quantity demanded
falls from 55 a week to 45. What is the PED?
a) 0.4 b) -0.4 c) 2.5 d) -2.5
Question 3
Suppose a
demand curve runs from the price axis to the quantity axis in a straight line.
Whereabouts will PED=-1.0?
a) Where the
curve meets the price axis.
b) Everywhere
along the curve.
c) At the
mid-point of the curve.
d) Nowhere
along the curve.
Question 4
A consumer
product has a PED of -0.12. Which of the following factors would not help to
explain this?
a) There are
few substitutes available.
b) Any
substitutes there are have higher prices.
c) The product
accounts for a small percentage of consumer expenditure.
d) The product
is a normal good.
Question 5
Which of the
following statements is true?
a) When an
economy grows, firms would prefer to be making inferior goods rather than
making normal goods.
b) If a firm
notices that the price of a substitute for its product has fallen, it would
prefer the CED between the products to be far from zero rather than close to
zero.
c) If a firm
notices that the price of a complement for its product has risen, it would
prefer the CED between the products to be far from zero rather than close to
zero.
d) If a firm's
costs increase and it has to increase the price of its output, it would prefer
demand to be price inelastic rather than price elastic.
Question 6
Suppose incomes
double over a period of years. Which sorts of product will experience the
biggest increases in price?
a) Those with a
PES close to 0.0 and an IED well above 0.0.
b) Those with a
PES close to 0.0 and an IED well below 0.0
c) Those with a
PES well above 1.0 and an IED well above 0.0
d) Those with a
PES well above 1.0 and an IED well below 0.0
Question 7
Suppose the
price of a product increases from Rs.50 to Rs.70 and the quantity supplied
rises from 40 a day to 80. What is the PES?
a) 0.5 b) -0.5 c) 2.0 d) -2.0
Question 8
Which of the
following statements is false?
a) PES is
infinity all along any horizontal supply curve.
b) PES is 1.0
all along any supply curve which passes through the origin.
c) PED is zero
all along any vertical demand curve.
d) PED is -1.0
along any demand curve where spending would be the same at each price.
Question 9
A consumer
product has a PES of 0.1. Which of the following factors would not help to
explain this?
a) The
producers are close to full capacity.
b) One or more
of the key intermediate products needed to make the product are themselves
items with an inelastic supply.
c) Consumers
need very little time to respond fully to price changes.
d) One type of
labour used by the producers may be in inelastic supply
Question 10
Which of the
following statements is false?
a) Price
elasticity of demand is negative for most products.
b) Price
elasticity of supply is positive for most products.
c) Income
elasticity of demand is positive for normal goods.
d) Cross
elasticity of demand is positive between complements.
Correct answer: 1.A 2.B
3.C 4.D 5.D
6.A 7.C 8.D
9.C 10.D
EXPLANATION
1. To reduce
the overcrowding, the club must raise the ticket price for its discos. As disco
demand is elastic, its revenue from discos will then fall, so it needs to raise
its revenue from membership fees. As membership demand is inelastic, it should
raise the fee, and then the revenue from membership fees will rise. So a is the
correct answer.
2. The correct
answer is b. The change in quantity is -10 and the average quantity is 50, so
the percentage change is 100(-10/50)100 or -20. The change in price is Rs.8 and
the average price is Rs.16, so the percentage change is 100(8/16) or 50. So the
PED is -20/50 or -0.4.
3. The correct
answer is c. PED varies all along any sloping straight line demand curve. Above
the mid-point, demand is elastic, so the PED is below -1.0; and below the
mid-point demand is inelastic, so the PED is between -1.0 and 0.0. So the PED
equals -1.0 at the mid-point.
4. Factor d
would not help to explain this. A normal good is one where demand decreases if
incomes increase, but this says nothing about the PED.
5. d is true
because if demand is inelastic, then the rise in price will lead to only a
small fall in the quantity sold and to a higher total revenue, whereas if
demand is elastic, then the rise in price will lead to a large fall in the
quantity sold and to a fall in revenue. Note that a is false because, when
incomes grow, demand for normal goods increases but demand for inferior goods
decreases. b and c are false because, if the price of a substitute falls or the
price of a complement rises, then firms would like as little effect on the
demand for their products a possible.
6. The effect
on price depends in part on how much demand increases: the further the IED is
above 0.0, the more demand will increase. The effect on price also depends on
the PES. The more inelastic is the supply, that is the closer the PES is to
0.0, the more the effect will be. So the combination in a is the correct one.
7. The change
in quantity is 40 and the average quantity is 60, so the percentage change is
100(40/60)100 or 67. The change in price is £20 and the average price is £60,
so the percentage change is 100(20/60) or 33. So the PES is 67/33 or 2.0 (answer
c).
8. Statement d
is false. For PES to be 1.0 all along a supply curve, the curve must not only
pass through the origin: it must also be straight.
9. Only factor
c would not help to explain the low PES. This factor concerns the time
consumers need to react to price changes, and that affects the PED of a
product, not its PES.
10. Statement d
is false. If the price of a product increases, then people will demand a lower
quantity of it and, in turn, a lower quantity of any complements they consume
with it. So a positive change in the price of one of the complements leads to a
negative change in the quantity demanded of the other complements. So a CED
between complements is always negative
ECO5
Question 1
Which of the
following is not an argument against government intervention in a market?
a) If the
government reduces output below the free market level, consumer surplus will
fall.
b) If the
government reduces output below the free market level, producer surplus will
fall.
c) If the
government raises output above the free market level, consumers will get no
benefit from the extra units of output.
d) If the
government raises output above the free market level, some units of output will
cost more to produce than the value placed on them by consumers.
Question 2
Which of the
following statements about a price ceiling is false?
a) The number
of buyers who gain from the ceiling is smaller than the original number of
buyers.
b) The ceiling
creates an excess demand.
c) The ceiling
generates losers as well as gainers.
d) To have any
effect, the price ceiling must be set at a higher level than the original
market price.
Question 3
Assuming that
everyone is law-abiding, which of the following would not reduce the quantity
traded in a market?
a) The
imposition of an effective price ceiling.
b) The removal
of an effective price floor.
c) The
imposition of a supply-side quantity control.
d) The
imposition of a demand-side quantity control.
Question 4
Suppose the
government introduces a specific tax of £5 a unit on a product which has
sloping supply and demand curves. Which of the following statements about the
resulting curve S+tax is true?
a) The gap
between S+tax and S will be higher at high quantities than at low quantities.
b) The gap
between S+tax and S will be higher at low quantities than at high quantities.
c) The gap
between S+tax and S will be £5 at each quantity.
d) The gap
between S+tax and S will be whatever is needed to show that the equilibrium
price for consumers increases by £5.
Question 5
On a graph showing
the effects of an ad valorem tax, where do we find the price received by
producers?
a) At the point
on S below the point where S+tax intersects D.
b) At the point
where S intersects D.
c) At the point
where S+tax intersects D.
d) At the
initial price minus the amount of the tax.
Question 6
Which of the
following statements about the incidence of a specific tax is false?
a) The
incidence which falls on consumers plus the incidence which falls on producers
equals the amount of the tax.
b) The
incidence falls more heavily on producers than consumers if the demand curve is
flatter than the supply curve.
c) The
incidence falls more heavily on consumers than producers if the supply curve is
flatter than the demand curve.
d) The
incidence always falls wholly on consumers.
Question 7
Under which of
the following circumstances would the incidence of a specific tax fall wholly
on consumers?
a) Demand is
perfectly elastic.
b) Supply is
perfectly elastic
c) Both demand
and supply have unit elasticity.
d) Under all circumstances.
Question 8
Suppose the CAP
has imposed a tariff on the import of a certain foodstuff from outside the EU,
and suppose that EU consumers always pay a price equal to the rest of the world
price plus the tariff. Which of the following events would not lead to a higher
price for EU consumers?
a) A rise in
the supply of the foodstuff by EU producers.
b) An increase
in the tariff.
c) A rise in
the demand for the foodstuff by non-EU consumers.
d) A fall in
the supply of the foodstuff by non-EU producers.
Question 9
Suppose the CAP
reduces the tariff on imports of a certain foodstuff from outside the EU. Which
of the following statements is false?
a) The quantity
consumed in the EU would increase.
b) The quantity
of imports into the EU would increase.
c) The incomes
of EU farmers would increase.
d) The incomes
of non-EU farmers would increase.
Question 10
Suppose the
government introduces a prohibition on the supply or purchase of some
substance. Assuming that some suppliers and some users ignore the law, which of
the following could not occur?
a) The price
might rise.
b) The price
might stay the same.
c) The price
might fall.
d) There would
be no price because the market would disappear underground.
Correct answer:
1.C 2.D 3.B
4.C 5.A 6.D 7.B
8.A 9.C 10.D
EXPLANATION
1. c is not an
argument against intervention. Consumers would get some benefit from extra
units of output at any output level between the free market level and the level
where the demand curve intersects the price axis.
2. Statement d
is false. To have any effect, the ceiling must be set at a lower level than the
original price.
3. The event in
statement b would not reduce the quantity traded. A price floor, like a price
ceiling, reduces the quantity traded, so its removal would increase the
quantity traded.
4. Statement c
is true. The curve S+tax is parallel to S with a specific tax, and is above S
by the amount of the tax.
5. Statement a
gives the correct place. Notice that this point is therefore important, even
though there is no intersection here. We also look at the same point on a graph
concerned with a specific tax.
6. Statement d
is false. Unless either the supply or demand curve is horizontal or vertical,
the tax always raises the consumer price by less than the amount of the tax, so
that the consumers do not bear the full incidence, and instead producers bear
some of the incidence because the price they receive after the tax has been
paid is less than the price they received initially.
7. The
incidence falls wholly on consumers if supply is perfectly elastic, as in b. In
a, where demand is perfectly elastic, the incidence falls wholly on producers.
In c, where both demand and supply have unit elasticity, the incidence is
shared, but falls more on consumers than producers.
8. Only event a
will not raise the price paid by EU consumers, because a rise in the supply by
EU producers will simply lead to some imports being replaced by more food
produced inside the EU. Event b, an increase in the tariff raises the price directly;
and events c and d lead to a higher price in the rest of the world and so in
turn to a higher price for EU consumers.
9. Statement c
is false. This is because at the lower price which is now paid in the EU, EU
farmers would be willing to sell a lower quantity, as shown by their supply
curve. So with a lower output sold at a lower price, their incomes would fall.
10. The outcome
in statement d could not occur. This is because the fact that the market goes
underground does not mean there is no price in the market. The events in
statements a, b and c could all occur: the actual effect on price depends on
whether the prohibition shifts the demand curve by less than the supply curve,
or by the same amount, or by more.
ECO6
Question 1
Which of the
following statements about the market demand curve for a product is false?
a) The market
demand curve represents the individual demand curves of all consumers added
together.
b) The market
demand curve may shift if there is a change in the behaviour of some households
which consume the product.
c) The market
demand curve may shift if there is change in the price of the product.
d) The market
demand curve may shift if there is a change in the number of consumers who buy
the product.
Question 2
Which of the
following does the principle of diminishing marginal utility say about what
happens when a consumer consumes more of a product?
a) The
consumer's total utility will be unaffected.
b) The
consumer's total utility will diminish.
c) The
consumer's marginal utility will diminish.
d) The
consumer's marginal utility will become negative
Question 3
A consumer
finds that for product A, the price is Rs.5 and the consumer's marginal utility
is 100 utils, while for product B, the price is Rs.10 and the consumer's
marginal utility is 160 utils. Which of the following statements is true?
a) The consumer
is maximizing utility from A and B.
b) The consumer
would gain more utility from A and B by consuming more A and less B.
c) The consumer
would gain more utility from A and B by consuming less A and more B.
d) The consumer
could only gain more utility from A and B by consuming more of both products.
Question 4
Which of the
following factors does not help to explain why most indifference curves between
consumer products slope down to the right and are curved rather than straight?
a) The
principle of diminishing marginal utility.
b) The fact
that both products concerned are regarded as desirable.
c) The fact
that most pairs of products are not perfect substitutes.
d) The fact that
the further an indifference curve is from the origin, the more total utility it
represents.
Question 5
Which of the
following factors does not affect the slope and position of a consumer's budget
line between two products, A and B?
a) The shape
and position of the consumer's indifference curves.
b) The price of
A. c) The price of B. d) The consumer's income.
Question 6
A consumer
plots an indifference map between two products A and B, and marks in points to
show the combinations of A and B that the consumer would buy if the price of A
changed but the price of B remained the same. The consumer then plots a line
through these points. Which of the following is this curve called?
a) A budget
line. b) A demand curve. c) A price consumption curve. d) An indifference curve.
Question 7
A consumer
plots an indifference map between two products A and B, and marks in points to
show the combinations of A and B that the consumer would buy if the prices of A
and B remained the same but the consumer's income increased. Which of the
following statements about this line is false?
a) The line is
called an income consumption curve.
b) The line
will always slope upwards to the right if both products are normal goods.
c) The line
will slope backwards or downwards at income levels where one product is an
inferior good. d) The line
may not pass through the origin.
Question 8
Suppose a
consumer faces a rise in the price of product A while the consumer's income
remains unchanged. Which of the following statements about the income effect is
false?
a) There is no
income effect because the consumer's income is unchanged.
b) Between them
the income and substitution effects cover the entire change in the quantity
that the consumer demands.
c) If the
product is normal, the income effect works in the same direction as the
substitution effect.
d) If the
product is inferior, the income effect works in the opposite direction to the
substitution effect.
Question 9
Suppose we draw
an indifference map diagram to explore the hours of work a worker will choose
to do. Which of the following will not apply to this diagram?
a) The
indifference curves slope downwards to the right because both income and
leisure are desirable.
b) The curves
get flatter to the right because both income and leisure have diminishing
marginal utility.
c) The
indifference curves furthest from the original represent the highest total
utility.
d) An increase
in the wage rate shifts the earnings leisure line, with the new line being parallel
to the initial line.
Question 10
Which of the
following statements about labour supply curves at high wages is true?
a) The supply
curves of individuals may slope backwards, and also the market supply curve for
any given type of labour may well slope backwards.
b) The supply
curves of individuals may slope backwards, but the market supply curve for any
given type of labour is most unlikely to slope backwards.
c) The supply
curves of individuals are most unlikely to slope backwards, but the market
supply curve for any given type of labour may well slope backwards.
d) The supply
curves of individuals are most unlikely to slope backwards, and the market
supply curve for any given type of labour is also most unlikely to slope
backwards.
ANSWERS:
1.C 2.C
3.B 4.D 5.A
6.C 7.D 8.A
9.D 10.
EXPLANATION
1. Statement c
is false. If the price of the product changes, then individual consumers move
to different points on their demand curves, but their demand curves stay put
and so does the market demand curve.
2. As its name
implies, the principle makes the statement given at c.
3. The consumer
could gain more utility by consuming more A and less B, as in b. For example,
if the consumer consumed half a unit less of B, the consumer's total utility
would fall by 80 utils, but the Rs.5 saved would allow the consumer to buy one
more unit of A and gain 100 utils.
4. Factor d
does not help to explain the shape of indifference curves. Admittedly this
factor arises from factor b which does help to explain it: because if one
product was considered undesirable, the curves would not slope down to the
right at all.
5. Factor a has
no effect on the budget line. The shape and position of the consumer's
indifference curves depend entirely on the consumer's preference or tastes.
6. Answer c is
correct: this is the price consumption curve. From it, however, the consumer
could derive the consumer's individual demand curve for A. But this demand
curve would be drawn on a graph with the quantity of A on one axis and the
price of A on the other, whereas the indifference map has the quantity of A on
one axis and the quantity of B on the other.
7. Statement d
is false. The line must pass through the origin, because if the consumer's
income fell to zero, the consumer could not buy any A or any B. The line must
also slope upwards as it leaves the origin and at low income levels both
products must be normal goods. The line will slope backwards or downwards at
higher income levels if one product becomes an inferior good.
8. Statement a
is false. The income effect concerns the way in which a change in price alters
a consumer's decisions by altering the consumer's purchasing power.
9. Statement d
does not apply. If the wage rate increases, the earning leisure line pivots
about the end on the leisure axis.
10. Statement b
is true. Individual labour supply curves may slope backwards at high wages,
because people may then respond to wage rises by working a little less and
taking more leisure. But the market supply curve for any type of labour is
unlikely to slope backwards, because ever higher wages are likely to attract
ever increasing numbers of workers to that type of labour.
ECO7
Question 1
Which of the
following statements about profit maximization is true?
a) It is
something that all firms actually do.
b) It is
something which economists believe that all firms actually do.
c) It is what
economists believe is the most common aim of firms.
d) It means
that no firms ever make losses.
Question 2
Which of these
statements about UK
firms in 2009 is false? (Note: you do not need to learn these facts to
understand any later material, but hopefully you will find them interesting.)
a) More than
99% of firms have fewer than 50 employees.
b) Less than 1%
of firms have 250 or more employees.
c) Between
them, firms with fewer than 50 employees account for under 50% of the total
turnover (that is total sales) of all firms.
d) Between
them, firms with 250 or more employees account for under 50% of the total
turnover of all firms.
Question 3
Which of the
following statements about firms is false?
a) All firms
must pay corporation tax on their profits.
b) Both sole
proprietorships and partnerships have unlimited liability.
c) All
companies have limited liability.
d) Internal
finance arises when a company finances new assets by using past profits.
Question 4
Which of the
following statements about the principal-agent problem is false?
a) It is the
risk that a principal who hires or employs an agent to perform a task may find
that the task is done poorly.
b) It is least
likely to arise in cases where there is asymmetric information.
c) It may be
reduced in the case of a company if its directors are given bonuses that relate
to the company's profits.
d) It may be
reduced in the case of a company if its directors fear their company may be
subject to competition for corporate control.
Question 5
Which of the
following statements about types of market or industry is false?
a) There are
many firms in both perfect competition and monopolistic competition.
b) Costs must
be kept as low as possible in both monopolistic competition and monopoly.
c) There may be
homogeneous products in both perfect competition and oligopoly.
d) There are
barriers to entry in both oligopoly and monopoly.
Question 6
Which of the following
statements about barriers to entry is false?
a) They help to
make a market contestable.
b) They may
include a fear of sunk costs.
c) They may
include a lack of know-how.
d) They may
include the well-known brand names of existing firms.
Question 7
Which of the
following statements about firms in different types of market is false?
a) A perfect
competitor has no influence over the price of its product.
b) A
monopolistic competitor may engage in non-price competition.
c) An
oligopolist may monitor the prices and products of all the other firms in its
market.
d) A monopolist
must be a large firm.
Question 8
Suppose you
give up a job and use some savings to buy a small bus which you drive on a
remote rural route. Which of the following costs of your firm is an explicit
cost?
a) The
depreciation on the bus.
b) The wage of
the job you gave up.
c) The fuel you
buy for the bus.
d) The interest
you earned on your savings before you used them to buy the bus
Question 9
To see whether
a firm is making an economic profit, which of he following should be deducted
from its revenue?
a) Its explicit
costs only.
b) Its explicit
costs plus depreciation.
c) Its implicit
costs only.
d) Its explicit
costs and its implicit costs.
Question 10
Which of the
following statements is false?
a) A five-firm
concentration ratio assesses firms' sizes with reference to the number of
employees, and shows the percentage of total employment in an industry
accounted for by the five firms with the most employees.
b) The firms in
an industry with a high concentration ratio may, nevertheless, find themselves
in a highly competitive environment.
c) Economic
profits in a contestable market attract new entrants.
d) In deciding
whether to produce inputs or buy them, firms take account of transactions
costs.
Correct answer:
1.C 2D 3.A
4.B 5.B 6.A
7.D 8.C 9.D
10.A
EXPLANATION
1. Statement c
is true. There are other economic theories which use other assumptions about
firms' aims. And the fact that a firm seeks to make as much profit as possible
does not mean that it will never make a loss.
2. Statement d
is false. Firms with 250 or more employees accounted for 51% of all turnover in
2009.
3. Statement a
is false. Only companies have to pay corporation tax on their profits.
4. Statement b
is false. The principal-agent problem is most likely to occur in cases where
there is asymmetric information of the form where the agent has more
information than the principal.
5. Statement b
is false. A firm needs to keep costs as low as possible only if there are no
barriers to entry, and while this applies to monopolistic competition, it does
not also apply to monopoly.
6. Statement a
is false. Barriers to entry are factors which reduce the extent to which a
market is contestable, because they make it hard for new firms to enter the
market and compete with existing firms.
7. Statement d
is false. A monopolist may actually be a very small firm. For example, there
may be only one bus firm operating on a remote rural route, and this firm may
be owned by one person who owns and drives one small bus and has no employees
8. Only c, the
fuel for the bus, is an explicit cost, which is a cost where you actually pay
out money.
9. Statement d
is correct - all costs must be deducted. Note that the procedure in c would
indicate the firm's accounting profit.
10. Statement a
is false. Concentration ratios refer to firms' outputs, not the number of their
employees. If you suggested b, note that firms in an industry with a high
concentration ratio may nevertheless face stiff competition from foreign firms.
ECO8
Question 1
Which of the
following statements about short-run and long-run costs is false?
a) A firm might
quote its short-run costs as the costs of producing different output levels
over a period of a month.
b) A firm might
quote its long-run costs as the costs of producing different output levels over
a period of an hour.
c) A firm might
quote both its short-run costs and its long-run costs as the costs of producing
different output levels over a period of a week.
d) Short-run
costs are always lower than long-run costs.
Question 2
Which of the
following statements about a profit-maximizing firm is false?
a) It might set
its daily output at a higher level in the short run than in the long run.
b) It might set
its daily output at a lower level in the short run than in the long run.
c) If it had a
daily output of zero in the short run, it would be sure to have a total cost of
zero.
d) If it had a
daily output of zero in the long run, it would be sure to have a total cost of
zero.
Question 3
Which of the
following statements about a fixed input is true?
a) Its price is
fixed.
b) The quantity
of it that a firm can use in the long run is fixed.
c) The quantity
of it that a firm can use in the short run is fixed.
d) The quantity
of output that the firm can produce with it is fixed.
Question 4
In the
short-run, which of the following always gets smaller as output increases?
a) Average
fixed cost.
b) Average
variable cost.
c) Short-run
average cost.
d) Short-run
marginal cost.
Question 5
Which of the
following statements about graphs of short-run cost curves is false?
a) The AFC at
each output equals the gap between the SAC and AVC curves at that output.
b) The SMC
curve lies above the MVC curve.
c) The MVC
curve intersects the lowest point on the AVC curve.
d) The SMC
curve intersects the lowest point on the SAC curve.
Question 6
Which of the
following is the correct definition of the law of diminishing returns?
a) If extra
units of one variable input are added to a fixed amount of all other inputs,
then sooner or later the marginal returns will get smaller.
b) If extra
units of one variable input are added to a fixed amount of all other inputs,
then the marginal returns will always get smaller.
c) If extra
units of all variable inputs are added to a fixed amount of all fixed inputs,
then the marginal returns will always get smaller.
d) If extra
units of all variable inputs are added to a fixed amount of all fixed inputs,
then sooner or later the marginal returns will get smaller.
Question 7
Which of the
following statements about economies of scale is false?
a) A firm may
have economies of scale, even if it does not have increasing returns to scale.
b) A firm may
initially have economies of scale and later have diseconomies of scale.
c) An industry
where economies of scale are exhausted at an output that is low relative to the
industry output may have many small firms.
d) Throughout
the output range where a firm enjoys economies of scale, its long-run marginal
cost curve, LMC, will slope downwards.
Question 8
Which of the
following statements about a firm's average cost curves is false?
a) Its SAC
curve will stay put if the price of an input that is fixed in the short run
increases.
b) Its SAC
curve will shift upwards it the price of an input that is variable in the short
run increases.
c) Its SAC
curve will generally lie above its LAC curve.
d) Its LAC
curve will shift upwards if new firms enter its industry and there are external
diseconomies of scale.
Question 9
An isoquant
relates the quantity of inputs a firm uses to the quantity of output it can
produce. In drawing an isoquant, which of the following assumptions about the
firm is made?
a) It is a
profit-maximizing firm.
b) It is a
technically efficient firm.
c) It is an
economically efficient firm.
d) It has at
least one fixed input.
Question 10
Suppose a
profit-maximizing firm faces a rise in the wage rate it pays. Which of the
following would definitely stay the same?
a) Its choice
of production method.
b) The expansion
path on which it ends up.
c) Its isocost
lines.
d) Its
production function.
Correct answer:
1.D 2.C 3.C
4.A 5.B 6.A
7.D 8.A 9.B
10.
EXPLANATION
1. Statement d
is false. Short-run costs are the costs to a firm of producing different output
levels up until some future date, before which it will not have time to vary
the quantity it uses of every input, and after which it will have had time to
vary the quantity it uses of every input. Short-run costs will not be lower
than long-run costs, because there is nothing a firm can do in the short run
that it cannot do in the long run. To see why statements a, b, and c are true,
suppose a firm needs two years to vary the quantity of it uses of every input,
so the short-run for this firm lasts two years. This firm might well quote the
short-run and long-run costs of producing any output level per hour, per day,
per week, or per month over the next two years, and these would be its
short-run costs, or after those two years, and these would be its long-run
costs.
2. Statement c
is false. A firm which reduces its output to zero will ideally want no inputs,
but in the short run it will face costs for any inputs whose quantity it cannot
vary in the short run and so cannot reduce to zero.
4. a is correct.
Average fixed cost is defined as total fixed cost divided by output. In the
short run, the quantity of fixed inputs is fixed, so their total cost divided
by output decreases as output increases.
5. Statement b
is false, because the SMC and MVC curves actually coincide. To see why,
remember that MVC shows the change in a firm's total variable cost if its
output changes by one unit, while SMC shows the change in its short-run total
cost if its output changes by one unit. Now, in the short-run, if a firm
changes its output by one unit, it can change the quantity of the variable
inputs it uses but not the quantity of the fixed inputs, so the change in its
total cost equals the change in the cost of its variable inputs.
6. Statement a
is the correct definition of the law. Statement b is false because the returns
may initially increase, for example in cases where extra workers can initially
exploit the possibilities of teamwork. Statement c is false, partly because the
returns may initially increase, and partly because the law of diminishing
marginal returns refers to adding extra amounts of a single variable input.
Statement d is false because the law of diminishing marginal returns refers to
adding extra amounts of a single variable input, but although statement d is a
false definition of the law, and so an incorrect answer to this question, it is
in fact a true statement.
7. Statement d
is false. Throughout the output range where any firm enjoys economies of scale,
its long-run average cost curve, LAC, will slope downwards; but its LMC curve
will start to slope upwards in this range, even while LAC slopes downwards, if
at higher outputs the firm has constant costs or diseconomies of scale.
8. Statement a
is false. A rise in the price of a fixed input increases a firm's total costs,
even though it cannot alter the quantity of this input that it uses in the
short run. As its total cost for each output level increases, the average cost
of each output level increases, so its SAC curve shifts upwards.
9. Statement b is correct. Any point on an
isoquant shows a combination of two inputs that the firm might use. The
quantity of output on that isoquant is the quantity of output that will be
produced if the firm produces that output in a technically efficient way.
10. Statement d
is correct. The production function is its set of isoquants which shows how
much it could produce with each combination of inputs if it was technically
efficient, and the relationship between quantities of inputs and output is not
affected by input prices.
ECO9
Question 1
Which of the
following statements about the market supply curve for a product is false?
a) The market
supply curve represents the individual supply curves of all firms which produce
the product added together.
b) The market
supply curve may shift if there is a change in the behaviour of some firms
which produce the product.
c) The market
supply curve may shift if there is change in the price of the product.
d) The market
supply curve may shift if there is a change in the number of firms which supply
the product.
Question 2
Which of the
following statements about a firm which is a price-taker is false?
a) The firm
will sell its product at the going market price.
b) The demand
curve faced by the firm is downward sloping.
c) The demand
curve faced by the firm is horizontal even though the market demand curve is
downward sloping.
d) The firm
would sell nothing if it set a higher price than the market price.
Question 3
On a graph for
a perfect competitor, which of the following curves coincide?
a) The demand
curve, average revenue curve, and marginal revenue curve.
b) The demand
curve and the average revenue curve, but not the marginal revenue curve.
c) The demand
curve and marginal revenue curve, but not the average revenue curve.
d) The average
revenue curve and the marginal revenue curve, but not the demand curve.
Question 4
A
profit-maximizing perfect competitor is setting an output of 100 per day. Which
of the following statements is false?
a) Its marginal
revenue and marginal cost curves must intersect at an output of 100 per day.
b) If it
increased its output to 101, then its revenue would rise by less than its
costs.
c) If it
decreased its output to 99, then its revenue would fall by more than its costs.
d) It must be
earning the highest total revenue that it could earn.
Question 5
A
profit-maximizing perfect competitor is setting an output of 100 per day and is
making a profit. Which of the following statements is false?
a) Its profit
per unit of output will equal the gap between its AR curve and its SAC curve at
an output of 100 a day.
b) Its average
fixed cost for each unit of output will equal the gap between its SAC and AVC
curves at an output of 100 a day.
c) Its total
revenue will equal its AR at an output of 100 a day multiplied by 100.
d) Its total
cost will equal its AVC at an output of 100 a day multiplied by 100.
Question 6
A perfect
competitor finds that the best it can do if it produces any output is to
produce a daily output of 100 units which it will sell at the market price or
AR of £10, but even then it would then make a loss. Under what circumstances
would it definitely make a smaller loss if it shut down and produced nothing?
a) If, at an
output of 100 a day, its AVC would be above £10.
b) If, at an
output of 100 a day, its AFC would be above £10.
c) If, at an
output of 100 a day, its SAC would be above £10.
d) If, at an
output of 100 a day, its SMC would be above £10.
Question 7
Which part of a
perfect competitor's short-run marginal cost curve, SMC, is also its short-run
supply curve, SS?
a) The whole of
the SMC curve.
b) The whole of
the upward sloping part of the SMC curve
c) The part of
the SMC curve above its intersection with the AVC curve.
d) The part of
the SMC curve above its intersection with the SAC curve.
Question 8
A
profit-maximizing perfect competitor is in short-run equilibrium with an output
of 100 per day. Which of the following events would not cause it to alter its
output in the short-run?
a) A change in
the demand for the product it makes.
b) A change in
the number of other firms in its industry.
c) A change in
the price of a fixed input.
d) A change in
the price of a variable input.
Question 9
A
profit-maximizing perfect competitor faces a price of £10 and is in long-run
equilibrium with an output of 100 per day. At an output of 100, which of the
following will have a value of £10?
a) Only its
LMC.
b) Only its LMC
and its LAC.
c) Only its LMC
and its SMC.
d) Its LMC,
LAC, SMC and SAC.
Question 10
When would a
perfectly competitive industry have a long-run supply curve that slopes
downwards?
a) If the
industry has constant costs.
b) If the
industry has decreasing costs.
c) If the
industry has increasing costs.
d) Never.
ANSWERS:
1.C 2.B 3.A
4.D 5.D 6.A
7.C 8.C 9.D
10.B
EXPLANATION
1. Statement c
is false. If the price of the product changes, then individual producers move
to different points on their supply curves, but their supply curves stay put
and so does the market supply curve.
2. Statement b
is false. A price-taker faces a demand curve which is horizontal at the market
price; this curve shows that the firm would sell nothing at all if it set a
higher price, and would be swamped with orders if it set a lower price.
3. Statement a
is correct. The text shows a firm facing a market price of £440, so its demand
curve is horizontal at this price, and so also are its AR and MR curves.
4. Statement d
is false. The firm could readily raise its revenue by selling more than 100 a
day at the current market price. It will not do so because the extra revenue it
would get would be less than the extra costs that it would incur, so its profit
would fall.
5. Statement d
is false. To find its total cost, we must multiply its SAC at an output of 100
a day by 100.
6. Statement a
is correct. If its AVC is over £10, then AVC is above AR, so its revenue would
not even cover its variable costs; so its loss would be even greater than its
fixed costs. If it instead shut down, it would have no revenue and no variable
costs, so its loss would only equal its fixed costs.
7. Statement c
identifies the SS curve.
8. Event c
would not cause the firm to alter its output. The firm will set its output
where its MR curve intersects its SMC curve. With event c, neither of these
curves shifts: the firm will simply make less profit or start to make a loss.
With events a and b, its MR curve shifts. With event d, its SMC curve shifts;
in turn its SS shifts and so does the market supply curve, so that the price
changes and the firm's MR curve also shifts.
9. Statement d
is correct. This firm faces an AR and an MR of £10. As it is in long-run
equilibrium, its LMC must equal MR, so LMC equals £10. Also, the firm must be
breaking even - otherwise firms would be entering or leaving its industry, so
it would not be in long-run equilibrium - so LAC must equal AR which is £10.
Moreover, a firm which is in long-run equilibrium must also be in short-run
equilibrium, with SMC equal to MR, so SMC also equals £10. And as the firm is
breaking even, SAC must also equal AR which is £10.
10. Statement b
is correct. If the industry has decreasing costs, then the cost curves of the
firms in it shift downwards as the industry expands. This means the lowest
point on each firm's LAC shifts down, so the lowest price at which firms can
break even falls. And this is the price the industry will have in the long-run.
So the industry price gets lower as industry output expands.
ECO 10
Question 1
Which of the
following statements about price-takers is false?
a) They include
monopolistic competitors and monopolists.
b) They can
always raise their prices and still retain some customers.
c) They may set
different prices in the short run and in the long run.
d) We do not
analyse them using diagrams with supply and demand curves.
Question 2
On a graph for
a monopolist or monopolistic competitor, which of the following curves
coincide?
a) The demand
and average revenue curves only.
b) The demand
and marginal revenue curves only.
c) The average
revenue and marginal revenue curves only.
d) The demand,
average revenue and marginal revenue curves.
Question 3
A
profit-maximizing monopolist sets an output of 100 per day and a price of £10.
Which of the following statements is true?
a) The firm's
SMC and MR curves intersect at an output of 100, and the point on its demand
curve at this output is at £10.
b) The firm's
SMC and MR curves intersect at an output of 100, and the point on its MR curve
at this output is at £10.
c) The firm's
SMC and AR curves intersect at an output of 100, and the point on its MR curve
at this output is at £10.
d) The firm's
SMC and AR curves intersect at an output of 100, and the point on its AR curve
at this output is at £10.
this output is at £10.|"
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Question 4
A
profit-maximizing monopolist finds that if it remains open, the best output is
50 a week, but at this output it would make a loss. Under what circumstances
should it shut down?
a) If AR at
this output is below SAC.
b) If AR at
this output is below AVC.
c) If MR at
this output is below SAC.
d) If MR at
this output is below AVC.
Question 5
Which of the
following statements about a profit-maximizing monopolist is false?
a) This firm
might respond to a fall in demand by reducing its output and reducing its
price.
b) This firm
might respond to a fall in demand by reducing its output and increasing its
price.
c) This firm
would respond to a fall in the price of a fixed input by increasing its output
and reducing its price.
d) This firm
would respond to a fall in the price of a variable input by increasing its
output and reducing its price.
Question 6
Suppose a
monopolist discriminates between different groups of customer. Which of the
following statements is false?
a) The best
strategy for the monopolist is to set the highest prices for the types of
customer with the least elastic demand.
b) Some
customers will face a higher price than they would if the firm did not adopt
price discrimination.
c) By having a
relatively low price for some groups of customers, the monopolist is sure to
make less profit than it would without price discrimination.
d) The
monopolist might be able to make more profit by instead discriminating between
different individual customers.
Question 7
Suppose a
profit-maximizing monopolist faces no threats from possible new entrants to its
industry. Which of the following statements about the firm's long-run
equilibrium is false?
a) The firm may
make a profit indefinitely.
b) The firm's
SMC curve and its LMC curve will both intersect its MR curve at its chosen
output.
c) The firm's
SAC curve will intersect its LAC curve at its chosen output.
d) If the firm
suddenly started to worry about the prospect of new entrants, it might decide
to reduce its price.
Question 8
Which of the
following statements about a monopolistic competitor is false?
a) It faces a
downward sloping demand curve.
b) Its demand
curve, and those for its competitors, may all be in different positions.
c) It will
produce at the output where its MR and SMC curves intersect, provided it would
make either a profit or a loss that was less than its total fixed cost.
d) It supply
curve is part of its marginal cost curve.
Question 9
Which of the
following statements about the long-run equilibrium of a profit-maximizing
monopolistic competitor is false?
a) The firm
will just break even.
b) The firm's
SMC curve and its LMC curve will just touch each other at its chosen output.
c) The firm's
SAC curve and its LAC curve will just touch each other at its chosen output.
d) The firms AR
curve and its SAC curve will just touch each other at its chosen output.
Question 10
A student
alleges that there are four differences between monopolistic competitors and
monopolists, as follows. Which of these alleged differences is false?
a) There are
many firms in monopolistic competition and only one in monopoly.
b) The
monopolist may make a profit in the long run whereas the monopolistic
competitor will not.
c) Price
discrimination is less common with monopolists than with monopolistic
competitors.
d) A monopolist
would never react to the imposition of a tax on its product by reducing its
price, but a monopolistic competitor might.
ANSWERS: 1. B 2.A
3.A 4.B 5.C
6.C 7.C 8.D
9.B 10. C
1.Statement b
is false. A monopolist or monopolistic competitor may well be able to raise its
price some way without losing all its customers, but there would no doubt come
a time when its price was so high that it would lose them all. At this price,
the demand and average revenue curve it faces meets the price axis. Regarding
c, note that while the diagrams we use for these firms have demand curves, they
do not include supply curves.
2. a is
correct. The demand and average revenue curves coincide. The MR curve starts at
the same point on the vertical axis, but is otherwise below them.
3. Statement a
is true. The intersection of SMC and MR is always best, unless it results in a
loss that exceeds the firm's total fixed costs, in which case it is better to
shut down and produce nothing. To find the price a price-setter must set, we
always look at the point on its demand curve at the output it wishes to sell
4. Statement b
is correct. If AR is less than AVC, then each unit of output has a revenue
below its variable cost. In turn, total revenue is less than total variable
cost, so the firm's loss would equal the gap between its total revenue and its
total variable cost plus its total fixed cost. If the firm instead shut down
and produced nothing, it would have a zero total revenue, and it would buy no
variable inputs and so have a zero total variable cost. So its loss would only
equal its total fixed cost.
5. Statement c
is false. A change in the price of a fixed input has no effect on a firm's SMC
or MR curves and so has no effect on the best output for it to produce. Note
that statement b is true; if a monopolist faces a sufficiently curved demand
curve, then its best response in the event of a fall in demand might be to
combine a reduction in output with an increase in price.
6. Statement c
is false. Provided some groups of customers are known to have less elastic demand
than others, a profit-maximizing monopolist can always make more profit with
discrimination than without.
7. Statement c
is false. The SAC and LAC curves will touch at this output, but not intersect.
Instead, the SAC curve will be above the LAC curve at both lower outputs and
higher outputs.
8. Statement d is false. Like a monopolist, a
monopolistic competitor faces a downward-sloping demand curve which can change
over time in terms of both its slope and the point where it meets the price
axis. As a result, it might at different times find it best to set the same
price but have different outputs, and because there is no single best output at
each price, we cannot derive a supply curve for it.
9. Statement b is false. Its SMC and LMC curves
will not touch each other at its chosen output, although they will both
intersect its MR curve at its chosen output
10. Statement c
is false. Price discrimination is more associated with monopoly; a monopolist
competitor which discriminated against any group might lose many of the
customers concerned, perhaps all, to competitors.
ECO11
Question 1
Which of the following
statements about industries that are oligopolies is false?
a) Firms in these
industries may attempt to cooperate.
b) Firms in these
industries are interdependent.
c) The fact that there
is more than one firm in an oligopoly means that there are no barriers to
entry.
d) An oligopoly with
two firms is called a duopoly.
Question 2
Which of the following
statements about duopolists in the Cournot model of oligopoly is false?
a) Each firm makes an
assumption about how much the other will produce, and sets its own output at
the level which will maximize its profit if the other firm behaves as assumed.
b) Each firm has a
reaction curve showing its chosen output for different outputs that the other
might set.
c) The equilibrium is
where the reaction curves intersect.
d) If the duopolists
produce homogeneous products, then the equilibrium price will be the same as if
the industry had a monopoly.
Question 3
Which of the following
statements about duopolists in the Bertrand model of oligopoly is false?
a) The model assumes
one firm is a price leader.
b) Each firm makes an
assumption about the price that the other will set, and sets its own price at
the level which will maximize its profit if the other firm behaves as assumed.
c) Each firm has a
reaction curve showings its chosen price for different prices that the other
might set.
d) If the duopolists
produce homogeneous products, then the equilibrium price will be the same as
would arise if the industry was in perfect competition.
Question 4
For which of the
following does the kinked-demand curve theory not offer an explanation
a) Why an
oligopolist's price is what it is.
b) Why an oligopolist
might find that its sales fell greatly if it raised its price.
c) Why an oligopolist
might find that its sales increased little if it cut its price.
d) Why an oligopolist
might not change its price, even if the prices of variable inputs changed.
Question 5
What is the definition
of a Nash equilibrium?
a) A situation where
each player adopts their dominant strategy.
b) A situation where
each player adopts the best strategy for them, given the strategy adopted by
the other.
c) A situation where
the combined payoffs of the players is the maximum possible.
d) The outcome that
will arise in a game.
Question 6 What is the key feature of a prisoners'
dilemma game?
a) A game where
neither player has a dominant strategy.
b) A game where each
player would have a better payoff if each adopted their non-dominant strategy
rather than their dominant strategy.
c) A game where there
is no Nash equilibrium.
d) A game which
applies only to prisoners.
Question 7 Which of the following circumstances makes
it harder for oligopolists to start engaging in cooperation without agreement?
a) If their industry
has very few firms.
b) If entry to their
industry is particularly hard.
c) If the firms
produce strongly differentiated products.
d) If demand and input
prices are fairly stable.
Question 8 Which
of the following statements about cheating on agreements is false?
a) Each firm may
benefit if it alone cheats.
b) If two firms repeat
their game a known number of times, then threats of punishment will not deter
cheating.
c) If two firms repeat
their game an unknown number of times, then threats of punishment may deter
cheating.
d) With a tit-for-tat
strategy, if one firm cheats in one period, the other firm refuses to cooperate
indefinitely.
Question 9 Which of the following statements about price
leadership is false?
a) Price leadership is
a form of tacit collusion.
b) With dominant price
leadership, the leader in an industry is the biggest firm.
c) With barometric
price leadership, the leader may change even if the relative size of each firm
stays the same.
d) Price leadership
breaks down if input prices or demand conditions change.
Question 10 Which of the
following outcomes could not occur in a game with two layers who each have two
available strategies?
a) A game where only
one player has a dominant strategy.
b) A game where
neither player has a dominant strategy.
c) A game where one
player has two dominant strategies.
d) A game where the
combined payoff for the two players is the same with every possible combination
of strategies.
Correct answer:
1.C 2.D 3.A
4.A 5.B 6.B
7.C 8.D 9.D
10.
EXPLANATION
1. Statement c is
false. The fact that there are few firms in an oligopoly implies that there are
barriers to entry.
2. Statement d is
false. The price will be below the price that would arise if the industry had a
monopoly, but above the price that would arise if it instead had perfect
competition.
4. Statement a is
correct; the kinked-demand curve theory does not explain why a firm has its
current price.
5. Statement b is the
definition of a Nash equilibrium.
6. Statement b is the
key feature of a prisoners' dilemma.
7. Statement c is correct. The more different
are the firms' products, the less likely the firms are to have already a
history of already changing their prices and outputs at similar times, and this
makes it harder to start cooperating without agreement.
8. Statement d is
false. With a tit-for-tat strategy, if one firm cheats in one period, then the
other firm will cheat in the next, but the second firm will stop cheating
immediately if the first firm stops cheating.
9. Statement d is
false. With price leadership, the leader reacts to the changes to maximize its
own profit, and the other firms follow its lead.
10. Outcome c could
not occur. To see this, suppose a player has two strategies, X and Y. If X is a
dominant strategy, then the player is better off adopting strategy X than
strategy Y, irrespective of what the opponent does. The player cannot also be
better of playing Y than X, no matter what the opponent does, so if X is a
dominant strategy, then Y cannot also be one.
ECO12
Question 1
Suppose a country uses
its resources in a Pareto-efficient way. Which of the following statements is
true?
a) There might be
inefficiency in production.
b) There might be
inefficiency in consumption.
c) It might be
possible to make one person better off without making another person worse off.
d) There might be
considerable inequality of income among the country's citizens.
Question 2
Which of the following
statements is the correct definition of market failure?
a) It means that a
market economy will fail to secure economic efficiency.
b) It means that a
market economy will fail to secure Pareto-efficiency.
c) It means that a
market economy will fail to secure productive efficiency.
d) It means that a
market economy will fail to secure technical efficiency.
Question 3
Suppose a firm is
economically efficient. The firm uses two inputs, capital and labour, for which
it has the marginal products MPK and MPL and for which it faces the prices PK
and PL. Which of the following statements is false?
a) The firm must be
producing its output at the lowest possible cost.
b) The firm must be
technically efficient.
c) The firm must use
its resources in a way which means that its MPK/MPL equals PK/PL.
d) All firms which use
the same types of capital and labour must face the same prices for them.
Question 4
Which of the following
statements about productive efficiency is true?
X It means that an economy is producing at a
point on its production possibility frontier.
Y It will arise if all firms face the same
prices for any inputs that are used by more than one firm, and if all firms are
economically efficient.
a) Both X and Y b) X only c) Y only d) Neither X nor Y
Question 5
Which of the following
statements about consumption inefficiency is true?
X It could arise even if an economy is
producing at a point on its production possibility frontier.
Y It could arise even if all consumers face
the same prices for each product.
a) Both X and Y b) X only c) Y only d) Neither X nor Y
Question 6
Suppose the firms in a
perfectly competitive industry merge to form a monopoly. Which of the following
would not occur?
a) A rise in total
consumer plus producer surplus. b) A rise in producer
surplus.
c) A deadweight loss.
d) A fall in consumer surplus.
Question 7
Suppose a
profit-making unregulated natural monopoly is brought under the control of
regulator who requires it in future to follow a marginal cost pricing rule.
Which of the following statements is false?
a) The monopoly would
move from making a profit to making a loss.
b) The monopoly would
reduce its output.
c) The monopoly would
now set its output where its MC curve intersects its AR curve.
d) The monopolist's
price would now equal its marginal cost.
Question 8
Suppose the regulator
in question 7 now tells the natural monopoly to follow an average cost pricing
rule rather than a marginal cost pricing rule. Which of the following
statements is true?
a) The monopoly would
move from making a loss to making a profit.
b) The monopoly would
increase its output.
c) The monopoly would
now set its output where its AC curve intersects its AR curve.
d) The monopoly's
price would be below its marginal cost.
Question 9
Suppose at various
times, the regulator of a natural monopoly switches its rules as shown in the
following four statements. Which switch might not result in the firm making a
lower loss or more profit?
a) A switch from a
marginal cost pricing rule to a two-part tariff.
b) A switch from an
average cost pricing rule to rate of return regulation.
c) A switch from rate
of return regulation to revenue cap regulation.
d) A switch from
revenue cap regulation to price cap regulation.
Question 10
Which of the following
statements about competition policy is false?
a) One function of the
UK's
Office of Fair Trading is to try and help consumers.
b) The Competition
Commission may consider firms with large shares of a local market as well as
firms with large shares of the UK
market.
c) The European
Commission is allowed to control state aid to firms in the EU.
d) Deregulation means
ending regulation.
Correct answer:
1.D 2.B 3.D
4.A 5.A 6.A
7.B 8.C 9.C
10.D
EXPLANATION
1. Statement d is
true: there could be considerable inequality. Statements a, b and c are false:
if the use of resources is Pareto-efficient, then there can be no inefficiency
in production or consumption, and it is not possible to make one person better
off without making another person worse off.
2. Statement b is the
correct definition. Note, though, that this failure could arise because of a
failure to secure either production efficiency or consumption efficiency, and a
failure to secure production efficiency could arise because of a failure to
secure economic efficiency and technical efficiency.
3. Statement d is false. This condition is
required for productive efficiency in the economy as a whole, but it is not
required for economic efficiency by individual firms. Statement a is true
because this is the definition of economic efficiency. Statements b and c are
true, because a firm which fails to meet either of these conditions will not be
economically efficient.
4. Answer a is
correct. Regarding statement X, note that productive efficiency means that an
economy cannot produce more of one product without producing less of another.
This applies to all points on its production possibility frontier, but not to
any points inside the frontier; indeed, at any point inside the frontier, the
country would be able to produce more of all products.
5. Answer a is
correct. Even if an economy is producing at a point on its production
possibility frontier, there might be consumption inefficiency, because it might
be possible to move to another point on the frontier and use the changed
pattern of products produced to make at least one consumer better off without
making another worse off. And even if all consumers face the same prices, there
would be consumption inefficiency if some consumers were irrational.
6. Statement a is correct because the total surplus would
not increase. Although the producer surplus would increase, because the
monopolist would raise the price and secure more profit, the total of consumer
plus producer surplus would fall by the deadweight loss from the monopoly.
7. Statement b is
false. The monopoly would initially set its output where its MR curve intersects
its MC curve. Its price would be found on the point on its AR curve above this
intersection, so its price would exceed both MR and MC. With a marginal cost
pricing rule, it must set its price so that it equals MC, so its price would
fall, and in turn its output would rise.
8. Statement c is
true, and as a result the firm will break even rather than make a loss, but it
will not make a profit. Its output would fall and its price would be above
marginal cost, which is what it would have equalled before the switch in rule.
9. The switch in
statement c might not lead to a higher profit: instead, the firm would simply
be told to move from setting prices that allow a certain level of profit to
setting prices that are linked to rises in the retail prices index, and this
might lead to higher or lower profits. In contrast, statement a refers to a
move which would reduce the loss of a firm following a marginal cost pricing
rule, statement b refers to a move that would take a firm from a position where
it had to break even to a position where it was allowed a profit, and statement
d refers to a move that allows larger price rises than before.
10. Statement d is
false. Deregulation means reducing regulation.
ECO13
Question 1
A drunken passenger on
a train sets off the alarm for no good reason, and the train comes to a halt.
There is then a long delay before it sets off again. This delights a small boy
who enjoys the kerfuffle, but it irritates the other passengers and holds up a
freight train behind. Which of the following externalities from consumption has
the passenger not created?
a) An external benefit
to consumers. b) An external cost
to consumers.
c) An external benefit
to producers. d) An external
cost to producers.
Question 2
Suppose both the
production and the consumption of a product generate externalities. At which of
the following outputs would output be at the Pareto-efficient level.
a) Where marginal
private cost equals marginal private benefit.
b) Where marginal
private cost equals marginal social benefit.
c) Where marginal
social cost equals marginal private benefit.
d) Where marginal
social cost equals marginal social benefit.
Question 3
Suppose a large city
has several power stations which all emit CO2. The government wants to reduce CO2
emissions, but knows that it will cost some power stations more than others to
reduce their emissions. In order to secure the most reduction from the stations
which would find it cheapest to cut back, which of the following policies would
be best?
a) A regulation
limiting how much CO2 a power station can emit per megawatt of electricity
generated.
b) A tax on
electricity. c) A tax on
emissions of CO2.
d) Giving power
stations the property right to emit CO2, and relying on people affected to
bribe them to cut back.
Question 4
Return to the city in
the last question. Suppose the government wishes to reduce CO2 emissions but
does not want to measure them. Which of the following policies would be best?
a) A regulation
limiting how much CO2 a power station can emit per megawatt of electricity
generated.
b) A tax on
electricity.
c) A tax on emissions
of CO2.
d) Giving power
stations the property right to emit CO2, and relying on people affected to
bribe them to cut back.
Question 5
Which of the following
statements is true?
a) When Wimbledon's Centre
Court has the legal maximum number of 15,000
spectators, watching a match there is non-rival because so many people are
watching it.
b) A tennis racket is
non-rival, because one person can use it today while another can use it
tomorrow.
c) All motorways are
excludable, because people could be charged tolls for using them.
d) National Health
Service hospitals are non-excludable, because patients are not charged for
using them.
Question 6
Which of the following
statements is true?
1. A common resource is rival and
non-excludable.
2. A public good is non-rival and
non-excludable.
a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2
Question 7
Consider a fishing
ground. Which of the following statements is false?
a) The fish may be
driven to extinction.
b) The efficient yield
may be more than the maximum sustainable yield.
c) More boats may fish
in it than are needed for the maximum sustainable yield.
d) Fewer boats may
fish in it than are needed for the maximum sustainable yield.
Question 8
Which of the following
problems may be caused by asymmetric information?
1. It may lead to an adverse selection of used
cars being offered for sale.
2. It may lead to an adverse selection of
borrowers applying for loans at a bank.
3. It may lead to an adverse selection of
drivers applying for comprehensive car insurance.
a) 1 and 2 and 3 b) 1 and 2 only c) 1 and 3 only d) 2 and 3 only
Question 9
Which of the following
statements is false?
a) Investing in
pension schemes may be regarded as a merit good because many people
underestimate the need to save for retirement.
b) Controlled
substances may be seen as demerit goods because people may become addicted to
them, despite the damage to their health.
c) If healthcare was
provided by private suppliers, and people financed it by taking out private
insurance, then unhealthy people might end up facing the highest premiums.
d) It is fair for
students to meet the full cost of higher education, because they get all the
benefits.
Question 10
Which of the following
statements is false?
a) The median voter
theorem states that competing parties select their policies on any issue to
meet the preferences of the median voter on that issue.
b) It is rational for
voters to be ignorant.
c) Bureaucrats may
push for government spending at levels above the efficient level.
d) Rent-seekers may
push for government spending at levels below the efficient level
Correct answer:
1.C 2.D 3.C
4.B 5.C 6.A
7.B 8.A 9.D
10.D
EXPLANATION
1. C is correct: there
are no producers who now need to use fewer inputs than before to produce their
current output. But some producers, notably those running the freight train,
face extra costs because they need to employ more hours of labour to get the
train to its destination.
2. D is the correct
answer. This is because the efficient level is where the total extra benefit
from an extra unit, that is the marginal private benefit plus the marginal
external benefit, just equals the total extra cost from the extra unit, that is
the marginal private cost plus the marginal external cost.
3. Policy c would be
best. Policies a and b would not discriminate between power stations where the
cost of reducing pollution would be high and those where it would be low.
Policy d would not work here, because it would be hard for individuals to know
how much they were affected by each station, and hard to coordinate any actions
they took.
4. Policy b is best.
All the others would require some measurement of CO2 emissions.
5. C is true: a
product is excludable if it is technically possible to exclude people, and this
applies to all motorways. It also applies to National Health Service hospitals,
so it is false to say they are non-excludable, simply because the government
chooses not to charge people. Regarding a, if Wimbledon's
Centre court is full, watching the match is rival because no-one else can come
and watch it at the same time as the 15,000 people who are there. Regarding b,
the tennis racket is rival, because when one person is using it, no one else
can use it at the same time.
6. A is correct
because both definitions are true.
7. Statement b is
false. The efficient yield is always less than the maximum sustainable yield.
8. A is correct: all
three types of problem may arise. People whose cars are lemons are most likely
to offers them for sale, people who are risky borrowers may try to borrow the
most, and people who are careless drivers may want the most cover.
9. Statement d is
false, because other people also benefit from living in a society where many
people have been educated to a high level.
10. Statement d is false: rent-seekers, like
bureaucrats, are likely to push for excessive government spending.
ECO14
Question 1
Which of the following
statements about the market demand curve for labour in a competitive labour
market is false?
a) The market demand
curve represents the individual demand curves of all firms which hire this type
of labour added together.
b) The market demand
curve may shift if there is a change in the behaviour of some firms which hire
this type of labour.
c) The market demand
curve may shift if there is change in the wage rate for this type of labour.
d) The market demand
curve may shift if there is a change in the number of firms which hire this
type of labour.
Question 2
Which of these two
assumptions must be made if a firm's demand curve for a given type of labour is
to be the same as its MRP curve for that labour?
X No matter what the wage rate is, and no
matter how many workers the firm hires, it will always use the same quantity of
other inputs.
Y No matter what the wage rate is, other
firms will always hire the same number of workers.
a) Both X and Y. b) X only. c) Y only. d) Neither X nor Y.
Question 3
Which of the following
statements about a firm's demand for labour is false?
a) Its demand for
labour is a derived demand.
b) Its demand for
labour depends on the marginal revenue product of the labour concerned.
c) If the prices of
other inputs that are used along with the labour increase, the firm would be
sure to demand less labour.
d) If labour became
more productive, the firm would be sure to demand less labour.
Question 4
Two workers, X and Y,
are roofers working on the same wage for the same firm. X earns more economic
rent than Y. Which of the following statements is false?
a) X has lower
transfer earnings than Y.
b) Because Y is
earning some economic rent, the firm which hires Y could reduce the wage and Y
would continue to work for that firm.
c) If the wage for
roofers generally fell enough to persuade Y to take up another occupation, X
might continue to be a roofer.
d) If we add up X's
economic rent and transfer earnings, we would get the same figure we would get
if we add up Y's economic rent and transfer earnings.
Question 5
Which type of workers
is most likely to enjoy substantial economic rent?
a) Those with high wages
which compensate them for unpleasant aspects of their jobs.
b) Those with high
wages which result from them possessing the innate ability to develop some
skill to a very high level
c) Those with low
wages which can be paid because their jobs have other very pleasant aspects.
d) Those with low
wages which result from no need to have a period of training.
Question 6
Suppose one type of
labour is hired by only one employer. Which of the following statements is
false?
a) The employer is
called a monopsonist.
b) The employer faces
an upward sloping supply curve for labour, which is also the average cost of
labour, ACL.
c) The employer hires
more labour so long as the MP of that labour exceeds the marginal cost of that
labour, MCL.
d) The wage paid
equals the MP of the labour hired.
Question 7
Which of the following
statements about minimum wages is false?
a) In a competitive
labour market, a minimum wage creates a kinked supply curve.
b) In a competitive
labour market where a minimum wage has already increased the wage, a rise in
the minimum wage always reduces the quantity of labour that is demanded.
c) In a monopsonistic
labour market, a minimum wage creates a two-part MCL curve.
d) In a monopsonistic
labour market where a minimum wage has alreadt increased the wage, a rise in
the minimum wage always reduces the quantity of labour that is demanded.
Question 8
Which of the following
statements about trade unions is false?
a) They have many
roles in addition to negotiating wages.
b) If they negotiate a
higher wage in a competitive labour market, they will result in employers
wanting to hire less labour.
c) If they negotiate a
higher wage with a monopsonistic employer, they will always make the employer
want less labour.
d) They may attempt to
alter the demand curve for labour.
Question 9
Which of the following
statements about efficiency wages is false?
a) Efficiency wages
are paid only to discourage shirking.
b) Efficiency wages
discourage shirking because they create an excess supply of labour, so a
shirking worker who was dismissed might face a lengthy period of unemployment.
c) The no shirking
constraint curve shows the number of non-shirkers who could be hired at each
wage.
d) The efficiency wage
is above the market wage.
Question 10
Which of the following
statements about discrimination in labour markets is false?
a) It is always
illegal for employers in the UK
to discriminate on race or gender.
b) Employers are most
likely to discriminate against applicants from particular groups if the wage is
held above the market wage, for example because of a minimum wage law.
c) It is irrational
for a profit-maximizing firm to pay different wages to different genders for
the same work, unless they or their clients believe one gender performs better
than the other.
d) Females earn less
on average than males, partly because within each occupation, males hold a
disproportionate share of the better paid jobs, and partly because women tend
more often to work in low paid occupations.
Correct answer:
1.C 2.A 3.D
4.B 5.B
6.D 7.D 8.C
9.A 10.A
EXPLANATION
1. Statement c is
false. If the wage rate changes, then individual firms move to different points
on their demand curves, but their demand curves stay put and so does the market
demand curve.
2. Statement a is
correct: both assumptions are needed. Unless both these assumptions are made,
the firm's MRP curve will actually shift whenever the wage rate changes. For
example, if a fall in the wage causes the firm to use more of other inputs,
then the MP of labour will increase and this will shift its MRP curve upwards.
Also, if a fall in the wage rate causes other firms to hire more labour and so
produce more output, then the price of the output will fall, and this will
shift the firm's MRP curve downwards.
3. Statement d is
false. Suppose new technology arrives which increases the productivity of all
workers in the industry. This will increase the MP of labour for each firm. But
it will also increase the output of the industry, so the price of the output
will fall, and in turn the MR that each firm gets from selling an extra unit of
output will fall. If the rise in MP is smaller than the fall in MR, then the
firm's MRP from the labour will decrease and in turn its demand for labour will
indeed decrease. But this is not the only possible outcome, because if the rise
in MP is greater than the fall in MR, then the firm's MRP from labour will
increase, and in turn its demand for labour will actually increase.
4. Statement b is
false. If the firm reduced Y's wage, Y would no doubt move to another firm.
5. Statement b is
correct. It might need a big drop in the wage before these people gave up that
occupation and moved to one where their innate ability was not needed. In
contrast, workers in parts a, c and d might all switch occupation even if there
was only a small fall in the wage.
6. Statement d is
false. Although the monopsonist hires labour at the point where its MRP curve
intersects its MCL curve, the wage paid is found from the point on ACL below
this intersection.
7. Statement d is
false. If the minimum wage is raised up to the point where the firm's MRP curve
intersects its initial ACL curve, the firm will actually hire more workers as
well as paying a higher wage.
8. Statement c is
false. If a union can raise the wage up to the point where the firm's MRP curve
intersects its initial ACL curve, the firm will actually hire more workers as
well as paying a higher wage.
9. Statement a is
false. For employers may also pay efficiency wages to secure more applicants for
vacancies and so have a wider selection of people from whom they can choose.
Also in some countries, employers pay efficiency wages to enable workers to
afford a nutritionally adequate diet.
10. Statement a is
false. Discrimination is occasionally legal. For example, race and gender
discrimination is legal for acting and modelling. Race discrimination is legal
for serving food or drink, if necessary to authenticity. And gender
discrimination is legal for jobs where an employee might otherwise have a close
or physical contact with someone of the opposite sex.
ECO15
Question 1
Which of the following
decisions would a carpet maker not analyse using marginal product analysis?
a) Whether to buy a
new loom during the next three months.
b) How much labour to hire
over the next three months.
c) How much wool to
buy over the next three months.
d) Whether to hire an
extra warehouse for the next three months.
Question 2
Which of the following
statements about people who rent out land for animals to graze on is true?
a) The whole income of
these people is economic rent because land as a whole is in perfectly inelastic
supply.
b) The whole income of
these people is transfer earnings, because if the rent was any lower they would
not bother to rent out their land.
c) The income of these
people is divided between economic rent and transfer earnings, and some people
have higher transfer earnings and lower economic rent than others.
d) The income of these
people is divided between economic rent and transfer earnings, and the
proportion of this income which is economic rent is the same for all of them.
Question 3
Suppose the discount
rate is 10% per year. Which of the following statements is true?
a) The future value of
£1,000 in three years' time is £1,300.
b) The present value
of £1,300 in three years' time is £1,000.
c) The future value of
£1,331 in three years' time is £1,000.
d) The present value
of £1,331 in three years' time is £1,000.
Question 4
Suppose a firm is
considering the purchase of a machine. The machine costs £10,000 and has an
expected stream of future returns which, at the current risk-free interest
rate, have a present value of £10,500. Which of the following statements is
false?
a) The future returns
are the extra revenue the firm will get from owning the machine.
b) The net present
value of the machine is £500.
c) The firm might not
buy the machine now simply because of the risk involved.
d) If the firm does
not buy the machine now, but redoes the calculations in three months, it might
find the net present value has increased.
Question 5
Which of the following
statements about investment appraisal is false?
a) If prices rise at a
rate faster than the nominal interest rate, then real interest is negative.
b) If the risk-free
interest rate rises, the projects whose net present values are most affected
are those with short lives.
c) The internal rate
of return on a project is the discount rate which would make its net present
value zero.
d) The internal rate
of return on a project is a percentage measure of its expected returns.
Question 6
Suppose someone owns a
mineral resource and suppose the interest rate is currently 5%. Under which of
the following circumstances would the owner definitely prefer to extract it now
rather than in one year's time?
a) If the expected
price next year exceeds the extraction cost by any amount.
b) If the expected
price next year exceeds the extraction cost but by less than 5%.
c) If the expected
price next year exceeds the extraction cost but by exactly 5%.
d) If the expected
price next year exceeds the extraction cost but by more than 5%.
Question 7
Suppose the interest
rate is 5%. Which of the following statements would explain why the owners of a
mineral resource will extract some this year but not all?
a) They expect the
price next year, minus the extraction cost, to equal the figure for this year.
b) They expect the
price next year, minus the extraction cost, to exceed the figure for this year
by less than 5%.
c) They expect the
price next year, minus the extraction cost, to exceed the figure for this year
by exactly 5%.
d) They expect the
price next year, minus the extraction cost, to exceed the figure for this year
by more than 5%.
Question 8
Which of the following
statements about the future price of a mineral resource is false?
a) The owners expect
the price minus extraction costs to rise each year at the same rate as the rate
of interest.
b) The owners expect
the price to rise over time until it reaches the choke price.
c) The owners expect
the choke price to be reached when the mineral resource is exhausted.
d) In practice, the
price may not rise steadily over time, but it will always rise.
Question 9
Which of the following
should someone not allow for when assessing the costs of continuing full-time
education beyond the school leaving age?
a) The income foregone
while undertaking the education.
b) The value of any
extra enjoyment obtained from education beyond that which would be obtained
from working.
c) The fact that
undertaking further education signals to employers that they are hard-working
ad ambitious.
d) Any scholarships or
grants.
Question 10
What does UK
evidence suggest about the returns from taking an economics degree?
a) It raises earnings
more than most degrees.
b) It raises earnings
by about the average amount for all degrees.
c) It raises earnings
by less than most degrees.
d) It has no
significant effect on earnings.
ANSWERS: 1.
A 2.C
3.D 4.A 5.B
6.B 7.C 8.D
9.C 10.A
EXPLANATION
1.Statement
a is correct because the firm would not use marginal product analysis to decide
whether to buy a new loom. The loom could have a life of many years, and the
analysis would need to look ahead over that lengthy period.
2. the income of the land owners is divided
between economic rent and transfer earnings. People who would not let out their
land for grazing unless the rent was nearly as high as it is have high transfer
earnings and low economic rent. People who would let out their land for grazing
for a rent that is well below the market rent have high economic rent and low
transfer earnings.
3. The present value of £1,331 in three years'
time is £1331/(1+0.10)3 which is £1331/(1.1)3 or £1331/1.331, that is £1,000.
4. The returns are the extra revenue minus any
extra expenditure on inputs such as labour and intermediate products. With
statement d, note that the firm might find the net present value has risen if
it redoes the calculations in three months: for example, the cost of the
machine may fall, or its expected returns may increase because of an increase
in the demand for the product which it will make, or the risk-free interest may
decrease, and so raise the present values of the same returns.
5. The net present
values of projects with long lives are most sensitive to changes in the
discount rate. This is because the present value of distant returns may be
extremely low if the discount rate is high.
6.To see this, suppose
the price minus the extraction costs is currently £1,000 a tonne. Then, if the
mineral is extracted now, the revenue minus the extraction cost of £1,000 could
be lent at 5% to be worth £1,050 in one year's time. Suppose instead the
mineral is extracted next year, and the price minus the extraction cost is less
than 5% above the present value of £1,000; say it is 3% higher at £1,030. Then
the owner would get only £1,030 next year by extracting the mineral next year.
It would be better to extract it now, with the possibility of having £1,050
next year.
7. because in this
situation the owners will be indifferent between leaving the mineral in the
ground now and extracting it. If a or b applied, and the expected price minus
the extraction was less than 5% above this year's figure, it would be best to
extract all the mineral now. If d applied, and the expected price minus the
extraction was more than 5% above this year's figure, it would be best to
extract no mineral now.
8. At the start of each year, the owners expect
the price to rise. But it may fall for many reasons. For example, new deposits
may be found, the interest rate may rise, and demand for the mineral may fall.
9.c gives the factor
which should not be allowed. Signalling to employers is a benefit of education,
not part of its cost.
ECO16
Question 1
When statisticians discuss the distribution of income, which of the following
figures do they look at?
a) The incomes of different individuals.
b) The incomes of different households.
c) The incomes each household would need to maintain its present living
standard if it comprised just one adult.
d) The incomes each household would need to maintain its present living
standard if it comprised just a married or cohabiting couple.
Question 2
Which of the following definitions of a household's income is false?
a) Its original income is its income from earnings, investments and pensions
other than State Pensions.
b) Its gross income adds in transfers from the government.
c) Its disposable income deducts taxes paid directly to the government.
d) Its post-tax income deducts other taxes and adds in the value of
government services received free of charge.
Question 3
Which of the following statements about income inequality is false?
a) Gross incomes are less unequal than original incomes.
b) Final incomes are less unequal than disposable incomes.
c) A curve which plots a cumulative percentage of income against a
cumulative percentage of households is called a Lorenz curve.
d) If we compare the distribution of two incomes, the one with the lower
Gini coefficient is the more unequal.
Question 4
Which of the following might help to make the distribution of original
incomes more unequal?
a) A rise in the State Pension.
b) A ceiling on the number of hours that people were allowed to work each
week.
c) A policy to encourage more low income households to buy shares in
companies.
d) An effective policy to reduce bankers' bonuses.
Question 5
Which of the following might help to make original incomes less unequal?
a) People living longer.
b) A rise in the demand for unskilled labour.
c) Lower occupational pensions in many jobs.
d) A rise in unemployment.
Question 6
Many rich people support government policies for redistribution. Which of
the following would not help to explain why they do so?
a) Rich people may be altruistic.
b) Rich people may fear that one day in the future they may be poor themselves.
c) Rich people may feel redistribution should be left to voluntary
donations
d) Rich people regard redistribution as a public good.
Question 7
Which of the following statements is false?
a) Utilitarians believe the government should aim to maximize total
utility.
b) Followers of Rawls believe the government should aim to make the person
with the lowest original income as well off as possible.
c) With each tax, the higher the rate, the larger the revenue.
d) A government which pursued complete equality of final incomes might
leave everyone on very low incomes.
Question 8
Which of the following statements about approaches to poverty is false?
a) On every approach, a doubling of the incomes of all households would
reduce the number of people in poverty.
b) A problem with the absolute approach to poverty is deciding what items
to put on the list.
c) A problem with the relative approach to poverty is deciding what
percentage of average incomes to use.
d) A problem with hybrid approaches to poverty is deciding exactly what to
include.
Question 9
Suppose a UK
newspaper headline reads 'government figures show that more children are in
poverty than was the case ten years ago'. What can we be sure of from this?
a) More children are in households which find it harder to survive than was
the case ten years ago.
b) Many children are in households whose incomes are lower than they were
ten years ago.
c) The incomes of poorer families have risen less over the last ten years
than the incomes of average families.
d) The very poorest households are poorer than they were ten years ago.
Question 10
Which of the following does not cause problems for the government in its
efforts to reduce poverty?
a) The fact that means-tested transfers may create an unemployment trap.
b) The fact that housing is covered by separate benefits.
c) The fact that some people may become benefit-reliant.
d) The fact that some people do not claim benefits to which they are
entitled.
Correct answer: 1.D 2.D 3.D 4.A 5.
B 6.C
7.C 8.A 9.C 10.B
EXPLANATION
2.Statement d is false. The household's post-tax income does deduct other
taxes, but it does not include the value of government services; the income
which includes the value of these is the household's final income.
3.The more unequal is a distribution, the higher is the Gini coefficient.
4.People might respond to this policy by saving less for retirement, and so
have lower original incomes in retirement.
5.Statement b is correct. This would raise the wages of unskilled people, and
as their wags are relatively low, this would make original incomes less
unequal.
7.Statement c is false. It is likely that each tax has a Laffer curve,
showing that as the rate approaches 100%, its yield approaches zero because
fewer and fewer people would both to undertake whatever was being taxed.
8. On the relative approach, a doubling of everyone's income would not help
the relative position of poor households at all, so this approach would say
that the number of households in poverty is the same as before.
9.UK
figures define poverty as having an income under 60% of the median household,
so the number of children in poverty will rise if the incomes of poor families
rise less than the incomes of average families. But even if the number of
children in poverty rises, the incomes of their households may actually have
increased.
10.Statement b does not make things more difficult for the government. In
fact, housing is treated separately so that more help can be concentrated on
people in areas where housing is relatively expensive, to try and raise their
living standards to the same level as people in areas where housing is
relatively cheap.
ECO18
Question 1
Suppose that, over time, the share of manufacturing
industry in a country's GDP falls. Which of the following statements is true?
1. The quantity of the goods and services produced by
manufacturing industry must be falling.
2. The value of the goods and services produced by
manufacturing industry must be falling.
a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2
Question 2
Which of the following statements is true?
1. Total welfare is affected by many factors including
economic welfare.
2. Economic welfare refers to living standards.
a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2
Question 3
Suppose that over the course of a decade an economy had a
stable population and real GNDI increased by 20%. However, an economist
estimates that economic welfare increased by less than 20%. Which of the
following would not be a factor that could help to explain this?
a) Household production (excluding owner-occupied
property) increased by less than 20%.
b) Output by the underground economy increased by less
than 20%.
c) Leisure time increased by less than 20%.
d) Prices increased by more than 20%.
Correct answer: 1. D 2.A 3.D
EXPLANATION
1.Statement d is correct. If the share of manufacturing
industry in GDP falls, all we can deduce is that its value added accounts for a
smaller proportion of total value added. It is quite possible that the quantity
of goods and services produced by manufacturing industry has increased, and
quite possible that the value added by manufacturing industry has increased.
2.Statement a is correct as both of the statements in the
question are true.
3. Statement d is correct, because rising prices would
not explain why living standards increased by less than the increase in real
GNDI. It is true that prices increased, but this increase has already been
allowed for, because it is figures for real GNDI, not nominal GNDI, that
increased by 20%
ECO19
Question 1
Which of the following must always be equal?
a) Actual saving and actual investment in a two-sector
economy
b) Planned saving and planned investment in a two-sector
economy
c) Actual saving and actual investment in a four-sector
economy
d) Planned saving and planned investment in a four-sector
economy
Question 2
Which of the following statements is correct in the case
of a four-sector economy?
a) G equals all planned government spending.
b) I equals planned spending on new capital goods.
c) T equals all planned receipts from taxes.
d) C is less than disposable income minus planned saving.
Question 3
Suppose that one month, injections in a four-sector
economy are greater than withdrawals. Which of the following statements is
false?
a) Planned spending will be greater than output.
b) Actual investment will be less than planned
investment.
c) Planned investment must exceed planned saving.
d) Output is likely to be increased.
Question 4
Suppose we draw the consumption function for a two-sector
economy, with disposable income, YDIS, on the horizontal axis and planned
consumption, C, on the vertical axis. Suppose we also add a 45° line through
the origin, and find that the consumption function intersects this at a YDIS
equal to £1,000 billion a year. Which of the following statements is false?
a) The slope of the consumption function at any level of
YDIS shows the value of MPCDIS at that level of YDIS.
b) If YDIS in the economy was £1,000 billion a year,
planned consumer spending would also equal £1,000 billion a year.
c) If YDIS in the economy was less than £1,000 billion a
year, planned saving would be negative.
d) The consumption function must be a straight line.
Question 5
Which of the following factors might cause a country's
consumption function to shift upwards?
a) A fall in share prices.
b) A fall in interest rates.
c) Expectations that the economy will soon go into a
recession.
d) Households deciding to be thriftier.
Question 6
Consider a two-sector economy. Output has settled in
equilibrium at the level where the injections line, J, intersects the
withdrawals line, W. Which of the following statements is false?
a) An increase in autonomous consumption will shift W
downwards.
b) An increase in induced consumption would make the W
line flatter.
c) An increase in injections will shift the J line
upwards.
d) If either line shifts upwards, the equilibrium level
of output will increase.
Question 7
In a four-sector economy, which of the following is
assumed always to increase when GDP increases?
a) I b)
G c) M d) X
Question 8
In a four-sector economy, which of the following would
not cause a change in MPEy?
a) An increase in exports.
b) An increase in the fraction of their income which
people spend on imports.
c) An increase in tax rates.
d) An increase in thriftiness by households.
Question 9
Suppose the government increases the tax on tobacco
products, and suppose the demand for these products is inelastic. How should
this be analyzed on the multiplier model? Which of the following statements is
true?
a) The planned expenditure line will shift upwards,
because people will pay more in the shops on tobacco products.
b) The planned expenditure line will shift downwards,
because people will buy fewer cigarettes, so their spending on tobacco after
allowing for the tax will be lower.
c) The withdrawals line will end up shifting downwards,
because the rise in the tax will cause people to save less.
d) The injections line will shift downwards, because this
includes all government spending net of taxes.
Question 10
Which of the following statements about multipliers is
false?
a) The multiplier in a four-sector economy equals
1/(1-MPEY).
b) The multiplier in a four sector economy equals
1/(MPSY).
c) The size of the multiplier increases if the W line
becomes flatter.
d) The balanced budget multiplier means that if the
government increases its taxes and purchases by the same amount, output might
still increase.
Correct answer: 1.A. 2.D 3.C 4.D
5.B 6.D 7.C
8.A 9.B 10.B
EXPLANATION
1.Statement a is correct. Statement b is incorrect
because planned saving and planned investment may not equal actual saving and
actual investment. Statements c and d are incorrect because there are other
components of injections and withdrawals in a four-sector economy.
2.Statement d is correct: C is regarded as consumer
spending at factor cost, so to find it we must also deduct taxes on expenditure
net of subsidies. Note that a is false because G only covers planned government
purchases: it excludes transfers and subsidies; b is false because I also
includes planned increases in stocks or inventories; and c is false because T
concerns taxes net of transfers and subsidies.
3.Statement c is false. Even if I is less than S,
injections, that is I+G+X, could exceed withdrawals, that is S+T+M, provided
G+X was sufficiently higher than T+M.
4.Statement d is false. The consumption function need not
be straight; typically, economists expect it to flatten slightly towards the
right, because they expect the marginal propensity to consume to get smaller
when incomes increase.
5.Statement b is correct. If interest rates fall,
households might decide saving was less rewarding and so save less and consume
more. Households might also be more willing to borrow to finance some of their
purchases.
6. Statement d is false. It is true that if J shifts
upwards, then the equilibrium output will increase; but if W shifts upwards,
the equilibrium output will decrease.
7.Statement c is correct. The model assumes imports
increase when output and incomes increase.
8.Statement a is correct: a change in exports would not
alter induced expenditure, but would simply shift the planned spending line and
the injections line upwards parallel to the original lines.
9.Statement b is correct. Planned expenditure, E, equals
C+I+G+XM where C is consumers' expenditure at factor cost, that is after
deducting taxes on expenditure. So while people may pay more in the shops,
which is a rise in spending at market prices, they will actually buy fewer
cigarettes and so spend less after allowing for the tax.
10.Statement b is false. This formula applies only in a
two-sector economy.
ECO20
Question 1
Which of the following
statements is false?
a) People can
undertake exchange without using money.
b) The only function
of money is to be a medium of exchange.
c) One problem with
coins that included valuable metals was that rulers might replace them with
debased coins and so cause inflation.
d) From 1719-1931 it
was generally possible to exchange Bank of England notes for gold at a stable
rate.
Question 2
Which of the following
would cause a bank to lose reserves?
a) One of the bank’s
depositors makes an internet payment to another of its depositors.
b) One of the bank's
depositors pays out a cheque to another of its depositors.
c) One of the bank's
depositors pays out a cheque to a depositor of another bank.
d) The bank raises the
interest rate it pays on deposits.
Question 3
Which of the following
statements about money creation by banks is false?
a) A bank creates
money when it writes a higher number against the deposit of a depositor who
wants an advance.
b) A bank creates
money when it buys securities.
c) Unless the
authorities intervened, there is no limit to how much money banks would be
willing to create.
d) The increase in
deposits that can occur when banks get £1 million extra reserves is greater
than £1 million.
Question 4
Suppose banks desire a
ratio of reserves to deposits, r, of 4%. And suppose the public desire a ratio
of cash to deposits, d, of 2%. Which of the following is correct?
1. The bank deposit
multiplier is 25.
2. The money
multiplier is 17.
a) Both 1 and 2. b) 1 only. c) 2 only. d) Neither 1 nor 2.
Question 5
Which of the following
statements about the liabilities of UK commercial banks is false?
a) Sight deposits can
be withdrawn on demand without penalty.
b) No deposits can be
bought and sold.
c) With repos, people
who pay money to a bank are given securities rather than a normal type of
deposit.
d) Capital includes
money put up by the banks' shareholders and money from past profits.
Question 6
Which of the following
statements about the assets of commercial banks in the UK bank is false?
a) A bank's reserves
are all held as cash in its branches.
b) Market loans
include between one bank and another
c) Securities include
bills, bonds, and equities.
d) Over half the
assets are denominated in currencies other than sterling.
Question 7
Which of the following
statements is false?
a) Financial
intermediaries offer risk transformation and maturity transformation.
b) The Bank of England
may act as a lender of last resort.
c) A bank can increase
its capital adequacy ratio by switching some funds from advances to buying more
company shares.
d) A bank can increase
its capital adequacy ratio by selling some company shares and lending the
proceeds as mortgages.
Question 8
Which of the following
would not shift the money demand curve to the right?
a) A move which means
that all workers who were in the past paid weekly will in future be paid
monthly.
b) A rise in incomes. c) A rise in wealth. d) A fall in the interest rate.
Question 9
Which of the following
methods of intervention in the money market has not been used in the UK
since the 1980s?
a) Monetary base
control.
b) Interest rate
control.
c) A change in the
regulations about banks' reserve ratios.
d) Monetary base
control.
Question 10
Suppose the Bank of
England reduces Bank Rate. Which of the following statements is false?
a) The Bank will be
able to ensure that the money market ends up with whatever interest rate and
money stock it wishes.
b) The money supply
curve will shift right.
c) The interest rate
on market loans within the UK
will decrease.
d) Banks will be
willing to lend to riskier customers than previously.
Question 11
Which of the following
statements about the IS curve is false?
a) It shows that the
lower is the interest rate, the higher is the equilibrium level of output.
b) The more responsive
planned spending is to changes in the interest rate, the more interest elastic
is the IS curve.
c) A fall in the
interest rate will shift IS to the right.
d) An increase in
exports will shift IS to the right.
Question 12
Which of the following
statements about the LM curve is false?
a) An increase in the
demand for money will shift LM right.
b) An increase in the
supply of money curve will shift LM right.
c) It shows that the
higher is the level of output, the higher is the equilibrium rate of interest.
d) The more interest
elastic is the demand for money, the more interest elastic is the LM curve.
Question 13
Suppose that at
present an economy is at some distance from the equilibrium position where the
IS and LM curves intersect, and is on neither the IS curve nor the LM curve.
Which of the following most accurately states what will happen?
a) The economy will
move rapidly to the equilibrium.
b) The economy will
move rapidly to the point on the LM curve that applies to the current level of
output, and then move slowly along the LM curve to the equilibrium.
c) The economy will
move rapidly to the point on the IS curve that applies to the current rate of
interest, and then move slowly along the IS curve to the equilibrium.
d) The economy will
move slowly to the new equilibrium, and will not be on either the IS curve or
the LM curve until it reaches this equilibrium.
Question 14
Suppose there is an
initial increase in planned investment of £100 billion a year, and suppose the
multiplier is four. Which of the following statements is false?
a) By ignoring the
fact that a rise in output will lead to higher interest rates, the multiplier
model will predict that the planned expenditure line will end up £100 billion a
year higher than it started.
b) By ignoring the
fact that a rise in output will lead to higher interest rates, the multiplier
model will predict a rise in output of £400 billion a year.
c) By allowing for the
fact that a rise in output will lead to higher interest rates, the IS-LM model
will predict a rise in output of less than £400 billion a year.
d) The IS curve will
shift to the right by less than £400 billion a year.
Question 15
Which of the following
statements is false?
a) If spending is very
responsive to changes in interest rates, and the demand for money is interest
inelastic, then monetary policy tends to be more powerful than fiscal policy.
b) If spending is not
very responsive to changes in interest rates, and the demand for money is interest
elastic, then fiscal policy tends to be more powerful than monetary policy.
c) It might sometimes
make sense for a government to combine an expansionary monetary policy with an
expansionary fiscal policy.
d) It would never make
sense for a government to combine an expansionary monetary policy with a
contractionary fiscal policy.
Correct answer: 1.B 2.C 3.C
4.A 5.B 6.A
7.C 8.D 9.A
10.C 11.A 12.A
13.C 14.D
EXPLANATION
4. Note that r is 4%
or 4/100 which is 0.04, while d is 2 or 2/100 which is 0.02. The bank deposit
multiplier is 1/r which is 1/0.04 or 25. The money multiplier is (1+d)/(r+d)
which is 1.02/0.06 or 17.
5.Statement b is
false. Certificates of Deposit (CDs) can be bought and sold.
6.As well as cash in
its branches, a bank holds some reserves in its deposit at the Bank of England.
7.Statement c is
false. In capital adequacy calculations, non-government securities and advances
have the same weight, so there would be no change in the total of the bank's
risk-weighted assets.
8.Statement d is
correct. The effect on the quantity of money demanded of a change in the
interest rate is shown by a move along the money demand curve, not by a shift
of the curve.
10.Statement a is
false. By changing Bank Rate, the Bank of England can shift the money supply
curve, and then the money market will end up at a different point on the money
demand curve. If the Bank wants a certain interest rate, say 4%, then it must
shift the money supply curve so that it intersects the money demand curve at
4%, and then the Bank must accept whatever money stock will be demanded at 4%.
If, instead, the Bank wants a certain money stock, say £2,000 billion, then it
must shift the money supply curve until it intersects the money demand curve at
a money stock of £2,000 billion, and then the Bank must accept the interest
rate that is needed to ensure that people demand to hold £2,000 billion worth
of money. In short, it can control the interest rate or the money stock, but
not both simultaneously.
11.Statement c is
false. A fall in the interest rate takes the economy to a lower point on the IS
curve but does not shift it
12.Statement a is
false. An increase in the demand for money means that at each level of output,
interest rates will be higher, and this results in a leftwards shift in LM.
13.Statement b is
correct. If the economy is off the LM curve, then the money market is not in
equilibrium at the current output; but in this case, the interest rate will
change quickly to bring the money market to equilibrium, so the economy will
quickly go to the point on the LM curve at the current output. In contrast, if
the economy is off the IS curve, then output is not in equilibrium at the
current interest rate; but in this case, output can change only slowly, so it
will take time for the economy to reach the IS curve.
14.Statement d is
false. The IS curve will shift right by £400 billion a year.
15.Statement d is
false. Suppose the government wants to promote investment, so it wants a lower
rate of interest. But suppose it also does not want the equilibrium level of
output to change. Then it might well pursue this policy combination, shifting
LM to the right and IS to the left, so that they intersect at the same output
but at a lower interest rate.
ECO21
Question 1. Which
of the following is a shortcoming of the simple multiplier model that the AS-AD
model overcomes?
1. The multiplier model ignores the fact that a rise in
planned spending which causes a rise in output will also lead to a rise in
incomes and the demand for money, and so in turn lead to a rise in the interest
rate.
2. The multiplier model ignores the fact that a rise in
injections leads to a rise in prices which will cause people to reduce their
spending plans.
a) Both 1 and 2
b) 1 only c) 2 only d) Neither 1 nor 2
Question 2. Which
of the following arguments for a sloping AD curve is unconvincing?
a) A rise in the price level in a country will tend to
lead to a fall in the real value of exports and a rise in the real value of
imports.
b) A rise in the price level in a country will lead to
lower real spending because it will lead to lower real wealth.
c) A rise in the price level in a country will reduce the
real value of firms' profits, causing them to reduce planned investment.
d) A rise in the price level in a country will lead to
lower real spending because it will lead to a higher interest rate.
Question 3
Which of the following will not cause a country's AD
curve to shift left?
a) A reduction in government transfers. b) An increase in VAT
c) A reduction in exports. d) An
increase in the price level.
Question 4
Which of the following would lead to an upwards movement
along a country's aggregate demand for labour curve, ADL?
a) Prices and nominal wages both increase by 10%.
b) Prices rise by 10% while nominal wages increase by 5%.
c) Prices rise by 5% while nominal wages increase by 10%.
d) The real wage falls.
Question 5
Suppose the real wage in a country is at the equilibrium
level, but there is some natural unemployment. Which of the following does not
help to explain this natural unemployment?
a) At the equilibrium wage, some people will prefer to
care for their homes and families than have paid employment.
b) At the equilibrium wage, some people who recently
returned to the labour force after caring for young children will be unemployed
while they wait for what they feel is the right job.
c) At the equilibrium wage, some people may be unemployed
because the demand for their skills has fallen and there are no suitable jobs
available.
d) At the equilibrium wage, some new graduates will be
unemployed while they wait for what they feel is the right job.
Question 6.
Suppose that a country is in short-run equilibrium at the point where
its aggregate demand curve intersects its aggregate supply curve. Then
aggregate demand falls. Which of the following does not help to explain why
output may then move to a lower short-run equilibrium level?
a) Nominal wages may be sticky downwards.
b) Prices may be sticky upwards.
c) Individual producers may mistakenly believe that they
alone have faced a fall in demand, and so may demand less labour.
d) Individual workers may mistakenly believe that while
nominal wages have fallen, the price level has not.
Question 7
Which of the following statements about a country's
long-run aggregate supply curve, LAS, is true?
a) It is vertical throughout its length at the output
which would be produced if there were no unemployment.
b) It is vertical throughout its length at the output
which would be produced if there were only natural unemployment.
c) It slopes forwards at low price levels and is then
vertical.
d) It slopes forwards at all price levels.
Question 8
Suppose an economy is in short-run and long-run
equilibrium where its AD, SAS, and LAS curves intersect. Then there is a demand
shock and AD shifts to the right. Which of the following statements is false?
a) In the short run unemployment will exceed the natural
level.
b) In the long run unemployment will equal the natural
level.
c) In the short run the price level will increase.
d) In the long run, the price level will equal the
original level.
Question 9
Suppose an economy is in short-run and long-run
equilibrium where its AD, SAS and LAS curves intersect. Then there is an
improvement in technology which leads to a higher demand for labour, so
increasing the level of natural employment and the level of potential output.
Which of the following statements about the new long-run equilibrium position
is false?
a) The new LAS curve will be to the right of the original
LAS.
b) The price level will be lower than it started.
c) The real wage will be higher than it started.
d) The new SAS curve will be to the left of the original
SAS.
Question 10
Suppose an economy is in short-run and long-run
equilibrium where its AD, SAS and LAS curves intersect. Then there is an
increase in the price of imported inputs. Which of the following statements
about the new long-run equilibrium position is false?
a) The new AD curve will be to the left of the original
AD.
b) The new SAS curve will be to the left of the original
SAS.
c) The new LAS curve will be to the left of the original
LAS.
d) The new aggregate demand for labour curve will be to
the left of the original curve.
Correct answer:
1.A 2.C 3.D
4.C 5.A 6.B
7.B 8.D 9.D
10.A
EXPLANATION
1.Note that the rise in interest rates will reduce
planned consumer and investment spending. The rise in prices will have various
effects on planned spending that are explored in section 21.2
2. Statement c is correct because it is unconvincing: it
is not clear that a rise in the price level will reduce real profits: they
might even increase if, for example, prices rose more quickly than nominal
wages.
3. Statement d is
correct because an increase in the price level will not lead to a shift in the
AD curve. Instead, it will simply shift the country to a higher point on its AD
curve.
4. Only in this
case is there an increase in the real wage, which is given by an index of
nominal wages divided by the GDP deflator.
5. because this
does not help to explain natural unemployment. Natural unemployment refers to
people who are in the labour force and yet who are unemployed, but carers are
not considered to be part of the labour force.
6. because it does not help explain why output may fall.
If demand decreases, there is no pressure for prices to rise, and therefore any
upward stickiness in prices would be irrelevant. (Of course, if prices were
sticky downwards, then firms might respond to a fall in demand solely by
producing less, causing output to fall.)
7. In the long
run, the labour market settles in equilibrium with the only unemployment being
natural unemployment, so output is at the level which the remaining people in
the labour force, that is those in natural unemployment, will produce, and LAS
is vertical at this output.
8. In the short run, the shift in AD takes the economy up
its SAS curve to a point where the price level exceeds the original level. The
increase in prices leads to a lower real wage, and this will shift the
short-run aggregate supply curve to the left, raising the price level still
further. The price level ends up where the new AD curve intersects the LAS
curve.
9. LAS shifts right to intersect AD at a lower price
level than the initial level. In the long-run, SAS must shift right to
intersect AD at the same lower price level. It is true that the real wage will
increase, and it may seem that this will shift SAS to the left; but remember
that new technology means firms want to hire more workers, and it is their
increased demand for labour that pushes up the real wage. In short, they want
to hire more workers and supply more output, despite the higher real wage.
10. Aggregate demand will not be affected. But the higher
prices of imported inputs will make production less profitable, so that the
demand for labour falls, in turn reducing the level of natural employment and
the level of potential output so that LAS shifts left. And in the long run SAS
will be to the left of the original intersecting AD at the same price level as
the new LAS intersects it.
ECO22
Question 1
Which of the following groups of people are not regarded as economically
inactive?
a) People who want a job but do not have one.
b) Family or home carers.
c) Students with no employment.
d) Discouraged workers.
Question 2
Which of the following statements is false as far as the UK is concerned?
a) The unemployment rate for people aged 50+ is lower than the rate for
people aged 16-24.
b) The unemployment rate tends to vary across ethnic groups.
c) The unemployment rate for males is lower than the rate for females.
d) The unemployment rate for people in the East of England is lower than
the rate for people in the North East of England.
Question 3
If all the following events occurred in 2013, which one would put upward
pressure on the rate of natural unemployment in the UK in 2013?
a) A cut in the benefits available to unemployed people.
b) An increase in the school leaving age to 17.
c) An increased in consumer demand for meals out.
d) Much tighter regulations for the UK financial services industry.
Question 4
Which of the following will not cause the level of unemployment to settle
above the level where the aggregate supply curve of labour intersects the
aggregate demand curve for labour?
a) Efficiency wages. b)
Successful trade union action to force up wages.
c) Hysteresis.
d) A minimum wage law.
Question 5
What is the main reason that led classical economists to believe that the
government need not respond to a demand shock which led to unemployment?
a) Demand shocks are always very small.
b) Real wages are highly flexible.
c) Governments always act too late.
d) Economies never displayed demand-deficient unemployment.
Question 6
According to the idea of the neutrality of money, or the classical
dichotomy, which of the following statements describes the long-run effect of a
rise in the money stock?
a) It has no effect.
b) It affects variables expressed in nominal terms, notably prices, but not
variables expressed in real terms, notably output and unemployment.
c) It affects variables expressed in real terms, notably output and
unemployment, but not variables expressed in nominal terms, notably prices.
d) It affects variables expressed in nominal terms and variables expressed
in real terms, notably prices, output and unemployment.
Question 7
According to the quantity theory of money, what long-run effect will a 10%
rise in the money stock have on the price level?
a) No effect.
b) The price level will rise, but by less than 10%.
c) The price level will rise by 10%.
d) The price level will rise by more than 10%
Question 8
Keynes suggested several reasons why the government should not rely on
flexible real wages to remove demand-deficient unemployment. Which of the
following was not one of these reasons?
a) Workers would resist cuts in nominal wages which reduced their wages
relative to those paid in other occupations.
b) Trade unions would resist cuts in nominal wages.
c) Even if nominal wages fell, there might then be falls in prices, and
this could lead to a further fall in demand in the economy if people deferred
some purchases until they felt prices would fall no further.
d) Any efforts by the government to increase demand in the economy would
lead to higher real wages and so increase unemployment.
Question 9
Faced with a choice between fiscal and monetary policy to try and increase
aggregate demand, Keynes believed that fiscal policy would have more effect.
Which of the following was not one of his key reasons for holding this belief?
a) Fiscal expansion was highly effective because of the balanced budget
multiplier.
b) Monetary expansion might have little effect because the demand for money
is interest elastic.
c) If interest rates fell, consumer spending might not rise much, because
it depends chiefly on incomes, not on interest rates.
d) If interest rates fell, investment spending might not rise much, because
it depends substantially on firms' 'animal spirits'.
Question 10
Faced with a choice between fiscal and monetary policy to try and increase
aggregate demand, monetarists believed that monetary policy would have more
effect. Which of the following was not one of their key reasons for holding
this belief?
a) A tax cut which consumers thought would be only temporary might have
very little effect on their spending.
b) Monetary expansion might have considerable effect because the demand for
money is interest elastic.
c) If interest rates fell, consumer spending might rise greatly.
d) If interest rates fell, investment spending might rise greatly.
Correct answer: 1.A 2.C 3.D
4.C 5. B 6.B
7.C 8.D 9.A
10.B
EXPLANATION
1.people who want a job and do not have one are unemployed, but they are
regarded as economically active because they are in the labour force.
2. The rate is lower for females.
3. There is then a risk that this UK
sector would contract, with much business being taken over by institutions
abroad, so leading to unemployment of many people with skills that may not be
greatly needed elsewhere in the UK.
4. Hysteresis means the aggregate supply of labour curve may actually be to
the left of where it would otherwise be, but the market will settle where the
actual curve intersects the demand curve.
5.Flexible real wages mean that if demand-deficient unemployment appears,
then real wages will quickly fall enough to remove it.
6.It arises because flexible real wages ensure that in the long run
employment is at its natural level and output is at its potential level, so
that changes in the money stock have no
7. The theory is based on the fact that, by definition, MV must equal PY,
along with an assumption that V is constant and Y in the long run will be at
its potential level, so a change in M of any percent leads to an equal percentage
change in P.
8.Statement d was not one of Keynes's reasons. On the contrary, he argued
that a rise in demand might put upward pressure on prices and so reduce the
real wage, leading to employers wishing to hire more workers.
9. Keynes argued that fiscal expansion would be particularly effective if
higher government spending was financed by borrowing. The balanced budget
multiplier applies when higher government spending is instead financed by
higher taxes.
10.On the contrary, they believed the demand for money was interest
inelastic, so that a rightward shift in the supply curve for money would
greatly reduce interest rates and in turn greatly stimulate consumer spending
and investment.
ECO23
Question 1. Which of the following statements are true?
1. For cost increases
to lead to sustained inflation, there must be persistent rises in costs
followed by persistent government efforts to return output to its potential
level.
2. For cost increases
to lead to sustained inflation, there must be persistent rises in costs coupled
with wage flexibility that always returns the labour market to equilibrium.
3. For demand
increases to lead to sustained inflation, there must be persistent increases in
demand followed by persistent government efforts to return output to its
potential level.
4. For demand
increases to lead to sustained inflation, there must be persistent increases in
demand coupled with wage flexibility that always returns the labour market to
equilibrium.
a) 1 and 3 only b) 1 and 4 only c) 2 and 3 only d) 2 and 4 only
Question 2
Which of the following
statements about the UK
is false?
a) Phillips's original
curve concerned increases in nominal wages, not increases in the price level.
b) Phillips's
observations suggested that his curve was generally stable between 1861 and
1957.
c) Phillips curves are
generally concerned with increases in the price level, not increases in nominal
wages.
d) Phillips curves
have generally been fairly stable since 1957.
Question 3
Suppose inflation over
the next year is expected to be 5%, and assume there are no supply shocks. What
rate of inflation will the short-run Phillips curve show at the natural rate of
unemployment?
a) 0% b) Between 0% and 5% c) 5% d) Over 5%
Question 4
Which of the following
explains why the long-run Phillips curve is drawn as a vertical line?
a) Because in the long
run, government policies will ensure that unemployment is at its natural rate.
b) Because in the long
run, the labour market will settle so that unemployment is at its natural rate.
c) Because of the
quantity theory of money.
d) Because its true
shape is unknown.
Question 5
Which of the following
might shift the short-run Phillips curve to the left?
a) A rise in the
expected rate of inflation.
b) A natural disaster
which temporarily disrupts production.
c) A rise in the
benefits paid to unemployed people.
d) An increase in the
labour force.
Question 6
Which of the following
would shift the long-run Phillips curve to the left?
a) A change in the
expected rate of inflation.
b) A natural disaster
which temporarily disrupts production.
c) Improved technology
which increases labour demand.
d) A rise in the price
of imported inputs.
Question 7
Which of the following
views is not characteristic of the monetarist approach to policies regarding
unemployment and inflation?
a) To secure generally
stable prices, governments should aim to keep the money stock stable over time.
b) Government efforts
to reduce unemployment have lags, so when they take effect, it may be too late.
c) Government efforts
to hold unemployment below the natural rate will lead to accelerating inflation
if people form adaptive expectations about the inflation rate.
d) If the unemployment
rate exceeds the natural rate, wage flexibility will return the rate to the
natural rate quite quickly.
Question 8 . Which of the following statements about
rational expectations is false?
a) They assume that
people take account of all information.
b) They assume that,
on average, people's forecasts are correct.
c) They imply that
expected changes in demand have no effects on unemployment or the price level.
d) They imply that
unexpected changes in demand have long-lasting effects on both unemployment and
the price level.
Question 9
Suppose the labour
market is away from equilibrium, with unemployment above the natural rate. The
new Keynesian view of inflation and unemployment offers several reasons why the
labour market can stay away from equilibrium for long periods. Which of the
following is not one of these reasons?
a) Efficiency wages
may hold wages below the equilibrium level.
b) Workers may resist
wage cuts which reduce their wages below those paid to other workers in the
same occupation.
c) Prices may be
sticky downwards in some markets because consumers prefer stable prices.
d) Prices may be
sticky downwards in some markets because consumers may judge quality by price.
Question 10
Suppose a government
instructs its central bank to operate a Taylor
rule, and that the government sets a credible inflation target. Which of the
following statements is false?
a) The central bank
will make its interest rate decisions solely by considering whether actual
inflation goes above or below the target.
b) The central bank
will decrease the interest rate if there is a demand shock which reduces
aggregate demand.
c) The central bank
will increase the interest rate if there is a supply shock which permanently
reduces aggregate supply.
d) The central bank
may not increase the interest rate if there is a supply shock which temporarily
reduces aggregate supply.
Answer:
1. B ( because
statements 1 and 4 are true. Regarding 2, note that cost increases initially
lead to a rise in the price level and some unemployment; if wages then fell to
return the labour market to equilibrium, there would be a downward move in the
price level, not persistent inflation. Regarding 3, note that demand increases
initially lead to a rise in the price level and output rising above its
potential level; if the government wished to return output to its potential
level, it would have to reduce demand, and there would then be a downward move
in the price level, not persistent inflation.)
2.D (The curve shifted
away from the origin between 1966 and 1980, and since 1987 it has either
shifted erratically back since then or (as explained on page 536) perhaps
become almost horizontal. )
3. c) 5% ( In the
absence of supply shocks, the short-run Phillips curve always shows the
expected rate of inflation at the natural rate of unemployment.)
4.B ( In the long run
unemployment will be at the natural rate, while the inflation rate could be
anything, depending chiefly on the rate of growth of the money stock and the
rate of growth of real output.)
5.D (The increase in
the labour force will increase the supply of labour and so lead to more people
in employment, but with the larger labour force, there will also be more people
unemployed, so the natural rate of unemployment could rise, fall or stay the
same. If it fell, the long-run Phillips curve would shift left, taking the short-run
curve right with it. In contrast, all the other events will shift the curve
away from the origin.)
6.C (an increase in
labour demand will increase the employment level where the labour market is in
equilibrium, and lead to less natural unemployment, so that the natural rate of
unemployment falls. In contrast, a change in the expected rate of inflation and
a natural disaster which disrupts production temporarily do not shift the
long-run Phillips curve. A rise in imported input prices will shift it, but it
will shift it to the right, not to the left.)
7.A (Statement a is
not part of the monetarist view. They argue that to keep prices generally
stable, the money stock should increase by k% a year where k is the average
annual percentage by which real output grows over time. )
8.D (because although
expected changes in demand have no effect on unemployment, they do affect the
price level. )
9.A (Statement a is not one of the reasons for
believing the labour market may take a long time to reach equilibrium; instead,
efficiency wages cause a problem because it is believed that they may hold the
wage rate above the equilibrium level, not below it.)
10.A ( The central
bank will be asked also to consider whether output is below or above its
potential level.)
ECO24
Question 1
Which of the following
statements is false?
a) Trend GDP shows
what the path of potential GDP would be if it grew steadily.
b) A trough occurs at
the end of a period of contraction.
c) Trend GDP may be
below potential GDP in some quarters and above in others.
d) Trend GDP may be
below actual GDP in some quarters and above in others.
Question 2
When is a country said
to move into a recession?
a) If actual output
falls below the potential level of output.
b) If actual output
falls below the trend level of output.
c) If actual output
falls.
d) If actual output
falls for two consecutive quarters of a year.
Question 3
Which of the following
statements about classical economists in the 19th century is false?
a) They used the term
trade cycles, not business cycles.
b) They knew cycles
existed because of fluctuations in measured real GDP.
c) They believed the
typical cycle lasted between seven and eleven years.
d) They suggested that
one cause of cycles was the activity of sunspots on the sun.
Question 4
On which of the
following do Keynesians and monetarists agree?
a) The most important
cause of demand shocks is changes in the money stock.
b) The demand for
money is interest elastic.
c) Output departs at
times from potential output because of demand shocks.
d) When there is a
recessionary gap, flexible wages will return the labour market to equilibrium
fairly quickly.
Question 5
Which of the following
statements about the accelerator model of cycles is false?
a) The model believes
firms have an optimum ratio of capital to output.
b) The model suggests
that cycles could be damped or anti-damped rather than regular.
c) To get repeated
cycles, the model needs repeated shocks to investment.
d) The model assumes
that firms expect their output in the next period to be the same as it was it
the previous period.
Question 6. In this question, ignore new classical
economists who propose real business cycle theory. Which of the following
statements is false?
a) On the new
Keynesian view, a single unexpected demand shock could take output below the
potential level .
b) On the new
Keynesian view, it needs repeated unexpected demand shocks to take output below
the pote ntial level for long periods.
c) On the new
classical view, it needs an unexpected demand shock to take output below the
potential level.
d) On the new
classical view, it needs repeated unexpected demand shocks to take output below
the potential level for long periods.
Question 7
Which of the following
is not part of the real business cycle explanation of business cycles?
a) Wage flexibility
keeps output close to its potential level.
b) Output fluctuates
because of fluctuations in aggregate supply.
c) Aggregate supply
fluctuates because of fluctuations in the demand for labour.
d) Labour demand might
fall if technology increases faster than expected.
Question 8. Which of
the following statements about real business cycle theory is false?
a) It believes the
supply of labour is inelastic.
b) It requires a run
of positive or negative technology shocks to explain why peaks and troughs may
last for protracted periods.
c) It believes that
unemployment is a result of people's choices and need not concern the
government.
d) Few economists
regard it as offering the main explanation of business cycles.
Question 9. Which of
the following statement about the automatic stabilizer created by government
taxes and spending is false?
a) The stabilizer
arises because if an economy moves into a recessionary gap, tax revenues fall
and transfers rise, while if it moves into an inflationary gap, tax revenues
rise and transfers fall.
b) The stabilizer
means that if the government balances its budget when output is at its
potential level, then it will have a deficit in a recessionary gap and a
surplus in an inflationary gap.
c) If output moves
away from its potential level, the stabilizer ensures that it will eventually
return to it.
d) The stabilizer
would be stronger if the government imposed higher taxes on people with high
incomes and paid higher transfers to the unemployed.
Question 10
What are the
implications of the automatic stabilizer created by government taxes and
spending on the effects of shocks in long-run aggregate supply?.
a) It makes output
changes smaller than they would otherwise be, but prices changes larger than
they would otherwise be.
b) It makes output
changes the same as they would otherwise be, but prices changes larger than
they would otherwise be.
c) It makes both
output changes and price changes smaller than they would otherwise be.
d) It makes output
changes the same as they would otherwise be, but prices changes smaller than
they would otherwise be.
Answer:
1. a) 2.D
3.B 4.C (Regarding statement a, Keynesians believe
other causes of shocks are more important. Regarding statement b, monetarists
believe the demand for money is interest inelastic. Regarding statement d
Keynesians believe wages are not very flexible.)
5.C 6.B
(Owing to an assumption of sticky wages, new Keynesians believe that a
single shock could lead to output being below the potential level for a long
period. ) 7.D (Statement d is not part of real business
cycle theory. The theory assumes that improvements in technology increase the
demand for labour.) 8.A ( The theory assumes that labour supply is
elastic.)
9.C ( The stabilizer does not return output to
its potential level; it merely ensures that output moves less far away from its
potential level than it would do if there were no stabilizer.)
10. B ( To see this, suppose for example that LAS
shifts left, so that GDP falls and the price level rises. Then the automatic
stabilizer reacts to the fall in GDP by increasing demand, so AD shifts right.
This has no effect on GDP, which stays at the level given by the new LAS curve,
but it increases the price level even more. )
ECO25
Question 1
Which of the following statements is false?
a) Even if a country acquired no extra resources, its output could grow.
b) Even if a country had no technological progress, its total factor
productivity could increase.
c) Even if a country's workforce stayed the same, there could be an
increase in human capital.
d) If a country's GDP per head rose by 3% a year, it would take about 33
years for its output GDP per head to double.
Question 2
Suppose GDP was constant over a period of years and yet living standards
increased. Which of the following might not be a reason for this?
a) There might be an increase in household production.
b) There might be an increase in production by the underground economy.
c) There might be an increase in exports.
d) There might be an increase in leisure.
Question 3
Which of the following statements is false?
a) Growth is no help in efforts to ease relative poverty.
b) Over a period of time when economic welfare increased, total welfare
could decrease.
c) If a country decides to invest in more capital this year, then living
standards may initially fall and yet in time be higher than they would
otherwise have been.
d) Growth has reduced drudgery.
Question 4
In the basic neoclassical growth model, where does equilibrium occur?
a) Where investment per worker equals saving per worker.
b) Where investment per worker equals depreciation per worker.
c) Where investment per worker equals capital per worker.
d) Where capital per worker equals output per worker.
Question 5
Suppose the proportion of the population in the workforce increases while
everything else stays the same. According to the neoclassical growth model,
which of the following statements is false?
a) Initially, output per worker will fall.
b) Eventually, output per head of population will be higher than it
started.
c) There will be sustained economic growth.
d) There will be capital widening.
Question 6
According to the neoclassical growth model, which of the following
statements is false?
a) If the population continually grows, while everything else stays the
same, then living standards will be lower than they would be if the population
was constant.
b) If people save and invest a higher proportion of their incomes, while
everything else stays the same, then there will be sustained growth.
c) If people save and invest a higher proportion of their incomes, while
everything else stays the same, living standards could fall.
d) A new technology which makes workers more productive, while everything
else stays the same, may not lead to sustained growth.
Question 7
In the past 50 years, the world's population has more than doubled. Which
of the following has also occurred?
1. Most people have been left on subsistence incomes, as predicted by
Matlhus.
2. The prices of most natural resources have risen greatly in relation to
average wages.
a) Both 1 and 2 b) 1
only c) 2 only d) Neither 1 nor 2
Question 8
There are many reasons why a poor country may fail to catch up with a rich
neighbour. Which of the following is not one of these reasons?
a) The poor country may have more rapid population growth.
b) The rich country may have more human capital.
c) The poor country may have a higher saving ratio.
d) The rich country may be more open to the world economy.
Question 9
Which of the following statements is true?
1. If output per head is proportional to the number of ideas had in the
past, then a constant rate of growth requires ever rising numbers of new ideas
each year.
2. World population growth is a potential source of new ideas.
a) Both 1 and 2 b) 1
only c) 2 only d) Neither 1 nor 2
Question 10
Which of the following statements about y=Ak growth models is false?
a) They assume the production function shifts upwards whenever the stock of
physical capital increases.
b) They suggest that if the level of investment is higher than
depreciation, then there could be sustained growth.
c) They are called endogenous growth theories.
d) They argue that increasing the saving ratio will have only a temporary
effect on output per worker.
Answer:
1. d) (Statement d is false, because
the rule of 72 shows that it would take about 24 years. Regarding a, note that
output can grow even without having any extra resources, if there is an
increase in total factor productivity; regarding b, note that total factor
productivity can increase, even without technological progress if, for example,
there is better management; and regarding c note that human capital concerns
education, training and work experience, which can all improve even if the
number of workers stays the same.)
2.C ( If GDP, that is a country's output of goods and services, is constant
and a larger share is sold abroad as exports, then a smaller share is available
to benefit the country's own citizens. )
3. a) ( If there is no growth,
helping people below the poverty line means reducing the living standards of
those above, which voters as a whole may well oppose. If there is growth,
helping those below the poverty line could be achieved by allowing the living
standards of the poor to rise faster than the living standards of the rich,
which voters as a whole may accept.)
4. b) (When investment per worker
equals depreciation per worker, the capital available to each worker is
constant.)
5. c) (Output per worker will
eventually be constant at the same level as it was to begin with.)
6.b) (If people save and invest a
higher proportion of their incomes, while everything else stays the same, then
the economy will end up with more capital per worker and higher living
standards, but it would take some other factor, notably sustained technological
growth, to secure further sustained increased in living standards. )
7. d) (Regarding statement 1, most
people have higher living standards. Regarding 2, many resource prices simply
fell, once inflation is allowed for.)
8. c) (Statement c does not help to
explain why a poor country may fail to catch up a rich country. Other things
being equal, a country with a high saving and investment ratio will enjoy a
higher output per worker than a country with a lower ratio.)
9.a) (Regarding 1, for sustained
growth of 2% per year, there would have to be 2% more ideas each year than in
the previous year. Regarding 2, ideas are non-rival, so more people should have
more ideas which can be used by everyone)
10.d) (Unlike the neoclassical
growth model, y=Ak models argue that high saving ratios will lead to sustained
higher growth rates.)
ECO26
Question 1. Suppose that aggregate demand has recently increased.
This has taken output above the potential level and it has also increased the
price level. The government is keen to avoid any further increases in the price
level. Which of the following options should it avoid?
a) Simply wait for the
labour market to return output to the potential level.
b) Apply a
contractionary fiscal policy.
c) Announce a credible
zero target for inflation.
d) Apply a supply-side
policy to shift LAS to the right?
Question 2. Which of the following is not a problem with
discretionary policies?
a) Governments might
use them in a way which leads to political business cycles.
b) Discretionary
fiscal policies may act too late.
c) Discretionary
monetary policies lose any power that a rules policy has to hold inflationary
expectations down.
d) They need to be announced
in advance.
Question 3. Suppose that growth and unemployment were at satisfactory
levels. What target would be the focus of the Bank of England's monetary
policy?
a) The interest
rate. b) The rate of growth of the
money stock.
c) The current
inflation rate. d) The expected
inflation rate in two years' time.
Question 4. Suppose a central bank is concerned about inflation and
wishes to raise interest rates. Which of the following instruments would it be
inappropriate to use?
a) Interest rate
control. b) Open market operations.
c) Quantitative
easing. d) Reserve ratio controls.
Question 5. Suppose the Bank of England wishes to restrain inflation, so it increases
Bank Rate. Which of the following events will not be part of the monetary
policy transmission process?
a) The increased Bank
Rate will increase the value of sterling.
b) The increased Bank
Rate will increase people's wealth.
c) The increased Bank
Rate will lead to increases in other nominal interest rates.
d) The increased Bank
Rate will reduce the incomes people expect to have in future.
Question 6. To secure equity over time, which principle of government
finance is generally recommended?
a) To finance all
government spending by loans. b) To
finance all government spending by taxes.
c) To finance
government capital spending by loans and government current spending by taxes.
d) To finance
government capital spending by taxes and government current spending by loans.
Question 7. Which of the following statements is false?
a) An increase in
government spending financed by loans can crowd out other spending in the
economy.
b) A structural
deficit is the government would have if it adopted its current policies and
output was at the potential level.
c) The last and
current UK
governments have favoured trying to ensure that, each year, total government
borrowing equals total net government investment.
d) A cyclically
adjusted deficit is the same as a structural deficit.
Question 8. Suppose the government of a country has a high level of
debt. Which of the following statements about this debt is false?
a) If all the debt was
in the form of bonds owned by the country's own citizens, then the debt would
not be a burden to the country's taxpayers.
b) If all the debt was
in the form of bonds owned by the country's own citizens, then the debt would
not be a burden to the country's citizens.
c) A high debt might
make lenders worry if the government could repay its loans and so raise the
interest rate people wanted when they lent to it.
d) A high debt would
make it difficult for the government to respond to any future downturns in its
economy with expansionary fiscal policy.
Question 9. Which of the following policies would not be used by a
government which wished to increase the quantity of labour that will be hired?
a) A reduction in
income tax rates. b) An increase in
firms' non-labour costs.
c) A reduction in the
benefits paid to unemployed people.
d) An increase in help
for unemployed people to retrain.
Question 10. Which of the following policies would not be used by a
government which wished to increase the output per labour hour?
a) Increase the school
leaving age. b) Discouraging firms
from investing in new capital.
c) Make government
departments more efficient. d) Promoting
competition.
ANSWERS
1. a) (Employment is currently above the natural
level, and left to its own the labour market will check this by a rise in real
wages which will shift SAS to the left and further increase the price level.)
2.D.
3.D 4.C 5.B (wealth
will not increase. Instead, higher interest rates on loans will reduce the
demand for securities and - by raising the cost of mortgages - reduce the
demand for homes, so there may be falls in security prices and house prices. )
6.C 7.C
8.A ( the debt is a burden to
taxpayers because they must pay taxes to cover the interest and repayments.
But, regarding statement b, if all the debt was in the form of bonds held by
the country's own citizens, then all the interest and repayments financed by
the country's taxpayers would go to those of its citizens who owned the bonds,
so the country's citizens as a whole would neither gain nor lose when the taxes
were raised and the interest and repayments were paid. ) 9.B
(an increase in firms' non-labour costs would not be used because this
would encourage them to hire fewer workers. ) 10. B ( a government would not discourage
investment in new capital. Instead it would encourage investment, on the
grounds that the more capital each worker has, the more each worker can
produce.)
ECO-27
Question 1. Suppose Countries A and B use only labour as an input and produce only
cloth and wheat. In A, a worker in a day could produce 2 units of cloth or 4
units of wheat. In B, a worker in a day could produce 3 units of cloth or 9
units of wheat. At present the countries do not trade. Which of the following
statements is false?
a) Country A has a comparative advantage in cloth.
b) Country B has a
comparative advantage in wheat.
c) Country A has an
absolute advantage in cloth.
d) Country B has an
absolute advantage in wheat.
Question 2. Return to the countries in question 1. Suppose trade opens up. Which of the
following statements is true?
a) Country A will
export cloth to B, and import wheat from B, and each country will be able to
consume more of both products than before.
b) Country A will
export wheat to B, and import cloth from B, and each country will be able to
consume more of both products than before.
c) Country A will
export cloth to B, and import wheat from B, but only country B will gain from
the trade.
d) Country A will
export wheat to B, and import cloth from B, but only country B will gain from
the trade.
Question 3. Suppose Countries C and D use only labour as an input and
produce only tables and tents. In A, a worker in a week could produce 4 tables
or 2 tents. In B, a worker in a week could produce 6 tables. Initially the
countries do not trade, and then trade opens up. Under which circumstances will
country C export tables?
a) Under no
circumstances.
b) If a worker in
country D could produce fewer than 3 tents a week.
c) If a worker in
country D could produce 3 tents a week.
d) If a worker in
country D could produce more than 3 tents a week.
Question 4. Suppose two countries E and F use many inputs. Country E
exports tractors and imports televisions. Assuming there are no economies of
scale, which of the following statements is true?
a) If the countries
did not trade, then E would have a lower opportunity cost for tractors.
b) Even though there
is trade, E has a lower opportunity cost for tractors.
c) E is sure to
produce no televisions while F is sure to produce no tractors.
d) Neither country can
consume at a point outside its production possibility frontier.
Question 5. Which of the following statements is false?
a) Two countries may
benefit from trade, even if their production possibility frontiers have
identical shapes, if preferences differ in the two countries.
b) Two countries may
benefit from trade, even if their production possibility frontiers have
identical shapes, if industries have substantial economies of scale.
c) When two countries
benefit from the opening up of trade, all citizens in each country will
benefit.
d) Differences in the
degree of human capital offer one reason why two countries may have production
possibility frontiers that differ in shape.
Question 6. Suppose a small country imposes a tariff on a good. Which
of the following statements is false?
a) Consumer surplus
from the good will decrease.
b) Producer surplus
from the good will decrease.
c) The quantity
imported will fall.
d) The deadweight loss
will be less than the total fall in surplus.
Question 7. Suppose a large country imposes a tariff on a good. Which
of the following statements is false?
a) The total consumer
plus producer surplus decreases.
b) The price for
consumers rises from the pre-tariff situation by the amount of the tariff.
c) If other countries
do not retaliate, the country may be better off.
d) If other countries
do not retaliate, the country may be worse off.
Question 8. Which of the following arguments for trade barriers
offers potential benefits to consumers?
a) To soften the fall
of declining industries.
b) To protect
industries from competition from low wage countries.
c) To protect
industries from dumping.
d) To nurture infant
industries by protecting them from cheaper imports.
Question 9. Two large countries currently impose tariffs against each
other. Each country would be better off with free trade. Which of the following
statements are true?
1. Each country might
think 'if the other country maintains its tariff, we will be better off
maintaining our tariff.'
2. Each country may
think 'if the other country unilaterally abolishes its tariff, we may be better
off maintaining our tariff. a) Both 1
and 2 b) 1 only c) 2 only
d) Neither 1 nor 2
Question 10. Which of the following statements is false?
a) Over 150 countries
belong to the World Trade Organisation.
b) If a country joins
a customs union, it may do less trade with non-members than it did previously.
c) A single market
requires the removal of barriers to the movement of labour.
d) Members of a free
trade area agree to have uniform tariffs on imports from non-members.
Answers
1. c 2 .a 3.d
4.a 5.c 6.b
7.b 8.d 9.a 10.d
ECO28
Question 1
Which of the following
statements about the UK
balance of payments accounts is false?
a) The current balance
shows the balance for the trade in goods and services combined.
b) If a foreign
citizen places some money in a deposit in the UK, the accounts regard this as a
credit.
c) If the government's
reserves of foreign currencies increase, then there is a minus sign by this
item.
d) Allowing for errors
and omissions the accounts always balance.
Question 2
Suppose that one year
a country had a balance of trade deficit. Suppose also that the balance for
wages, investment income and current transfers was zero. Then which of the
following statements is false?
a) Borrowing from
abroad must have been equal to the trade deficit.
b) Either investment
must have exceeded saving, or government spending exceeded taxes (net of
transfers and subsidies), or both.
c) The country's debt
to foreign countries must have grown as a percentage of GDP.
d) There must have
been a surplus on the capital and financing account.
Question 3. Which of the following statements is true?
1. The supply curve
for sterling on the foreign exchange markets must slope upwards to the right.
2. The demand curve
for sterling on the foreign exchange markets must slope downwards to the right.
a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2
Question 4. Which of the following would cause sterling to depreciate against the US
dollar, other things being equal?
a) A fall in incomes
in the US. b) News which suggests that prospects
for UK
firms are improving. c) A rise in
interest rates in the UK. d) An expected rise in the value of sterling.
Question 5. Which of the following exchange rate regimes best describes the situation
for both sterling and the euro?
a) A fixed exchange
rate regime. b) An adjustable peg
exchange rate regime.
c) A managed float
routine. d) A floating exchange
rate regime.
Question 6. Which of the following statements is false?
a) The law of one
price says that the prices which producers in different countries set for a
particular product will be the same if the prices are expressed in the same
currency using the current exchange rate.
b) Purchasing power
parity is a theory which says that says the total prices of any basket of
products which apply in two different countries will be the same if the prices
are expressed in the same currency using the current exchange rate.
c) Interest rate
parity is a theory that the interest rates on similar assets in two countries
will be the same.
d) The real exchange
rate between two countries is the rate at which a particular basket of products
produced in one country can be traded with a similar basket produced in
another.
Question 7. Suppose a country has a floating exchange rate and no capital controls. It
also has a recessionary gap. It tackles this with an expansionary monetary
policy. In the final equilibrium people expect its exchange rate to stay at its
new value. Which of the following statements is false?
a) The interest rate
will initially fall but must in the end return to its initial value.
b) Consumer spending
and investment will initially increase, but must in the end return to their
initial values.
c) Money demand must
end up higher that it was initially.
d) The exchange rate
must end up at its initial value.
Question 8. Suppose a country has a floating exchange rate and no capital controls. It
also has a recessionary gap. It tackles this with an expansionary fiscal
policy. In the final equilibrium people expect its exchange rate to stay at its
new value. Which of the following statements is false?
a) There will be an
initial increase in demand, probably government purchases and consumer
spending.
b) As demand
increases, incomes and money demand start to increase, causing a rise in the
interest rate and, in turn, in the exchange rate.
c) The interest rate
must end up at its initial value, so money demand must return to its original
level. d) Output will end up
higher than it was initially.
Question 9. Which of the following statements is false?
a) If the government
wants an expansionary policy in which only consumer spending and government
purchases increase, it should combine a fiscal expansion with a monetary
expansion.
b) In the event of a
demand shock, fiscal policy is powerless to offset the change in demand.
c) In the event of a
demand shock, monetary policy can be used to offset the change in demand.
d) With either fiscal
or monetary policy expansion, the exchange rate initially overshoots its new
equilibrium value.
Question 10. There are
several reasons why the UK
government would be cautious about joining the euro. Which of the following is
not one of these reasons?
a) The eurozone and
the UK
might not have well synchronized output gaps over time.
b) Interest rate
changes are thought to affect consumer spending less in the UK than in the eurozone.
c) The UK
might have to lend or give more money to eurozone countries which run into
difficulty.
d) An oil price shock
might affect the UK
and the eurozone differently.
Correct answer:
1. a) The current
balance shows the balance for the trade in goods and services combined.
2. c) The country's
debt to foreign countries must have grown as a percentage of GDP.
3. c) 2 only
4. a) A fall in incomes in the US.
5. d) A floating exchange rate regime.
6. c) Interest rate
parity is a theory that the interest rates on similar assets in two countries
will be the same. (Feedback: Statement c is false. The interest rates must
be different if the exchange rate between the countries' currencies is expected
to change. More specifically, the interest rate in the country whose currency
is expected to depreciate must be sufficiently higher to ensure that the total
returns, allowing for interest and expected changes in the exchange rate, will
be equal.)
7. d) The exchange rate must end up at its
initial value. (Feedback: To see why,
note that a must be true: if people expect no further change in the exchange
rate, then interest rates in this country must be the same as elsewhere. And if
interest rates are the same as elsewhere, the monetary policy will have no
effect on consumer spending or investment, as stated in b; these components of
spending will initially rise but later fall back. Now if there has been monetary
expansion, with a rightward shift in the money supply curve, and the interest
rate ends up at its initial value, then there must also have been a rise in the
demand for money, as stated in c, which must be caused by a rise in output and
so in incomes. For output to rise, the exchange rate must end up lower than it
was initially, in contradiction of d, leading to an increase in exports and a
fall in imports. )
8. d)
Output will end up higher than it was initially. (Feedback: Statement d is
false. To see why, note that government purchases and consumer spending will
initially increase, as in a, causing an initial rise in output that increases
the demand for money, so raising the interest rate and the exchange rate, as in
b, which will reduce exports and increase imports. However, if people expect no
further change in the exchange rate, then interest rates in this country must
be the same as elsewhere, so the demand for money must return to its initial
level, as in c, which means output and incomes must return to their initial
level, in contradiction of d. Output falls because the rise in the exchange
rate raises imports and cuts exports enough to offset any rise in consumer
spending or government purchases.)
9. b) In the event of
a demand shock, fiscal policy is powerless to offset the change in demand.
(Feedback: If the government is quick,
the effects of the fiscal policy may be to change consumer spending and
government purchases enough to prevent demand changing after all.)
10. b) Interest rate changes are thought to
affect consumer spending less in the UK than in the eurozone.
(Feedback:The UK has a
relatively high proportion of households that are owner-occupiers with variable
interest rate mortgages, and this means that consumer spending tends to react
more to interest rate changes in the UK than in the eurozone. )
..sk..
