Multiple Choice Questions

Question 1

Where is profit maximised on a diagram?

Answer 1

Where MC=MR

Question 2

Where is normal profit made on a diagram?

Answer 2

Where AR=AC

Question 3

What acts as an incentive for firms to enter a monopolistic competition market?

Answer 3

In the short run supernormal profits are made.

Question 4

What changes from the short run to the long run in monopolistic competition?

Answer 4

Supernormal profits are made in the short run and in the long run this changes to normal profits instead to make the equilibrium more stable. This is because the short run can not be sustained for long periods of time.

Question 5

Why are demand/ revenue curves downward sloping in a monopolistic competition market?

Answer 5

Products and services have a slight uniqueness that they don’t have in perfect competition.

Question 6

What is a function of the World Bank?

Answer 6

To promote economic development.

Question 7

What is asymmetric information?

Answer 7

Where information is not shared equally between the producer and consumer, one knows more than the other.

Question 8

What is a moral hazard?

Answer 8

When consumers or producers behave differently because of their superior information.

Question 9

Which school of macroeconomic thought became dominant as a result of the Great Depression?

Answer 9

Keynesian

Question 10

Why might an increase in domestic interest rates cause the exchange rate to appreciate?

Answer 10

Hot money will flow into the country as they can get more interest in the UK banks, therefore this increases the demand for currency.

Question 11

What is the free rider problem?

Answer 11

Where individuals are unwilling to pay for public goods as they know they will be able to consume these public goods even if they don’t pay so there is no incentive to pay.

Question 12

How do you work out the balance of the current account?

Answer 12

Current account =
secondary income (net international transfers)
+ primary income (net investment income)
+ trade in goods
+ trade in services

Question 13

What will a technological advancement enabling greater capital-labour substitution do to the demand of labour?

Answer 13

Make it more elastic as it means that labour is not a necessary factor of production if there is better capital to substitute it.

Question 14

Goods A and B are substitutes, if an excise duty is placed on Good A what will happen to their demand curves?

Answer 14

The supply curve for Good A will shift left because of the excise duty, causing a contraction along the demand curve. Consumers will switch to the relatively cheaper substitute, causing the demand curve for Good B to shift right.

Question 15

What is a widening of the trade surplus in a country?

Answer 15

Where the excess value of exports over imports increases or vice versa.

Question 16

How to calculate inflation rate.

Answer 16

Price Index = the sum of (price x weight) / sum of the weights
The rate of inflation is the percentage change in price index from year to year.

Question 17

What are some limitations of using CPI?

Answer 17

• may have inaccurate weighting of items in the basket of goods
• only change the basket of goods every 12 months
• some goods and services are excluded e.g. house prices
• inaccurate for non-typical households

Question 18

What is economic growth?

Answer 18

An increase in real GDP (more goods and services for people to consume)

Question 19

Does a high rate of economic growth mean that economic development will also be improving?

Answer 19

No, as the high rate may mean that workers are working longer hours etc. which means that the increase in economic growth may have an impact on the overall health of the working population.

Question 20

What is short run economic growth?

Answer 20

The actual annual % increase in an economy’s output, referred to as actual economic growth (usually measured by real GDP)

Question 21

What is long run economic growth?

Answer 21

The rate at which the economy’s potential output could grow as a result of changes in capacity to produce goods and services, referred to as potential economic growth (an increase in long run aggregate supply).

Question 22

What factors can affect AD?

Answer 22

LOWER INTEREST RATES – Lower interest rates reduce the cost of borrowing and encourage consumer spending and firms to invest.
INCREASED WAGES. Higher real wages increase disposable income and encourage consumer spending.
DEVALUATION. A fall in the value of the exchange rate makes exports cheaper and increases the quantity of exports (X).
LOWER TAX. Lower income tax will increase the disposable income of consumers and increases consumer spending (C).
FINANCIAL SECURITY. If there is financial stability and banks are willing to lend, then firms will be more willing to invest and investment will increase aggregate demand. (I)

Question 23

What is a marginal tax rate?

Answer 23

The rate of tax you pay on any extra money earned.

Question 24

What is an average tax rate?

Answer 24

The percentage of some total amount (e.g. total income or total profits) paid as tax.

Question 25

What is income tax?

Answer 25

An average tax rate and is the total amount of income tax you pay as a percentage of your total income.