Section A

Answer ALL questions. This section carries 40 marks.

Questions A1 – A20: select either A, B, C or D and write your answer in the

Answer Booklet provided.

Question A1

Which of the following is most likely to lead to an outwards shift of a country’s production possibility frontier?

A    A death rate higher than the birth rate

B    A fall in productivity

C    Depreciation of capital stock exceeding investment

D    The discovery of new oil reserves

Question A2

The diagram below shows aggregate demand and short-run aggregate supply in a given economy with the original curves as AD1 and SRAS1.

Price

Level

SRAS2

0

Real National Output

What is most likely to have caused the change in equilibrium shown?

A    A rise in productivity

B    A rise in oil prices

C    A fall in consumer spending

D    A fall in investment

Question A3

The table below shows how the costs of a firm rise as it increases output by adding labour to a fixed stock of capital.

Which of the following provides a pair of statements both of which are correct?

A    The total fixed cost is £150 and the marginal cost of the fourth unit of

output is £20

B    The firm only has variable costs and the average total cost of two units

is £120

C    The average total cost of one unit is £200 and diminishing returns to

labour are seen in the output range shown

D    The average fixed cost of two units of output is £75 and the average

variable cost is £120

Question A4

All other things being equal, which of the following is most likely to lead to a worsening in the balance of payments deficit of a country? A rise in

A    income tax rates.

B    exports.

C    the exchange rate.

D    unemployment.

Question A5

Which one of the following is most likely to give a positive value for cross elasticity of demand?

A    A fall in bus fares increases the demand for bus travel

B    A fall in rail fares decreases the demand for coach travel C    A fall in the price of petrol increases the demand for cars

D    A fall in the cost of car insurance increases the demand for cars

Question A6

income?                                                                                                       [ 1 ]

A    consumption, exports, saving

B    taxes, investment, government spending

C    imports, exports, taxes

D    government spending, investment, exports

Question A7

The diagram below shows the aggregate demand and short-run aggregate supply curves for an economy, where X is the initial equilibrium.

SRAS3

Where will be the new equilibrium position (A, B, C or D) following a

significant decrease in productivity and imports?

A

B

C

D

A

B

C

D

Question A8

national income, this is known as                                                                   [ 1 ]

A    a positive output gap.

B    the trend rate of economic growth.

C    the multiplier.

D    a budget surplus.

Question A9

The diagram below shows the change in the production possibility frontier for a country over time from Line A to Line B.

Consumer Goods

From the diagram it can be concluded that

A    there has been a fall in demand for consumer goods.

B    there has been an increase in long-run aggregate supply.

C    consumers are demanding more capital goods.

D    unemployment is rising.

Question A10

The diagram below shows a country’s aggregate demand and supply

schedules, with equilibrium at point Y.

            YF     Real National Output  

Using the diagram, we can deduce that the economy is operating with

A    a positive output gap.

B    low unemployment.

C    inflationary pressure.

D    spare capacity.

Question A11

A supermarket has estimated values of the income elasticity of demand for some of its products as shown in the table below.

If incomes increase by 10%, for which of these grocery items will the quantity demanded increase by more than 3%?

A    Eggs

B    Milk and eggs

C    Milk and cheese

D    Cheese and fruit

Question A12

The diagram below shows the economic cycle for a given country.

[ 1 ]

Which one of the following policies is most appropriate when the economy is at point Z?

A    Measures to weaken the exchange rate to promote exports

B    Measures to constrain the money supply to combat inflation

C    Expansionary fiscal policy

D    Cutting the interest rate to stimulate economic activity

Question A13

A firm benefits from economies of scale as it increases output. Which one of     [ 1 ]

the following is the most likely consequence as it grows in size?

A    The firm will be able to set its own prices

B    Barriers to entry in the industry will fall

C    Total production costs will fall

D    The firm will leave the industry

Question A14

[ 1 ]

The law of diminishing returns states that

A    the employment of an additional factor of production causes a relatively

smaller increase in output.

B    total output has been maximised.

C    as more factors of production are added, total output will fall.            D    there are no more variable factors of production available in the long-

run.

Question A15

The equilibrium market price of a good decreases. The establishment of the new equilibrium at a lower price would most likely result from

A    a fall in the price of a complementary good.

B    a rise in the price of a substitute.

C    new firms entering the market.

D    excess demand at the original price.

Question A16

In the Phillips Curve diagram above, the economy is currently at its non- accelerating inflation rate of unemployment with an inflation rate of L.

inflation rate of unemployment?                                                                     [ 1 ]

A    Measures to increase the mobility of labour

B    Measures to reduce the inflation rate to M

C    A reduction in inflationary expectations

D    A rise in aggregate demand

Question A17

All other things being equal, in the short-run an increase in aggregate demand in an economy is most likely to result in an increase in

A    government spending on welfare benefits.

B    the unemployment rate.

C    the budget deficit.

D    the balance of payments deficit.

Question A18

which it meets by hiring extra workers to operate existing capital.  Which of

the following could apply?                                                                              [ 1 ]

A    The firm benefits from internal economies of scale

B    The firm benefits from external economies of scale

C    The firm benefits from gains from specialisation

D    The firm will suffer diseconomies of scale in the long-run

Question A19

In economics, the ‘short-run’ refers to the time period when

A     all factors of production are fixed.

B     some factors of production are fixed, others may vary.

C     profit is fixed.

D     all factors of production may change.

Question A20

Which one of the following applies to de-merit goods?

A    They are likely to be provided by the government

B    Their marginal private benefit is greater than their marginal social

benefit

C    They have the characteristics of non-excludability and non-rivalry      D    They are likely to be provided by the free market, but not in sufficient

quantities

Question A21

Prices for all major cereal commodities increased in 2018

In 2018, international prices of all major cereals rose steadily while those of other commodities declined, with sugar dropping the most, according to the Food and Agriculture Organization of the United Nations (FAO).

Over the whole of 2018, the Cereal Price Index averaged just over 165   points, 9% higher than in 2017 but 31% below its peak reached in 2011. Falling world output of wheat contributed to the increase in prices during 2018.

Wheat prices rose during December, due to weather effects in the southern hemisphere, while rice prices declined for the sixth successive month.

However, in 2018, the Sugar Price Index fell by almost 22% from the       previous year, aided by a rise in global production and accumulating levels of stock contribution towards more elastic supply.

Source: naturalrpoductsinsider.com (adapted extract) 2019

b)   With the aid of a demand and supply diagram, explain why wheat and

maize prices rose during December 2018.                                                [ 3 ]

c)   Analyse ONE reason why higher cereal prices might be considered to be

a significant problem.                                                                             [ 3 ]

d)   Volatile food and cereal prices can create major problems for an

economy. Analyse ONE way in which the government might intervene

to stabilise food and cereal prices.                                                           [ 3 ]

Question A22

Scottish unemployment rate hits record low at 3.6%

Unemployment in Scotland has fallen below the 100,000 mark for the first time, new figures have revealed. The Office for National Statistics (ONS)   said the number of people seeking work fell to 99,000 between September and November last year. This makes the jobless rate 3.6%, a record low.

The UK unemployment rate is 4.0%, its lowest point since 1975.

Scottish Business Minister Jamie Hepburn said: "Despite the huge and      continued challenges of Brexit, the Scottish economy remains resilient and our jobs market is strengthening” .

Across the UK, the number of people in work in the UK has reached a record high of 32.5 million. Average earnings, excluding bonuses, increased by      3.3% in the year to November, as wage rises continued to rise faster than   inflation.

Excluding bonuses, they went up by 3.4% - the biggest rise for a decade.

Source: BBC News (adapted extract) – January 2019

a)   Define the term “unemployment” .

b)   Using an aggregate demand and supply diagram, briefly explain the likely effects on the Scottish economy if unemployment continues to fall.

c)   Analyse ONE possible cause of unemployment.

d)   Analyse ONE possible effect on the UK economy of average earnings rising faster than inflation.

Section B

Answer 2 questions. This section carries 60 marks.

•   You must answer 2 complete questions.

•   Each question has two parts, a) and b).  Both parts must be answered for each of the questions you choose.

•   You must answer one question from Section B Part One (Micro Economics) and one question from Section B Part Two (Macro Economics).

•   For all questions, you may use diagrams to help illustrate your answer.

Part One (Micro Economics)

Question B1

a)   In the USA, manufacturers of electric vehicles can apply for a subsidy of  $2,500 to $7,500 on the first 200,000 electric vehicles sales. With the aid of a diagram, describe the likely economic effects of such a subsidy on    the market for electric vehicles AND explain the concept of market

failure.

b)   Evaluate the effectiveness of such a subsidy on combating the negative externalities caused by car travel in traditional petrol and diesel cars.

Question B2

a)   Explain, with the use of diagrams, the concepts of consumer and          producer surplus AND explain how both of them will change when there are changes to supply.

b)   Evaluate the extent to which price elasticity of demand is the largest influence on the determination of a good or services’ price level in a market.

Question B3

a)   Explain, with examples, the advantages and disadvantages of mergers to firms and consumers AND explain the different types of merger that are available to firms.

b)   Evaluate the extent to which you agree with the view that firms in     oligopoly will always seek to fix prices and damage consumer welfare.

Question B4

a)   Explain carefully, with examples, the difference between direct and        indirect taxation AND with the use of a diagram, explain the likely effect of a decrease in taxation in an economy.

b)   Economist Joseph Stiglitz has noted that “when a country is facing recession, you need to have an expansionary fiscal policy. ”

Evaluate the view that fiscal policy is the most effective way for a government to prevent a recession.

Question B5

a)   Outline the role of the Word Trade Organisation in international trade AND analyse the potential benefits that might arise from free trade.

b)   American economist Thomas Sowell has noted that “Tariffs that save jobs in the steel industry, mean higher steel prices which in turn means fewer American steel products are sold around the world and losses of far more jobs than are saved. ”

form of protectionism.                                                                                  [20]

Question B6

a)   Identify and explain the different supply side policies available to a      government AND with the aid of a diagram illustrate and compare how expansionary supply-side policy might be shown by Keynesian and      Monetarist economists.

b)   Many monetarist economists propose that enhanced production and        supply is the key to economic prosperity and that control over production and supply is the best way to control inflation.

Evaluate the view that supply side policy is the most effective method of reducing the level of inflation in an economy.