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Question and
Answer Book
Write your full examination number,
your contact ID and your name on a
double-sided card, which must be
attached to this booklet here.
3a FECB
17 November 2003
Monday morning
INSTRUCTIONS TO CANDIDATES
Read this page before you look at the questions
You are allowed two hours to answer this question paper. All questions are compulsory.
Answer the ONE question in section A (this has 26 sub-questions and is on pages 2 – 9).
Answer the THREE questions in section B (these are on pages 10 – 16).
You are advised to spend 10 minutes reading through the paper before starting to answer the questions.
You should spend no more than 55 minutes on answering the ONE question in section A, which has 26
sub-questions.
You should spend no more than 55 minutes on answering the THREE questions in section B.
Hand this entire booklet to the invigilators at the end of the examination. You are NOT permitted to leave
the examination hall with this booklet.
TURN OVER
Each of the sub-questions numbered from 1.1 to 1.26 inclusive, given below, has only ONE correct
answer.
REQUIRED:
Place a circle "O" around the letter A, B, C or D that gives the correct answer to each sub-question.
If you wish to change your mind about an answer, block out your first answer completely and then circle
another letter. You will NOT receive marks if more than one letter is circled.
Please note that you will NOT receive marks for any notes or workings to these sub-questions.
Question One
1.1 The cost of one product, measured in terms of what must be given up to produce it, is called the
A real cost.
B opportunity cost.
C total cost.
D potential cost.
1.2 Which ONE of the following would be most likely to raise economic welfare in a country in the long
run?
A A rise in unemployment.
1.4 Which ONE of the following is a supply side policy designed to promote long-term economic growth?
D Raising aggregate demand to encourage firms to expand their supply of goods and services.
1.5 Conventional measures of national income fail to give an accurate indication of sustainable economic
welfare because they
1.6 Which ONE of the following would be the outcome of a market economy operating with a high degree
of competition?
A The interaction of demand and supply would ensure that resources are equally distributed.
B Companies would produce only those goods that are desirable for society since only such goods can
be sold at a profit.
D Producers would respond to changes in demand and consumers would respond to changes in supply.
TURN OVER
B a rise in price will lead to a larger than proportionate fall in sales volume.
1.8 What will be the effect of a rise in the price of cars on the demand curve for petrol?
There will be
1.9 If the imposition of a congestion charge on the use of cars in cities does not significantly reduce the
use of cars for travelling to and from work (commuting), this must be because
D what matters is the marginal cost of driving and this will not be affected.
1.10 Which ONE of the following, in a competitive labour market, would explain differences in wages
between occupations in the long run?
B In the long run, everyone has to accept the wage levels determined by the market.
C The skill and knowledge content of some occupations acts as a barrier to entry.
A An increase in demand will lead to higher prices only if supply is price inelastic.
B A shortage of goods can occur if prices are above the equilibrium level.
C The imposition of a minimum price for a good will always lead to a surplus of output over demand.
D If prices are flexible, there can be no market surpluses or shortages in the long run.
1.12 Oligopolistic competition is often characterised by the avoidance of price competition. Which ONE of
the following is the best explanation for this?
C The expectation that rival companies will always reduce prices in response to a price cut.
D Price reductions would encourage the entry of new competitors into the industry.
1.13 Assuming that pollution reduces economic welfare, which ONE of the following would be most likely to
raise long-term economic welfare?
1.14 Railway companies offering off-peak services at reduced prices must ensure that, in the short run,
these reduced prices cover at least
C overhead costs.
TURN OVER
1.17 In comparing perfect competition with monopoly, which ONE of the following statements is true?
B In the short run, firms in both monopoly and perfect competition attempt to minimise average fixed
costs.
C In the long run, firms in both monopoly and perfect competition produce where average costs are
lowest.
D Profits in perfect competition will be reduced in the long run by the entry of new firms, but long-run
monopoly profits are protected by entry barriers.
1.18 A country’s gross national product (GNP) will be greater than its gross domestic product (GDP) when
C Internally-generated funds.
D Commercial banks.
1.20 All of the following are effects on a business of a reduction in interest rates EXCEPT ONE.
1.21 Other things being equal, which ONE of the following is a typical feature of the recovery phase of the
trade cycle?
1.22 A significant fall in stock market values in a country will be likely to contribute to a contraction of the
circular flow of income because
A the circular flow is one of individual wealth of which shares are a part.
B reductions in consumer wealth will encourage lower consumption and higher saving.
C the buying of shares is an injection into the circular flow, and falling share prices will discourage the
buying of shares.
D outflows from the economy increase as investors switch savings to overseas stock markets.
TURN OVER
1.24 The comparative advantage theory of international trade shows that countries can benefit from trade
because
B all countries have an absolute advantage in the production of some goods and services.
C they can profit by running a trade surplus with the rest of the world.
D countries can acquire imported goods at a lower opportunity cost than from domestic production.
1.25 A multinational company may wish to locate production in a number of countries for all of the following
reasons EXCEPT ONE.
(Total = 52 Marks)
End of section A
TURN OVER
IMPORTANT
MARKS ARE AWARDED FOR COMPLETING THE SHADED BOXES WITH THE CORRECT
ANSWER WHERE A MARK IS INDICATED IN THE RIGHT-HAND COLUMN.
DO NOT WRITE IN THE MARGINS NOR IN THE COLUMNS FOR USE BY MARKERS.
Question Two
The following diagram shows the long-run average total cost curve (LRAC) for a business.
Average
total costs
LRAC
A B C
Output
Using your knowledge of economics and the diagram, answer the following:
Maximum 25 words 2
(ii) With reference to the diagram, state, in the shaded boxed below,
which part of the long-run average cost curve (A, B or C) refers to
each of the following:
Description Section of the long-run
average cost curve (A, B or C)
Decreasing returns to scale 1
Increasing returns to scale 1
sub-total: 4
(b) In the shaded boxes below, give an example of each one of the scale For use For use
effects that a business might experience. by the by the
(Maximum 15 words each) Marks first second
available marker marker
A technical economy of scale
1
A commercial economy of scale
1
A managerial economy of scale
1
A diseconomy of scale
1
sub-total: 4
(c) Indicate with a cross (X) in the appropriate box whether each of the
following is TRUE or FALSE?
Statement TRUE FALSE
Economies of scale limit the number of firms in an
industry by acting as a barrier to entry. 1
Even if a firm experiences economies of scale in
the long run, its short-run average cost curve will
always be U-shaped because of diminishing
marginal returns. 1
If a business’s long-run cost curve is falling, it can
always increase total profits by raising output. 1
The main source of economies of scale is
technological change because this reduces costs
over the long run. 1
sub-total: 4
(d) Fill in the gaps in the following statements (Maximum 3 words per gap)
(i) Economies of scale tend to lead to
industries; here there are a few large firms and competition is often
by methods. 2
(ii) For a business, the is the level of
output where almost all economies of scale have been secured. If
this is large relative to the total market, a
is likely to emerge. 2
sub-total: 4
TURN OVER
• Structural unemployment;
• Cyclical unemployment;
• Frictional unemployment;
• Seasonal unemployment.
Using your knowledge of economics and the list given above, answer the
following.
(a) Match ONE of the above types of unemployment to each of the For use For use
following definitions. by the by the
Marks first second
available marker marker
(c) For each of the following events, indicate with a cross (X) in the
appropriate box below whether the direct effect for the economy as a For use For use
by the by the
whole would be raise the level of unemployment, lower the level of
Marks first second
unemployment or to leave the level of unemployment unchanged. available marker marker
Event Raise Lower Leave
unemployment employment unemployment
unchanged
The imposition of a
legal national
minimum wage
below the equilibrium
wage rate. 1
Monetary policies
leading to a rise in
the real exchange
rate for the country’s
currency. 1
A reduction in the
level of real interest
rates. 1
A downturn in
economic activity in
the country’s trading
partner countries. 1
Sub-total: 4
(d) Fill in the gaps in the following (maximum of 3 words per gap).
A Keynesian approach to unemployment would emphasise the need
to raise by increasing public 1
expenditure or reducing the level of taxation. Subsequent budget
deficits would be financed by . 1
In contrast, the approach 1
would focus on reducing both direct taxes and unemployment
benefits to make employment more attractive, and on the removal of
imperfections in the market 1
arising from regulations and from the activity of trade unions.
Sub-total: 4
TURN OVER
November 2003 13 FECB
Question Four
The following diagram shows the demand and supply for US dollars on the foreign exchange market and the
exchange rate with the Euro.
D1 D2 S1
Exchange
rate Euros
per $
Required:
Using the diagram above and your knowledge of economic theory, answer Do not write in these
the answer the following: columns below
Required:
Do not write in these
columns below
(b) Indicate with a cross (X) in the appropriate box whether each of the For use For use
following processes would lead to a shift in the demand curve for by the by the
dollars from D1 to D2 Marks first second
available marker marker
Process YES NO
An increase in the level of capital inflows into the
USA. 1
A rise in exports of US services to eurozone
countries. 1
Dirty floating
Free floating
Adjustable peg
Fixed
Managed floating
Exchange rate band
Joint float
(d) Assume that the US economy recovers strongly from the recent
recession and inflationary pressures begin to emerge. As a result, the
US monetary authorities raise US interest rates.
For use For use
For each of the following statements, indicate with a cross (X) in the by the by the
appropriate box, whether they would result from the action of the US Marks first second
monetary authorities in raising interest rates. available marker marker
Statement TRUE FALSE
There would be increased outflows of capital from
the USA to other countries. 1
European businesses would experience increased
competition from US businesses because the
dollar would tend to depreciate relative to the
Euro. 1
Interest rates would tend to rise in other countries. 1
US national income would be lower than otherwise
thus reducing the potential market for European
exporters. 1
sub-total: 4
FECB
Monday morning