Exam Questions

Question 1

Explain one advantage of a free market economy compared to a command economy. (2)

Answer 1

1) Free markets are competitive + responsive to consumers (no competition in command economies to ensure firms are efficient)
2) Reduces risk of gov failure as govs don’t know what it demanded + can lead to unintended consequences (e.g. Hanoi Rat Massacre)

Question 2

Explain why a firm might try to reduce the PED for its products (3).

Answer 2

K - PED + lower the PED, the less price sensitive the product is
App - E.g. if a product with a PED of -0.1 had a 10% price rise, sales would fall by 1%
Ana - Lower the product’s price elasticity, the easier it is to increase revenue by raising the price

Question 3

Using an example, explain why the government imposes specific taxes on many goods and services.

Answer 3

K - A specific tax is a set amount of tax per unit of the product sold
App - e.g. fuel duty or sugar tax
Ana - In order to internalise the externalities from the consumption of products causing external costs (or raising revenue)

Question 4

Define the term government failure.

Answer 4

This occurs when government intervention in the economy causes a net welfare loss/decline in economic welfare

Question 5

Define the term indirect tax.

Answer 5

An indirect tax is imposed on producers by the government

Question 6

Define the term ceteris paribus.

Answer 6

All other things being equal OR all other factors remain unchanged

Question 7

Define the term base year.

Answer 7

The year with which all other values in a series are compared

Question 8

Define the term subsidies.

Answer 8

A gov grant designed to encourage production or consumption

Question 9

Define the term national income

Answer 9

Total spending on g/s

Question 10

Define the term circular flow of income (2).

Answer 10

1- Money flows around the economy between firms and households
2 - There are injections and withdrawals
3 - Withdrawals include taxation, savings, imports

Question 11

Define the term purchasing power parities (2).

Answer 11

• The rate at which the currency of one country would have to be converted into that of another country to buy the same amount of g/s in each country
• Comparison between countries, taking into account different cost of living.

Question 12

Define the term real GDP

Answer 12

1 mark for def of GDP - value of the total output
1 mark for def of real - taking inflation into account

Question 13

Explain one characteristic of a recession (2).

Answer 13

• Falling inflation, due to reduction in consumer spending
• Rising unemployment, due to to less demand for workers caused by falling output
• Falling profits/investments of firms, leading to high level of business failures
• Increase in budget deficit/worsening of the fiscal position, due to a rise in gov spending on benefits/a fall in tax revenues

Question 14

Define the term index number.

Answer 14

Shows percentage change (increase or decrease) in price/quantity from the base year

Question 15

Define the term price level.

Answer 15

Is the average of the current prices of g/s in the economy

Question 16

Explain what is meant by spare capacity in an economy (2).

Answer 16

When the economy is not operating at full capacity/employment (1)
There is a negative output gap in the economy (1)
Under-utilisation of the FoP so there is room to increase supply/output (2)

Question 17

Explain one likely cause of inflation (2).

Answer 17

Demand pull inflation, increase in AD due to an increase in consumption
Cost push inflation, decrease in SRAS due to an increase in cost of raw materials
Increase in money supply due to an increase in QE

Question 18

Explain the reason for the shape of the Classical LRAS curve (2).

Answer 18

Economy operates at full capacity, so there are no unused FoP

Question 19

Define the term interest rates.

Answer 19

Cost of borrowing/Reward for saving

Question 20

Define the term Gross National Income.

Answer 20

GDP plus net income paid into the country by other countries for things such as dividends or interest

Question 21

Define the term exchange rate.

Answer 21

The price of one currency in terms of another

Question 22

Define the term of Gross Domestic Product

Answer 22

GDP is the total value of g/s produced in an economy

Question 23

Define the term recession

Answer 23

Recession is negative economic growth for 2 consecutive quarters

Question 24

Define the term direct tax (1)

Answer 24

Tax on income/earnings
Tax on business profits