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.

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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. )

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