Past Paper Questions Flashcards
Discuss TWO challenges resulting from the economic problem of scarcity and choice. (5)
A movement along the demand curve can be caused by a change in population. Is this
statement true or false? Explain by illustrating your answer with a diagram. (10)
Use a demand and supply curve diagram to explain what happens when:
i. there is an increase in personal income tax; (5)
ii. there is an industrial technological innovation; (5)
To prevent financial problems at University, a taxpayer suggests increasing examination
fees. What would be expected in terms of the price elasticity of demand for total receipts
to increase? (5)
The demand for good X is price elastic. The price falls. What happens to the total revenue? (8)
Why are agricultural commodity prices more volatile than manufactured goods? How can
they be stabilized? (12)
The consumer aims to distribute their income on various commodities to achieve marginal
utility. Explain.
What is:
i. the difference between the short run and the long run? (4)
ii. the law of diminishing marginal product? (4)
Give reasons why the Long Run Average Cost Curve might at first fall and later rise. (9)
Outline THREE characteristics of a perfectly competitive market and THREE
characteristics of a monopoly. (6)
Discuss how a perfectly competitive firm and a monopoly maximize profits in the long
run. (10)
What are the benefits for the consumer from perfect competition when compared to
monopoly? (9)
Discuss TWO features exhibited by oligopoly. (8)
What do you understand by monopolistic competition? (10)
What is product differentiation? Mention THREE types and provide an example for each. (7)
What happens in the labour market when firms have the power to set wages unilaterally? (5)
How are wages determined in a free market economy? (10)
“Various government policies often affect the demand for labour, supply of labour, and
the equilibrium in the labour market. One such thing is the imposition of a minimum
wage”. Discuss. (10)
Describe the different methods which can be applied to measure aggregate GDP. What
must occur for the value of GNP to be less than that of GDP? (7)
The Covid-19 pandemic has created a simultaneous decline in household consumption
expenditure and in imports of goods and services. Based on your knowledge of the
circular flow of income for an open economy, how would the TWO factors affect the level
of gross national income? (9)
Explain in detail TWO benefits and TWO costs linked with the process of long run
economic growth. (9)
Explain, by making use of the appropriate diagram, what the slope of the Keynesian
consumption function represents and what is its relation with the income multiplier. (9)
Discuss THREE determinants of aggregate investment behaviour within the economy. (7)
Explain, by applying the Keynesian income multiplier model, how an increase in
aggregate investment would affect the equilibrium level of national income. Give ONE
example of a key determinant of aggregate investment in the economy. (9)
Describe the main functions of money (7)
Explain the process of credit creation. What are the effects of a decline in the reserve
ratio on the process of credit creation? (9)
Explain what would be the impact on the equilibrium interest rate of the economy as a
result of an expansionary monetary policy effected by the Central Bank. (9)
Explain how a Consumer Price Index, such as the HICP or RPI, is constructed. Which of
these two indicators would you choose to assess and compare the inflation rate in Malta
with that of other EU countries? (7)
Describe THREE types of unemployment and provide an example of a policy that can be
utilised to alleviate the effect of each one of these three types of unemployment. (9)
Based on your understanding of the Philips curve relation, is it possible for the inflation
rate and the unemployment rate, to increase simultaneously? Why? (9)
Explain the differences between the government budget deficit and the rate of national
debt. Explain why a high level of national debt is viewed as an economic burden. (8)
Discuss the role that automatic stabilizers can have within the context of the overall
management of the national economy. (8)
Suppose government decides to undertake a contractionary fiscal policy in order to
decrease the government budget deficit. Provide an example of such a policy, and utilise
the aggregate demand and aggregate supply model to show how such a policy would
impact the price level and the equilibrium level of output in the economy. (9)
Describe the difference between quotas, tariffs, and export subsidies. Provide ONE
motive that explains why the government would want to implement such policies. (8)
Describe the components of the balance of payments. What must occur for the balance
of payments to be in deficit? Can such a deficit be sustained indefinitely? (8)
Distinguish between a fixed exchange rate system and a floating (flexible) exchange rate
system. Is there a limit in what way a country can sustain a balance of payments deficit,
definitely under a fixed exchange rate system? (9)
What is the production possibility frontier? By means of a figure, illustrate the points of
efficiency and inefficiency. (5)
What will be the effect, in the short run, on the demand for butter for each of the
following. Illustrate your answer with a diagram for each.
i. a fall in the price of butter; (5)
ii. a rise in the price of bread; (5)
iii. the imposition of a tax on margarine; and (5)
iv. a successful advertising campaign against the consumption of dairy products. (5)
Which elasticity concept would be useful to determine whether two commodities are
substitutes? Explain why. (5)
In a free market, what will happen to price in a situation of excess supply and excess
demand? (10)
“Price controls are normally mandated by the government in the free market. They are
usually implemented as a means of direct economic intervention to manage the
affordability of certain goods and services, including rent. Although it may make certain
goods and services more affordable, price controls can often lead to disruptions.” Discuss
this statement and provide an appropriate diagram. (10)
What is the equi-marginal principle? (5)
What is the relevance of the law of diminishing marginal product to costs of production
in the short run? (10)
What is the envelope curve of short run average cost curves? Explain by making reference
to the relevant diagram. (10)
What is the most competitive market structure? Outline FOUR characteristics related to it. (10)
Compare the long-run equilibrium of the most competitive to the least competitive
market structure. How do output, costs, price and consumer welfare compare? (10)
How is price discrimination used under the least competitive market structure? (5)
What is imperfect competition? (10)
What is oligopolistic interdependence? Why is this non-existent under monopolistic
competition? (7)
What do you understand by perfect and imperfect collusion? Provide ONE example for
each. (8)
What is economic profit? (5)
Are economics profits eroded under monopolistic competition in the long run? (12)
“Monopolistic market structures engage in non-price competition”. Is this statement true
or false? Provide an explanation to your answer. (8)
Define GDP and discuss THREE problems of utilizing the GDP measure to assess the
overall level of welfare within a specific country. (7)
Explain, by also making use of the appropriate diagram, the various components which
together constitute the circular flow of income for an open economy and discuss what an
increase in exports of goods and services would have on the level of gross national
income. (9)
Discuss and explain the differences of THREE main pillars (or determinants) of long run
economic growth. For each pillar also specify an example of an applied policy that can be
utilized to accelerate the process of economic growth. (9)
Explain, by also making use of the appropriate diagram, the economic relationship that
is put forward by the Keynesian consumption function and explain TWO factors that could
cause this function to shift downwards. (9)
Explain, by referring to the accelerator principle, why aggregate investment is generally
one of the most volatile components of aggregate demand expenditure. (7)
Explain, within the context of the income multiplier model, how a decrease in government
spending would impact the equilibrium level of national income in the economy. Would
such an effect be smaller or larger if the marginal propensity to consume were to
decrease? (9)
On the basis of the quantity theory of money, how should the ECB proceed in order to
increase Nominal GDP? (7)
What are the main objectives and instruments of monetary policy that can be applied by
the central bank? (9)
Explain, with the use of an appropriate diagram, the impact on the equilibrium interest
rate in the economy, resulting from the central bank undertaking contractionary open
market operations. (9)
Define Structural unemployment and identify causes that result in such a type of
unemployment. Identify at least THREE measures governments could take to effectively
address Structural unemployment. (8)
Explain the difference between cost-push and demand-pull inflation. Between these two
causes of inflation, which would potentially be associated with the occurrence of
stagflation? (8)
The Philips Curve attempts to explain the relationship between inflation and
unemployment. Does such a relationship always hold in both the short and the long run?
(9)
Distinguish between public and merit goods and provide ONE example for each type of
good. (8)
Explain the difference between a government budget deficit and national debt. Why is a low
level of national debt considered as a positive? (8)
Utilize the aggregate supply and aggregate demand relations, to explain the impact of a
supply side shock such as an increase in the price of energy, on the equilibrium level of
output and the price level in the economy. (9)
Describe the differences between the law of absolute advantage and the law of
comparative advantage. Provide TWO examples for each type of advantage. (7)
Explain THREE methods which can be applied by policy makers in order to restrict trade
and provide THREE explanations as to why policy makers would want to implement such
policies. (9)
Describe the main components of the balance of payments and explain what would be
the likely impact on the current account of the Maltese economy, in the state of an
appreciation of the British Pound against the Euro. (9)
How does the production possibility curve illustrate the microeconomic issues of choice
and opportunity cost? (5)
What is the difference between a movement and a shift in the demand curve for full fat
milk? (10)
Explain and demonstrate graphically:
i. the effect of an increase in the price of denim fabric on the equilibrium price and
quantity of denim jeans; and (5)
ii. the effect of a change in consumer preferences in favour of health and wellness on
the equilibrium price and quantity of gym membership fees. (5)
What are the potential benefits and drawbacks of price floors and ceilings? (10)
What is the difference between a necessity good and a luxury good? In this respect, how
does the nature of the good affect price elasticity of demand? (10)
How can firms use income elasticity of demand to predict consumer demand? (5)
Which law is explained by marginal utility theory? Provide a definition of this law and give
ONE practical example. (5)
Name the cost in relation to the type provided in the definition below. Illustrate your
answer with the relevant diagram.
i. The increase in total cost from producing one more unit. (2)
ii. Total cost less total variable cost. (2)
iii. Total fixed cost divided by the level of output. (2)
iv. Total cost less total fixed cost divided by the level of output. (2)
v. Total cost divided by the level of output. (2)
Distinguish between economies and diseconomies of scale. Mention TWO examples for
each type that occur in real life business situations. (10)
Outline THREE characteristics underlying perfect competition and THREE characteristics
related to monopolistic competition. (6)
How are profits maximized under perfect competition in the short run? What type of
profits can be made? (7)
Can supernormal profits exist in the long run under perfect competition and monopolistic
competition? Explain your answer by using relevant diagrams. (12)
What is price discrimination? In which market structure is it mainly used? Provide TWO
examples. (10)
What is deadweight loss? (10)
Product differentiation and branding are very important in monopolistic competition, as
they are the key to a firm’s success. Explain this statement. (5)
How does normal profit differ from supernormal profit? (7)
What does a price war attempt to achieve in a highly competitive market? Who benefits?
Consumers or firms? (10)
Discuss the advantages and disadvantages to consumers when firms decide to cooperate
rather than compete under an Oligopoly market structure. (8)
Distinguish between Gross Domestic Product (GDP) and Gross National Income (GNI).
Can GDP be higher than GNI? (7)
As GDP per capita grows, quality of life also improves. Discuss. (8)
Outline the likely impact on nominal GDP (positive or negative) in the following situations.
Explain your reasoning in each case:
i. A big company in the gaming sector that used to export gaming services to Germany
decides to leave Malta to relocate to the UK. (2)
ii. Maltese oil importers witness an increase in the price of oil due to energy shortages.
Volumes imported are assumed to remain the same. (2)
iii. The reopening of the Chinese economy following the pandemic leads to an increase
in Chinese tourists visiting Malta. (2)
iv. A substantial upward revision to the collective agreement of public officials. (2)
v. An increase in Euro zone interest rates set by the European Central Bank and
resulting in an increase in bank lending rates. (2)
How could an increase in investment affect the level of national income? In your answer,
make reference to the multiplier. (8)
What is the consumption function? Distinguish between a pivot and a shift of the
consumption function. (7)
Briefly describe the expected effect on overall consumption of the following shocks:
i. a decline in global equity prices, leading to a decrease in household wealth; (2)
ii. a decrease in net migration as a significant number of migrants previously residing
in Malta went back to their home country; (2)
iii. an increase in remote work; (2)
iv. an increase in bank interest rates; and (2)
v. an increase in prices of grain products like bread, cereal and pasta at supermarkets. (2)
What is monetary policy? (8)
Explain the process of money creation. What would the effect on the overall supply of
money be if the reserve ratio were to fall? (9)
“Inflation is always and everywhere a monetary phenomenon.” Milton Friedman, 1963.
Discuss, referring to the quantity theory of money in your answer. (8)
Do you think that an increase in Government debt is always bad? Mention TWO cases
when the Government may need to increase its debt. (6)
What is the difference between government budget deficit and government debt?
Evaluate the impact of an ageing population on public deficits and public debt. Mention
TWO remedies to counteract the impacts you mentioned. (12)
The Government notices that economic growth is weak and below potential output, and
that inflation is at 1%, which is below the 2% target. You have been approached to
provide your advice on what the Government can do to reduce the deflationary gap.
Given your knowledge on the tools of fiscal policy, what policy do you deem appropriate?
Identify ONE potential negative repercussion of the policy you proposed. (7)
Distinguish between frictional, structural, and seasonal unemployment and provide ONE
example of a policy that the government can implement to reduce each of these three
types of unemployment. (9)
Explain the relationship between inflation and unemployment as outlined by the Phillips curve.
Is it possible for the unemployment rate to increase while inflation is also increasing? (8)
Over the period 2011-2016, the Maltese economy grew by an average of 5.1% compared
to the EU-average of 1.1%. A key contributor to this growth was an increase in the
working age population, which grew by 5.4% compared to the EU-average, which
decreased by 1%. Discuss TWO benefits and TWO costs associated with higher growth
in the working age population. (8)
Describe the main components of the Balance of Payments. (8)
Mention THREE factors that can improve the goods and services account of the balance
of payments. (8)
What are the implications of a persistent deficit in the current account for Malta? (9)
Explain why scarcity and choice are the basic problem in economics. (5)
How is price equilibrium achieved and how do market forces work to clear a disequilibrium? (10)
Explain and demonstrate graphically:
i. the effect of an increase in the price of beef on the equilibrium price and quantity of
chicken, which is a substitute good. (5)
ii. the effect of an increase in the price of beef on the equilibrium price and quantity of
beef burgers. (5)
Discuss, in economic terms, how a price floor affects the market price for a product. Are
there any disadvantages which the consumer may suffer as a consequence of such a
minimum price? Support your arguments with the appropriate diagram. (10)
Discuss FIVE determinants of the price elasticity of demand. (10)
Cross price elasticity of demand between private car use and public transport is positive.
Is this true or false? Explain your reasoning. (5)
An additional unit of consumption of any good will always yield an increase in both total
and marginal utility. Discuss this statement in the context of the Law of Diminishing
Marginal Utility. (10)
Distinguish between short run and long run in production. (5)
Explain why with increased output a firm’s average costs fall in the short run. (10)
Outline THREE characteristics underlying perfect competition. (6)
Provide FOUR disadvantages related to a monopoly market structure. (8)
Compare the long-run equilibrium of monopoly with that of perfect competition. How do
output, costs, price and consumer welfare compare? (11)
Explain how firms with market power can earn economic profits in imperfectly competitive
markets. (8)
What is interdependence in Oligopoly? (8)
What is a price war? How is this beneficial to consumers and detrimental to firms? (9)
What is economic profit? (5)
What is non-price competition? In what type of markets is it mostly used? Mention THREE
examples of non-price competition. (10)
Why would economic profits likely to disappear in the long run under monopolistic
competition? (10)
Explain what GDP at factor cost is and distinguish between GDP at factor cost and GDP.
Describe THREE different methods that can be used to measure GDP. (8)
Is GDP a suitable measure of standard of living? (7)
Outline the likely impact on GDP (positive or negative) in the following situations. In
each case, explain your reasoning:
i. Investment of €10 million by a Maltese aircraft operator, where 95% of the
investment is an imported aircraft from Canada;
ii. A decline in tourists from the United Kingdom from the prior summer because of a
significant depreciation of the pound relative to the euro;
iii. Government providing vouchers for people to consume from restaurants following
the removal of pandemic restrictions;
iv. A decrease in the population from the prior year; and
v. An increase in bank interest rates.
(10)
Distinguish between a pivot and a shift in the consumption function. In your answer,
discuss THREE factors that can cause the consumption function to shift. (8)
Explain, by referring to the accelerator principle, why investment is generally the most
volatile component of aggregate demand expenditure. (8)
Explain, within the context of the income multiplier model, how a contractionary fiscal
policy would generate a deflationary gap. How would a larger multiplier coefficient impact
the resulting deflationary gap? (9)
Outline the main driver(s) of demand for money and supply of money? (6)
Explain the money creation process. What would be the impact of a decrease in the
reserve ratio on the overall supply of money? (9)
The war between Russia and Ukraine has had significant ramifications on the European
economy. Due to the implementation of sanctions on Russia, Europe lost a key supplier
of its gas. Besides, due to harvest and shipping disruptions, the prices of essential food
components increased sharply. In response to these inflationary supply side shocks, the
European Central Bank responded by raising interest rates and the latest statistics show
that the European economy is in a recession, but prices remain higher than before the
war started.
Using an AS-AD framework, illustrate the impact of these developments on the European
economy. Clearly indicate the initial price and output levels, and the resulting price and
output levels following the shocks described above. (10)
What is the difference between government budget deficit and government debt? How
does the state of the economy influence the size of the government budget balance?
Does the government budget balance improve or deteriorate in times of economic
recession? (10)
Distinguish between automatic stabilisers and discretionary fiscal policy, including ONE
example of each policy. Give at least ONE factor that could limit the effectiveness of
automatic stabilisers and discretionary fiscal policy. (8)
The Government notices that economic growth is strong and above potential output, and
that inflation is well above the 2% target, to the extent that a significant inflationary gap
has emerged. As an advisor to the Government, you have been approached for your
advice on what the Government can do to reduce the inflationary gap. Given your
knowledge on the tools of fiscal policy, what policy do you deem appropriate? Identify
ONE potential negative repercussion of the policy you proposed. (7)
What is inflation? Mention TWO types of measures of inflation, and describe how each
of them is constructed, clearly outlining any major differences between them. (6)
Mention THREE repercussions that inflation has on the economy. Why is it beneficial to have
some modest positive inflation? Mention TWO reasons why deflation is undesirable. (9)
The following is a list of inflationary shocks. You are expected to categorise each of these
shocks into those caused by one of the following: domestic demand (demand pull
inflation), aggregate supply (cost push inflation). For each case, provide a suitable
reason to justify your answer:
i. Marvin owns a construction company and his supplier increased the price of cement
by 10%. Marvin decides to pass the full increase in cost to his clients;
ii. Following the removal of restrictions during the pandemic, restaurant bookings
increased notably and hotels are running at near full capacity. This enabled
restaurant and hotel operators to increase prices; iii. Ceramika Ltd is engaged in the manufacturing of ceramics and employs 50 people
with contractual agreements that are about to expire. Unions are exerting pressure
on the management of Ceramika Ltd. to raise wages for their employees by 8.5%.
Management agrees, but warns the Unions that the wage increases will be reflected
in the price of the ceramics it sells;
iv. Following the decision of several developed economies to stop from purchasing oil
from Russia, the price of oil increased by 50%. All industries using oil will incur a rise
in input costs, most of which will be reflected in consumer prices; and
v. Rental prices in Malta almost doubled from 2013 to 2021 following substantial growth
in the population, predominantly driven by migrants.
(10)
Define the Balance of Payments and how is it calculated? Briefly explain each component
of the Balance of Payments. What do you understand by a current account deficit? (8)
Distinguish between the law of absolute advantage and the law of comparative
advantage. Give ONE example for each. (7)
Elaborate whether the following scenarios will have a positive or negative effect on
Malta’s current account balance. Explain your answer in each case:
i. A depreciation of the euro against a basket of other currencies;
ii. An increase in “Minerals and Fuels” component of goods imports due to the increase
in the price of oil, assuming that the amount of oil imported remained unchanged
from last quarter;
iii. An increase in tourists compared to the previous year;
iv. A reduction in primary income outflows from Malta due to a decline in Foreign Direct
Investment flows into Malta compared to the previous year; and
v. The imposition of tariffs on an essential product which cannot be produced in Malta.
(10)
