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AS ECONOMICS

QuestionBank
2005
Multiple choice and true-false questions to test your knowledge
and understanding of key topics in AS Economics

Author: Geoff Riley (Eton College)


tutor2u 2004 All Rights Reserved

CONTENTS
1

REVISION TESTS .............................................................................. 5


1.1
1.2
1.3
1.4

MICROECONOMICS .......................................................................... 34
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.15
2.16
2.17
2.18
2.19

Macroeconomics Revision Test (1) ..................................................................... 6


Macroeconomics Revision Test (2) ................................................................... 13
Microeconomics Revision Test (1).................................................................... 19
Microeconomics Revision Test (2).................................................................... 25
Introductory Economic Concepts..................................................................... 35
Production Possibility Frontier (PPF)................................................................ 40
The Theory of Demand................................................................................... 47
The Theory of Supply..................................................................................... 53
Price Elasticity of Demand.............................................................................. 58
Cross Price and Income Elasticity of Demand ..................................................... 64
Price Elasticity of Supply ............................................................................... 70
Market Equilibrium and Changes in Equilibrium Prices ......................................... 74
Maximum and Minimum Prices ........................................................................ 81
Consumer and Producer Surplus...................................................................... 86
Government Intervention: Taxation and Subsidies.............................................. 90
Markets in Action ......................................................................................... 95
Production and Costs ...................................................................................100
Economies and Diseconomies of Scale.............................................................105
Market Failure and Government Failure ...........................................................108
Monopoly and Competition ...........................................................................114
Public and Merit Goods.................................................................................117
External Costs and Benefits...........................................................................121
Market Failure and Government Intervention....................................................127

MACROECONOMICS........................................................................ 131
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13

Introduction to Macroeconomics....................................................................132
Interpreting Macroeconomic Data ..................................................................137
Growth and the Economic Cycle......................................................................141
Aggregate Demand......................................................................................148
Aggregate Supply .......................................................................................154
Equilibrium National Income.........................................................................158
Monetary Policy and the Exchange Rate...........................................................168
Fiscal Policy ...............................................................................................174
Supply-side Policies ....................................................................................179
Inflation ...................................................................................................183
Unemployment and the Labour Market ............................................................189
The Balance of payments ..............................................................................194
International Trade .....................................................................................198

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AS Economics QuestionBank 2005

Introduction
About QuestionBank 2005
There are over 650 multiple-choice and true-false questions in this edition of the AS Economics
QuestionBank. They are designed to cover the key aspects of the AS Economics specifications of
all the major examination boards. The questions are organised into sub-sections so that you
can test your knowledge and understanding of key concepts and topics as you work through
your course. All the questions are individually and sequentially numbered.
On the following page there is a blank worksheet for you to use to record your answers to each
quiz. Your teacher may ask you to try certain questions or to work through a complete section.
Print out and use this worksheet to note down the questions you have attempted, your answer
and the correct answer.
You will find the answers to each section directly after the questions (but on a separate page!).
Good luck with your studies.
Best wishes

Geoff Riley
Head of Economics
Eton College
http://www.tutor2u.net

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AS Economics QuestionBank 2005

Answer sheet

Name
Question No

Your answer

Correct answer

; or : ?

Total score
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AS Economics QuestionBank 2005

1 Revision Tests

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AS Economics QuestionBank 2005

1.1

Macroeconomics Revision Test (1)


1. Which one of the following is NOT an example of the use of government fiscal policy? A change in

a) Government spending on the National Health Service


b) Interest rates
c) The size of the budget deficit
d) A tax imposed on imports of goods and services

2. Which one of the following would cause an outward shift of the long run aggregate supply
curve? An increase in
a) The demand for credit
b) The rate of consumer price inflation
c) The volume of exports produced
d) The productivity of labour and capital inputs

3. The chart below shows real consumer spending in the UK for each year from 1987 to 2003. From
the chart it can be seen that

a) The real level of consumer spending fell in 1995


b) Consumer spending grew more strongly in the second half of the 1990s than the first half of the same decade
c) The UK economy was in recession in 1991 and 1992
d) The level of consumer spending was at its highest in 1988

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AS Economics QuestionBank 2005

General
Price Level

LRAS

P2
P1

AD2
SRAS1
AD1

Y1

Y2

Yfc

Real National Income

4. The change in aggregate demand shown in the diagram above could have been caused by all of
the factors below except
a) An increase in the level of household disposable income
b) An increase in the level of government borrowing
c) A fall in the value of the sterling exchange rate
d) An increase in the level of direct taxation for consumers and businesses

5. Which of the following is likely to decrease short run aggregate supply in an economy?
a) A rise in the price of raw materials and components
b) Improvements in production technology
c) Increased geographical mobility of labour
d) A rise in business confidence

6. Supply-side economic policies are most likely to be concerned with influencing


a) The value of the UK exchange rate against the Euro
b) The long run trend rate of economic growth
c) Short run fluctuations in the general price level
d) Short run fluctuations in the volume of UK exports sold overseas

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AS Economics QuestionBank 2005

7. The chart above provides information on house prices in the UK from data published by the
Halifax and the Nationwide, two of Britain's leading mortgage providers. From the data it can be
seen that
a) UK House prices were at their lowest in January 2001
b) The Nationwide has sold fewer houses than the Halifax during the period
c) The UK housing market experienced a recession during 2003
d) On average, house prices have risen by more than ten per cent per annum since 2002

8. Other things being equal, a rise in interest rates in the UK is most likely to
a) Decrease the external value of the pound against other currencies
b) Decrease the demand for new homes
c) Decrease the propensity to save among consumers
d) Decrease the level of government spending on public and merit goods

9. Which one of the following is a supply-side policy to reduce the level of unemployment?
a) A cut in interest rates
b) An increase in the real value of unemployment benefits
c) A reduction in the basic rate of income tax from 22% to 20%
d) A cut in spending on the Governments New Deal programme

10. If the short run aggregate supply curve is drawn as perfectly inelastic, an increase in aggregate
demand will lead to an increase in
a) Inflation
b) Real national output
c) Both inflation and real national output
d) Real national output and employment

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11. In the short run an increase in the governments budget deficit is most likely to reduce
a) The demand for imported goods and services
b) Unemployment
c) Interest rates
d) Inflation

12. A decision by the Bank of England to cut UK interest rates at a time when the value of the UK
exchange rate is falling is most likely to lead to an increase in
a) Long run aggregate supply
b) Unemployment
c) The trade surplus in goods and services
d) Aggregate demand

13. The chart above shows the household savings ratio for the UK for each year from 1990 to 2004.
From the data shown in the chart above we can say that
a) Consumers were spending less in 2001 than they were in 2000
b) Interest rates were higher in 1992 than there were in 2001
c) The average propensity to save has fallen since 1994
d) The number of households in debt has increased since 1998

14. Other factors remaining the dame, a 10 per cent fall in the UK exchange rate is most likely to
lead to
a) A fall in the UK price of imported food and drink
b) A rise in the foreign price of UK exports of cars
c) Higher demand for imported televisions into the UK
d) Higher demand for exports of digital cameras out of the UK

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15. Economic growth occurs when there is an increase in


a) Aggregate demand
b) The rate of inflation
c) Wage rates
d) Productive capacity

16. Which one of the following would not be regarded as a macro-economic government objective?
a) Achieving a steady rate of economic growth
b) Increasing capital investment and productivity in the steel industry
c) Keeping the rate of consumer price inflation within target
d) Reducing the rate of claimant count unemployment

17. The level of structural unemployment is most likely to be reduced by


a) Reducing interest rates
b) Reducing tariff barriers on imports of new technology
c) Increasing funding for training schemes for the unemployed
d) Decreasing capital investment grants for small businesses

18. The diagram above shows the annual rate of growth of real GDP for the Euro Zone countries and
the UK. From the data it can be seen that
a) The UK has grown faster than the Euro Zone throughout the period shown
b) Unemployment has fallen in both the Euro Zone and the UK since 1997
c) Both the Euro Zone and the UK economy experienced a recession in 2001
d) The UK economy experienced an upturn in economic growth in 2003

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19. Which one of the following is most likely to lead to an increase in the rate of consumer price
inflation?
a) An appreciation of the exchange rate
b) A fall in the balance of payments surplus
c) A rise in the budget surplus
d) A rise in world commodity prices

20. A government wishes to increase the rate of economic growth and reduce a deficit on the
balance of payments. Which of the following mix of policies would be most likely to achieve
these objectives?
a) Expansionary fiscal policy together with a rise in interest rates
b) Expansionary monetary policy together with a rise in taxes
c) Policies aimed at increasing investment and education and training
d) Increased investment in infrastructure together with policies aimed at raising the exchange rate

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AS Economics QuestionBank 2005

Macroeconomics Revision Test (1) - Answers


1. (b)
2. (d)
3. (b)
4. (d)
5. (a)
6. (b)
7. (d)
8. (b)
9. (c)
10. (a)
11. (b)
12. (d)
13. (c)
14. (d)
15. (d)
16. (b)
17. (c)
18. (d)
19. (d)
20. (c)

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1.2

Macroeconomics Revision Test (2)


21. Unemployment is most likely to rise when

a) GDP grows more quickly than the trend rate of growth


b) The world economy experiences an acceleration in growth
c) GDP grows more slowly than the underlying trend rate of growth
d) Aggregate demand is higher than aggregate supply

22. The Consumer Price Index is a measure of changes in the


a) Level of consumer spending on goods and services
b) Average standard of living
c) Effective demand for consumer goods
d) Average cost of living

23. In 2000, the money national income of a country was $500 billion. In 2001 the money value of
national income had grown to $550 billion but the price level had risen to 102. The approximate
value of real national income in 2001 is
a) $550 billion
b) $539 billion
c) $525 billion
d) $510 billion

24. One of the advantages of an appreciation in the UK exchange rate against other currencies is
that
a) Manufacturing exports to overseas countries will increase
b) Raw materials will cost more for the UK to import
c) The government will run a larger budget surplus
d) The purchasing power of UK tourists overseas will rise

25. The Monetary Policy Committee of the Bank of England decides to reduce interest rates over a
period of time from 6% to 4%. Other things being equal, this is likely to lead to
a) A rise in the average level of house prices
b) A fall in business sector investment
c) An increase in the value of the exchange rate
d) A reduction in consumer confidence

26. Macroeconomic disequilibrium exists when


a) Aggregate output is not equal to aggregate real income
b) Aggregate demand is not equal to aggregate supply
c) Aggregate exports are not equal to aggregate imports
d) Government expenditure is not equal to government tax revenue

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AS Economics QuestionBank 2005

General
Price Level

LRAS

P2
P1

SRAS2
SRAS1
AD

Y2 Y1

Yfc

Real National Income

27. The most likely cause of the shift in the short run aggregate supply curve shown in the diagram
above would be
a) A rise in the exchange rate
b) A rise in unit labour costs
c) A rise in government spending on public goods
d) A rise in business confidence

28. The chart above shows the UK (sterling)exchange rate and the annual trade balance in goods for
the UK for each year since 1990. The rise in the exchange rate during the years 1996 - 2001 is
likely to have caused a larger trade deficit because
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AS Economics QuestionBank 2005

a) UK exports will have become more expensive in international markets


b) UK imports will have become more expensive
c) UK consumers will have seen a fall in their real incomes
d) UK consumers will have decided to save a greater proportion of income

29. An increase in the rate of valued added tax would other things remaining equal lead to
a) A fall in the average cost of living
b) A fall in people's disposable income
c) A fall in the real level of consumer spending
d) An increase in government borrowing

30. Supply-side policies are understood to be policies which


a) Reduce the rate of inflation by controlling consumer spending
b) Reduce the price of imported goods and services
c) Encourage a rise in business sector investment and productivity
d) Restrict the supply of labour from other European Union countries

31. Which one of the following types of unemployment would be associated with a decline in
employment in the pharmaceuticals industry due to a global economic slowdown?
a) Structural unemployment
b) Cyclical unemployment
c) Frictional unemployment
d) Seasonal unemployment

32. A country experiences a persistent deficit in its balance of payments and falling unemployment.
Which one of the following policies would suggest that the Government's main objective is to
reduce the balance of payments deficit?
a) A reduction in the standard rate of income tax
b) An increase in government spending on the National Health Service
c) An increase in tax allowances for business investment
d) An increase in the standard rate of income tax

33. A tax is defined as regressive if


a) A lower income earner pays less in tax than a higher income earner
b) A lower income earner pays a lower percentage of their income in tax than a higher income earner
c) A lower income earner pays a higher percentage of their income in tax than a higher income earner
d) A higher income earner pays a higher percentage of their income in tax than a higher income earner

34. Real national income may be defined as


a) Money national income with direct taxes deducted
b) Money national income adjusted for changes in the level of prices
c) The sum of all output from manufacturing and construction industries
d) Money national income minus the effects of international trade
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35. The chart above shows the index of the level of output in Manufacturing and Service industries.
From the data contained in the table it can be seen that
a) Manufacturing has grown more quickly than services over the period
b) Manufacturing industry was in recession in 1989
c) Manufacturing industry has grown more slowly than the service sector
d) UK manufacturing has become less competitive against other countries

36. A government wishing to reduce the level of unemployment through the use of fiscal policy
would be most likely to
a) Lower interest rates to stimulate private sector investment
b) Remove all controls on consumer credit and bank lending
c) Increase the size of the budget deficit
d) Encourage a depreciation of the exchange rate

37. Investment may be defined as


a) Spending on goods and services by consumers
b) Any addition to the capital stock of the economy
c) All types of spending by the government
d) That part of household spending which is financed by borrowing from banks rather than from saving

38. A cut in interest rates will give a boost to aggregate demand if it leads to an increase in
a) Saving
b) The value of the pound
c) Consumer borrowing and spending
d) Imports

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39. A multiplier effect occurs when an initial change in government spending leads to a larger
change in the level of
a) Investment
b) National income
c) Prices
d) Saving

40. Real income may be obtained from data on money income by allowing for
a) Changes in wage rates
b) Changes in interest rates
c) Changes in the general level of prices
d) Changes in government taxation

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AS Economics QuestionBank 2005

Macroeconomics Revision Test (2) - Answers


21. (c)
22. (d)
23. (b)
24. (d)
25. (a)
26. (b)
27. (b)
28. (a)
29. (c)
30. (c)
31. (b)
32. (d)
33. (c)
34. (b)
35. (c)
36. (c)
37. (b)
38. (c)
39. (b)
40. (c)

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1.3

Microeconomics Revision Test (1)


41. A indirect tax on the suppliers of a good usually

a) Raises its price


b) Increases the profits of producers supplying the good
c) Causes an inward shift of demand
d) Offsets the effect of a government subsidy on the good

42. The price mechanism helps to allocate scarce resources efficiently because
a) It will always ensure that competition between firms prevents excessive profits being earned
b) When the supply of non-renewable resources such as coal nears depletion, the market price will increase,
putting downward pressure on demand
c) It will lead to a distribution of output amongst consumers on the basis of greatest need rather than ability to pay
d) It results in lower wages being paid to workers when the demand for the good or service they produces increases

43. The fundamental economic problem facing all countries is


a) Too much money chasing too few goods
b) The depletion of the earth's scarce resources
c) Noise and air pollution from road congestion
d) Unlimited needs and wants constrained by limited factor resources

44. A manufacturer of kitchen equipment reduces the prices of their standard models by 8% and, as
a result, the volume of sales of new kitchens rises by 6%. The price elasticity of demand for the
good is
a) -1.33
b) -0.66
c) -0.75
d) -0.50

45. An advertising campaign aimed at differentiating a product from its only substitute was
successful. What is likely to have happened to the price elasticity of demand for the product and
the cross price elasticity of demand of the substitute?
a) Price elasticity increases and cross elasticity increases
b) Price elasticity increases and cross elasticity decreases
c) Price elasticity decreases and cross elasticity increases
d) Price elasticity decreases and cross elasticity decreases

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46. When the price of a new pre-recorded DVD is 15 per DVD, 20,000 DVDs are demanded. If the
price elasticity of demand is (-) 2.5, how many DVDs would be demanded if its price fell to 12
per DVD?
a) 30,000
b) 28,000
c) 27,500
d) 25,000

47. The price elasticity of demand for digital cameras will be influenced by
a) The degree of necessity or luxury that is perceived by consumers of digital cameras
b) The time taken to produce digital cameras
c) The availability of resources used to produce digital cameras
d) The ease with which producers of digital cameras are able to respond to market changes by changing their
output
S2

Price

S1
F
C

D1
J

Quantity

48. The diagram above shows the demand and supply curves for a product following the
introduction of an ad valorem tax. As a result of the shift in the supply curve from S1 to S2, the
level of consumer surplus falls by
a) ACF
b) ABEC
c) CED
d) ABDC

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49. If the supply curve of a commodity is positively sloped, a fall in the price of the commodity
caused by an inward shift of demand results in
a) A contraction in quantity supplied
b) A decrease (inward shift) in supply
c) An expansion of quantity supplied
d) An increase (rightward shift) in supply

50. In a typical demand schedule, quantity demanded


a) Varies directly in price
b) Varies proportionately with price
c) Varies inversely with price
d) Varies according to the amount available for sale

51. Given a rise in real income, the demand curve for an inferior good will, other things being equal
a) Shift to the left causing a fall in market price
b) Shift to the right causing an increase in market price
c) Shift to the left causing a rise in market price
d) Shift to the right causing an inward shift of the market supply curve
S2

Price

S1
F
C

D1
J

Quantity

52. The diagram above shows the effect of a tax on producers introduced by the Government. As a
result of the tax, the total tax revenue going to the government equals area
a) ACEB
b) CID
c) ACIJ
d) FAC
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53. The demand curve for lobster is downward sloping. If the demand for lobster is price inelastic a
reduction in its price (other things remaining equal) must result in
a) Excess supply of lobsters
b) An increase in the quantity demanded of lobster
c) An increase in total spending on lobster by consumers
d) Increased sales of crab (a substitute for lobster)

54. In a free-market economy, an increase in the price of a good will


a) Always lead to more resources being devoted to production of the good
b) Always be accompanied by a fall in the output of the good
c) Provide information which will influence the production and consumption decisions of economic agents
d) Make it less likely that new suppliers will enter the industry

55. Which one of the following statements referring to the price mechanism is correct?
a) Low prices act as an incentive for firms to supply more products
b) Firms are unable to influence market demand for their products
c) High prices will always lead to higher profits
d) Consumers will see a rise in their real incomes (other things being equal) if the general price level falls

Price of
Good S

Demand

Quantity demanded of Good T

56. The relationship in the diagram above illustrates that the two goods S and T are
a) Complementary goods
b) Inferior goods
c) Normal goods
d) Substitute goods

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AS Economics QuestionBank 2005
Demand
Price

Supply (post tax)

Supply (pre tax)

P2

P1

Q1

Quantity

57. The diagram above shows the effect of a tax on petrol to reduce road congestion and pollution
from road use. It can be deduced from the diagram that
a) Suppliers pay all the tax
b) Consumers pay all the tax
c) Consumers will refuse to pay the tax
d) The demand for petrol falls as a result of the tax

58. A product has a price elasticity of supply of +1.2. If its price rises from 6.00 to 8.50 then its
supply will
a) Rise by 25%
b) Rise by 50%
c) Fall by 50%
d) Fall by 20%

59. Which one of the following measures is designed to deal with divergences between private and
social costs?
a) Minimum wage legislation
b) Equal pay legislation
c) The introduction of "bus only lanes" in city centres
d) The introduction of toll charges on road bridges

60. When the economy is operating on its production possibility frontier, an increase in the
production of public goods will
a) Increase the opportunity cost of private goods
b) Mean a reduction in the production of private goods
c) Have no effect on the supply of private goods
d) Increase total output because public goods are non rival
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AS Economics QuestionBank 2005

Microeconomics Revision Test (1) - Answers


41. (a)
42. (b)
43. (d)
44. (c)
45. (d)
46. (a)
47. (a)
48. (d)
49. (a)
50. (c)
51. (a)
52. (c)
53. (b)
54. (c)
55. (d)
56. (d)
57. (b)
58. (b)
59. (c)
60. (b)

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1.4

Microeconomics Revision Test (2)


61. The opportunity cost to the government of a decision to construct five new by-passes for a
selection of towns would be

a) The financial cost of building the roads


b) The other goods and services that the capital equipment constructing the roads could have produced
c) The other goods and services that would be produced if the by-passes had not been built
d) The loss of natural habitat given up in order to build the roads

62. Which one of the following is a positive statement?


a) The exchange rate is affected by the level of interest rates
b) The British fishing industry should be given a subsidy to cover their financial losses due to the loss of fish stocks
in the North Sea
c) Fire fighters deserve higher pay than nurses
d) The government should increase the rate of excise duty on cigarettes

63. If an economy is operating at full capacity, the most likely effect of an increase in the output of
capital goods is that the output of consumer goods will
a) Increase in the short run but fall in the long run
b) Decrease in the short run but fall in the long run
c) Increase in the short run but rise in the long run
d) Decrease in the short run but rise in the long run
All Other
Operations

A
B

Heart Operations

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64. The diagram above shows an economy with a production possibility boundary producing heart
operations and other health treatments. The economy is able to expand output from the
combination shown by point A to the combination shown by point C if
a) There is an increase in the productivity of all resources available to provide health treatments
b) Wage costs increase in the National Health Service
c) Technological improvements in providing heart operations only reduce the cost of such procedures
d) There is a reduction in the number of people employed in the NHS
Price

Domestic Supply

World Price + Tariff

Pw + T

M
World Price
Pw

Domestic Demand

Qs

Qs2

Qd2

Qd

Output (Q)

65. The diagram above shows the domestic demand and supply for a commodity and also the world
supply both before and after the introduction of an import tariff. The shaded area in the diagram
labelled by the letter M represents
a) The volume of imports before the introduction of the tariff
b) The value of imports before the introduction of the tariff
c) The volume of imports after the introduction of the tariff
d) The value of government tax revenue after the introduction of the tariff

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AS Economics QuestionBank 2005

Price

S1
S2

P1
P2

D1

Q1

Q2

Quantity

66. The change in the supply curve shown in the diagram might have been caused by
a) An increase in consumers' real incomes
b) A successful advertising campaign for the product
c) A fall in the costs of raw materials and components
d) The exit of some suppliers from the market

67. If, when income changes, the quantity demanded of a commodity remains the same, its income
elasticity of demand is equal to
a) Infinity
b) Zero
c) +1
d) -1

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Price
S1

S2

P1

P2

Demand
Q2

Q3

Quantity

68. The diagram above shows the effect of an increase in market supply for a commodity. The shaded
area in the diagram represents
a) The increase in producer surplus following a fall in market price
b) The increase in total costs following a fall in market price
c) The increase in consumer surplus following a fall in market price
d) The increase in government tax revenue following a fall in market price

69. If, when the price of product S rises by 20%, the demand for product W falls by 4% and the
demand for product T rises by 5%, then we can say that
a) W is a substitute for S and T is a complement to S
b) W is a substitute for S and T is a substitute to S
c) W is a complement for S and T is an inferior good
d) W is a complement for S and T is a substitute to S

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Supply

Price

Pe

P max

Maximum Price

Demand

Quantity

70. The diagram above shows a market where the government has introduced a statutory maximum
price of P max. As a result of the maximum price, the output that will be supplied onto the
market will be
a) A
b) B
c) C
d) D
Price
Supply
A
P1

D
Demand

Q1

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Quantity

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71. The diagram above shows a market in equilibrium at price P1 and output Q1. Which area, A, B, C
or D shows the level of producer surplus in the market at this price and output?
a) A
b) B
c) C
d) D

72. The effect of a government imposing a minimum price for cereals above the free market
equilibrium price will result in
a) No change in equilibrium price
b) A fall in the quantity of cereals produced
c) An increase in the demand for cereals
d) Over-production of wheat because of the incentive of higher prices

73. If the supply curve of a commodity is positively sloped, a fall in the price of the commodity
brought about by an inward shift of demand results in
a) A contraction in quantity supplied
b) A decrease in supply at all price levels
c) A rise in producer surplus
d) An increase in consumer surplus
Price of
Lamb

Supply of
Lamb

P2
P1

D1

Q1

Q2

D2

Quantity of Lamb

74. The change in the market demand for lamb shown in the diagram above might have been caused
by
a) A fall in consumers' incomes (assuming lamb is a normal good)
b) A rise in the price of beef (a substitute for lamb)
c) A successful advertising campaign for chicken (a substitute for lamb)
d) An increase in the number of farmers supplying lamb to the market
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Price
G

Supply pre
subsidy

Supply + Subsidy

C
E

Demand

Q1

Q2

Quantity

75. The diagram above shows the effect of a government subsidy to producers of cereals. Following
the subsidy, the total amount that the government will pay to producers as part of the subsidy
arrangement is equal to area.
a) GDA
b) GFB
c) DABF
d) ECBF

76. A producer estimates that the price elasticity of supply for his product is +1.5. As a result of an
increase in market price from 30 to 45 following an outward shift of the producer's demand
curve, we could expect the producer to expand supply by
a) 50%
b) 70%
c) 75%
d) 100%

77. The government wishes to increase economic welfare by introducing policies that create
external benefits as well as internal ones. It should
a) Raise the price of unleaded fuel
b) Increase the highest rates of income tax
c) Increase the school - leaving age
d) Invest more in funding training for the long-term unemployed
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78. A government believes that consumers derive greater benefit from a good than consumers
themselves perceive. To which category does the good belong?
a) Merit good
b) Collective good
c) Superior good
d) Public good

79. Which one of the following statements referring to a market economy is correct?
a) Monopolists never take account of consumer preferences they just charge the maximum price a consumer is
willing to pay
b) Prices in markets do not always reflect externalities
c) Efficiency is always indicated by high producer profits
d) Large firms are always more efficient than smaller firms

80. Which one of the following would be included in the economists definition of physical capital?
a) A concert musician
b) Timber from forests
c) Fish stocks in the North Sea
d) Computer aided design technology used in car manufacturing

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Microeconomics Revision Test (2) - Answers


61. (c)
62. (a)
63. (d)
64. (a)
65. (d)
66. (c)
67. (b)
68. (c)
69. (d)
70. (a)
71. (b)
72. (d)
73. (a)
74. (b)
75. (c)
76. (c)
77. (d)
78. (a)
79. (b)
80. (d)

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2 Microeconomics

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2.1

Introductory Economic Concepts


81. True or False: According to the basic model of competition in a market, firms seek to maximise
profits

a) True
b) False

82. True or False: Economics cannot claim to be a science since the subject cannot make use of
controlled laboratory experiments to test a theory
a) True
b) False

83. True or False: The following statement is an example of a normative statement: the cost of fruit
and vegetables should be subsidised by the government to encourage healthy eating
a) True
b) False

84. Individuals and businesses must make choices because


a) They must act rationally
b) Of resource scarcity
c) Of the law of diminishing returns
d) None of the above

85. If a consumer is acting rationally, we mean that


a) They save a proportion of their monthly income rather than spend it all
b) They wont take a job that pays low wages
c) They weigh up the costs and benefits of each choice they make
d) They will always buy the products in the market that are cheapest

86. Allocating scarce products such as cup final tickets by using ballot or a lottery is an example of
a) The profit motive
b) Rationing
c) Only selling to the highest bidder
d) None of the above

87. In a market-based economy the scarcity of factors of production means that


a) Consumers must inevitably consider the opportunity cost of their choices
b) A country cannot achieve economic growth every year
c) Inflation is inevitable
d) The economy cannot produce on its production possibility frontier

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88. Which of the following is not a factor of production as the term is used by economists?
a) Farmland
b) Cash in a bank account
c) Buildings and machinery
d) Labour

89. Which one of the following is best described as a normative statement?


a) A reduction in spending on the NHS will result in some job losses
b) Free health care should be provided to everyone
c) A reduction in health care spending will have most impact on lower income households
d) Extra funding for the NHS may involve some switching of spending from other services such as education or
transport

90. Economics is primarily concerned with the study of


a) Determining how the government should allocate resources
b) How to make more effective use of resources through reducing wants
c) Allocating scarce resources to satisfy competing and unlimited wants
d) How new wants and economic resources are produced by businesses

91. Which one of the following is a positive statement?


a) Income inequality in the UK has increased over the last 30 years
b) The rate of unemployment is too high
c) The national minimum wage rate should be increased to 5 per hour
d) Nurses working in the National Health Service should have a maximum working week of 50 hours per week

92. Choice is important in the basic economic problem because


a) Wants increase with income
b) Scarce economic resources are distributed equally
c) Limited economic resources have many alternative uses
d) High demand leads to higher market prices

93. Which one of the following is a 'normative statement'?


a) Increased spending on new cars will lead to a rise in traffic congestion
b) Prices in a competitive market are likely to be lower than a monopoly
c) Most firms seek to maximise their market share
d) The government should raise taxes on products which harm the environment

94. In economics it is generally assumed that the main objective of firms is to


a) Reduce their prices and satisfy as many consumers as possible
b) Maximise the company share price on the stock market
c) Employ more workers in order to reduce unemployment
d) Maximise total profits
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95. Profit is most likely to be an objective of


a) State-owned industries
b) Consumers
c) Governments
d) Entrepreneurs

96. A possible advantage of a planned economy is that:


a) Resources are allocated via the price mechanism
b) There is greater consumer choice of products
c) Identification with the state may be a better work incentive than the profit motive
d) The state can better provide a range of goods for collective consumption

97. Which of the following is a measure of productivity?


a) The total amount of output produced by a business each year
b) Total output divided by total employment of labour
c) The quantity of capital used by a business
d) The percentage increase in employment

98. Which of the following is a positive statement?


a) Direct taxes should be increased to distribute income more fairly
b) The government ought to cut the taxes paid by motorists
c) The distribution of income and wealth is unequal
d) All taxes are bad, but some public services are good

99. Which one of the following is a normative statement?


a) The government should spend more on the health service
b) Building a new hospital involves an opportunity cost
c) The government regards health care as a merit good
d) Some medicinal drugs are ineffective and expensive to supply to patients

100.

Opportunity cost is best defined as

a) The cost of a choice measured by the cost of products bought


b) The cost of a choice measured by the next best alternative forgone
c) The cost of a choice measured by the time taken to consume
d) The cost of buying an additional unit of a good or service

101.

What are the four main types of factor of production?

a) Land, labour and money


b) Money, entrepreneurship, and factories
c) Labour, cash, capital, and entrepreneurship
d) Land, labour, capital and entrepreneurship
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102.
A student works for a book shop during the holidays. She is offered the alternative of
being paid 100 per week in cash of choosing 150 worth of books from the shelves. What is the
opportunity cost to the student of choosing the books?
a) 50
b) 150
c) 100
d) The alternative use to which her time could have been put

103.

If scarce resources are allocated efficiently then

a) Equal amounts of land, labour and capital have been used in producing a good or service
b) Firms are maximising their sales and profits
c) All consumers have equal amounts of goods and services
d) It is impossible to increase the output of one good without reducing the output of another good

104.

The existence of scarcity implies that

a) There are no free goods


b) Only rich households can save
c) Supplies of factors of production cannot be increased
d) Households, firms and governments must make choices

105.
The workers in a factory currently earn 240 for a 40 hour week. The management offers
them a choice between either a straight 10 per cent wage increase or an increase in the weekly
wage to 260 along with a reduction in hours from 40 to 39 hours. Disregarding the value of
leisure time, what is the opportunity cost to each worker of opting for the 39 hour week?
a) 4
b) 6
c) 20
d) 24

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Introductory Economic Concepts - Answers


81. (a)
82. (b)
83. (a)
84. (b)
85. (c)
86. (b)
87. (a)
88. (b)
89. (b)
90. (c)
91. (a)
92. (c)
93. (d)
94. (d)
95. (d)
96. (d)
97. (b)
98. (c)
99. (a)
100.

(b)

101.

(d)

102.

(c)

103.

(d)

104.

(d)

105.

(a)

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2.2

Production Possibility Frontier (PPF)


106.
True or False: Combinations of goods and services that lie within the production
possibility curve show an inefficient allocation of scarce resources

a) True
b) False

107.
True or False: A fall in the size of the available labour supply, other factors remaining
constant, will cause an outward shift of a production possibility curve
a) True
b) False

108.
True or False: A movement along the frontier of a production possibility curve can only
be achieved if the economy successfully reduced unemployment
a) True
b) False

109.

The production possibility schedule for vans and lorries is as follows


Vans
16
15
14
13
11
9
7
0

Lorries
0
1
2
3
4
5
6
7

The opportunity cost of the second lorry in terms of vans is


a) 1
b) 2
c) 7
d) 14

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Output of
consumer
goods
and
services

Output of capital goods

110.
Which economic concept is illustrated by the shape of the production possibility
frontier shown in the diagram above?
a) The law of diminishing returns
b) Economies of scale
c) Economic growth
d) Diseconomies of scale

111.

The production possibility curve

a) Shows the amount of two or more goods that a society can produce
b) Is normally drawn as a concave curve rather than a straight line
c) Shows allocations of two or more goods that are allocative efficient
d) All of the above

112.

When an economy operates on its production possibility frontier it is

a) Satisfying all the economic wants of consumers


b) Productively efficient
c) Maximising the profits of producers
d) Not producing demerit goods such as cigarettes and other harmful drugs

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113.
The production possibility frontier for a country producing two goods is shown in the
diagram above. The opportunity cost of increasing the output of MP3 players from 80 to 100 (a
movement from A to B) on the PPF is
a) 80 DVD players given up
b) 50 DVD players given up
c) 30 DVD players given up
d) 20 DVD players given up

114.
Which of the combinations of output of DVD players and MP3 players are feasible given
the PPF that a country faces a PPF shown in the diagram above?
a) A, B and C
b) A, B, C and D
c) E only
d) A, B, C, D and E

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115.
In the diagram above, what is happening to the marginal opportunity cost of producing
extra MP3 players as a country reallocates resources from combination A to B and then to C?
a) The marginal opportunity cost remains the same
b) The marginal opportunity cost is increasing
c) The marginal opportunity cost is falling
d) The marginal opportunity cost cannot be calculated
Output of Capital
Goods

C2

C1

X2

X1

Output of Consumer Goods

116.
A reallocation of resources within an economy from A to B shown in the PPF diagram
above is likely to lead to
a) A short term rise in production of consumer goods and a fall in demand for investment goods
b) A short term fall in production of consumer goods but a long term rise in an economy's productive potential
c) A decrease in demand for workers employed in producing capital goods
d) An increase in the demand for consumption goods

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117.

Periods of high unemployment in an economy correspond to

a) Points that lie within the production possibility curve


b) Points that lie on the production possibility curve
c) Points that lie outside the production possibility curve
d) None of the above

118.

If the United Kingdom has a comparative advantage in the production of a good, then

a) The UK will usually be a net importer of the good


b) The UK will be required to pay tariffs on imports of the good
c) Fewer resources are required to produce the good in the United Kingdom
d) The relative cost of producing the good is lower in other countries

119.
Important sources of comparative advantage in the production of a good or service
include
a) Natural endowments of factors of production
b) The quality of human capital
c) Lower unit labour costs
d) All of the above
All Other
Operations

A
B

PPF1

PPF1

Heart Operations

120.
The diagram above shows a production possibility frontier for health services. The
outward shift of the PPF might have been caused by
a) An increase in the efficiency of labour and capital providing heart operations only
b) A fall in new capital investment in the health service
c) An increase in the number of heart surgeons employed by the NHS
d) Improvements in medical technology available to provide a full range of health services

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121.
Which combination of output shown in the PPF above would represent a preference
within this economy to increase consumption of goods and services in future time periods?
a) A
b) B
c) C
d) D
All Other
Goods and
Services

C
F

B
PPF2
D

PPF1

Motor Cars

122.
The diagram above shows the effects of a shift in a production possibility frontier. Which
points shown in the diagram above indicate an efficient use of scarce resources after an
economy has grown?
a) A and B
b) D and E
c) C and G
d) C, G and F
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Production Possibility Frontier (PPF) - Answers


106.

(a)

107.

(b)

108.

(b)

109.

(a)

110.

(a)

111.

(d)

112.

(b)

113.

(c)

114.

(b)

115.

(b)

116.

(b)

117.

(a)

118.

(c)

119.

(d)

120.

(d)

121.

(c)

122.

(c)

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2.3

The Theory of Demand


123.
True or False: In a market economy, prices provide incentives to help the economy use
scarce resources efficiently

a) True
b) False

124.

True or False: As price falls, quantity demanded for a normal good will fall

a) True
b) False

125.
curve

True or False: A change in consumers' income will normally cause a shift in the demand

a) True
b) False

126.
True or False: A decrease in the price of a complement will shift the demand for the good
in question to the left
a) True
b) False

127.
True or False: A fall in the price of a substitute good will cause an inward shift in the
demand for a product
a) True
b) False

128.

Individual consumers normally try to maximise

a) Utility or satisfaction from consumption


b) Profits
c) The satisfaction of other consumers
d) Their intelligence

129.

In a free market economy, market prices

a) Reflect the relative scarcity of the product


b) Communicate information to producers about how much to supply
c) Provide incentives for consumers about how much to purchase
d) All of the above

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130.
As the market price rises, the quantity demanded decreases along the market demand
curve because
a) Some consumers enter the market
b) Some producers leave the market
c) Some consumers switch to relatively cheaper substitute products
d) Some producers enter the market

Price
per unit

D1

D2

Quantity demanded

131.
The shift of the demand curve from D1 to D2 in the diagram above could have been
caused by
a) An increase in the price of the good itself
b) A decrease in the price of the good itself
c) A fall in interest rates
d) A fall in real incomes of consumers if the good is a normal good

132.

The phrase 'ceteris paribus' means

a) A change in one factor affects another


b) Both factors moving in the same direction
c) No change in any economic factor
d) All other factors are held constant

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133.
As consumers have become more concerned about the amount of saturated fat in their
diet, the demand for chicken has increased whilst the demand for beef has fallen. The result of
this is likely to be
a) An increase in the quantity supplied of beef
b) A rise in the market price of beef
c) A decrease in the quantity supplied of chicken
d) A rise in the market price of chicken

134.

Which one of the following is NOT a cause of a shift in the market demand for a product?

a) A change in the product's own price


b) A change in consumer incomes
c) A change in the price of a complement
d) A change in consumer tastes and preferences

135.

The market demand curve for overseas holiday cruises will NOT shift when there is a

a) Rise in consumers real incomes


b) Successful advertising campaign
c) Fall in the price of a cruise in the brochures
d) Increase in the price of land-based holidays (a substitute for cruises)

136.

All other factors held constant a decrease in market demand for new cars will lead to

a) Decreased price and decreased quantity


b) Increased price and decreased quantity
c) Increased price and increased quantity
d) Decreased price and no change in quantity

137.
Suppose that a 20% increase in the price of good Y results in an increase in the
consumption of good X of 8%. This is an example of
a) A shift in supply
b) The substitution effect
c) The real income effect
d) A higher demand for all goods and services in general

138.
If the price of a digital camera falls from 500 to 300 during a period when the general
price level rose by 10 per cent, then the relative price of the camera has fallen by
a) 40 per cent
b) 50 per cent
c) 60 per cent
d) 100 per cent

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139.
When the price of one of the products that you buy increases, your purchasing power
decreases. Thus you are likely to buy less of all normal goods. This is known as:
a) The substitution effect
b) The real income effect
c) The law of diminishing marginal returns
d) The rip-off effect

140.
If consumers expect that the price of cocoa will increase in the future, what will happen
to equilibrium price and quantity of cocoa now?
a) Price will increase; quantity will increase
b) Price will increase; quantity will decrease
c) Price will decrease; quantity will increase
d) Both price and quantity will remain the same

141.
Which one of the following would be expected to cause an inward shift in the market
demand for UK produced cheese?
a) An increase in the price of cheese
b) An increase in the price of a complement to cheese
c) A rise in income - assuming that cheese is a normal good
d) A rise in the price of a substitute for cheese

142.
Tom graduates from university with a degree in Economics and his income increases by
10,000 a year. Other things remaining the same, he decreases the quantity of donuts he buys.
For Tom, donuts _______.
a) And toast have become substitutes
b) And tea has become complements
c) Are an inferior good
d) Are a normal good

143.
Chicken and fish are assumed to be substitutes for each other. If the price of chicken
increases, demand for fish will
a) Not change but there will be a movement along the demand curve for fish
b) Decrease and the demand curve for fish will shift to the left
c) Increase and the demand curve for fish will shift to the right
d) Increase or decrease, but there will be no change in demand for chicken

144.
Other factors remaining the same, a large rise in the price of using bus transport will
lead to
a) A fall in the demand for new cars
b) A fall in the demand for taxi services
c) An expansion of supply of new and second-hand cars
d) An expansion of new bus routes available for customers

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145.

Demand for a good or service is said to be effective only when it is associated with

a) The satisfaction of a want


b) Willingness and ability to pay for the good
c) The existence of an adequate supply of the good
d) Knowledge of the characteristics of the good

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The Theory of Demand - Answers


123.

(a)

124.

(b)

125.

(a)

126.

(b)

127.

(a)

128.

(a)

129.

(d)

130.

(c)

131.

(c)

132.

(d)

133.

(d)

134.

(a)

135.

(c)

136.

(a)

137.

(b)

138.

(b)

139.

(b)

140.

(a)

141.

(b)

142.

(c)

143.

(c)

144.

(c)

145.

(b)

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2.4

The Theory of Supply


146.

True or False: A change in the price of a good will cause a shift in its supply curve

a) True
b) False

147.
True or False: A poor cocoa crop will result in higher prices for chocolates, other things
being equal
a) True
b) False

148.
True or False: The introduction of a 17.5% value added tax on aviation fuel must lead to
a 17.5% rise in the average cost of a flight for air travellers
a) True
b) False
Price
per unit

Supply

P2

P1

Q1

Q2

Quantity
supplied

149.
The diagram above illustrates the market supply curve for fitted kitchens. The upward
slope of the market supply curve can be explained by the argument that at higher prices
a) Manufacturers stand to make higher profits if they produce more
b) Higher prices give kitchen manufacturers more monopoly power
c) Consumers will regard higher prices as a sign of product quality
d) The Government will offer a subsidy for more kitchens to be produced

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150.

According to the Law of Supply

a) Anything that is supplied by a business will be purchased by consumers


b) If the price is low, any firm will sell the product
c) The higher the price, the lower the quantity supplied
d) The higher the price, the larger the quantity supplied.

151.

The market supply of canned peaches at a given price will shift inwards when there is

a) An advertising campaign for canned peaches


b) A higher price for aluminium cans
c) An increase in the demand for milk
d) An increase in the demand for fresh fruit

152.
in

If the supply curve for a good is positively sloped, a rise in the price of the good results

a) An increase in quantity supplied


b) A rightward shift in the supply curve
c) A decrease in the quantity supplied
d) A leftward shift in the supply curve
Price
S1
S2

Quantity supplied

153.
The change in the supply curve from S1 to S2 in the diagram above could have been
caused by
a) The establishment of a monopoly in the industry supplying the good
b) A reduction in the rate of VAT applied to the good
c) A reduction in a government subsidy paid to producers of the good
d) An increase in the costs of components used in manufacturing the good

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154.

Which one of the following would not cause a shift in the market supply of new cars?

a) A change in the price of new cars


b) A change in the labour costs of producing new cars
c) A government tax on producers of new cars
d) The entry and exit of new firms supplying cars

155.
An improvement in technology lowers the cost of producing coffee. At the same time,
consumers change their preferences away from tea towards coffee. We would expect the
quantity traded of coffee to
a) Remain the same
b) Fall
c) Rise
d) Rise or fall depending on whether the price of coffee rises or falls

156.

A shift to the right of the supply curve for a product can be caused by

a) The entry of new firms into the industry


b) A rise in the costs of production
c) A government tax on the producers
d) A rise in the popularity of the product

157.
There is a sharp fall in the market supply of fresh haddock. The fall in market supply
might have been caused by:
a) A long term decline in fish stocks
b) Improved technology in the fishing industry
c) An increased preference for haddock by the consumer
d) A fall in the price of alternative fish products

158.
On a supply and demand diagram, other things remaining the same an increase in
production costs will normally shift
a) The demand curve to the right
b) The supply curve to the right
c) The demand curve to the left
d) The supply curve to the left

159.
Which one of the following would cause the market supply curve for new wool suits to
shift to the right?
a) A reduction in a tariff on imported wool used in suit manufacture
b) An increase in the prices of jeans and shirts
c) An increase in the selling price of new wool suits
d) An increase in the real incomes of consumers

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Price
per
unit

S2
S1

Quantity supplied

160.
The change in supply curve of the product from S1 to S2 shown in the diagram above
could have been due to
a) An improvement in production technology
b) A fall in the exchange rate causing a rise prices of imported components
c) A government subsidy to producers
d) An increase in the real incomes of consumers

161.
On a demand and supply diagram, other things remaining the same, a fall in production
costs will normally shift
a) The supply curve to the right
b) The demand curve to the right
c) The supply curve to the left
d) The demand curve to the left

162.

Two products are in joint supply when

a) An increase in the output of one product is accompanied by a decrease in the output of the other product
b) An increase in demand for one product reduces demand for the other product
c) An increase in the output of one product is accompanied by an increase in the output of the other product
d) An increase in the demand for one good causes producers to stop producing the other product

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The Theory of Supply - Answers


146.

(b)

147.

(a)

148.

(b)

149.

(a)

150.

(d)

151.

(b)

152.

(a)

153.

(b)

154.

(a)

155.

(c)

156.

(a)

157.

(a)

158.

(d)

159.

(a)

160.

(b)

161.

(a)

162.

(c)

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2.5

Price Elasticity of Demand


163.
True or False: The price elasticity of demand is greater for goods that have several rather
then fewer close substitutes

a) True
b) False

164.
True or False: Total spending on a product decreases as price falls when the demand
curve is price elastic
a) True
b) False

165.

True or False: A vertical demand curve can be described as perfectly elastic

a) True
b) False

166.
True or False: When the demand curve for a product is elastic, relatively more of a tax on
the production of the good will be borne by producers
a) True
b) False

167.
True or False: Demand for a product will tend to less price elastic in response to a price
change in the long run compared to the short run
a) True
b) False

168.
True or False: If the demand for a product is perfectly inelastic, a rise in market supply
will only cause a fall in market price and no change in production
a) True
b) False

169.
Suppose that the price elasticity of demand for a product is estimated to be 0.6. The
demand for the good is
a) Perfectly elastic
b) Inelastic
c) Elastic
d) Perfectly inelastic

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170.
Suppose that price of Good X rises by 30 per cent and demand for Good X falls by 10 per
cent. Elasticity of demand is
a) -3
b) -30
c) -0.33
d) -1.33

171.

The demand for a product will tend to be elastic when:

a) It has few close substitutes in the market


b) The consumer regards the product as a necessity
c) The purchase of a good takes up a high proportion of a consumers' budget
d) It is subject to habitual consumption

Price

Price

Demand

Demand

Quantity
Price

Supply

Price

Quantity
D

Demand

Demand
Quantity

Quantity

172.
Which one of the diagrams above, A, B, C or D shows a demand curve that is perfectly
inelastic?
a) A
b) B
c) C
d) D

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173.
The demand for orange juice is found to have a price elasticity of demand equal to -1.8.
If there is a severe frost which destroys large quantities of oranges we expect to see
a) A fall in the market price and a rise in spending on orange juice
b) A rise in the market price and a fall in spending on orange juice
c) No change in the market price and no change in spending
d) An increase in the market price and no change in spending

174.
Ratko loves chocolate truffles. As the market price of a truffle increases from 50p to
60p, Ratko continues to buy a dozen truffles every week to satisfy his wants. Ratko's demand for
chocolate truffles is therefore
a) Elastic
b) Unit elastic
c) Perfectly inelastic.
d) Illustrated by a horizontal demand curve.

175.
When the price of a DVD version of a new film is 12 per unit, 180,000 DVDs are
demanded each week. The manufacturer estimates that the price elasticity of demand is (-) 1.4.
If the price of the DVD were cut by 3, how many DVDs would be demanded at the new price?
a) 200,000
b) 215,000
c) 220,000
d) 243,000

176.
EasyJet cuts its fares on average by 14% and finds that the volume of passengers
demanding flights on their services rises by 25%. As a result, the total revenue of EasyJet will
a) Decrease because demand is price elastic
b) Increase because demand is price inelastic
c) Increase because demand is price elastic
d) Remain the same as elasticity of demand = unity (1)

177.
A manufacturer reduces the price of his washing machines by 5% and, as a result, the
volume of sales of washing machines rises by 4%. The price elasticity of demand for the good is
a) -1.25
b) -0.8
c) -1.0
d) Indeterminate from available information

178.
A supermarket reduces the price of oranges from 20 pence each to 16 pence each. The
weekly sales increase from 8,000 to 12,000. The price elasticity of demand is
a) -0.4
b) -0.6
c) -2.0
d) -2.5
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179.
In 2001, export prices of coffee in Ethiopia fell by half - from 79 cents per pound in
2000 to 39 cents. If the demand for Ethiopian coffee is assumed to be price inelastic, the fall in
price will cause
a) A rise in the total revenue of coffee growers
b) A fall in the total revenue of coffee growers
c) No change in total revenue
d) An increase in the profitability of growing coffee in Ethiopia

180.
Vodafone estimates the price elasticity of demand for text messages to be -2.0. If the
business cuts the price of text messages by 20%, demand could be expected to
a) Expand by 20%
b) Expand by 30%
c) Expand by 40%
d) Expand by 10%

181.
If you earn 50,000 a year and acquiring a cable TV service costs you 360 per year, your
demand for cable television is likely to be
a) Perfectly inelastic
b) Perfectly elastic
c) Inelastic
d) Elastic

182.
The local multiplex cinema discovered that when it charged 5 for the matinee, it took
in 450 per showing, but when it lowered the price to 3, it took in 500 per showing. This
implied that the elasticity of demand is
a) Price inelastic
b) Price elastic
c) Unit elastic
d) Perfectly elastic

183.
When consumers only have a limited time period to respond to price changes, demand
becomes
a) Less price elastic
b) More price elastic
c) Unit elastic
d) The time frame does not influence price elasticity of demand

184.
If the price elasticity of demand for beans is estimated to be -0.4, then a 20% increase
in price will _______ the quantity demanded by ____ %
a) Increase, 8%
b) Decrease, 14%
c) Increase, 16%
d) Decrease, 8%
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185.
Which of the following products would you expect to have the most inelastic demand
following a price change in the short term?
a) Package holidays to Greece
b) Diesel
c) An XBox
d) A bottle of red wine

186.
Which of the following products would you expect to have an elastic demand following a
price change?
a) Fresh vegetables
b) Water
c) Cigarettes
d) Airline tickets for a short city break in Europe

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Price Elasticity of Demand - Answers


163.

(a)

164.

(a)

165.

(b)

166.

(a)

167.

(b)

168.

(a)

169.

(b)

170.

(c)

171.

(c)

172.

(c)

173.

(b)

174.

(c)

175.

(d)

176.

(c)

177.

(b)

178.

(d)

179.

(b)

180.

(c)

181.

(c)

182.

(b)

183.

(a)

184.

(d)

185.

(b)

186.

(d)

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2.6

Cross Price and Income Elasticity of Demand


187.
True or False: If two products are complements, the cross-price elasticity of demand is
likely to be positive

a) True
b) False

188.
True or False: An inferior good is one that has been badly manufactured by poorly
trained workers
a) True
b) False

189.
True or False: The income elasticity of demand for prime rump steak will be lower than
for own label cereals
a) True
b) False

190.
Fish and chips and pizzas are assumed to be substitute products for consumers. Other
things remaining equal, a rise in the price of takeaway fish and chips will cause the demand
curve for takeaway pizzas to
a) Shift to the right
b) Shift to the left
c) Remain unchanged
d) Become flatter

191.
Suppose we find that the cross-price elasticity of demand for two products is a negative
number. We know that
a) The two goods are complements
b) The two goods are normal goods
c) The two goods are substitutes
d) The two goods are inferior goods

192.

If the cross price elasticity of demand between two products is +3.5, then

a) The two products are complements


b) The two products are substitutes
c) One of the products is expensive and one is relatively inexpensive
d) One product is a normal good and the other is an inferior good

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193.
The demand for fresh bread from a bakery is estimated to have an income elasticity of +
0.3. Following a 15% rise in consumers real incomes (other factors held constant) we predict
that demand for fresh bread will
a) Rise by 3%
b) Rise by 4%
c) Rise by 4.5%
d) Rise by 15%

194.
The price of Toyota cars falls by 8% and in the following time period, the demand for
Nissan cars declines by 2%. The cross price elasticity of demand for Nissan cars is
a) +2.0
b) +0.25
c) +0.5
d) -0.25

195.
The price of fresh pasta increases by 30% and as a result the demand for red wine falls
by 3%, we can conclude from this information that
a) The two goods are close substitutes
b) The two goods are weak substitutes
c) The two goods are close complements
d) The two goods are weak complements

196.
Suppose that the demand for ink jet printers increases by 15% following a 30% decline
in the market price of home computers, we can conclude from this information that
a) CPed is negative and the goods are complements
b) CPed is negative and the goods are substitutes
c) CPed is positive and the goods are complements
d) There is no relationship between the two goods

197.
Evidence suggests that the cross elasticity of demand between private and public
transport, whilst positive, is low. Therefore it follows that
a) A fall in the demand for private transport would cause a small rise in the demand for public transport
b) A rise in the price of private transport would cause a slight fall in the demand for public transport
c) A fall in the demand for private transport would cause a small rise in the price of public transport
d) A rise in the price of private transport would cause a small rise in the demand for public transport

198.

A normal good can be distinguished from an inferior good because a normal good has

a) A positive income elasticity of demand


b) A positive price elasticity of demand
c) A positive cross price elasticity of demand
d) A negative income elasticity of demand

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199.
Given a fall in real income caused by an economic recession, the demand curve for a
normal good will, other things being equal,
a) Shift to the right, hence raising price
b) Shift to the right, only if prices rise by less than real income
c) Shift to the left, hence lowering price
d) Shift to the left, causing an inward shift of the supply curve

200.

What is an inferior good?

a) A good that only low income families will contemplate buying


b) A good of such poor quality that only Asda will stock it
c) A good for which demand will fall as income rises
d) A good that is advertised only on Channel 5

201.
Which of the following would be expected to increase market demand for foreign
holidays?
a) A rise in consumers' income
b) A fall in the value of the exchange rate
c) A rise in mortgage interest rates
d) A fall in consumer confidence

202.

Good X is an inferior good. A rise in consumers' income is likely to lead to:

a) A rise in demand and an increase in market price and quantity sold


b) A fall in demand and an increase in market price and quantity sold
c) A fall in demand and a fall in market price and quantity sold
d) An expansion of market supply following an increase in demand

203.
Under what circumstances would an increase in the price of product X result in a fall in
the demand for product Y?
a) The demand for Y is price elastic
b) Y is an inferior good
c) X and Y are substitute goods
d) X and Y are complementary goods

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204.
The table below shows the price and quantity for two goods X and Y. The cross price
elasticity of demand for X and Y when the price of X falls from 10 to 9 is
Price of Good X
per unit (s)

Quantity of Good X demanded

Quantity of Good Y demanded

10
9

20
24

30
42

a) -4
b) +2
c) -2
d) +4

205.
If the cross price elasticity of demand for hot chocolate resulting from changes in the
price of tea is +0.8, what will be the percentage change in demand for hot chocolate if the
market price of tea rises from 1.60 to 2.00 per kilo?
a) 40 per cent
b) 30 per cent
c) 20 per cent
d) 8 per cent

206.
The diagram below shows the income-consumption curves for four goods. Which good
has an income elasticity of demand will is always +1?
Income of
consumer

C
B

Quantity demanded of the good

a) A
b) B
c) C
d) D
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207.
It was estimated in 2002 that milk has an income elasticity of demand of -0.2. What can
be deduced about milk from this information?
a) It only accounts for a small proportion of household expenditure
b) It has very few close substitutes
c) It is a luxury good
d) It is an inferior good

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Cross Price and Income Elasticity of Demand - Answers


187.

(b)

188.

(b)

189.

(b)

190.

(a)

191.

(a)

192.

(b)

193.

(c)

194.

(b)

195.

(d)

196.

(a)

197.

(d)

198.

(a)

199.

(c)

200.

(c)

201.

(a)

202.

(c)

203.

(d)

204.

(a)

205.

(c)

206.

(b)

207.

(d)

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2.7

Price Elasticity of Supply


208.

True or False: The quantity supplied will be more elastic when stocks of products are low

a) True
b) False

209.
True or False: The elasticity of supply for agricultural products in the short run is often
very low because of the length of time involved in the production period
a) True
b) False

210.
If the price elasticity of supply of UK produced coal is +0.6, an increase in the price for
30 to 33 per tonne will increase the quantity produced each week from 400,000 tonnes to
a) 420,000 tonnes
b) 422,000 tonnes
c) 424,000 tonnes
d) 430,000 tonnes

211.

The long run elasticity of supply is higher than the short run elasticity of supply because

a) In the long run, the stock of machinery and buildings can change
b) In the long run, new firms can enter the market if demand increases
c) In the long run, firms can change the scale of their production
d) All of the above

212.
then

Suppose that market supply is perfectly elastic. If the demand curve shifts to the left,

a) Price and quantity will fall


b) Quantity will fall but the market price will remain the same
c) Price will fall but the quantity supplied will remain the same
d) None of the above

213.
The price elasticity of supply for PVC doubled-glazed windows is estimated to be +1.5. If
there is a 20 per cent increase in market price due to a rise in demand, then
a) Quantity supplied will rise by 15 per cent
b) Quantity supplied will rise by 20 per cent
c) Quantity supplied will rise by 30 per cent
d) Quantity supplied will rise by 50 per cent

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Price

Price

Supply

Supply

Quantity
Price

Supply

Price

Quantity
D

Supply

Quantity

Quantity

214.

Which of the diagrams above shows a supply curve that is perfectly elastic?

215.

Which of the following statements about price elasticity of supply is correct?

a) A
b) B
c) C
d) D

a) Elasticity of supply is normally negative rather than positive


b) Elasticity of supply is higher when stock levels are fairly high
c) Elasticity of supply is lower the longer the time period involved
d) Elasticity of supply will be higher when existing factor resources are being fully utilised

216.

An industry's supply curve is likely to be elastic if

a) Producers have low levels of stocks


b) Firms are operating at below full capacity
c) New firms are unable to enter the market
d) There are shortages of labour needed by the firm to increase production

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217.
A firm estimates that the elasticity of supply is +0.8. Its current level of output is 20,000
units per month. Following a price increase of 10%, we expect output to rise to
a) 21500 units
b) 21600 units
c) 22000 units
d) 22600 units

218.
A product is found to have a price elasticity of supply of + 2.0 If its price falls from
2.00 to 1.50, supply will
a) Decrease by 25%
b) Increase by 50%
c) Increase by 10%
d) Decrease by 50%

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Price Elasticity of Supply - Answers


208.

(b)

209.

(a)

210.

(c)

211.

(d)

212.

(b)

213.

(c)

214.

(a)

215.

(b)

216.

(b)

217.

(b)

218.

(d)

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2.8

Market Equilibrium and Changes in Equilibrium Prices


219.
True or False: The market equilibrium price is always set by the firm that has monopoly
power in the market

a) True
b) False

220.
True or False: When the current market price is above the equilibrium price, there will
tend to be excess supply
a) True
b) False

221.

True or False: The equilibrium price in a market cannot be influenced by the government

a) True
b) False

222.

A market is in equilibrium when

a) There is maximum output at minimum cost


b) Prices are at their lowest level
c) There is no tendency for price to change
d) Consumer satisfaction

223.
The table below shows the market demand and supply for a product at each price level.
The equilibrium price is
Price per unit

Demand
(thousands)

Supply
(thousands)

15
14
13
12
11
10

700
800
900
1000
1100
1200

1300
1250
1200
1150
1100
1050

a) 11
b) 12
c) 13
d) 14

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224.
A rise in consumer incomes causes market demand for the product in the table below to
rise by 200,000 at each price level. The effect of this change in demand, other factors remaining
constant, is to change the equilibrium price to
Price per unit

Original Demand
(thousands)

Original Supply
(thousands)

15
14
13
12
11
10

700
800
900
1000
1100
1200

1500
1400
1300
1200
1100
1050

a) 10
b) 12
c) 14
d) 15

225.

When excess demand occurs in a freely functioning market, there is a tendency for

a) Market price to fall


b) Market price to rise
c) Quantity supplied to fall
d) Quantity supplied to rise

226.

When the price mechanism is used to allocate resources, prices

a) Must rise to ensure producers make a profit


b) Are usually regulated by central government
c) Are determined solely by production costs
d) Send signals to producers about the strength of demand and supply

227.

Which one of the following statements referring to the price mechanism is correct?

a) High prices can ration demand for scarce goods and services
b) Firms are unable to influence the market demand for their products
c) High prices are always associated with high profits for producers
d) Producers and consumers take account of externalities

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Price

Supply

P2
P1

D2

D1

Q1

228.

Q2

Quantity

The change in demand shown in the diagram above might have been caused by

a) A fall in the costs of production


b) The introduction of a government subsidy for producers
c) A fall in income for a normal good
d) An increase in the price of a substitute good
S1

Price

S2

P2
P1
P3

D1

Q1

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Q3

D2

Quantity

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229.
The change in equilibrium price brought about by the shifts in supply and demand
shown in the diagram above might have been caused by
a) An increase in consumer incomes and technological improvements in supply
b) An increase in the price of a complement and a subsidy to producers
c) A fall in the price of a substitute & an increase in production costs
d) The introduction of a maximum price by the government and a rise in labour productivity
S2
Price
of
Bricks

S1

P2
P1

D2

Q2

Q1

D1

Quantity of Bricks

230.
The diagram above shows the supply and demand curves for bricks used in the
construction industry. The change in equilibrium price from P1 to P2 and quantity from Q1 to Q2
following the shift in supply and demand shown in the diagram might have been caused by
a) An increase in the demand for bricks from the main construction companies plus a fall in labour costs in the
brick industry
b) A recession in the construction industry and an increase in the costs of materials used in producing bricks
c) A fall in mortgage interest rates and technological improvements in the brick industry
d) A rise in the price of concrete blocks (a substitute for bricks) and a fall in labour costs used in producing bricks

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231.
"Pepper prices are soaring, thanks to poor rains in the major producing nations of India
and Indonesia, industry experts have warned. The price of the spice is being further supported by
growing consumption in India." Source: The Independent, 6 December 2002. Which one of the
following best explains the reasons behind the changing price of pepper outlined in the passage
above?
a) The market demand for pepper has shifted inwards and the market supply of pepper has shifted inwards
b) The market demand for pepper has shifted outwards and the market supply of pepper has shifted outwards
c) The market demand for pepper has shifted outwards and the market supply of pepper has shifted inwards
d) The market demand for pepper has remained the same and the market supply of pepper has shifted inwards

Which one of the following is not held constant when a demand curve is drawn?

232.

a) Consumers' money incomes


b) Consumers' tastes and preferences
c) The price of the good itself
d) The prices of substitute and complementary products
Price of
DVD
players

Supply of
DVD
players

P2
P1

D1

Q1

Q2

D2

Quantity demanded

233.
The diagram above relates to the market for DVD players. Which one of the following
could explain the shift in the demand curve from D1 to D2?
a) An increase in the price of DVD players
b) An increase in the level of interest rates
c) A fall in the price of DVD players
d) A fall in the price of pre-recorded DVDs

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234.
A government report states that the average price of British beef has fallen by 10%
during the past year and that the quantity bought and sold has fallen by 4%. From this
information we can deduce that
a) There has been an inward shift of market supply of beef
b) There has been an outward shift of market supply of beef
c) There has been an inward shift of market demand of beef
d) There has been an outward shift of market demand of beef

235.
A rise in the equilibrium prices of new houses available to buy in a small town might
have been explained by
a) A rise in the cost of rented properties
b) A rise in mortgage interest rates
c) An increase in the market supply of new homes in the town
d) A fall in the cost of raw materials and components used in the construction of new homes

236.
New technology makes it possible to produce more of a product at every given price.
What effect will this have on the equilibrium price and output in the industry?

a)
b)
c)
d)

237.

Price

Output

Decrease
Decrease
No change
Increase

Decrease
Increase
No change
Increase

The world demand for petrol:

a) Is perfectly inelastic
b) Is perfectly elastic
c) Is inelastic in the short run
d) Is more inelastic in the long run

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Market Equilibrium and Changes in Equilibrium Prices - Answers


219.

(b)

220.

(a)

221.

(b)

222.

(c)

223.

(a)

224.

(b)

225.

(b)

226.

(d)

227.

(a)

228.

(d)

229.

(a)

230.

(b)

231.

(c)

232.

(c)

233.

(d)

234.

(c)

235.

(a)

236.

(b)

237.

(c)

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2.9

Maximum and Minimum Prices


238.
True or False: A price ceiling set below the equilibrium price will have no effect on the
market

a) True
b) False

239.
True or False: A minimum price set below the equilibrium price will have no effect on the
market
a) True
b) False

240.
True or False: When labour demand and labour supply is elastic, the introduction of a
national minimum wage set above the free market equilibrium wage level may lead to a rise in
unemployment
a) True
b) False

241.
True or False: If the government introduces a maximum price on the cost of car
insurance, then the demand for insurance will shift to the right
a) True
b) False

242.
True or False: The introduction of rent controls on housing had the effect of creating a
shortage for rental housing as the market supply of rented properties declined in the long run
a) True
b) False

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Supply

Price
A

P min

Price Floor (Guaranteed)

Pe

Demand
Q3

Q2 Q1

Quantity

243.
The diagram above shows the demand for and supply of pepper. The government offers
a guaranteed minimum price (P min) to pepper producers. If the government imposes this
minimum price, then in the market there is likely to be
a) Excess demand for pepper of AB
b) No change in the market equilibrium price
c) Excess supply of pepper of AB
d) A fall in the market price below Pe

244.
The table below shows the demand for and supply of labour in an industry. The effect of
the government introducing a minimum wage rate of 7 per hour would be to
Wage Rate
per hour

Labour demand
(thousands)

Labour supply
(thousands)

8
7
6
5
4
3

850
1000
1200
1450
1800
2300

1800
1500
1200
1000
900
850

a) Create a shortage of labour in the industry


b) Raise the equilibrium wage rate to 7 per hour
c) Create an excess supply of labour compared to the equilibrium wage rate
d) Create an excess demand for labour
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245.
The table below shows the market demand and supply for a product. If a maximum price
of 50 per unit is imposed on the market by the government, then
Price per unit

Quantity demanded
(thousands of units)

Quantity supplied
(thousands of units)

50
40
30
20

130
160
190
220

200
160
120
80

a) There will be a surplus in the market of 70,000 units


b) There will be a shortage in the market of 70,000 units
c) There will be an outward shift of market demand
d) The maximum price will have no effect on equilibrium price and quantity
Price of
wheat

Supply

P1

Demand

Q1

Quantity of wheat

246.
The diagram above shows the free market equilibrium for wheat. The government aims
to keep the price of wheat stable at price P1. If there was an inward shift of market supply due to
a poor harvest, to keep the price at P1, the government could
a) Tax producers to increase market supply
b) Release stocks of wheat held in a buffer stock scheme
c) Set a minimum price of P1 for all wheat farmers
d) Buy the excess supply of wheat and add it to stocks

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247.
The annual demand and supply schedules for an agricultural good are shown in the
table below. The government fixes the minimum price at 18 per tonne to be maintained by
intervention. How much will such an action cost the government each year?
Price per unit (s)
20
18
16
14
12

Quantity demanded
(thousands of units)
4
6
8
10
12

Quantity supplied
(thousands of units)
12
10
8
6
4

a) 180,000
b) 144,000
c) 108,000
d) 72,000

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AS Economics QuestionBank 2005

Maximum and Minimum Prices


238.

(b)

239.

(a)

240.

(a)

241.

(b)

242.

(a)

243.

(c)

244.

(c)

245.

(d)

246.

(b)

247.

(d)

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2.10 Consumer and Producer Surplus


248.

True or false: Consumer surplus is zero when demand is perfectly elastic

a) True
b) False

249.

True or false: Producer surplus will be zero when supply is perfectly elastic

a) True
b) False

250.
True or false: An indirect tax reduces the level of producer surplus but increases the
level of consumer surplus at the new equilibrium price
a) True
b) False

251.

What is the definition of consumer surplus?

a) The total value placed on products by the market


b) The total value placed on products by consumers
c) The difference between the consumer's willingness to pay and the price actually paid for the product.
d) The difference between the consumer's willingness to pay and the firm's cost of the product.

252.
The table below shows the price that a student is willing to pay for a number of visits to
a theme park during the course of the summer holidays. If the admission price to the theme park
is 12, how many visits will the consumer make during the summer, and what will be the total
level of consumer surplus?
Visits to the theme park

1st
2nd
3rd
4th
5th

Price the consumer is willing


to pay

25
23
20
15
9

a) 3 visits, consumer surplus = 32


b) 4 visits, consumer surplus = 35
c) 5 visits, consumer surplus = 35
d) 5 visits, consumer surplus = 92

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253.
An ice-cream manufacturer would be willing to sell 1000 tubs of ice-creams for 3 each.
The tubs of ice-creams are popular and so the actual market price that the producer can charge
is 3.80 per tub and all 1,000 tubs are sold. This means:
a) The opportunity cost of each bar is less than the consumer surplus
b) The total consumer surplus is 800
c) The total producer surplus is 3,800
d) The total producer surplus is 800

254.
Which of the following is a true statement about the effect of a government-imposed
minimum price floor when the price set is above the normal free market price?
a) If the government imposes a price floor, consumer surplus will increase
b) If the government imposes a price floor, all firms will gain
c) If the government imposes a price floor, there will be a shortage
d) If the government imposes a price floor, consumer surplus will decrease

255.

Consumer surplus will be higher when demand is

a) Price elastic
b) Price inelastic
c) Income elastic
d) Income inelastic

256.

An increase in market demand for a normal good other things being equal will lead to

a) A rise in both consumer and producer surplus


b) A fall in both consumer and producer surplus
c) A rise in consumer surplus and a fall in producer surplus
d) A fall in consumer surplus and a rise in producer surplus

257.
Most of the benefits to agricultural support schemes such as the European Common
Agricultural Policy go to
a) Consumers
b) Producers
c) The Government
d) Everyone gains equally from price supports

258.
In 1999, the high street retailers Our Price and WH Smith typically charged 12.99 for a
compact disc, whereas Amazon, the internet retailer, charged 9.99 per disc. The short run
effect of Amazon's pricing strategy is likely to
a) Increase producer surplus
b) Make demand for compact discs from high street retailers less elastic
c) Increase consumer surplus
d) Increase the market share of high street retailers

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259.
When there is an increase in demand, other factors remaining constant, and the market
supply curve is upward sloping, then
a) Consumer surplus will increase and producer surplus will fall
b) Consumer surplus will increase and producer surplus will increase
c) Consumer surplus will fall and producer surplus will increase
d) Consumer surplus will fall and producer surplus will fall

260.
In the diagram below, the demand curve for bus transport in a local town is shown.
Initially the bus fare is P1 and the number of passenger journeys per day is Q1. If the bus
company abolishes fares for a month and the number of passenger journeys increases to Q0,
how will consumer surplus change?
Bus Fare

A
P1

Demand
P0
Q0

Q1
Passenger journeys per day

a) From A to B + C
b) From A to A + C
c) From A to A + B + C
d) From A + B to A + B + C

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AS Economics QuestionBank 2005

Consumer and Producer Surplus


248.

(a)

249.

(a)

250.

(b)

251.

(c)

252.

(b)

253.

(d)

254.

(d)

255.

(b)

256.

(a)

257.

(b)

258.

(c)

259.

(b)

260.

(c)

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2.11 Government Intervention: Taxation and Subsidies


261.
True or False: The government may choose to subsidise an industry in order to prevent
rising unemployment
a) True
b) False

262.
True or False: An indirect tax on producers causes an inward shift of the market demand
curve for a product
a) True
b) False

263.
tax

True or False: A 4 per packet excise duty on cigarettes is an example of an ad valorem

a) True
b) False

264.

A tax on producers of alcoholic lemonade (other factors remaining equal) would cause

a) An inward shift of supply


b) An outward shift of supply
c) An inward shift of demand
d) An outward shift of demand
S2

Price

S1
F
C

D1
J

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Quantity

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265.
The consumer burden of a tax equal to vertical distance CI shown in the diagram above
is equal to
a) FAC
b) ABEC
c) BJIE
d) CED

266.
Which one of the following is likely to result from an increase in government subsidies
paid to local bus companies?
a) An increase in traffic congestion
b) An increase in the real incomes of city dwellers using public transport
c) A reduction in distances travelled to work
d) A fall in the number of bus operators

267.

The imposition of a specific duty on producers of mobile phones will cause

a) An inward shift in market demand


b) An inward shift in market supply
c) An expansion along the market supply curve
d) An expansion along the market demand curve

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Price
G

Supply pre
subsidy

Supply + Subsidy

C
E

Demand

Q1

Q2

Quantity

268.
The diagram shows the effect of a government subsidy on producers, as a result of the
subsidy the total level of consumer surplus increases by
a) GEC
b) DABF
c) DECA
d) ECBF

269.

Which one of the following is an indirect tax?

a) Income tax
b) National insurance contributions
c) Air passenger duty
d) Corporation tax

270.
The benefit of an increase in a government subsidy to milk producers will go mainly to
consumers in the form of a lower price when
a) Demand for milk is price elastic
b) Supply of milk is perfectly inelastic
c) Demand for milk is price inelastic
d) Demand for milk is income elastic

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Supply (2)

Price

Supply

P2
P1

Demand

Q1

Q2

Quantity

271.
The diagram above shows the effects of an indirect tax applied by a government to
producers of a good. As a result, the majority of the burden of the tax will be paid by
a) Consumers because demand is elastic
b) Producers because demand is elastic
c) Consumers because demand is inelastic
d) The burden will be shared equally between producers and consumers
Price
Supply post tax

P1

Supply pre tax

Demand

Q2

Q1

Quantity

272.
The diagram above illustrates the effect of an indirect tax on a product. The burden of
the tax will be paid by
a) Producers only
b) Consumers only
c) The burden will be shared equally between producers and consumers
d) The government will receive no tax revenue in this example
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Government Intervention: Taxation and Subsidies - Answers


261.

(a)

262.

(b)

263.

(b)

264.

(a)

265.

(b)

266.

(b)

267.

(b)

268.

(d)

269.

(c)

270.

(c)

271.

(b)

272.

(a)

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2.12 Markets in Action


273.
True or False: An improvement in the production technology of supplying washing
machines will, other things remaining constant, increase supply and cause an expansion of
quantity supplied
a) True
b) False

274.
True or False: The introduction of a large import tariff on imported steel, other things
remaining constant will reduce the quantity demanded of new cars
a) True
b) False

275.
True or False: A fall in the cost of building materials will, other things remaining
constant increase the price of new houses
a) True
b) False

276.

If the market price is above the equilibrium price

a) Quantity demanded will equal quantity supplied


b) Quantity demanded will be less than quantity supplied
c) Quantity demanded will be greater than quantity supplied
d) None of the above

277.
Chicken and fish are substitutes. If the price of chicken increases, the demand for
chicken will
a) Not change but there will be a movement along the demand curve for fish.
b) Decrease and the demand curve for fish will shift leftward.
c) Contract and the demand for fish will shift outwards
d) Increase or decrease but the demand curve for fish will not change.

278.

In the market for fertilizer, an

a) Increase in the cost of equipment will increase supply of fertilizer.


b) Advance in technology will increase the supply of fertilizer.
c) Increase in the wage rate will increase the demand for fertilizer.
d) Increase in the wage rate will increase the supply of fertilizer

279.
An increase in the wage rate paid to workers in the popcorn industry will ________
popcorn and the equilibrium quantity of popcorn will __________
a) Increase the demand for, increase
b) Decrease the demand for, decrease.
c) Decrease the supply of, decrease
d) Decrease the supply of, increase.
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280.
A government decides to intervene in an agricultural market in order to stabilize the
incomes of farmers. It does this by
a) Selling from a buffer stock when output is high, and buying into the stock when output unexpectedly falls short
b) Buying stock when output is high, and selling stock when output unexpectedly falls short
c) Buying stock when output is low, and selling stock when output is unexpectedly high
d) Selling stock when output is high, and selling stock when output unexpectedly falls short

281.
A car rental firm rents its cars on weekdays to business users and to holidaymakers at
weekends. An increase in demand for rentals on weekdays leads the firm to increase the size of
its car fleet. Which of the following will be the most probable effect on the price of car rentals?
a) Weekday rentals will decrease, weekend rentals will be unchanged
b) Weekday rentals will decrease, weekend rentals will decrease
c) Weekday rentals will increase, weekend rentals will be unchanged
d) Weekday rentals will increase, weekend rentals will decrease

282.
An increase in the market demand for computers and an increase in the number of
producers of computers will
a) Decrease the price but increase the number of computers bought.
b) Increase the price of a computer.
c) Increase the price and the number of computers bought.
d) Increase the number of computers bought and sold

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Supply

Price

Minimum Price

P min

Pe

Demand

283.

Quantity

If the government introduces a minimum price into diagram above, the effect will be

a) The market equilibrium quantity would be achieved at quantity B


b) There would be a shortage equal to quantity AC
c) There would be surplus equal to quantity AC
d) Only quantity 0A would be supplied by producers in the market

284.
Which one of the following would be the most probable consequence of a fall in the
market supply of coffee, the supply curve of tea remaining unchanged?
a) A decrease in the price of coffee and an increase in the price of tea
b) An increase in the price of coffee and an increase in the price of tea
c) An inward shift in the demand for coffee and an inward shift in the demand for tea
d) An inward shift in the demand for coffee and an outward shift in the demand for tea

285.
Given that the household demand for water is price inelastic, a change from flat-rate
charges to the metering of supplies (i.e. a charge for each litre used) is likely to
a) Encourage water companies to build more reservoirs
b) Be more likely to cause water shortages
c) Discourage consumers from conserving water
d) Reduce the total amount of water demanded by consumers

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286.
An increase in the rate of indirect tax applied to a product will have no effect on its
market price if the
a) Demand for the product is completely price inelastic
b) Demand for the product is perfectly price elastic
c) Income elasticity of demand for product is zero
d) Good is an absolute necessity

287.
The Common Agricultural Policy of the European Union has resulted in over-production
of agricultural goods within the European Union leading to a build up of farm surpluses. Those
who benefit financially from the CAP include
a) EU farmers
b) Taxpayers within the EU
c) Farmers in developing countries seeking to export to EU markets
d) Consumers within the EU

288.

The table below refers to price and output in a market during two successive periods
Period

Price ()

Output (millions)

1
2

60
68

1.2
1.5

Other things remaining constant, what change might explain the price and output data?
a) A decrease in the cost of raw materials
b) A decrease in the price of a substitute good
c) An increase in consumer incomes
d) An increase in labour productivity

289.

The table below refers to price and output in a market during two successive periods
Period

Price ()

Output (millions)

1
2

140
110

2.8
2.4

Other things remaining constant, what change might explain the price and output data?
a) A decrease in wage rates paid to the workforce
b) A decrease in the price of a substitute good
c) An increase in consumer incomes
d) A fall in the productivity of the capital equipment used by the firm

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Markets in Action - Answers


273.

(a)

274.

(a)

275.

(b)

276.

(b)

277.

(c)

278.

(b)

279.

(d)

280.

(b)

281.

(d)

282.

(d)

283.

(c)

284.

(b)

285.

(d)

286.

(b)

287.

(a)

288.

(c)

289.

(b)

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2.13 Production and Costs


290.
True or False: A bakery employs 20 workers and finds that total output is 3000 loaves
per day. As a result of adding another worker to the labour-force, total output rises to 3100
loaves per day. The average productivity of adding a worker has increased
a) True
b) False

291.
True or False: Depreciation in the value of capital equipment due to wear and tear
during production is an example of a fixed cost
a) True
b) False

292.
True or False: An increase in the stock of new capital machinery used by a business will
always increase the productivity of the workforce
a) True
b) False

293.

In the short run time period for production,

a) All inputs are variable


b) Some inputs are variable
c) No inputs are variable
d) Labour is the only variable input

294.

The table below shows the output of potatoes on a farm in relation to labour inputs
Number of persons
1
2
3
4
5

Total Output per year


(Tonnes)
100
190
270
320
350

Output per person


(Tonnes)
100
95
90
80
70

The marginal product of the fifth person is


a) 80 tonnes
b) 50 tonnes
C) 30 tonnes
d) 10 tonnes

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295.

Diminishing marginal product refers to the fact that

a) The marginal product decreases as the quantity of the input increases


b) The marginal product increases as the quantity of the input increases.
c) The marginal product is constant as the quantity of the input increases
d) Output will increase at an increasing rate as more inputs are hired

296.

As output increases in the short run, we know that

a) Total fixed costs decline


b) Average total costs will always decline
c) Average variable costs will always decline
d) Average fixed costs will always decline

297.
The table below shows the output of strawberries that is produced as extra units of
labour are added to a fixed amount of land and capital. At what level of labour input do
diminishing returns to labour start to set in?
Quantity of Labour
(people)

Total Output
(kilos per week)

0
1
2
3
4
5
6
7

0
200
450
830
1160
1400
1580
1700

a) The 2nd worker


b) The 3rd worker
c) The 4th worker
d) The 5th worker

298.
If 12 people are employed to produce a total product of 900 units then the average
product is
a) Unknown
b) 70 units
c) 75 units
d) 90 units

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299.
Which diagram below shows the relationship between total fixed costs and its level of
output in the short run?

A
Costs

Costs

Output

D
Costs

Costs

Output

Output

Output

a) A
b) B
c) C
d) D

300.

Which of the following is not a variable cost in the short run?

a) Raw materials
b) Capital spending on new technology
c) The labour costs of part time workers employed by the hour
d) Energy costs

301.

Information about a firms costs is given below


Total variable costs
Average fixed costs
Average total costs

$ 7200
$ 20
$ 100

What is the firms output?


a) 60 units
b) 72 units
c) 90 units
d) It cannot be calculated without information about business revenue

302.
When average cost per unit declines as a result of a merger or integration of two
businesses that are not producing the same type of product, the new firm experiences
a) Economies of scale
b) Economies of scope
c) Economies of hope
d) Economies of expectation
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303.

The break-even point or output for a business in both the occurs when _____________

a) Price = Average Variable Cost


b) Price = Average Fixed Cost
c) Price = Average Total Cost
d) Price = Marginal Cost

304.

The variable costs of a business

a) Are dependent upon the level of fixed costs in the long-run


b) Are always equal to the company's total average costs in the long-run
c) Are determined by quantity of output produced by a firm
d) Decrease as production increases

305.

Which one of the following is classified as a fixed cost?

a) Royalties paid by a radio station to a recording company every time it plays one of its records
b) Costs of raw materials and components paid by a manufacturer of children's toys
c) Interest charges paid by an airline company on a bank loan to buy a new fleet of aircraft
d) The cost of materials used in the production of double-glazing

306.

In economy theory, the short run differs from the long run in that, in the short run

a) All costs are fixed


b) All costs are variable
c) All factor inputs are variable
d) At least one factor input is fixed

307.

A printing firm can produce greetings cards at the following rates:

Number of cards

Total cost ()

250
500
1000
2000

175
200
250
350

From the information in the table, we can deduce that


a) The firm is making a profit at each level of output
b) The average cost of production is falling at each level of output
c) The average cost of production is rising at each level of output
d) The firm has no fixed costs

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Production and Costs


290.

(b)

291.

(b)

292.

(b)

293.

(b)

294.

(c)

295.

(a)

296.

(d)

297.

(c)

298.

(c)

299.

(b)

300.

(b)

301.

(c)

302.

(b)

303.

(c)

304.

(c)

305.

(c)

306.

(d)

307.

(b)

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2.14 Economies and Diseconomies of Scale


308.
True or False: A technical economy of scale can be exploited when production can take
place in integrated plants
a) True
b) False

309.
True or False: if, in the long run, a firm finds that reducing its output leads to a fall in
long run average cost, then it is likely that the firm has been experiencing diseconomies of scale
a) True
b) False

310.
True or False: Economies of scale can only be exploited by businesses with a large share
of their market
a) True
b) False

311.

Which one of the following is an example of a financial economy of scale?

a) Volume car producers can use high productivity and expensive unit of capital equipment
b) National supermarket chains can employ specialist managers to reduce inefficiency and raise productivity
c) A company quotes on the stock market can raise extra funds more cheaply than an owner-run business
d) A multinational company can afford to spend huge sums on advertising and marketing

312.

In the production of personal computers (PCs) external economies of scale arise when

a) Benefits accrue to all PC users and not only to the owners of PCs
b) Specialised component suppliers of components locate and develop close to PC manufacturers
c) Output is sold in international markets
d) An expansion of production by the industry raises the costs of individual producers of PCs

313.

Which one of the following is a financial economy of scale?

a) Less risk due to a business diversifying


b) Lower costs in raising extra financial capital to pay for expansion
c) Lower unit marketing and advertising costs
d) Lower average costs arising from using bulky units of capital equipment

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314.
When a firm's long-run average cost curve exhibits internal economies of scale in the
long run
a) The long-run average cost curve (LRAC) is downward sloping
b) The long-run average cost curve (LRAC) is horizontal
c) The long-run average cost curve (LRAC) is upward sloping
d) The long-run average cost equals the short-run average cost for all levels of output

315.

Which of the following is most likely to lead to diseconomies of scale?

a) Labour shortages
b) A limited size of market
c) Difficulties in co-ordinating production when a business becomes large
d) An increase in the market prices of important raw materials

316.

Which one of the following is not an external economy of scale?

a) Cheaper loans from a local bank resulting from a merger


b) Improvements to the local transport network
c) Research and development facilities provided by a local university
d) The availability of skilled labour force in a region of the economy

317.

Diseconomies of scale are likely to occur in the long run when

a) A firm pays a lower price for inputs as production increases.


b) A firm faces a high level of sunk costs
c) The workforce demands a higher share of profits as output increases leading to higher wage costs
d) A firm's long run average cost decreases with increased production.

318.
If a producer's long-run average cost rises as its scale of operations increases, the
producer is experiencing
a) Diminishing returns
b) Diseconomies of scale
c) Economies of scale
d) Falling profits

319.

Which of the following is not an internal economy of scale?

a) A computer firm locating in a science park to take advantage of specialised support services from other computer
firms.
b) An expanding firm which directly employs specialist accountants, lawyers and retail managers
c) A motor vehicle manufacturer spreading its research and design costs over a large output
d) A major supermarket gaining bulk discounts on the purchase of food.

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Economies and Diseconomies of Scale - Answers


308.

(a)

309.

(a)

310.

(b)

311.
312.
313.
314.
315.
316.
317.
318.
319.

(c)

tutor2u

(b)
(b)
(a)
(c)
(a)
(c)
(b)
(a

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2.15 Market Failure and Government Failure


320.
True or False: A farmer tips chemical waste into a river because he can do so at no cost
to itself is an example of a positive externality
a) True
b) False

321.
True or False: People may not know what is in their own best interests and thus may
under- consume certain goods or services such as education and health care
a) True
b) False

322.
True or False: Government failure cannot happen if the government has the support of
consumers and producers when it decides on its policies
a) True
b) False

323.

The list below shows the estimated costs and benefits of building a new factory

Private costs
90,000
External costs
30,000
Private benefits 75,000
External benefit 25,000
From the data it can be concluded that
a) Social costs exceed social benefits
b) Social benefits exceed social costs
c) The factory should be built
d) The social costs equal 30,000

324.

Which one of the following is a characteristic of a merit good?

a) Once the good has been supplied to one consumer, there is no extra cost in supplying it to others
b) It is always provided free of charge to low-income consumers
c) It may not be provided by the market in sufficient quantities
d) It tends to be provided by the government because of the problem of non-excludability

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325.
An argument for the government providing merit goods such as state education and the
National Health Service free of charge to consumers is that
a) They are unlikely to be provided at all by the private sector
b) The consumption of merit goods results in negative externalities
c) Merit goods are both non-excludable and non-rival
d) It is considered unacceptable that people on lower incomes may be unable to afford them

326.

Market failure always arises when

a) Firms are unable to earn high profits and have to lay-off workers
b) Imports take a rising share of total market demand
c) Positive externalities exist in consumption of goods and services
d) Costs increase as a firm expands production

327.
Given that the market demand for heroin is inelastic, how will a reduction in market
supply affect total revenue of those selling this drug (other things equal)?
a) Total revenue will rise
b) Total revenue will fall
c) Total revenue will remain unchanged
d) The final effect on total revenue cannot be predicted - it depends on how much the supply has fallen

328.

Positive externalities exist when

a) Production and consumption creates pollution


b) Social costs exceed private costs
c) Private benefits are less than social benefits
d) Private benefits are greater than private costs

329.
Market failure results in a misallocation of scarce resources. This may be corrected by
the government
a) Providing and financing the provision of public goods
b) Subsidising all loss-making firms to prevent unemployment
c) Placing a tax on the consumption of merit goods
d) Placing a tax on all imported goods and services

330.
Road space throughout the world is becoming increasingly scarce as the demand for
motor transport increases each year. Which one of the following policies would represent an
attempt to use command and control techniques to reduce the problem of road congestion?
a) The introduction of a congestion charge for all major towns and cities
b) Banning cars from parking in city centres
c) Raising the excise duty applied to petrol and diesel
d) Offering a subsidy to users of bus and rail services

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331.
"Well designed environmental taxes and other economic instruments can play an
important role in ensuring that prices reflect environmental cost and discouraging behaviour that
damages the environment" (Source: Environmental taxation in the UK, Treasury paper,
November 2002). The use of taxation to correct for market failure is an example of the
a) Government interference principle
b) "Polluter pays" principle
c) Principle of horizontal equity
d) "Who gambles wins" principle

332.
Which one of the following would be treated as an external cost arising from the
growing volume of cars on Britain's roads and increasing levels of car congestion?
a) The cost of car purchase and replacement
b) Depreciation of car values due to car mileage
c) Higher prices for goods and services due to increased costs of transportation
d) The costs of purchasing fuel

333.

A private good's characteristic of excludability means that

a) Consumption by one person reduces the amount available for others


b) Consumption by one person does not reduce the amount available for other
c) The benefits of the good are restricted to those who pay for them
d) The benefits of the good are available to all

334.

Which of the following necessarily represent a market failure?

a) Rising costs of production due to higher wages


b) Rising prices because of an increase in market demand
c) Firms closing down production because of the effects of cheaper imports
d) Producers being unable to charge a price for the external benefits they create

335.

Which one of the following statements referring to a free market economy is correct?

a) Monopolists have no need to take account of consumer preferences


b) Market prices do not always reflect externalities
c) Firms that make high profits are always efficient
d) Larger firms are always more efficient than smaller firm

336.
When a minimum price which is above the free-market equilibrium price is imposed on a
good by the government
a) Excess supply will result
b) Trading will continue at the equilibrium price
c) Excess demand will result
d) Firms will sell the quantity they wish at this price

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337.

Government failure always arises when

a) Consumers pay higher prices for a good following a shortage of supply


b) A government finds it necessary to supplement the private sector provision of a good
c) A government finds it necessary to provide a range of public goods
d) A government's financial support for an industry leads to over-supply and a loss of efficiency

338.

Government intervention in the market to improve economic welfare may fail because

a) The opportunity cost of government intervention is zero


b) The administrative costs of government action are excessive
c) The government seeks to maximise profit
d) Subsidies have to be paid for out of taxation

339.

An economy is productively efficient when

a) It only produces private goods and does not produce public goods
b) All externalities are eliminated
c) All firms experience economies of scale
d) The economy operates on its production possibility curve

340.
The government wishes to increase economic welfare by introducing policies that create
external benefits as well as internal ones. It should:
a) Lower the excise duty on cigarettes and petrol
b) Increase the rate of national insurance contributions
c) Reduce the retirement age
d) Invest extra funds in training schemes for the long term unemployed

341.
Which one of the following arguments provides support for a government policy of
offering grants to students in higher education?
a) Higher education cannot be supplied through the private sector market
b) Higher education is a private consumption good as well as being a path to higher career earnings
c) The social benefit of a better qualified workforce exceeds the private benefits to the students concerned
d) Student grants will increase the funds available for research and teaching at the UK's major universities

342.

Government intervention in the economy to correct a market distortion may fail because

a) Governments can only supply public goods


b) The opportunity cost of government intervention is zero
c) The laws of supply and demand do not apply to governments
d) Of incomplete information relating to all the costs of intervention

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343.

A free good

a) Is available free of charge to consumers


b) Has no opportunity cost of production
c) Is not taxed by the government
d) Creates no externalities

344.
Which of the following can be efficiently allocated between competing uses by the price
mechanism?
a) Private goods
b) Public goods
c) Free goods
d) Negative and positive externalities

345.

Which of the following is least likely to be a feature of a monopoly?

a) In the long run, no profits will be earned


b) Choice for the consumer will be restricted
c) It will be protected by barriers to entry
d) Price may be higher than in a more competitive market

346.

What is implied by the existence of a negative externality?

a) Individuals are not the best judges of their own well-being


b) Output is below its socially optimum level
c) Producers are not always seeking to maximise profits
d) There is a divergence between private and social costs

347.

Which of the following is NOT a cause of market failure?

a) The existence of commonly-owned property resources such as the oceans


b) The existence of public goods
c) The existence of externalities
d) The existence of perfect knowledge of prices among consumer and producers

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Market Failure and Government Failure - Answers


320.

(b)

321.

(a)

322.

(b)

323.

(a)

324.

(c)

325.

(d)

326.

(c)

327.

(d)

328.

(c)

329.

(a)

330.

(b)

331.

(b)

332.

(c)

333.

(a)

334.

(d)

335.

(b)

336.

(a)

337.

(d)

338.

(b)

339.

(d)

340.

(d)

341.

(c)

342.

(d)

343.

(b)

344.

(a)

345.

(b)

346.

(d)

347.

(d)

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2.16 Monopoly and Competition


348.
True or False: Technological advances can sometimes allow new firms to compete with a
monopoly supplier by enabling the production of close substitutes
a) True
b) False

349.
True or False: A competitive market will always be more efficient in the allocation of
resources than a market dominated by a few big suppliers / firms
a) True
b) False

350.

A misallocation of resources is most likely to occur in a monopoly if

a) Other firms enter the industry


b) Higher prices are charged than under competitive conditions
c) Market output increases
d) There are economies of scale

351.
Assume that a competitive industry is in equilibrium. If market demand increases (other
things being equal) which of the following will occur?
a) Market price will increase
b) Firms will produce more output
c) Firms will increase their profits
d) All of the above are correct

352.
Large economies of scale, such as those involved in the production of gas and
electricity, result in a(n)
a) Upward sloping long run average cost curve
b) Flat long run average cost curve
c) Downward sloping average cost curve
d) None of the above

353.

Why are monopolistic markets thought to lead to an inefficient allocation of resources?

a) Because they will always have higher costs than competitive firms
b) Because they are much less likely to use new technologies
c) Because they redistribute income from producers to consumers
d) Because they restrict output and charge a higher price creating a loss of economic welfare

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354.

A natural monopoly is most likely to exist when

a) There are long term patents


b) There are large barriers to entry
c) There is government regulation of the industry
d) There are large economies of scale

355.

Which one of the following is least likely to be a feature of a monopoly?

a) A high level of profits


b) A restriction of consumer choice in the market
c) Lower prices than in a competitive market
d) Limited exploitation of economies of scale

356.
Comparing a monopoly and a competitive firm, the monopolist will, other things
remaining constant ____________
a) Produce less at a lower price
b) Produce less at a higher price
c) Produce more at a lower price
d) Produce more at a higher price

357.
A monopoly market such as the market for pharmaceuticals may be self-perpetuating in
the long run because profits may be used for
a) Research and development
b) Reductions in long run average costs
c) Advances in production technology
d) All of the above

358.
An industry is made up of seven firms. Firm A has a market share of 12 percent, B has 28
percent, C has 15 percent, D has 8 percent, E has 4 percent, F has 9 percent, and G has 24
percent. The four-firm concentration ratio (%) for this industry is ____________________.
a) 75%
b) 79%
c) 80%
d) 85%

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Monopoly and Competition - Answers


348.

(a)

349.

(b)

350.

(b)

351.

(d)

352.

(c)

353.

(d)

354.

(d)

355.

(c)

356.

(b)

357.

(d)

358.

(b)

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2.17 Public and Merit Goods


359.

When applied to a public good, 'non-rival' means that

a) There is a single monopoly supplier of the good


b) The resources used in its production could not have been used to produce other goods
c) If the good is provided for one person it must be provided for others
d) Consumption of the good by one person does not reduce the amount available to others

360.

Which one of the following would most likely be classified as a pure public good?

a) An aircraft flight from London to Cape Town


b) Buying and consuming a beef-burger and a beer at a student union bar
c) Purchasing a new DVD player
d) Radio waves broadcasting coverage of a Premier League soccer game

361.
Which one of the following could be an argument for the government providing health
care in the UK?
a) The private benefit from health care is less than the social benefit
b) Health care cannot be provided by the free market
c) Health care is both a merit good and a public good
d) The policy allows for the provision of health care to be maximised

362.

A public good is essentially one

a) Which is provided exclusively by the public sector at prices below opportunity cost
b) Which is provided exclusively by the private sector at prices below the market price
c) The consumption of which does not deny its consumption by others
d) The production of which involves no opportunity cost

363.
Public goods can often present problems for the efficient allocation of resources in a
market economy because
a) Only the private sector can provide public goods
b) People can benefit from consuming public goods without paying
c) No opportunity cost is involved in the production of public goods
d) There is no free rider problem

364.

An argument for the State providing merit goods and services free of charge is that

a) They are unlikely to be provided by the private sector


b) The consumption of merit goods results in negative externalities
c) It is considered undesirable that people on low incomes may be unable to afford them
d) Merit goods are both non-excludable and non-rival

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365.
Merit goods are under-provided through the free working of the price mechanism
because
a) The market mechanism fails to take account of externalities
b) The market can only supply private goods
c) Merit goods can only be supplied by the government
d) The price elasticity of demand for merit goods is zero

366.

Which one of the following is a characteristic of a merit good?

a) It may be provided by the free market but not in sufficient quantities


b) Once the good has been supplied to one consumer, there is no extra cost in supplying it to others
c) It is always supplied free to consumers to maximise their consumption
d) It tends to be provided by the government because of the problem of non-excludability

367.

With a de-merit good

a) The private benefit of consumption is less than the social benefit


b) The private benefit of consumption exceeds the social benefit
c) Consumers can purchase the good at discounted prices
d) Producers are given a subsidy to produce the good

368.
Common resources such as the oceans and skies are similar to public goods because
they are both ________________
a) Non-excludable in consumption
b) Non-rival in consumption
c) Non-excludable and non-rival in consumption
d) Excludable and rival in consumption

369.
Which of the following would you NOT expect to see as a result of the existence of a
common property resource?
a) Families maintaining the gardens at their expense in the city park
b) Over-extraction of fish stocks in a fishery open to all fishermen
c) Rubbish being thrown onto public highways
d) Over-grazing of common land by people with animals

370.

Market failure arises in the case of pure public goods because of

a) The large financial cost associated with providing public goods such as national defence systems and flood relief
schemes
b) Negative and positive externalities
c) Government inefficiency
d) The absence of well defined property rights for common resources which leads to over exploitation of the
resource

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371.

A private good's characteristic of excludability means that

a) Consumption by one person reduces the amount available for others


b) Consumption by one person does not reduce the amount available for others
c) The benefits of the good are restricted to those who pay for them
d) The benefits of the good are available to all

372.

Which of the following goods is neither non rival and non-excludable?

a) An online catalogue
b) A public telephone in a shopping centre
c) A bowl of cherries
d) An office photocopying machine

373.

_____ is necessary for a good to be produced by a firm for sale on the market

a) Exclusivity
b) Excludability
c) Desirability
d) Anonymity

374.
When an economy is operating on its production possibility frontier, an increase in the
production of public goods will
a) Increase the opportunity cost of private goods
b) Have no effect on the supply of merit goods
c) Increase GDP because public goods do not use up scarce resources
d) Mean a reduction in the supply of private goods in the economy

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Public and Merit Goods - Answers


359.

(d)

360.

(d)

361.

(a)

362.

(c)

363.

(b)

364.

(c)

365.

(a)

366.

(a)

367.

(b)

368.

(c)

369.

(a)

370.

(d)

371.

(c)

372.

(a)

373.

(b)

374.

(d)

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2.18 External Costs and Benefits


375.
True or False: A cigarette smoker creating air pollution when smoking in a restaurant is
an example of an external costs of consumption
a) True
b) False

376.
True or False: A airline that drops aviation fuel into the oceans is an example of an
external benefit of production
a) True
b) False

377.

True or False: The monetary value of a human life can never be calculated

a) True
b) False

378.

Positive externalities exist when

a) Production creates pollution


b) Private benefits are less than social benefits
c) Private benefits are greater than social costs
d) Social costs exceed private costs

379.

Which of the following is an externality arising from an open-air music festival?

a) Revenue earned by bus operators running extra services to the venue


b) Bonuses paid to performers if attendances rise beyond a target figure
c) Payments made by the organisers to meet the cost of policing
d) Damage caused by festival goers to nearby farmland and buildings

380.

What is implied by the existence of a negative externality?

a) Individual consumers are not the best judges of their own well-being
b) Output is below the socially optimal level
c) There is a divergence between private and social costs
d) Producers decide not to maximise profits

381.

Under a pollution permits system

a) The government imposes a tax on the pollution produced by a firm


b) The government imposes a quota on the amount of pollution a firm can produce using specific technology
c) The government subsidises each unit of waste produced
d) The government assigns each firm the right to pollute a certain amount, and these rights are bought and sold
between firms through the market

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382.

Marketable pollution permits are likely to result in

a) An increase in the level of pollution


b) No effect on the level of pollution
c) Severe pollution in some areas
d) A shift of pollution reduction towards higher cost firms

383.
A tax or charge equal to the spill-over cost per unit of industrial or commercial waste is
known as
a) An external benefit
b) A pollution tax
c) A marketable pollution permits system
d) A command and control policy

384.

The main aim of the London Congestion Charge introduced in February 2003 was to

a) Reduce the demand for bus transport at peak times


b) Shift congested traffic to other parts of London
c) Increase the private cost of motoring in the zone at certain times
d) Increase the level of congestion on the London Underground

385.

If the production of output from the UK farming industry creates negative externalities:

a) Social benefits are higher than private benefits


b) Social costs are lower than private costs
c) Social costs are higher than private costs
d) Social benefits and costs are higher than private benefits and costs

386.

If the government imposes a pollution tax on a market where externalities are present

a) Private costs will move closer to social costs


b) The supply curve will shift to the left
c) Some of the tax may be shifted onto the consumer
d) All of the above

387.

Which one of the following is unlikely to be classified as an environmental tax?

a) The Landfill Tax


b) The Climate Change Levy
c) Income Tax
d) The London Congestion Charge

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388.
Which one of the following is a cause of government failure when trying to deal with the
effects of externalities?
a) The pollution tax has a damaging effect on the distribution of income
b) Producers who pollute pass on a tax to the consumer
c) The tax is set at the wrong level to achieve a social optimum
d) All of the above

389.

A pollution permit is a

a) License issued to producers in non-market economies


b) Government voucher allowing unlimited pollution
c) Tax levied on firms creating pollution
d) Means of creating a market in the right to create externalities

390.
town

The table bellows shows the estimated costs and benefits of building a new factory in a

Private Costs
External Costs
Private Benefits
External Benefits

60,000
15,000
52,000
17,000

From the data it can be concluded that


a)
b)
c)
d)

Social costs exceed social benefits


The social benefits equal 37,000
Social benefits exceed social costs
The social costs equal 15,000

391.
Consumers can create externalities when they consume different goods and services.
Examples include noise and air pollution from cars and motorbikes and the externalities created
by smoking and alcohol abuse. Negative consumption externalities lead to a situation where
the
a) Social benefit of production is less than private benefit
b) Social benefit of consumption is less than private benefit
c) Social cost of consumption is less than private benefit
d) Social cost of consumption is greater than private benefit

392.
Positive externalities create external benefits beyond the people directly consuming a
good or service. This means that the
a) Private benefit is less than the private cost
b) Social cost = social benefit
c) External costs are zero
d) Social benefits will exceed private benefits
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393.
The diagram below illustrates the market for a product which incurs external costs. The
distance AB shown in the diagram represents
Social
Cost

Costs
Benefits
A

Private
Cost

Demand
Q1

Q2

Output (Q)

a) External benefit
b) External cost
c) Social benefit
d) Profit for the business

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394.
The diagram below illustrates the market for a product which creates positive
externalities when consumed.
Costs
Benefits

Supply

Social benefit
Private benefit
Q1

Output (Q)

The difference between the social and private benefit curve at output Q1 is
a) External cost
b) External profit
c) Consumer surplus
d) External benefit

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Externalities - Answers
375.

(a)

376.

(b)

377.

(b)

378.

(b)

379.

(d)

380.

(c)

381.

(d)

382.

(d)

383.

(b)

384.

(c)

385.

(c)

386.

(d)

387.

(c)

388.

(d)

389.

(d)

390.

(a)

391.

(b)

392.

(d)

393.

(b)

394.

(d)

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2.19 Market Failure and Government Intervention


395.
True or False: The Government is willing to make transfer payments to certain
households through the benefits system even though nothing is expected from those
households in return.
a) True
b) False

396.
True or False: Air and noise pollution from a paper mill is an example of an externality in
the consumption of paper.
a) True
b) False

397.
True or False: A government subsidy to businesses designed to reduce the costs of
training is designed to increase the social costs of production
a) True
b) False

398.

Distortions in the market which may require government intervention may be caused by

a) The existence of monopoly power in a market or industry


b) The existence of externalities
c) Imperfect information among consumers and businesses
d) All of the above

399.
When a the production and consumption of a good generates an externality in the
market
a) Society's scarce resources are allocated efficiently
b) Someone is affected who is not involved in buying or selling of the good
c) The good's price reflects the externality
d) Government intervention can never improve the market's performance

400.

The "free-rider problem" arises because

a) Private goods are not correctly priced in the market place


b) The cost of producing public goods is too high
c) It is possible for an individual to consume and benefit from a public good without him or her paying for it
d) Private goods may also be public goods

401.
In a market economy which is free of government intervention, the market mechanism
can achieve all the following except
a) Causing supply to respond to changes in demand
b) Signalling changes in consumer tastes
c) Ensuring a fair distribution of all types of good
d) Eliminating excess supply and demand
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402.
When a minimum price which is above the free-market equilibrium price is imposed on a
good by the government
a) Excess supply will result
b) Trading will continue at the equilibrium price
c) Excess demand will result
d) Firms will sell the quantity they wish at this price

403.
Without government intervention, which one of the following is most likely to be underproduced in a free market economy?
a) Normal goods
b) Merit goods
c) Luxury goods
d) Inferior goods

404.
Government intervention in a market economy can lead to an increase in economic
welfare if
a) The market mechanism has failed to allow for externalities
b) It leads to an increase in production and consumption of de-merit goods
c) The price elasticity of supply of private goods is high
d) The demand for inferior goods rises as incomes increase

405.

Government intervention in the market

a) Does not necessarily result in an improvement in economic welfare


b) Is always undertaken when there are externalities present in the market
c) Is always best achieved through the use of taxes and subsidies
d) Is only undertaken when the risk of government failure is minimal

406.
If an effective minimum price is imposed by the government, what would be expected to
occur?
a) Nothing; the price is not an equilibrium price
b) There will be a surplus (excess supply)
c) There will be a shortage (excess demand)
d) The market will now be efficient in allocating scarce resources

407.
All of the following are appropriate government policies in solving pollution problems
EXCEPT
a) Regulations and Laws
b) Pollution Taxes
c) Marketable - Pollution Permits
d) Minimum Price Guarantees for Producers

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408.
In 2001 the government of Majorca and Ibiza proposed a tax of 1.25 per tourist for
every night spent in hotel accommodation. The government would be most likely to justify this
in terms of
a) The external benefits of tourism
b) The external costs of tourism
c) The private costs of tourism
d) The private benefits of tourism

409.
Which of the following is an example of government intervention to correct a market
failure?
a) An increase in nurses' salaries
b) An increase in the rate of VAT on all goods and services
c) The taxation of goods with negative externalities
d) The taxation of pure public goods

410.
Following the introduction of a national minimum wage, the level of employment in a
country increased. Which one of the following could account for this result?
a) There were unemployed resources and the national minimum wage increased the level of aggregate demand in
the economy
b) There were unemployed resources and the national minimum wage reduced the international competitiveness of
the countrys industries
c) The government adjusted the way that the unemployment figures were measured
d) The demand for labour and the supply of labour were both completely price inelastic

411.

Continued government subsidies to an industry can be justified if the industry

a) Is more efficient compared to that of other countries


b) Creates a positive externality for consumers
c) Has a large share of the market
d) Is subject to diseconomies of scale

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Market Failure and Government Intervention - Answers


395.

(a)

396.

(b)

397.

(b)

398.

(d)

399.

(b)

400.

(c)

401.

(c)

402.

(a)

403.

(b)

404.

(a)

405.

(a)

406.

(b)

407.

(d)

408.

(b)

409.

(c)

410.

(a)

411.

(b)

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AS Economics QuestionBank 2005

3 Macroeconomics

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3.1

Introduction to Macroeconomics
412.
True or False: It is impossible to have falling inflation and falling unemployment at the
same time

a) True
b) False

413.
True or False: The official measure of Gross Domestic Product understates the true level
of national income because of the existence of the shadow or informal economy
a) True
b) False

414.

True or False: Since the early 1990s, the British economy has avoided a recession

a) True
b) False

415.

Which one of the following is a major macroeconomic objective of the government?

a) Sustained economic growth


b) Low and stable inflation
c) High levels of employment
d) All of the above

416.

Which one of the following is NOT a goal of macroeconomic policy?

a) Full employment
b) A reduction in environmental pollution
c) A period of sustained economic growth
d) Price stability

417.
The money value of goods and services produced in a year within the geographical
boundaries of a country is known as
a) Gross National Product
b) The Balance of Payments
c) Gross Domestic Product
d) The Consumer Price Index

418.

In the commonly accepted definition of a recession, the level national output

a) Rises at an accelerating rate


b) Rises at a decreasing rate
c) Declines
d) Is rising faster than the trend rate of national output

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419.
If national output in one year is measured at Euro 300 billion and a year later it is
measured at Euro 315 billion, then the rate of growth in that year is
a) 2 per cent
b) 5 per cent
c) 10 per cent
d) 15 per cent

420.

The inflation-adjusted gross domestic product is called

a) Gross National Product


b) Real Gross Domestic Product
c) Money Gross Domestic Product
d) Disposable Income

421.
If prices and wages rise at the same rate, the real purchasing power of the average
worker will
a) Fall
b) Rise
c) Stay the same
d) Rise or fall depending on what happens to the level of interest rates

422.

Which of the following is the most accurate indicator of a nation's standard of living?

a) Gross national product


b) Gross domestic product
c) Real national income per capita
d) Real national income

423.
Which of the following categories would be included as part of gross fixed capital
investment in the UK economy?
a) An increase in the value of business inventories (stocks)
b) An increase in the rate of capital depreciation
c) An increase in new commercial and residential property investment
d) An increase in government spending on wages of people working for the National Health Service

424.

Which of the following statements is correct?

a) Gross investment equals net investment minus depreciation


b) Gross investment plus net investment equals depreciation
c) Net investment equals gross investment minus depreciation
d) Net investment minus depreciation equals gross investment

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425.
Which of the following items of expenditure are included as part of current government
spending in the UK national income accounts?
a) Grants made to students in full-time education
b) Expenditure on the wages and salaries of teachers in state schools
c) Interest payments on government debt
d) Payments of the state pension to claimants

426.
For the year 2004, in the British economy the percentages of consumption spending,
gross investment, government purchases, and net exports (X-M) as a share of GDP were
approximately as follows:
a) 67%, 18%, 18%, and 3%.
b) 40%, 25%, 20% and 15%
c) 75%, 10%, 15% and 5%
d) 64%, 30%, 8% and -2%

427.

Per capita GDP is a baseline measure of the standard of living. It equals

a) GDP divided by the total number of people employed in the economy + the unemployed
b) GDP divided by the number of taxpayers
c) GDP divided by the total population
d) GDP divided by the adult population (i.e. those people aged 16+)

428.
Which one of the following is the best guide to the likely trend rate of economic growth
for a country? An increase in
a) Consumer Spending
b) Net Exports
c) Labour and Capital Productivity
d) Government Spending on Welfare

429.
Investment is a _______of spending that ______________ the _____________ of
capital
a) Flow; increases; stock
b) Flow; adds to; flow
c) Stock; decreases; stock
d) Stock; increases; flow

430.

Real GDP is not a good indicator of economic welfare because it __________

a) Excludes the value of income and spending in the shadow or "black" economy
b) Does not make an adjustment for the external costs and benefits created by externalities
c) Measures the value of time spent working in producing goods and services but not the value of leisure time
d) All of the above

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431.
In a small regional farming sector in a given year, farmers sell potatoes to factories for
10m Factories then manufacture and sell frozen chips and crisps to supermarkets for 17m.
Supermarkets sell these frozen chips and crisps to consumers for 21m. From this information
we can conclude that
a) The value added by the factories is 11m during the year
b) The value added by the farmers is 12m during the year
c) The total value added is 48m
d) The total value added is 21m

432.
In country X in a given year the money value of national output is estimated to be
300m at current prices. If the GDP deflator (index of prices) is found to be 120, then real
national output measured at constant base year prices will be
a) 200m
b) 250m
c) 300m
d) 320m

433.
The chart above shows the annual rate of real GDP growth for the UK and the USA for
each year since 1998. From the data shown in the chart we can deduce that
a) The USA has grown faster than the UK throughout the period since 1990
b) The USA has a higher standard of living than the UK
c) The USA experienced an economic slowdown in 2001
d) The UK had a more volatile cycle than the US over the years shown

434.

Real national income may be defined as

a) The real value of all assets owned by the nation's inhabitants


b) The money value of national income re-valued at constant prices
c) National income expressed in current prices
d) National income net of all tax payments
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Introduction to Macroeconomics Answers


412.

(b)

413.

(a)

414.

(a)

415.

(d)

416.

(b)

417.

(c)

418.

(c)

419.

(b)

420.

(b)

421.

(c)

422.

(c)

423.

(c)

424.

(c)

425.

(b)

426.

(a)

427.

(c)

428.

(c)

429.

(a)

430.

(d)

431.

(d)

432.

(b)

433.

(c)

434.

(b)

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3.2

Interpreting Macroeconomic Data


435.
True or False: If the index of GDP rises from 114 in 2003 to 119 in 2004, then the rate of
growth for 2004 is 5 per cent

a) True
b) False

436.
In terms of her gross domestic product (GDP), the UK is the largest economy inside the
European Union
a) True
b) False

437.
The general price level in the base year is calculated to be 150.0. If, over the course of a
year it rises to 170.0, what is the annual rate of inflation?
a) 20 per cent
b) 13 per cent
c) 50 per cent
d) 10 per cent

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438.

From the information contained in the chart above, we can deduce that

a) The rate of economic growth was fastest in 1994


b) The UK economy has expanded in each year since 1987
c) The volatility of growth was greater from 1987-1991 than from 1995-2003
d) The UK economy experienced a recession in 2002

439.
The chart above shows the annual rate of consumer price inflation for the UK since
January 1989. From the information contained in the chart we can deduce that
a) There has been a continuous fall in inflation in the UK since 1991
b) Prices in 1989 were higher than they were in 1993
c) The value of money has increased over the period 1988-2003
d) The UK economy has experienced low and stable rates of inflation over the last ten years

440.

Which one of the following would best indicate economic growth? An index of

a) Share prices
b) Retail prices
c) Export volumes
d) Gross domestic product

441.
Which one of the following is most likely to lead to a rise in a country's potential growth
of real GDP in the long term?
a) An increase in capital investment
b) An increase in consumer spending
c) An increase in imports of consumer goods
d) An increase in government spending

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442.

Other things being equal, a fall in interest rates will

a) Increase exports
b) Increase consumer spending
c) Increase unemployment
d) Increase the external value of the exchange rate

443.
Assuming that all the main objectives of national economic performance are of equal
importance, which one of the following countries is most successful in achieving the main
objectives?
Country

Inflation rate (%)

A
B
C
D

7
3
5
4

Rate of growth of real GDP


(%)
3
3
3
4

Rate of unemployment (%)


6
2
7
3

a) A
b) B
c) C
d) D

444.

Which one of the following can lead to a rise in inflation? An increase in

a) Unemployment
b) The exchange rate
c) Interest rates
d) Costs of production

445.
If an economy operating at full-employment experiences a more efficient allocation of
resources because of technological progress, then national income per head
a) Will rise in real terms
b) Will fall in real terms because of higher inflation
c) Will be distributed more equally among the population
d) Will remain the same because the economy is already operating at full-employment

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Interpreting Macroeconomic Data - Answers


435.

(b)

436.

(b)

437.

(b)

438.

(c)

439.

(d)

440.

(d)

441.

(a)

442.

(b)

443.

(B)

444.

(d)

445.

(a)

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3.3

Growth and the Economic Cycle


446.
True or False: An annual average economic growth rate of just 3 per cent per year leads
to the level of real national output doubling in less than 25 years

a) True
b) False

447.
True or False: Sustained economic growth cannot occur unless there is immigration of
labour into an economy to boost the size of a countrys labour force
a) True
b) False

448.
True or False: An increase in capital investment spending can lead to higher levels of
productivity and growth as workers have more capital to work with in their jobs
a) True
b) False

449.
True or False: For developing countries to experience growth, they must introduce
import controls to protect their domestic markets
a) True
b) False

450.
In 2002, the US economy experienced a brief recession. Which one of the following is
most likely to have helped cause the recession?
a) Rising business confidence
b) Rising interest rates and a fall in business confidence
c) A falling exchange rate
d) A fall in US government spending

451.

Economic growth can be best described as the

a) Continuous outward shift of aggregate demand


b) An increase in aggregate demand which causes a movement along the short-run aggregate supply curve
c) A long term expansion of a country's potential GDP
d) The avoidance of a negative output gap

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452.
The table below shows the level of real national output for a country over the years 1999
2004. In which year was the annual rate of growth the highest?
Year

Level of Real National Output


billion
560
580
675
690
685

1999
2000
2001
2002
2003
a) 2000
b) 2001
c) 2002
d) 2003

453.
In 1999 the market price of a mobile phone was 160. By the end of 2003, the market
price of the same mobile phone was 90. Over the same time period, the general level of prices
has risen by 15%. From this information we can deduce that
a) The real price of the phone has increased
b) The nominal price of the phone has fallen by more than the real price
c) The nominal price of the mobile phone has increased
d) The real price of the phone has fallen by more than the nominal prices

454.

If aggregate demand is constant, a leftward (inward) shift in the LRAS curve will

a) Affect only the level of real GDP


b) Increase real GDP and also lower the price level
c) Reduce real GDP and also raise the price level
d) Affect only the general level of prices

455.

Economic growth occurs when there is an increase in

a) Aggregate demand
b) The inflation rate
c) Wage rates
d) The economy's supply-side capacity

456.
Which one of the following is the most likely of the determinants of long run aggregate
supply?
a) The exchange rate
b) The accumulated skills of the labour force
c) Government spending
d) The level of unemployment

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457.
Which one of the following is most likely to lead to an increase in national income
without an increase in the rate of inflation?
a) An increase in exports
b) A reduction in interest rates
c) An increase in manufacturing and service sector investment
d) An increase in consumer spending

458.

The trend rate of growth is best defined as the

a) Fastest rate of growth the economy can achieve over a ten year period
b) The average rate of growth achieved during an economic boom
c) The rate of economic growth that can be sustained in the long run
d) The rate of economic growth that can be maintained without a balance of payments deficit

459.
If the rate of growth of aggregate demand becomes greater than the trend rate of
economic growth of output then in the short run the economy is likely to experience
a) A decrease in national output
b) An increase in unemployment
c) An increase in the rate of inflation
d) A decrease in the demand for imports

460.

Investment may be defined as

a) Spending on goods and services by consumers


b) That part of household income which is saved rather than spent
c) Spending which adds to the capital stock of a country
d) All types of spending by the government sector

461.
If an economist wishes to make a distinction between real and money national income,
which one of the following would have to be considered?
a) The rate of economic growth
b) The rate of interest
c) The exchange rate
d) The rate of inflation

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462.
The chart above shows the annual change in real national output and real investment
spending in the British economy during the period 1990-2003
From the data we can deduce that
a) The rate of growth of the economy has more stable than the rate of growth of investment
b) The rate of growth of the economy has more volatile than the rate of growth of investment
c) Real spending on capital investment fell in 1999
d) Real spending on capital investment increased in 1992

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463.
The chart shows GDP per hour worked employed for three countries Germany, Japan and
the United States. The base figure for the index is the level of GDP per hour worked in the UK in
each of the years shown. From the chart, it may be deduced that
a) Germany had the highest level of output in 2000
b) The Japanese economy has been in recession since 1995
c) Productivity in the German economy has been approximate twenty per cent higher than the UK since 1992
d) GDP per hour worked in higher in Japan than it is in the UK

464.
Which one of the following is most likely to cause firms to decrease the amount of
investment they undertake?
a) A fall in company taxation
b) A fall in business confidence
c) A rise in expected consumer demand
d) A fall in interest rates

465.
The government is concerned that, without any change to its current economic policy,
the rate of growth of the economy will fall below the trend rate. Which of the following policy
changes is most likely to prevent this from happening?
a) An increase in interest rates
b) A reduction in the level of unemployment benefits
c) An increase in government capital spending
d) A reduction in the target for the rate of inflation

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466.

The table below shows GDP per head data for two countries
GDP per head
2000
100
100

Country A
Country B

2004
114
107

From the above information we can conclude that


a) Country B has enjoyed a lower rate of inflation than Country A
b) Country A has a higher level of national income than Country B in 2004
c) GDP per head was the same in Country A and Country B in 2000
d) The rate of growth of GDP per head was higher in Country A than in Country B between 2000 and 2004

467.
The chart above shows the annual rate of growth of real GDP for the United States
economy. From the data it can be seen that
a) Economic growth in the United States slowed during 2000 and 2001
b) The United States economy experienced a recession in 2001
c) The United States economy has a trend rate of growth close to 4 per cent
d) Unemployment in the USA must have increased in between 2000 - 2003

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Growth and the Economic Cycle - Answers


446.

(a)

447.

(b)

448.

(a)

449.

(b)

450.

(b)

451.

(c)

452.

(b)

453.

(d)

454.

(c)

455.

(d)

456.

(b)

457.

(c)

458.

(c)

459.

(c)

460.

(c)

461.

(d)

462.

(a)

463.

(c)

464.

(b)

465.

(c)

466.

(d)

467.

(a)

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AS Economics QuestionBank 2005

3.4

Aggregate Demand
468.
True or False: If a country is running a trade surplus, the net effect is to reduce the level
of aggregate demand, because goods and services are being sold to other countries instead

a) True
b) False

469.
True or False: Exports from the UK economy now account for nearly 30% of our national
output
a) True
b) False

470.
True or False: A recession in the European Union economy would tend, other things
remaining constant, to cause a fall in aggregate demand in the UK economy
a) True
b) False

471.
The diagram below shows a movement down the aggregate demand curve from A to B.
The movement down the AD curve is caused by
General
Price Level

AD

Real National
Income

a) A rise in government spending


b) A rise in investment spending
c) A fall in aggregate supply
d) A fall in the general price level

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472.

Which one of the following would cause AD to fall?

a) A decrease in unemployment
b) A fall in the demand for imported goods and services
c) A fall in government expenditure on defence and transport
d) A rise in productivity

473.

Which one of the following is not a component of aggregate demand?

a) Exports
b) Government spending
c) Employment
d) Household spending

474.
Which one of the following is most likely to increase the rate of capital investment in an
economy?
a) A decrease in the rate of growth of consumer demand
b) An increase in the rate of growth of consumer demand
c) A rise in interest rates
d) A fall in business confidence

General
Price Level

AD1
AD2

Real National Income

475.

In the diagram above, the shift in the curve from AD1 to AD2 might have been caused by

a) A fall in interest rates


b) A fall in capital investment spending by UK businesses
c) A fall in the cost of raw materials and components
d) A fall in the exchange rate

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476.

Other things being equal, a rise in interest rates is likely to cause a fall in

a) The household savings ratio


b) The level of capital investment spending
c) The level of unemployment
d) The exchange rate

477.

Which one of the following statements above saving is correct?

a) Saving is a component of aggregate demand


b) Only households with high incomes can afford to save
c) Savings can be used to finance capital investment spending by firms
d) Increased savings may lead to an increase in demand pull inflation

478.

Which of the following is a component of aggregate demand?

a) Tax revenues
b) Savings
c) The money supply
d) Household (consumer) spending

479.
Which one of the following is most likely to cause a fall in aggregate consumer
spending?
a) An increase in house prices
b) A reduction in the real rate of interest
c) A rise in real national income
d) A large reduction in income tax allowances

480.

Which one of the following is most likely to decrease the level of aggregate demand?

a) Expectations that the government will cut income tax


b) Expectations that the Bank of England will cut interest rates
c) A fall in consumer and business confidence
d) A fall in the exchange rate

481.

An economy-wide decrease in house prices is likely to be associated with increased

a) Unemployment
b) Aggregate supply
c) Inflation
d) Imports

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482.
Other things being equal, the aggregate demand curve is most likely to shift
RIGHTWARD following
a) A rightward shift of aggregate supply
b) An increase in the price level
c) A fall in the proportion of income saved
d) A fall in government spending

483.

Aggregate demand is most likely to fall when there is

a) A fall in business and consumer confidence


b) A fall in the basic rate of income tax
c) A fall in the sterling exchange rate
d) A fall in the level of interest rates

484.
The table below shows the growth of real disposable income and consumer spending.
From the data it can be seen that

1998
1999
2000
2001
2002
2003
2004

Real Disposable Income


% change
0.4
3.3
6.2
4.9
1.5
2.1
2.8

Consumer Spending
% change
3.9
4.4
4.6
2.9
3.3
2.3
2.7

a) Consumer spending has grown more quickly than income in each year
b) Real disposable income has increased in each year
c) The household savings ratio rose in 2002
d) Most of the increase in consumption has gone on imported products

485.
The level of capital investment spending by private sector businesses tends to vary ____
with interest rates and ______ with business confidence
a) Positively, positively
b) Positively, negatively
c) Negatively, positively
d) Negatively, negatively

486.
The level of consumer spending tends to vary ____ with the rate of growth of house
prices and ______ with the rate of interest
a) Positively, positively
b) Positively, negatively
c) Negatively, positively
d) Negatively, negatively
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487.
The level of size of the government budget deficit tends to vary ____ with the rate of
growth of GDP and ______ with the level of unemployment
a) Positively, positively
b) Positively, negatively
c) Negatively, positively
d) Negatively, negatively

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Aggregate Demand - Answers


468.

(b)

469.

(a)

470.

(a)

471.

(d)

472.

(c)

473.

(c)

474.

(b)

475.

(b)

476.

(b)

477.

(c)

478.

(d)

479.

(d)

480.

(c)

481.

(a)

482.

(c)

483.

(a)

484.

(b)

485.

(c)

486.

(b)

487.

(c)

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3.5

Aggregate Supply
488.
True or False: The short run aggregate supply curve would shift inwards if there was a
fall in wage costs, other things remaining constant

a) True
b) False

489.
True or False: Short term increases in demand can often be met by an increase in
workers overtime and a reduction in stocks rather than increased investment in new plant and
machinery
a) True
b) False

490.
True or False: An outward shift in the long run aggregate supply curve is equivalent to
an outward shift in the production possibility curve
a) True
b) False

491.

Which one of the following is likely to decrease aggregate supply in the economy?

a) Improvements in technology
b) Increased occupational and geographical labour mobility
c) A rise in the price of raw materials and components
d) A reduction in the rate of corporation tax and income tax

492.

The short run aggregate supply curve is drawn on the assumption that

a) The prices of factors of production such as wages are constant


b) The amount of money in circulation is constant
c) Exports of goods and services are constant
d) Investment in the economy is constant

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General
Price Level

LRAS

SRAS2

SRAS1

National Income

493.

The shift in the SRAS curve shown in the diagram might have been caused by

a) A fall in the cost of imported components and raw materials


b) A rise in the world price of oil and other commodities
c) An increase in interest rates
d) An increase in business confidence leading to higher investment

494.
Which one of the following would cause a rightward shift in the long run aggregate
supply curve? An increase in
a) The amount of cash in circulation
b) The productivity of labour and capital
c) Inflation
d) The volume of goods exported

495.

The position of the long run aggregate supply curve for an economy depends upon

a) The size of the budget deficit


b) The rate of inflation
c) The current rate of unemployment
d) The size and quality of the labour force and the capital stock

496.

Supply-side economic policies are generally understood to be policies which

a) Enable the government to supply as many goods and services as possible


b) Reduce the labour supply in order to reduce the problem of unemployment
c) Reduce inflation by reducing the supply of credit
d) Help to create economic incentives and reduce market imperfections
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497.
Which one of the following is likely to result in a rightward shift of the short run
aggregate supply curve?
a) A decrease in wage rates
b) A decrease in government spending
c) An increase in indirect taxation on producers
d) An increase in planned capital investment spending by businesses

498.

Most economists believe that the long-run aggregate supply curve is vertical because

a) In the long run, the level of output is determined by resources and technology rather than changes in the price
level
b) Actual output can never exceed, even temporarily the trend rate of output
c) A vertical long-run supply curve indicates the maximum level of output that an economy can ever achieve
d) A vertical long-run supply curve indicates that an increase in aggregate demand will lead to a larger real output
but not a larger nominal output.

499.
The position of an economy's long-run aggregate supply curve might be determined by
all of the following EXCEPT
a) New technology in manufacturing
b) The productivity of labour
c) The rate of investment
d) Imports of consumer goods

500.
As a result of a rise in the sterling exchange rate, fewer tourists visit the UK. Other
things remaining the same, the likely effect of this is
a) An inward shift of short run aggregate supply
b) An inward shift of short run aggregate demand
c) An inward shift of long run aggregate supply
d) An outward shift of long run aggregate supply

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Aggregate Supply - Answers


488.

(b)

489.

(a)

490.

(a)

491.

(c)

492.

(a)

493.

(b)

494.

(b)

495.

(d)

496.

(d)

497.

(a)

498.

(a)

499.

(d)

500.

(b)

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AS Economics QuestionBank 2005

3.6

Equilibrium National Income


501.
True or False: An inward shift of the aggregate demand curve normally causes an inward
shift of the long run aggregate supply curve

a) True
b) False

502.
True or False: If the actual level of GDP is less than potential GDP, then prices across the
economy will start falling because of excess supply
a) True
b) False

503.
True or False: A ten per cent rise in UK house prices has more of an effect on aggregate
demand than a ten per cent rise in share prices
a) True
b) False
General Price
level
90
100
110
120
130
140

Aggregate demand
( billions)
2000
1970
1950
1930
1915
1900

Aggregate supply
( billions)
1950
1970
2000
2030
2060
2100

504.
The table above shows the aggregate demand and aggregate supply schedules for an
economy. What is the equilibrium level of national income?
a) 90 billion
b) 100 billion
c) 110 billion
d) 120 billion

505.

Which of the following will NOT cause an increase in the equilibrium level of GDP?

a) An increase in government spending


b) An increase in consumption
c) An increase in exports
d) An increase in imports

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506.

Which of the following will not cause a fall in the equilibrium level of GDP?

a) An increase in the propensity to consume


b) An increase in the rate of income tax
c) An increase in the marginal propensity to save
d) An increase in the propensity to import

507.

Macro-economic disequilibrium exists when

a) Aggregate output is not equal to aggregate real income


b) Aggregate supply is not equal to aggregate demand
c) Aggregate exports are not equal to aggregate imports
d) Government expenditure is not equal to tax revenue

508.
If the aggregate supply curve is perfectly inelastic, an increase in AD will lead to an
increase in
a) The price level
b) Real national output
c) Economic growth
d) Employment
LRAS
General
Price Level

Pe

P2

SRAS
AD1
AD2
Y2

Ye

Yfc

Real National Income

509.
The change in equilibrium national output shown in the diagram above would be likely
to lead to
a) A rising level of employment
b) A rise level of government tax revenue
c) A fall in the rate of unemployment
d) A fall in the level of real national income per head of population
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LRAS2

LRAS1
General
Price Level

Pe

SRAS

AD2
AD1

Y1

Y1

YFC2

National Income

510.
The diagram above shows the long run aggregate supply curve and AD curves for a
country over a period of time. The main cause of the shift in the long run aggregate supply curve
from LRAS1 to LRAS2 might have been
a) A fall in the exchange rate leading to a higher level of exports
b) An improvement in the rate of growth of productivity and technological progress in the economy
c) A decision by the government to increase spending on welfare benefits
d) A fall in interest rates leading to a boom in house prices

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General
Price Level

LRAS

P3

P2

P1

AD3
SRAS
AD2
AD1
Y1

Y2

Y3

Yfc

National Income

511.
The increase in aggregate demand from AD1 to AD3 shown in the diagram above is likely
to lead to
a) A fall in the rate of inflation and rising unemployment
b) A rise in real national output and rise in the rate of inflation
c) An increase in the government budget deficit
d) A fall in prices and a fall in unemployment

512.
If the aggregate supply curve is perfectly elastic, an increase in aggregate demand
brought will cause an increase in
a) The rate of price inflation
b) The level of real national output
c) The government budget deficit
d) The level of consumer debt

513.
If an economy is operating at full capacity, an increase in aggregate demand usually
leads to an increase in inflation because it is likely that
a) The exchange rate will appreciate
b) Government tax revenues will increase
c) The rate of increase in money wages will rise
d) Interest rates will fall

514.
The process by which an initial change in aggregate demand can lead to a larger final
effect on local or national income is known as
a) The output gap
b) The multiplier
c) The economic cycle
d) The production possibility frontier
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515.
Because of the multiplier effect, if UK exports rise by 600 million per year then UK
equilibrium GDP will rise by
a) Nothing
b) Less than 600 million per year
c) 600 million per year
d) More than 600 million per year

516.
Which of the following, if increased, would have an expansionary effect on the UK
economy?
a) Direct taxation
b) Overseas investment by UK companies
c) Imports of goods and services
d) Investment in new plant and machinery in the UK
General
Price Level

SRAS1

SRAS2

A
P1

B
P2

AD

Y1

Y2

Real National
Income

517.
The shift in the short run aggregate supply curve shown in the diagram above might
have been caused by
a) A fall in government spending
b) A fall in consumer confidence
c) A rise in interest rates
d) A fall in the costs of raw materials and components

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518.
"The UK economy grew 0.9% in the final quarter of 2003. That suggests there was quite
a lot more momentum in the economy at the end of last year than most commentators thought."
Which one of the following factors might have explained the stronger than expected growth in
the UK economy?
a) A lower exchange rate
b) A rise in interest rates
c) A rise in labour costs
d) A slowdown in the UK's main export markets

519.
"Shortages of skilled labour suggest that wages in the service sector and manufacturing
sector are set to pick up in coming months." The main result of this rise in wage rates would be
a) A rise in cost-push inflation
b) A rise in UK exports
c) A rise in government spending
d) A rise in the UK exchange rate

520.
In 2004, Country Xs potential GDP is Euro 210 billion per year. Its actual GDP is Euro
225 billion per year. The difference between potential and actual GDP is
a) A negative output gap
b) A positive output gap
c) A budget deficit
d) A balance of payments deficit

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LRAS
General
Price Level

P1

SRAS1

AD

Y1

Real National
Income

521.
The current level of equilibrium national income in the diagram above is Y1. At this level
of national income
a) There is a positive output gap
b) There is a negative output gap
c) There is low unemployment
d) There is rising inflation

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522.
In which diagram would an increase in exports of goods and services leave the general
price level unchanged?

Price
Level

Price
Level

AS

AD

AS

AD

GDP
Price
Level

Supply

Price
Level

GDP
AS

AS

AD
AD
GDP

GDP

a) A
b) B
c) C
d) D

523.
A government decides to pursue a more reflationary fiscal policy and the central bank
decides to pursue a more deflationary monetary policy. Which of the following is consistent
with this policy change?

a)
b)
c)
d)

Government spending
Decrease
Decrease
Increase
Increase

Interest rates
Increase
Decrease
Decrease
Increase

Taxation
Increase
Increase
Decrease
Decrease

524.
Over the last year, the rate of inflation for foreign holiday prices has fallen
significantly. In the year to December 2002, prices rose 11.1%. By contrast, in the year to
December 2003, they fell 2.4%. Which of the following might explain this price trend?
a) A rise in demand for foreign holidays
b) Increased competition among companies selling foreign holidays
c) A reduction in the number of holidays made available for sale
d) A fall in the sterling exchange rate
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525.
The US government increases its spending. At the same time, the US Federal Reserve
announces a cut in US interest rates. All other things being equal, the most likely outcome for
the US economy is that
a) Aggregate supply will increase but economic growth will remain the same
b) Aggregate demand will rise and inflationary pressures will increase
c) The US current account deficit will reduce and inflation will fall
d) Inflation will fall but unemployment will rise

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Equilibrium National Income - Answers


501.

(b)

502.

(b)

503.

(a)

504.

(b)

505.

(d)

506.

(a)

507.

(b)

508.

(a)

509.

(d)

510.

(b)

511.

(b)

512.

(b)

513.

(c)

514.

(b)

515.

(d)

516.

(d)

517.

(d)

518.

(a)

519.

(a)

520.

(b)

521.

(b)

522.

(b)

523.

(d)

524.

(b)

525.

(b)

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3.7

Monetary Policy and the Exchange Rate


526.
True or False: The rate of interest is the only factor that determines the level of capital
investment spending by privately owned businesses

a) True
b) False

527.
True or False: Monetary policy and fiscal policy changes affect aggregate demand
through different routes, but they tend to have similar effects on the level of demand, output
and prices
a) True
b) False

528.
True or False: It can take up to two years for the full effects of an interest rate change
from the Bank of England to have its full effects on the macroeconomy
a) True
b) False

529.
The major objective of monetary policy being pursued by the Bank of England is to
achieve
a) A target rate of inflation
b) A higher rate of economic growth
c) Full employment
d) Equilibrium on the UKs balance of payments

530.
In recent years, the UK and the United States has seen a period of low interest rates.
Other things being equal, which of the following combinations represents the most likely
outcome of cuts in interest rates?
The demand for consumer
credit
Fall
Rise
Rise
Rise

a)
b)
c)
d)

The exchange rate


Fall
Fall
Rise
Fall

The rate of growth of real


GDP
Rise
Fall
Rise
Rise

531.
"Higher interest rates normally reduce the growth of demand in an economy, initially
through consumer confidence and the housing market." The policy measure described above is
an example of
a) A deflationary fiscal policy
b) An expansionary fiscal policy
c) An expansionary monetary policy
d) A counter-cyclical monetary policy

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532.
The Bank of England can reduce inflationary pressure in the economy if an increase in
interest rates leads to a decrease in
a) Savings
b) The exchange rate
c) Consumer borrowing
d) Unemployment

533.
"The level of consumption and the housing market will fall back once interest rates start
to rise. Which one of the explanations below best describes the effects of higher interest rates
on the consumer?
a) Consumers will have less disposable income when interest rates rise
b) Consumer confidence will increase when interest rates rise
c) The government will reduce taxation if interest rates rise
d) The demand for housing will fall if interest rates rise

534.

From the data in the chart above it can be seen that

a) The Bank of England has tightened monetary policy on three occasions since it was made independent in May
1997
b) The level of real interest rates in the UK has been on a downward trend
c) Since 1997 the Bank of England has managed to keep the rate of inflation within target
d) Interest rates in the UK have remained higher than in the Euro Zone

535.
If there were a large outflow of sterling from the UK, which of the following would you
expect to occur?
a) A rise in the exchange value of the
b) A fall in the exchange value of the
c) A fall in interest rates
d) A rise in interest rates

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536.
Other factors remaining constant, a sustained rise in interest rates in the United States
is likely to result in
a) An off-setting fall in UK interest rates
b) An increase in short term capital flows from the United States to the UK
c) A fall in the sterling exchange rate against the US dollar
d) A rise in UK interest rates

537.
If one pound initially buys Euro 1.30 which of the following represents a subsequent
depreciation of the pound?
a) 1 = Euro 1.45
b) 1 = Euro 1.30
c) 1 = Euro 1.25
d) 1 = Euro 1.50

538.
The chart above shows the average weekly exchange rate between sterling and the US
dollar from January 2001 to April 2004. From the chart we can deduce that
a) The dollar has appreciated against sterling over the period
b) The pound has appreciated against the US dollar over the period
c) US inflation has been higher than inflation in the UK over the period
d) British exports to the USA will have fallen over the period

539.
Which one of the following is most likely to lead to an increase in the underlying rate of
inflation?
a) An increase in the exchange rate
b) A fall in the demand for UK exports
c) A rise in the government budget surplus
d) A rise in the growth of demand for consumer credit

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540.
The chart above shows the sterling exchange rate index and the balance of trade in
goods for the UK since 1990. The data in the chart shows that
a) The UK economy has run a trade surplus in goods in each year since 1990
b) The sterling exchange rate has depreciated since 1996
c) UK exports of goods have fallen since 1996
d) The sterling exchange rate has appreciated against other currencies in the period since the start of 1996

541.

What would result from a depreciation of the pound on the foreign exchange market?

a) An increase in the price of imported computers


b) A fall in the price of imported computers
c) An increase in the purchasing power of UK tourists overseas
d) A fall in the purchasing power of US tourists in London

542.
What will be the effect of the value of the pound sterling changing from 2000 to 2500
Italian lire over the course of a year?
a) British tourists travelling to Italy will see a decrease in their real purchasing power
b) UK exports to Italy will become cheaper
c) Italian exports to the UK will become more expensive
d) The Italian lire will be cheaper in terms of the pound

543.

If the pound rose in value against other currencies, what would be likely to happen?

a) Foreign cars would become more expensive in the UK


b) The number of foreign tourists visiting Britain would decrease
c) The price of raw materials imported into the UK would rise
d) UK exports would become cheaper abroad

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544.
The economics news on the television reports that the dollar has strengthened relative
to the Japanese yen. This means that;
a) The yen can now purchase more dollars
b) The dollar has depreciated relative to the yen
c) The dollar can now purchase more yen
d) The US trade balance with the Japanese economy has improved

545.

Other factors remaining constant, a period of rising interest rates will

a) Raise consumption
b) Lower consumption
c) Leave consumption unchanged
d) Reduce the savings ratio

546.

Which of the following will influence a country's exports?

a) Costs of transporting goods from country to country


b) Consumer tastes for domestic and foreign goods
c) Prices of goods at home and abroad
d) All of the above

547.
Between 1995 and the second quarter of 1998 the sterling effective exchange rate
index increased from 84.8 to 105.4. Which one of the following would be likely to result?
a) UK exports will become more competitive
b) Employment in manufacturing industry will fall
c) Inflationary pressures will grow
d) The cost of imported raw materials and components will rise

548.
The consequence of the European Central Bank raising interest rates for countries inside
the Euro Zone when the Euro is appreciating against other currencies is likely to be an increase
in
a) The level of unemployment
b) Aggregate supply
c) The balance of payments deficit
d) Aggregate demand

549.
In the summer of 2003, the Bank of England cut interest rates to 3.5%. One justification
for this might have been the MPCs concern over
a) Increasing evidence of a recession in UK manufacturing
b) A fall in the sterling exchange rate
c) An increase in the rate of inflation
d) Increasing activity in the UK housing market

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Monetary Policy and the Exchange Rate - Answers


526.

(b)

527.

(a)

528.

(a)

529.

(a)

530.

(d)

531.

(d)

532.

(c)

533.

(d)

534.

(a)

535.

(b)

536.

(c)

537.

(c)

538.

(b)

539.

(d)

540.

(d)

541.

(a)

542.

(d)

543.

(b)

544.

(c)

545.

(b)

546.

(d)

547.

(b)

548.

(a)

549.

(a)

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3.8

Fiscal Policy
550.
True or False: As people earn higher incomes, they tend to pay a rising percentage of
that income in taxation to the government

a) True
b) False

551.
True or False: The majority of tax revenues for the UK government comes from
businesses in the form of Corporation Tax and National Insurance Contributions
a) True
b) False

552.
True or False: A cut in direct taxation may have little effect on aggregate demand if
consumer confidence is low and consumers want to build up their savings
a) True
b) False

553.

Which of the following would an economist classify as a pure public good?

a) Health care
b) Public libraries and museums
c) Seat belts in cars
d) Street lighting

554.

The main aim of increasing taxes on alcoholic drinks is

a) To maximise government revenue


b) Eliminate alcohol consumption
c) Reduce alcohol consumption towards a socially efficient level
d) Reduce employment in the drinks industry

555.

Which of the following is a direct tax?

a) National insurance contributions


b) Value added tax
c) Excise duty on petrol
d) Car insurance tax

556.

The distribution of income can be made more equal by

a) Abolishing all taxes


b) Introducing indirect taxes on all goods and services
c) Introducing a progressive system of taxation
d) Introducing a proportional system of taxation

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557.

A budget deficit means that

a) Tax revenues exceed government spending


b) Imports of goods and services exceed exports
c) Government spending exceeds tax revenues
d) Exports of goods and services exceed imports

558.
If the Chancellor raised the income tax allowance by 500 leaving the basic rate at 20%,
what would the effect on annual disposable income be?
a) Raise it by 200
b) Raise it by 100
c) Lower it by 100
d) Leave it unchanged

559.
A government faces falling tax revenues and rising benefit payments. This is likely to be
due to
a) Faster economic growth
b) Rising export earnings
c) Higher unemployment
d) Increased inflation

560.
Stuart earns 20,000 per year and pays 4,000 in income tax. Steve earns 30,000 and
pays 8,000 in income tax. Sylvie earns 10,000 and pays 1,500 in tax. The income tax system
is
a) Regressive
b) Proportional
c) Progressive
d) Flat rate

561.
If an economy moves into an unexpected recession and the government has already
planned a budget deficit, planned tax revenues will
a) Rise, thus lowering the budget deficit
b) Remain unchanged
c) Fall, thus lowering the budget deficit
d) Fall, thus increasing the budget deficit

562.

A regressive tax is defined as one which requires

a) All taxpayers to pay the same amount of their income in taxation


b) High income earners to pay more in tax than low income earners
c) High income earners to pay a lower proportion of their income in taxes than low income consumers
d) High income earners to pay a higher proportion of their income in taxes than low income earners

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563.
A decision by the government to introduce an expansionary fiscal policy would be less
likely to succeed in reducing unemployment if a country had
a) A high marginal propensity to import
b) A fixed exchange rate
c) A high level of cyclical unemployment and spare capacity
d) A low level of business and consumer confidence

564.
Which of the following is not an automatic stabiliser of national income during a time of
economic slowdown or recession?
a) State retirement pensions
b) Social security contributions
c) Taxes on expenditure and income
d) Unemployment benefits

565.
Suppose a drop in consumer and business confidence results in a recession. In order to
move the economy out of the recession, an expansionary fiscal policy would include
a) An increase in direct and indirect taxation
b) An increase in the real value of welfare benefits
c) An expansion of the money supply
d) A depreciation of the exchange rate

566.

Which of the following is NOT an example of the use of fiscal policy?

a) A reduction in government spending on training


b) The use of the exchange rate to control inflation
c) A planned increase in the government's budget deficit
d) Tax concessions given to businesses locating in regions of high unemployment

567.
All other things being equal, a government would be undertaking a deflationary fiscal
policy if it reduced
a) Government expenditure
b) Interest rates
c) Taxation
d) The exchange rate

568.
Which one of the following changes in fiscal policy is most likely to explain a rightward
shift of an economy's aggregate demand curve?
a) A reduction in capital expenditure by government
b) An increase in the rate of Value Added Tax
c) A reduction in the level of welfare benefits
d) A reduction in the basic rate of income tax

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569.
According to Keynesian economists, for which one of the following types of
unemployment might an increased budget deficit be the most appropriate remedy?
a) Frictional
b) Structural
c) Technological
d) Cyclical

570.
A rightward shift in the AD curve is brought about by various fiscal policy decisions.
Among these might be
a) Increasing indirect taxes
b) Increasing the budget deficit
c) Reducing interest rates
d) Reducing income tax allowances

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Fiscal Policy - Answers


550.

(a)

551.

(b)

552.

(a)

553.

(d)

554.

(c)

555.

(a)

556.

(c)

557.

(c)

558.

(b)

559.

(c)

560.

(c)

561.

(d)

562.

(d)

563.

(a)

564.

(a)

565.

(b)

566.

(b)

567.

(a)

568.

(d)

569.

(d)

570.

(b)

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3.9

Supply-side Policies
571.
True or False: A cut in income tax will boost the incentive to work longer hours for all
workers

a) True
b) False

572.
True or False: The time lags between a change in supply-side policies and their effects
on the macroeconomy tend to be longer than changes in monetary and fiscal policies
a) True
b) False

573.
True or False: The introduction of labour-saving technology inevitably destroys more
jobs than it creates leading to rising unemployment
a) True
b) False

574.
True or False: Other things remaining constant, a sharp rise in world oil prices has
inflationary consequences for prices but deflationary effects on the level of real national output.
a) True
b) False

575.
All of the following are examples of government policies aimed at improving 'supplyside' economic performance and increasing the trend rate of economic growth except
a) Extra investment in labour training schemes
b) The introduction of a national minimum wage
c) The opening up of markets to increased competition
d) Reductions in the rate of income tax to boost the labour supply

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LRAS1

LRAS2

General
Price Level

SRAS1
SRAS2

YFC1

YFC2
Real National Income

576.
The diagram shows the long run aggregate supply curves for a country over a period of
time. The shift in the long run aggregate supply curve from LRAS1 to LRAS2 is most likely to have
resulted from
a) An increase in the natural rate of unemployment
b) An increase in the supply of money and credit
c) A fall in the general price level
d) Increased investment in human and fixed capital

577.

A 'supply-side' economist would support a policy of

a) Lower company taxes to encourage business investment


b) Higher government spending to boost aggregate demand
c) Higher rates of interest to control the risk of demand pull inflation
d) Higher wage rates to increase demand

578.
According to a supply-side economist, which one of the following would be likely to
reduce the 'natural' rate of unemployment?
a) Increased government spending on unemployment benefits
b) The introduction of a statutory national minimum wage
c) A reduction in the collective bargaining power of trade unions
d) Legislation to increase employment protection laws for employees

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579.
Which one of the following would be a supply-side measure designed to improve the
international competitiveness of domestic producers in world markets?
a) An increase in corporation tax
b) An import tariff
c) An increase in interest rates
d) An increase in capital investment tax allowances

580.

The long-run average or "trend" growth rate of real UK GDP is about

a) 0 per cent per year


b) 23 per cent per year
c) 46 per cent per year
d) 7-8 per cent per year

581.
The main factor determining changes in our living standards from one generation to the
next is
a) The current level of unemployment
b) The current rate of inflation
c) The rate of long term economic growth
d) The rate of government taxation on incomes and spending

582.
In country Z the underlying trend rate of growth is 3.0%. The table below shows the
actual rate of growth in real national income over four successive years.
Year

Percentage growth in real national


income
2.2%
0.9%
0.3%
1.9%

1
2
3
4
Between Year 1 and Year 4 it is most likely that
a) The economy experienced a recession
b) Inflation increased
c) Unemployment increased
d) Actual GDP rose above potential GDP

583.

Supply-side measures aiming to to reduce unemployment include

a) Reducing the marginal rate of income tax


b) Increasing government spending on unemployment benefits
c) Increasing the money supply in the economy
d) Increasing government borrowing to fund capital investment projects by the public sector

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Supply-side Policies - Answers


571.

(b)

572.

(a)

573.

(b)

574.

(a)

575.

(b)

576.

(d)

577.

(a)

578.

(c)

579.

(d)

580.

(b)

581.

(c)

582.

(c)

583.

(a)

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3.10 Inflation
584.

True or false: Inflation reduces the purchasing power of people on fixed incomes

a) True
b) False

585.

True or false: A fall in the rate of inflation means that prices are now falling

a) True
b) False

586.

True or false: The Bank of England must raise interest rates if inflation starts to rise

a) True
b) False

587.
True or false: An inflationary gap occurs when aggregate demand exceeds aggregate
supply at the full-capacity level of national income
a) True
b) False

588.
True or false: If the general price index for an economy rises from 144 in 2003 to 162 in
2004, then the approximate rate of inflation between 2003-04 is 12 per cent
a) True
b) False

589.

Inflation is best defined as a

a) Decrease in the general price level


b) Decrease in the rate of interest
c) Sustained increase in the general price level
d) Sustained increase in the level of national income

590.

Which one of the following could lead to an increase in the rate of inflation?

a) A fall in the exchange rate


b) A fall in the balance of payments surplus
c) A fall in consumer spending
d) A fall in the government budget deficit

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591.
During a year, there has been a rise in national income of 7% and a rise in the retail
price index of 4%. The population remained stable. The approximate change in real income per
head is?
a) -3%
b) +4%
c) +3%
d) +11%

592.

Price stability occurs when

a) All prices in the economy are constant


b) The rate of inflation is zero
c) The general price level increases at a steady and low rate
d) There is no change in the exchange rate against other currencies

593.
A country experiences a rate of inflation twice that of its main international
competitors. At the same time its currency appreciates in value. Which of the following is most
likely to occur?
a) A rise in exports
b) A rise in business confidence
c) A rise in investment
d) A rise in business failures

594.
Which of the following would be an attempt by the government to introduce direct
controls to reduce inflation?
a) Setting pay limits for workers in the NHS and education
b) Raising interest rates
c) Allowing the exchange rate to appreciate
d) Cutting government subsidies to farmers

595.

Weights are used in calculating the index of consumer prices to reflect the different

a) Amounts of money relative to their budget spent by consumers on each good and service
b) Levels of prices for each good
c) Numbers of people buying each good
d) Rate of change in price of each good over time

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596.

The table below shows consumer price indices for two countries over a four year period
Index of Consumer Prices

Period
Year
1
2
3
4

Country A
100.0
102.4
105.7
109.3

Country B
100.0
102.0
103.2
104.0

Which one of the following can be deduced from the data?


a) In Year 4, prices were higher in country A than in country B
b) The value of the exchange rate for country A has increased
c) Between years 14, the average inflation rate was higher in country A than in country B
d) Between years 14, the average inflation rate was higher in country B than in country A

597.

If the government wishes to reduce the rate of inflation, it is most likely to increase

a) Income tax allowances


b) The burden of direct taxation
c) Welfare benefits paid to pensioners and households on low incomes
d) The wages of people working in the National Health Service

598.
Suppose that currently the average inflation rate is 5% per year; however, business
firms and labour anticipate that the general price level will increase by substantially more than
the 5% over the next two years. Other things constant, these expectations can cause
a) An acceleration in the rate of increase of wages
b) An increase in the productivity of businesses throughout the economy
c) A decrease in the rate of inflation
d) No change in inflation but a rise in unemployment

599.
In an economy already at full-employment, which one of the following policies will be
least suitable for the control of inflationary pressure in the economy?
a) Higher interest rates to encourage saving
b) Higher direct taxes
c) A lower exchange rate
d) Higher government spending

600.
A group of workers receives a pay increase of 10%. Also over this same time period the
Retail Price Index rises 10 points to 510. It can be concluded that real wages have
a) Remained unchanged
b) Risen by approximately 8%
c) Risen by approximately 10%
d) Fallen

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601.
Between June 1997 and September 1998 the Bank of England's Monetary Policy
Committee increased interest rates by 1.5% to try to curb inflationary pressures. An increase in
interest rates might be expected to help reduce inflation because a rise in interest rates is likely
to
a) Reduce consumer spending
b) Increase investment spending
c) Lead to an increase in the money supply
d) Reduce the value of the
Wage
Inflation (%)

P3

P2

P1

U3

U2

U1

Unemployment Rate (%)

602.
The diagram above shows a relationship between unemployment and wage inflation.
We can deduce from the chart that
a) A rise in unemployment will cause a fall in the price level
b) A rise in unemployment will cause a rise in wage inflation
c) A fall in unemployment will cause an acceleration in wage inflation at some stage
d) A fall in unemployment will cause the exchange rate to rise

603.

Which one of the following can lead to a rise in inflation? An increase in

a) The exchange rate


b) Costs of production
c) Productive capacity
d) The level of direct taxation

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604.

One of the consequences of inflation is that it

a) Causes creditors to benefit at the expense of debtors


b) Can encourage people to increase saving
c) Causes debtors to benefit at the expense of creditors.
d) Causes people to postpone consumption

605.

As the price level increases

a) The quantity of money demanded falls


b) The value of money falls
c) The demand for credit will increase
d) Real GDP will increase

606.
Suppose the nominal interest rate is 9%. The rate of inflation is 6%. The real interest
rate is
a) + 3%
b) - 3%
c) + 15%
d) + 1.5%

607.
The chart above shows the annual rate of consumer price inflation for the UK since
1989. From the information in the chart we can deduce that
a) There was deflation in the economy during the 1990s
b) Prices fell from 2000 onwards
c) All prices of goods and services were rising throughout the 1990s
d) The average rate of inflation for the UK during the last ten years has been close to 2% per year

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Inflation - Answers
584.

(a)

585.

(b)

586.

(b)

587.

(a)

588.

(a)

589.

(c)

590.

(a)

591.

(c)

592.

(c)

593.

(d)

594.

(a)

595.

(a)

596.

(c)

597.

(b)

598.

(a)

599.

(c)

600.

(b)

601.

(a)

602.

(c)

603.

(b)

604.

(c)

605.

(b)

606.

(a)

607.

(d)

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3.11 Unemployment and the Labour Market


608.

True or false: The labour force includes those people registered as unemployed

a) True
b) False

609.
True or false: Structural unemployment includes those unemployed who are out of work
because of a fall in demand during a recession
a) True
b) False

610.
True or false: When the economy experiences an upturn in the business cycle, cyclical
unemployment should fall
a) True
b) False

611.
True or false: Unemployment cannot fall providing a country continues to enjoy steady
economic growth
a) True
b) False

612.

True or false: Full employment is achieved when the rate of unemployment reaches zero

a) True
b) False

613.
If the government wishes to achieve a fall in unemployment, which of the following
policies should it adopt?
a) Raise VAT
b) Reduce government spending on capital projects
c) Reduce the real value of income tax free allowances
d) Seek to achieve a depreciation in the exchange rate

614.
is

In a population of 50 million, 26m are employed and 2m unemployed. The labour force

a) 50 million
b) 28 million
c) 26 million
d) 2 million

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615.

Which unemployment occurs if an aircraft engine works closes because of recession?

a) Frictional
b) Seasonal
c) Technological
d) Cyclical

616.
An economy experiences a slowdown in growth but avoids a recession. Unemployment
in this economy can still rise because
a) Slow growth may mean job losses in some industries where labour is occupationally immobile
b) Rising productivity may mean that the extra national output can be produced using fewer workers
c) Companies may decide to substitute capital for labour in a bid to become more efficient
d) All of the above

617.

The level of structural unemployment is most likely to be reduced by

a) Increasing labour mobility


b) Increasing government spending
c) Increasing investment grants to industry
d) Increasing interest rates

618.
Unemployment is high but many vacancies are unfilled. Which is the most likely
explanation?
a) An ageing population
b) Excessive wage claims by people in work
c) Occupational immobility of labour
d) The increased use of capital machinery

619.
An individual who has just finished a period of training and is now searching for a job is
part of the
a) Employed labour force
b) Frictionally unemployed
c) Structurally unemployed
d) Cyclically unemployed

620.
The number employed in manufacturing has declined over the last two decades. Which
best explains this trend?
a) There has been a fall in the demand for imports
b) Foreign firms have invested heavily in the UK
c) Firms have substituted capital for labour to control costs
d) The government has subsidised manufacturing industry too much

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621.

Which of the following would lead to more jobs in a region with high unemployment?

a) A reduction in tax-free allowances on new investment


b) A requirement that only local labour can be employed
c) A rationing system for building development in that region
d) A new system of locally determined wage rates

622.
Which of the following is the best measure of the economic cost of higher
unemployment?
a) The loss of potential exports for the economy
b) The output of products that the unemployed workers could have produced
c) The increase in social security benefits paid by the government
d) The loss of tax revenue

623.

Students who leave school in the spring and look for work are one source of

a) Frictional Unemployment
b) Cyclical Unemployment
c) Structural Unemployment
d) Hidden Unemployment

624.
The number of jobs in the textiles industry decreases, but the number of jobs in the
travel industry increases. Initially, there will be
a) Full employment
b) A shortage of workers in both sectors
c) Structural unemployment
d) Cyclical unemployment in both sectors

625.
A government wishing to reduce the level of unemployment through the use of an
expansionary fiscal policy would be most likely to
a) Cut interest rates
b) Increase the size of the budget deficit
c) Boost the money supply by relaxing credit controls
d) Encourage a depreciation of the exchange rate

626.
Which of the following are likely to be the main economic consequences of a period of
rising unemployment?
a) A rising price level, which reduces the real incomes of consumers
b) A rising real national output and income
c) An increase in consumer confidence
d) A decline in real national output and income

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627.
A fall in export demand is an exogenous demand shock for a country. Other factors
remaining constant, this shock is likely to result in
a) An increase in the general level of prices as businesses attempt to restore their profitability
b) Rising unemployment
c) Improved profits for importing firms
d) Higher real wages for people working in other countries

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Unemployment and the Labour Market - Answers


608.

(a)

609.

(b)

610.

(a)

611.

(b)

612.

(b)

613.

(d)

614.

(b)

615.

(d)

616.

(d)

617.

(a)

618.

(c)

619.

(b)

620.

(c)

621.

(d)

622.

(b)

623.

(a)

624.

(c)

625.

(b)

626.

(d)

627.

(b)

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3.12 The Balance of payments


628.

True or False: Britain runs a large trade surplus in manufactured goods

a) True
b) False

629.
True or False: Spending by Japanese tourists on hotels, restaurants and flights whilst on
holiday in Britain would be counted as a credit item on the UK balance of payments
a) True
b) False

630.
True or False: Other things remaining equal, the introduction of an import tariff
stimulates consumer spending on domestically produced goods and services
a) True
b) False

631.
True or False: A fall in the exchange rate, other things remaining equal, will lead to an
increase in the demand for imported goods and services
a) True
b) False

632.

From the information contained in the chart above it can be seen that

a) Japan has been growing more quickly than the United States
b) The UK had on average, a smaller current account deficit than the USA
c) The value of the US dollar must have risen against the Japanese yen
d) The US government has been running a budget deficit since 1990

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633.

The current account of the UK balance of payments records

a) Transactions in financial assets such as stocks and bonds


b) Trade in goods only
c) Trade in services only
d) Trade in goods and services, investment income and transfers

634.
An economist might argue that a current account deficit can be consistent with a
healthy economy
a) When the economy is not growing too fast
b) When the deficit is partly due to a rise in imports of new technology
c) When the deficit is partly due to a rise in living standards of consumers
d) All of the above

635.
Which one of the following would appear as a credit item in the UK balance of
payments?
a) The purchase by a French company of a UK insurance business
b) Money sent by UK residents to their relatives living overseas
c) Expenditure by the British Government in maintaining foreign embassies overseas
d) The expenditure of Japanese tourists on holiday in Britain

636.

With reference to the data in the chart above it can be inferred that

a) The UK has reduced its demand for imported services over the period shown
b) The UK economy has developed a stronger comparative advantage in trade in services
c) The UK must have been running a current account surplus for each of the years shown
d) The UK economy has become more dependent on travel and tourism as a source of net export earnings

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637.
Which one of the following is a debit item on the current account of the UK's Balance of
Payments?
a) Foreign tourists choosing to spend money in London whilst on holiday
b) Sales of Sky television programmes to the United States
c) Exports from UK ports transported on UK merchant ships
d) The costs of supporting UK armed forces in overseas countries

638.
A government may seek to improve the current account of the balance of payments by
introducing either expenditure-reducing or expenditure-switching policies. Which of the
following is an expenditure-reducing policy?
a) A rise in income tax
b) Devaluation of the currency
c) The introduction of an export subsidy
d) The introduction of an import tariff

639.
"Increase in imports causes the UK's current account deficit to worsen by 4 billion".
Which of the following is most likely to have caused the situation described in the headline? An
increase in the UK's
a) Exchange rate
b) Aggregate supply
c) Level of taxation
d) Rate of productivity growth

640.
Which one of the following items would appear as a credit item on the UK balance of
trade in goods?
a) The purchase of wine from a French vineyard by a British wine merchant
b) A group of American tourists flying to Britain using Concorde
c) The purchase of UK produced digital cameras by a German company
d) The purchase of shares in a British oil company by Japanese investors

641.
The table below shows the balance of payments data for a hypothetical country in a
given year
$ Billion
Exports of services
75
Exports of goods
200
Net transfers from /to abroad
-5
Imports of goods
220
Imports of services
60
Net investment income
+14
From the data provided, the current account balance for this country is
a) - $10 billion
b) + $14 billion
c) - $5 billion
d) - $20 billion
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Balance of payments - Answers


628.

(b)

629.

(a)

630.

(a)

631.

(b)

632.

(b)

633.

(d)

634.

(d)

635.

(d)

636.

(b)

637.

(d)

638.

(a)

639.

(a)

640.

(c)

641.

(b)

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3.13 International Trade


642.
True or False: Consumers in the UK economy have a high propensity to purchase
imported goods and services when their disposable income grows
a) True
b) False

643.
True or False: Manufactured goods now comprise the majority of products exported from
developing countries to the developed world
a) True
b) False

644.
True or False: Countries will tend to specialise in producing those goods and services
where unit labour costs are highest relative to other nations
a) True
b) False

645.
If Geoff can make 400 cards or 80 Pencils in one week, while James can make 180 cards
or 60 Pencils in one week, which of the following statements is true?
a) Geoff has a comparative advantage in making pencils
b) James has a comparative advantage in making both cards and pencils
c) Neither has a comparative advantage
d) James has a comparative advantage in making pencils

646.
If Ben can make 100 Pots or 30 Watercolours in one year, while Adrian can make 90 Pots
or 20 Watercolours in one year, which of the following statements is true?
a) Ben has an absolute advantage in making Watercolours
b) Adrian has an absolute advantage in making Pots
c) Neither has an absolute advantage
d) Adrian has an absolute advantage in making Watercolours

647.

Japan has a comparative advantage over Germany in the production of cars if

a) Japan can produce more cars than Germany


b) The opportunity costs of car production are lower in Japan than Germany
c) The variable costs of car production are lower in Japan than in Germany
d) Germany has more efficient production than Japan in producing cars

648.

A major objective of the World Trade Organisation is to

a) Provide loans for countries with balance of payments difficulties


b) Provide financial help and advice to developing countries
c) Reduce the general level of protection in world trade
d) Achieve an orderly system of fixed exchange rates between countries so that trade can take place
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649.

Imports into the UK would tend to rise if

a) UK real national income rose due to a consumer boom


b) UK prices rose more slowly than other countries' prices
c) The external value of the pound sterling decreased
d) Import quotas were reduced

650.

The European Union might impose tariffs on goods from outside the EU in order to

a) Increase the budget deficits of member countries


b) Prevent the dumping of goods into the EU
c) Maximise the benefits of trade and specialisation
d) Increase consumer surplus and reduce prices

651.

The theory of comparative advantage suggests that countries should

a) Only trade if each country has an absolute advantage in at least one product
b) Seek to become self sufficient
c) Only trade if the opportunity costs of production differ between countries
d) Diversify as much as possible

652.

The law of comparative advantage implies that trade between two countries

a) Is always to the advantage of both


b) Can be to the advantage of both even though one may be more productively efficient at producing everything
c) Is beneficial to both if the exporter uses less resources than the importer would use to produce the same
quantity of goods
d) Is to the advantage of both if countries import only those goods that they are incapable of producing
themselves
Freezers

Freezers

PPF FOR THE UK

PPF FOR ITALY

2000

1600

1000

500

1000

200
Dishwashers

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400
Dishwashers

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653.
The diagram above shows the various combinations of two goods, freezers and
dishwashers, which can be produced in two countries, A and B from a given set of resources. If
trade takes place on the basis of comparative advantage
a) Italy will export freezers and import dishwashers
b) Italy will export both freezers and dishwashers
c) Italy will import freezers and export dishwashers
d) There are no gains from trade between the two countries
PPF FOR GERMANY

PPF FOR FRANCE

Good Y

Good Y

2000

1500

1500

1500

Good S

Good S

654.
The diagram above shows the production possibility frontier for two countries each
producing two goods, Y and S. From the diagrams we can conclude that
a) Germany has a comparative advantage in Good Y
b) Germany has a comparative advantage in Good S
c) France has an absolute advantage in producing both goods Y and S
d) The opportunity cost ratios for both countries are the same and thus there are no potential gains from trade

655.
Which one of the following types of import control would have a direct effect on
decreasing imports by a specific amount?
a) An increase in import tariffs
b) Changes in import safety specifications
c) An increase in the number of import licences
d) A decrease in import quotas

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Price

Domestic
Supply

P2

E
P1

World Price + Tariff


F

World Price

Domestic
Demand
G
Q3

Q1

H
Q2

Q4

Quantity

656.
In the diagram above, P1 is the world supply price for a product which is imported into a
country. After a tariff is imposed on imports of the product, the world supply curve shifts
upwards and the goods are imported at price P2. Which area represents the revenue to the
government from the imposition of the tariff?
a) AGHB
b) ADCB
c) EAD
d) BCF

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657.

The term gains from trade means

a) The profits to businesses that export their products


b) Revenue to the government from import tariffs
c) The general efficiency gains resulting from specialisation and trade
d) The opportunity of UK workers to find a job overseas
Price

Domestic
Supply

P2

E
P1

World Price + Tariff


F

World Price

Domestic
Demand
G
Q3

H
Q2

Q1

Q4

Quantity

658.
In the diagram above, P1 is the world supply price for a product which is imported into a
country. After a tariff is imposed on imports of the product, the world supply curve shifts
upwards and the goods are imported at price P2. Which area in the diagram represents the loss
of consumer surplus due to the imposition of the tariff?
a) BCF
b) EAD
c) ADCB
d) EFBA

659.

Which one of the following measures would reduce competition from abroad?

a) A reduction in tariffs
b) The elimination of existing import quotas
c) The removals of subsidies to domestic producers
d) A depreciation of the domestic currency

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660.
"The UK economy has a positive marginal propensity to import goods and services".
This statement implies that,
a) As income rises, UK consumers tend to buy less imports
b) As income rises, UK consumers tend to buy more imports
c) As income falls, UK consumers tend to buy more imports
d) As income rises, UK consumers tend to increase their savings

661.

In the context of trade, the term "dumping" refers to

a) Exporting inferior products to developing countries


b) Exporting at a price below average total cost
c) Polluting international waters by tipping goods from freight tankers
d) Burning surplus output

662.
If both countries specialise according to the principle of comparative advantage for the
two goods W and X shown in the diagram above, then
a) The United States will export Good X and import Good W
b) The United States will import Good X and export Good W
c) The United States will import Good X and export Good W
d) Neither country can benefit from specialisation and trade

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PPF FOR the UNITED STATES

PPF FOR CANADA


Good W

1000

750

250

500
Good X

Good X

663.
Both countries could gain from specialisation and trade using the example shown in the
PPF diagrams above if trade takes place at the following terms of trade
a) 4 units of Good W are exchanged for 2 units of Good X
b) 5 units of Good W are exchanged for 1 unit of Good X
c) 2 units of Good W are exchanged for 2 units of Good X
d) 5 units of Good W are exchanged for 2 units of Good X

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AS Economics QuestionBank 2005

International Trade - Answers


642.

(a)

643.

(a)

644.

(b)

645.

(d)

646.

(a)

647.

(b)

648.

(b)

649.

(a)

650.

(b)

651.

(c)

652.

(c)

653.

(a)

654.

(b)

655.

(d)

656.

(b)

657.

(c)

658.

(a)

659.

(d)

660.

(b)

661.

(b)

662.

(b)

663.

(d)

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