The correct answer is B.
EXPLANATION

Perfect competition is a market structure characterized by many buyers and sellers engaged in the production and
exchange of homogeneous products. Each firm is so small relative to the whole industry that it has no power to
influence price. Firms are price takers meaning that they accept the prevailing market price. Also, there is complete
freedom of entry into the industry for new firms. In the long run, if typical firms are making supernormal profits,
new firms will be attracted into the industry to take advantage of the profitable conditions. As more firms enter, the
market or industry supply increases, leading to a decrease in price. This decrease in price reduces the profitability of
individual firms, eventually eroding supernormal profits until firms make only normal profits.
Monopolistic competition is a market structure where, as with perfect competition, there are many firms and freedom
of entry into the industry, but where each firm produces a differentiated product and thus has some control over its
price. As a result, it can raise its price without losing all its customers.
An oligopoly is a market that is dominated by a small number of firms. In contrast to the situation under
monopolistic competition, there are various barriers to the entry of new firms. Also, the firms are interdependent, and
each firm is affected by its rivals’ actions.
A monopoly exists when there is only one firm in the industry. Compared with other market structures, demand
under monopoly will be relatively inelastic at each price. A monopolist will maximise profit where MR= MC.
Hence, the FALSE statement is that, firms under monopolistic competition produce homogeneous products.

The correct answer is D.
EXPLANATION

When a country has current account deficits, it implies the country is importing more than it is exporting to the rest
of the word. Policy combinations should be targeted at reducing imports and encouraging exports. The right answer
is option D. When interest rates are increased, it reduces money demand which leads to a reduction in domestic
demand. This will decrease the demand for imports and improve the current account balance. Also, increasing
income tax rates will decrease domestic demand and hence, the demand for imports.

The correct answer is C.
EXPLANATION

Vertical product differentiation is a type of product differentiation that occurs when a firm supplies different products
that have different qualities to the same market, and consumers see the difference in qualities based on their tastes for
the products. Producers employ vertical differentiation because of different costs incurred in producing products with
differing qualities, and as a strategy to charge different prices for their products.
Apple is an example of a company that employs vertical differentiation. This is feasible in the production of different
iPhone models such as the iPhone 14 Mini, iPhone 14 Pro, and iPhone 14 Pro Max, which differ in terms of their
features.

The correct answer is B.
EXPLANATION

Financial intermediaries are the general name for financial institutions (banks, building societies, etc.) that act as a
means of channeling funds from depositors to borrowers. They typically provide five important services/roles:
i. Expert advice, which may include offering an expert opinion on saving and investment activities or information
about other sources of finance.
ii.
0
A
Allocative efficiency, where financial intermediaries offer expertise in how to channel funds into activities that
have higher returns and balance the viability of loans against risks.
iii. Maturity transformation, where financial institutions facilitate the transformation of deposits into loans of longer
maturity.
iv. Risk transformation, which is the process whereby banks can spread the risks of lending by having a large number
of borrowers.
v. Transmission of funds, where money can be transferred from one person or institution to another without having to
rely on cash.

The correct answer is C.
EXPLANATION

The optimum combination of goods X for Y occurs when the marginal utilities ( MU x / MUy) equal the ratio of the
prices of the two goods (Px /Py). From the question, Px / Py = 40 / 40 = 1. Hence the optimum combination
occurs by purchasing three units of Good X and two units of Good Y, which gives MU x / MUy = 50 / 50 = 1.
Alternatively, the total consumer surplus is given by
Total Consumer Surplus (TCS) = Total Utility- Total Expenditure.
The optimum combination of units of Good X and Good Y for the consumer to purchase is the combination that
gives the highest TCS. From the options, purchasing three units of Good X and two units of Good Y produces
TCS = (100 + 80 + 50) + (70 + 50) – 200 = 150, which is the highest TCS.

The correct answer is C.
EXPLANATION

If firm A looks at the pricing decision from firm B’s point of view, it will show that firm B has a dominant strategy. If
firm A charges High, it can see that firm B’s best response is to charge Low (making a profit of 90 rather than 60). If
firm A charges Low, firm B’s best response is also to charge Low (making a profit of 40 rather than 20). Therefore,
firm A can predict with a high level of certainty that firm B will charge Low – its dominant strategy. Firm A’s best
response, therefore, is to charge Low and make a profit of 40 rather than 20. Hence the dominant strategy for the
firms is Firm A-Low; Firm B – Low.

The correct answer is D.
EXPLANATION

Economic activities can be broadly divided into the supply side and the demand side. The supply side refers to the
level of production or output in an economy, which is determined by resources such as labor, capital, and natural
endowment. The level of supply can also be influenced by factors that affect the availability of these resources, such
as their cost and efficiency. On the other hand, the demand side is typically determined by government spending,
consumption, and private investment. The level of consumption can be influenced by factors such as consumer
preferences, interest rates, and the money supply.
Therefore, policies such as cutting interest rates can increase consumption and private investment, resulting in a
decrease in unemployment and an increase in output. Similarly, when the government implements policies that
increase the money supply or its own spending, the level of economic activity can rise, leading to a decrease in
unemployment.
Privatisation policies involve transferring the ownership of businesses from the government to private citizens and
are generally categorized as supply-side policies. If privatization increases efficiency and leads to an increase in the
production of goods and services, then unemployment can decline. However, this is a supply-side effect, not a
demand-side effect. Therefore, option D is the correct answer.

The correct answer is D.
EXPLANATION

The national income identity for an open economy can be written in this form
S-l=X-M
Where S – I is the net capital outflow and X – M is the net exports or trade balance.
S is national saving which is a sum of public saving (T-G) and private saving (Y-C-T).
Public saving= 275-350 = -£75 billion.
This implies that National savings= 300-75 = £225 billion.
Now from the identity,

225-250 = X-M
X- M = – pounds 25 billion
Net export is a deficit of £25 billion.

The correct answer is B.
EXPLANATION

The correct answer is option B. A shift in the aggregate demand curve to the right implies an increase in aggregate
demand. Depreciation in the exchange rate will make exports cheaper and imports more expensive. This improves
the net exports component of GDP and hence causes an increase in aggregate demand. This will cause the aggregate
demand curve to shift to the right. All the other options will cause aggregate demand to decrease.

The correct answer is B.
EXPLANATION

In a simple closed economy with no government sector, we have:
Y=C+I
where C = consumption function; and I= investment expenditure. Given C = £80million + 0. 75Y and
I = £ 50million, then:
Y = £80million + 0.75Y + I
0.25Y = £80million + £50million
Then, equilibrium income Y = £520million. Therefore, consumption will be
C = £80million + 0.75Y = £80million + 0.75 x £520million = £470million.

The correct answer is D.
EXPLANATION

Given the equations for the supply and demand as:
Qdx = 50 – 0.2Px
Qsx = 10 + 0.6Px

We can find the market equilibrium price by setting the two equations equal to each other, since, in equilibrium, the
quantity supplied (Qsx) equals the quantity demanded (Qdx). Thus:
50 – 0.2Px = 10 + 0.6Px
40 = 0.8Px
which solves for Px = 50.
We can then solve for equilibrium quantity (Qe) by substituting Px = 50 into the demand or supply equations (since Qdx = Qsx). Thus, from the demand equation:
Qe = 50 – 0.2Px = 50 – 0.2(50) = 40
Then demand and supply are in equilibrium when: quantity is 40 and price is 50.

The correct answer is D.
EXPLANATION

Fixed costs have to be paid even if the firm is producing nothing at all, hence we will assume all fixed costs are also
sunk costs. This means that providing the firm is able to cover its variable costs, it is no worse off than it would be if
it temporarily shut down. Therefore, in the short run, a loss making firm that seeks to maximise profits will
continue to produce if: it can charge a price greater than its average variable cost.

The correct answer is B.
EXPLANATION

Structural unemployment is a type of unemployment that occurs when the skills of workers in certain industries do
not match the available jobs. This type of unemployment is usually caused by changes in the structure of an
economy, such as a change in consumer preferences.

The correct answer is C.
EXPLANATION

Suppose the government imposes a minimum wage above the market equilibrium wage. In that case, there will be
an increase in the quantity of labor supplied, which leads to surplus labor. The reason is that more people will be
willing to work (an increase in labor supply) to enjoy the new higher wage.

The correct answer is C.
EXPLANATION

The natural rate of unemployment is made up of frictional unemployment and structural unemployment. Frictional
unemployment occurs when workers are in transition between jobs. Structural unemployment occurs due to a
mismatch between the skills and qualifications of job seekers and the job opportunities that are available. Policies
targeted at reducing these two types of unemployment will reduce the natural rate of unemployment. Providing
information about job availability will reduce the transition periods between jobs, and hence reduce frictional
unemployment. The correct answer is option C.

The correct answer is B.
EXPLANATION

The price is determined in the industry by the intersection of demand and supply. Under perfect competition, the rule
of profit maximization is for each firm to produce the quantity of output where P = MC. The price (P) reflects
demand and as such, is a measure of how much buyers value the good, while the marginal cost (MC) is a measure of
what additional units of output cost society to produce. Following this rule assures allocative efficiency. However, in
the case of the monopoly, at the profit-maximizing level of output, the price is always greater than the marginal cost.
If P > MC, then the marginal benefit to society (as measured by P) is greater than the marginal cost to society of
producing additional units, and a greater quantity should be produced; and yet the the monopolist is deliberately
holding back, so as to keep its profits up.
Hence, the socially efficient output for a monopoly is at the point where: the marginal cost curve cuts the
demand curve.

The correct answer is A.
EXPLANATION

Because the monopolist is a price maker, prices will always be set in the region where the demand curve is elastic.
When the monopolist starts off on the inelastic part of the demand curve, there is always the possibility that revenues
can be increased by restricting output and charging higher prices. Also, with positive marginal cost, a reduction in
output reduces the total cost of production. This means that for the monopolist, as long as demand is inelastic, the
monopolist will keep reducing output and charging higher prices. Hence the monopolist continues to move up on the
demand curve until he enters the elastic portion of the demand curve. Hence, equilibrium is only possible on the
elastic portion of the demand curve (Elasticity is greater than I).
The right answer is option A

The correct answer is A.
EXPLANATION

A restrictive monetary policy refers to the actions taken by the Fed or the central bank to reduce the money supply in
the economy. One of the primary tools used in restrictive monetary policy is raising interest rates. By increasing the
cost of borrowing (raising interest rates), central banks aim to discourage borrowing and spending, reducing overall
economic demand. In an open economy, an increase in domestic interest rates will lead capital to flow from abroad
to the domestic economy, where investors can earn a higher return on their investments. The inflow of capital from
abroad will lead to an increased demand for domestic currency, resulting in the appreciation of the domestic currency
(or exchange rate appreciation). Therefore, the correct answer is A.
NB: A currency appreciates when its value rises (because of high demand for that currency) relative to other
currencies and depreciates when its value falls (because of low demand for that currency).

The correct answer is B.
EXPLANATION

The following data is for a perfectly competitive firm producing Good X in the short run:

$\begin{array}{cccc}
\begin{array}{c}
\text { Number of } \\
\text { machines }
\end{array} & \begin{array}{c}
\text { Number of } \\
\text { men }
\end{array} & \begin{array}{c}
\text { Total Output of } \\
\text { Good X }
\end{array} & \begin{array}{c}
\text { Marginal } \\
\text { Physical Product }
\end{array} \\
5 & 7 & 100 & – \\
5 & 8 & 140 & 40 \\
5 & 9 & 170 & 30 \\
5 & 10 & 190 & 20
\end{array}$

Marginal Physical Product = Change in Total Output of Good X from one additional unit of men – ~X.
From the table,
The marginal physical product of the 8th man = 40
The marginal physical product of the 9th man = 30
40>30
Note: Other options are incorrect based on the values in at the table.

The correct answer is C.
EXPLANATION

During the financial crisis, many European countries experienced significant economic downturns and faced
challenges in managing their public debt. The crisis revealed weaknesses in the financial systems of several
European countries, particularly those with high levels of government debt and fiscal imbalances. These countries
struggled to meet their debt obligations, leading to concerns about their solvency and the stability of the eurozone.
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A
The sovereign debt crisis in Europe was characterized by escalating borrowing costs for affected countries, declining
investor confidence, and the need for financial assistance from international organizations such as the International
Monetary Fund and the European Central Banlc Several countries, including Greece, Ireland, Portugal, and later
Spain and Italy, faced severe economic and fiscal challenges, which required substantial bailout packages and
austerity measures to address the crisis.
Therefore, the most accurate response is C.

The correct answer is D.
EXPLANATION

Terms of trade refer to the price index of exports divided by the price index of imports and then expressed as
a percentage. This means that the terms of trade will be 100 in the base year. Thus, if the average price of exports
relative to the average price of imports has risen by 20 percent since the base year, the terms of trade will now be
120. If the terms of trade rise (export prices rising relative to import prices), they are said to have ‘improved’, since
fewer exports now have to be sold to purchase any given quantity of imports. Changes in the terms of trade are
caused by changes in the demand for and supply of imports and exports and by changes in the exchange rate.
Hence, an improvement in the domestic country’s terms of trade will result from a rise in the average price of
exports relative to the average price of imports.

The correct answer is B.
EXPLANATION

The following are gains that countries may experience as a result of engaging in
international trade:
Decreasing costs – as countries specialise in a particular good they tend to experience economies of scale ( falling
unit costs), this can particularly arise within small countries where the local market is limited and presents no natural
opportunity for falling costs via expansion.
Differences in demand – one country may prefer a particular good to another and find that the demand for their
product is higher in another country. By engaging in trade, demand within both countries can be fulfilled.
Increased competition – imports from overseas can potentially create more
competition within a market and stimulate efficiency within the home market (if such competition were previously
lacking). This could lead to greater R&D and new
product development.
Trade as an engine of growth – increased demand elsewhere leading to a rise in
exports can help to stimulate growth within a country.
Non-economic advantages – other benefits may include political and social/cultural advantages as a result of
exposure to other firms across the world and differing ways of producing goods/services.
One argument for restricting international trade is to prevent Dumping. A country
may engage in dumping by subsidising its exports. The result is that prices may no longer reflect comparative costs .
The correct answer is: A country may engage in dumping by subsidising its exports.

The correct answer is A.
EXPLANATION

Devaluation refers to fall in the value of a domestic currency relative to other country’s currencies. Devaluation
usually causes exports to be cheaper and imports to be more expensive for the domestic country. Since exports
become cheaper relative to other countries, the domestic country’s export volume will rise and import volume will
fall.

The correct answer is D.
EXPLANATION

The cost of imposing a tariff is that consumers pay more as illustrated by the higher world price which now includes
the tariff and the resulting fall in consumer surplus. Before the tariff, consumer surplus is represented by the area
ABC. It falls to area ADE which represents a fall ofEDBC. The price rises from Pw to Pw+t. Domestic production
which was previously Q 1 increases to Q3 but consumption falls to Q4. Imports also fall to the difference between
Q4-Q3. Firms receive a higher price and therefore generate higher profits, represented by area 1. The government
receives income from the tariff represented by area 3. There are deadweight losses to society that are not recouped
anywhere and these losses are represented by areas 2 and 4 .
Therefore, the correct answer is: Rise in consumer surplus.

The correct answer is C.
EXPLANATION

To find the contribution of the company to the country’s Gross Domestic Product (GDP), we use the value-added
approach. That is,
GDP using the value-added method= Value of sales – Cost of intermediate goods
= £2,000,000 – (£800,000 + £200,000 + £400,000) = £600,000

The correct answer is C.
EXPLANATION

Consider a simple Keynesian model: GDP= C + G with T = 0.25GDP such that C = 0.B(GDP- 0.25GDP)
where C = aggregate consumption function; G = government expenditure; T = taxes and GDP= income.
This implies that,
GDP= 0.B(GDP- 0.25GDP) + G
GDP= 0.6GDP + G
GDP-0.6GDP = G
0.4GDP = G
GDP= 2.5G
: . The government expenditure multiplier is 2.5, i.e., an increase in government expenditure of £10 million will
increase the national income by £25 million.

The correct answer is D.
EXPLANATION

Aggregate Demand (AD) is normally referred to as aggregate expenditure (E). Aggregate expenditure consists of the
consumption of domestically produced goods Cd plus the three injections (J): investment in the domestic economy
(I), government purchases in the domestic economy (G) and expenditure from abroad on the country’s exports (X).
AD=E=Cd+J
An increase in the income tax rate will reduce the disposable income for people to spend on consumption; therefore,
aggregate demand reduces
A decrease in government expenditure reduces injections therefore, aggregate demand reduces
A decrease in the value of exports reduces reduces injections therefore, aggregate demand reduces
A decrease in the rate of interest means people will be encouraged to borrow to invest in production at a lower
cost which increases aggregate demand.

The correct answer is C.
EXPLANATION

The conventional Phillips Curve demonstrates an inverse relationship between unemployment and inflation,
suggesting that lower unemployment rates are associated with higher inflation, and vice versa. Therefore, the
correct answer is option C

The correct answer is B.
EXPLANATION

The currency-deposit ratio is the proportion of deposits held as cash= 0.5
The reserve-deposit ratio is the proportion of deposits held by the banks for reserves = 0.5
Hence, the money multiplier (m) is computed as:
$\frac {0.5+1}{0.5+0.5} = 1.5$

The narrow money supply (B) is the sum of currency held by the public and the bank reserves.
The broad money supply (M) depends on the narrow money supply in the following way:
M=m x B

This implies that the narrow money supply can be expressed as:
$B = \frac {M}{m} = \frac {300}{1.5} = 200 \text {rupees}$

The correct answer is A.
EXPLANATION

Cost-push inflation is caused by factors that increase the cost of production. The right answer is Option A. A
depreciation of the domestic currency will increase the cost of imported raw materials. This increases the cost of
production which is passed on to the consumer in the form of higher prices.

The correct answer is D.
EXPLANATION

Crowding out: Where increased public expenditure diverts money or resources away from the private sector. If the
government relies on pure fiscal policy. It will have to borrow the money from the non-bank private sector. It will
thus be competing with the private sector for finance and will have to offer higher interest rates. Which may
discourage firms from investing and individuals from buying on credit. Hence, there will be a fall in investment due
to the associated rise in interest rates.
Also, because the high-interest rates discourage consumers from buying on credit, then it will lead to a fall in
consumer demand. In addition, fear of higher future taxes due to a high budget deficit as a result of an increase in
government expenditure discourages consumer demand.
Further, the increase in interest rates, as a result of an increase in government expenditure, will lead to an inflow of
finance from abroad, which in tum will lead to an appreciation of the exchange rate. The higher exchange rate will
reduce the level of exports and increase the level of imports.
Therefore, reduced import expenditure due to increased government demand for domestically produced
goods is NOT a ‘crowding out’ effect resulting from a fiscal expansion.

The correct answer is A.
EXPLANATION

Automatic stabilizers are mechanisms that are built into government budgets to adjust government expenditures and
taxation in response to different states of the economy. When the economy is in a recession, the government needs to
stimulate demand, hence, automatic stabilizers will increase government expenditure and decrease taxation or
government revenues.

The correct answer is A.
EXPLANATION

If the central bank conducts a contractionary open market operation (OMO), it means government sells securities,
such as treasury bills, to the public in exchange for cash. This policy, therefore, causes a decline in supply of money
in the economy. Given that the demand for money remains the same, fall in money supply will give rise to shortage
of credit in the financial market, thereby leading to a rise in interest rate.
On the other hand, increase in sales of government securities would cause the supply for securites to increase in the
market, based on the theory of demand and supply, the price of treasury bills will fall. The fall in price of treasury
bills and a rise in interest rate due to fiscal contractionary policy is plausible because the relationship between price
of securities and interest rate is negative.

The correct answer is D.
EXPLANATION

As with firms in other market structures, a monopolist will maximise profit where MR= MC= 14 rupees. The less
elastic the demand at the output level where MC equals MR, the larger the gap between average revenue (AR) and
MR. Consequently, the price will be higher relative to MR. The relationship between price, MR ( or MC), and the
price elasticity of demand (PeD) can be expressed using the following formula:
$P = \frac {MR}{1+(1/P_{E_{D}})}
Plugging in the values we get:
$P = \frac {14}{1-(1/2)} = 28 \text {rupees}$

The correct answer is C.
EXPLANATION

There are three types of price discrimination: first-degree, second-degree, and third-degree. First-degree price
discrimination occurs when the seller charges each consumer the maximum price they are willing to pay for each
unit of the product. Second-degree price discrimination involves offering consumers a variety of pricing options for
the same or similar product. Third-degree price discrimination entails categorizing consumers into different groups
based on observable characteristics that provide information about their willingness to pay. The firm then charges
different prices to consumers in different groups, while keeping the price uniform within each group.
DTC’s practice of offering bus passes based on observable characteristics is a clear example of third-degree price
discrimination.

The correct answer is A.
EXPLANATION

A monopoly market structure is a market that is characterized by a sole seller of a product without any competition.
In a monopolistic competition, there are several firms each producing slightly differentiated products. There are
barriers to entry in a monopoly but not in the case of a monopolistic competition. Because of this, firms in
monopolistic competition can only make normal profits in the long run while a monopoly can make supernormal
profits in the long run. Also, because of the presence of competition, the demand curve for a firm under monopolistic
competition is relatively more price elastic compared to the case of a monopoly. Notice that all options except option
A states the difference between a monopolistic competition and a monopoly.

The correct answer is C.
EXPLANATION

Economies of scale refers to how costs change in proportion to the output produced. A firm experiences economies
of scale if costs per unit of output fall as the scale of production increases, i.e., the proportionate increase in total
costs is lower than the proportionate increase in output. Other things being equal, this means that it will be producing
at a lower unit cost. There are several reasons why firms are likely to experience economies of scale.
Specialisation and division of labour: In large-scale plants, workers can often do simple, repetitive jobs. With this
specialisation and division of labour, less training is needed; workers can become highly efficient in their particular
job, especially with long production runs; there is less time lost in workers switching from one operation to another;
and supervision is easier.
Indivisibilities: Some inputs are of a minimum size: they are indivisible. The most obvious example is machinery.
Take the case of a combine harvester. A small-scale farmer could not make full use of one. They only become
economical to use, therefore, on farms above a certain size.
Spreading overheads: Some expenditures are economic only when the firm is large: for example, research and
development – only a large firm can afford to set up a research laboratory. This is another example of indivisibilities,
only this time at the level of the firm rather than the plant. The greater the firm’s output, the more these overhead
costs are spread.
Therefore, Dilution of ownership does NOT contribute to economies of scale.

The correct answer is B.
EXPLANATION

The opportunity cost of producing the 6th unit of good Y is how much of good X that has to be given up in order to
produce the 6th unit of good Y. Initially, the economy was producing 10 units of Good X and 5 units of good Y. To
increase the production of good Y to 6 units, the economy had to give up 2 units of good X. This means that the
opportunity cost of producing the 6th unit of Good Y is 2 units of good X.

The correct answer is A.
EXPLANATION

The average method for computing the cross-price elasticity of demand is stated below:
$
\epsilon_{Y X}=\frac{Q_2^Y-Q_1^Y}{Q_2^Y+Q_1^Y} \times \frac{P_2^X+P_1^X}{P_2^X-P_1^X}
$

Where $\epsilon_{Y X}=-1, Q_1^Y=100, P_1^X=20$ cents, $P_2^X=25$ cents. You are required to find the new level of demand for $\operatorname{good} \mathrm{Y}\left(Q_2^Y\right)$.
$
\begin{gathered}
-1=\frac{Q_2^Y-100}{Q_2^Y+100} \times \frac{25+20}{25-20} \\
-1=\left(\frac{Q_2^Y-100}{Q_2^Y+100}\right) \times 9 \\
-Q_2^Y-100=9 Q_2^Y-900 \\
-10 Q_2^Y=-800 \\
Q_2^Y=\frac{-800}{-10}=80 \text { units }
\end{gathered}
$

The correct answer is A.
EXPLANATION

Demand: Q d = 15 – 0.5P
Supply: Qs = 3 + 2P
Substitute P into the equations for supply and demand.
Demand: Qd = 15 – 0.5(6) = 12
Supply: Qs = 3 + 2(6) – 15

When the price is £6, the supply of Good X is greater than the demand for Good X ( Q s> Q d)- This means there is
surplus in the market, which will result in a fall in price.

The correct answer is A.
EXPLANATION

An increase in the cost of production will cause a decrease in supply, shifting the supply curve to the left. This
causes the price to rise and the quantity to fall. Also, a rise in consumer incomes will increase the demand for the
commodity since it is a normal good. This will cause the demand curve to shift to the right, resulting in an
increase in the price and quantity. When both changes are combined, we see that the equilibrium price will
increase unambiguously, but the equilibrium quantity change is indeterminate. This is because the increase in
the cost of production causes quantity to decline while the increase in consumer incomes causes the quantity to
increase. The resulting effect will depend on the relative size of the shifts.

The correct answer is C.
EXPLANATION

Opportunity cost: The cost of any activity measured in terms of the best alternative forgone.
A
With this question, the opportunity cost is the sacrifice entailed by going for one year Masters’s degree in Actuarial
Science rather than taking the job. The correct list of opportunity costs of the one-year Masters degree would include
income from the job of £20,000 and tuition fees of £12,000. Hence the total is £32,000.
Note that we do not include the cost of her accommodation and the food bill because the student will incur that cost
whether she studies or works.

The correct answer is C.
EXPLANATION

Formal Collusive oligopoly is a situation when firms in an oligopoly agree formally to limit competition between
themselves by such practices as agreeing on each keeping its market share, price fixing, setting output quota or
limiting advertising.
Tacit collusive oligopoly is where oligopolists have no agreement between themselves, formal, informal or tacit.
Imperfect Oligopoly is a type of oligopoly where a few firms dominate the industry, but each firm produces a
slightly differentiated product. This contrasts with the case of a pure oligopoly where there is no product
differentiation.

The correct answer is D.
EXPLANATION

Note that the initial budget line is:
5X + l0Y = 100
A 50% fall in the price of Y means the price falls to £5. The new budget line is:
5X +5Y= 100
If 7 units of good Y are consumed, then the units of good X consumed is computed as follows:
5X + 5(7) = 100
5X +35 = 100
5X= 65
X= 13

The correct answer is D.
EXPLANATION

In a simple closed economy, the equilibrium level of national income Y is given by:
Y = C +I+ G = £40 million + 0.75Yd + £30 million + £50 million
Given total taxes T, the disposable income Yd= Y – T = Y – 0.2Y = Y(l – 0.2). Then we have
Y = 40 + 0. 75(1 – 0.2)Y + 30 + 50 ===} Y = 120 + 0.6Y
Then:
$Y = \frac {120}{0.4} =$ pounds 300 million.
The equilibrium national income is £300 million
The fiscal deficit is computed as T – G = 0.2(300) – 50 so there is a fiscal surplus of +£10 million

The correct answer is A.
EXPLANATION

The main targets of competition policy are the following:
Abuse of power by existing oligopolies and monopolies – monopoly policy. Monopoly policy is designed to
prevent existing oligopolies and monopolies from exploiting their dominant powers. Firms could, if they had the
opportunity, use this dominant power to raise prices and restrict output so as to make supernormal profits and also try
and increase barriers to entry. Therefore, the aim of monopoly policy is to ensure that there are caps on the prices
such firms can charge and to ensure, where possible, that there is competition between firms and sufficient consumer
choice and also sufficient investment for the future.
One target is to stop oligopolistic collusion: restrictive practices. The aim is to prevent firms colluding to exploit
their joint power to make larger profits. This could take numerous forms such as raising prices and/or restricting
output, dividing up the market or agreeing not to encroach on other firms’ established markets. The target is to
reduce the possibility of restrictive practices by use of fines, prosecution if collusion is found and other legal
remedies.
Limiting growth of power through mergers and acquisitions – merger policy. The aim of merger policy is to
provide oversight of mergers. This will involve analysing the potential gains and losses that may occur as a result of
a merger. As such, the impact on consumers, the public interest and the broader economy could be considered. The
policy may aim to limit the adverse impacts of the merger or prevent it going ahead .

The correct answer is D.
EXPLANATION

With the minimum wage currently above the equilibrium wage, a reduction in unemployment benefit, better
dissemination of information about job vacancies, and an extension of job retraining programmes will lead to a
reduction in unemployment as the supply of labor will increase. However, reducing the minimum wage will have the
opposite effect, where the unemployed are not desperate to get a job encouraging voluntary unemployment

The correct answer is D.
EXPLANATION

The scenario above presents a case of a negative externality in production. Here, the marginal social cost (MSC) of
chemical production equals the marginal private costs (MPG) plus the marginal external costs (MECp)- That is,
MSC=MPC+MECp.
The marginal private cost is: MPG= 10 + 20(10) = 210.
The external cost of the 10th unit is: MECp = 6(10) = 60.
⇒ The marginal social cost of producing the 10th unit is: MSC= 210 + 60 = 270.

The correct answer is B.
EXPLANATION

In a simple closed economy, the equilibrium level of national income Y is given by:
Y = C +I+ G = £10 million + 0.75Y + £20 million + £40 million
Then we have
Y= 70+0.75Y
Then:
$Y = \frac {70}{0.25}$ = pounds 280 million
The multiplier k is given by:
$k = \frac {1}{1-\text {mpc}} =\frac {1}{1-0.75} = 4,$
where mpc is marginal propensity to consume. Then, if government expenditure is increased by £ 10 million, the
national income will increase by:
4 x £ 10 million = £ 40 million
Hence the new level of national income= £40 million +£280 million =£320 million.

The correct answer is A.
EXPLANATION

A potential drawback or challenge for businesses resulting from a policy of tax cuts is the potential reduction in
government spending on public infrastructure projects. Tax cuts can lead to lower government revenues, which may
result in reduced funding for public investments in areas such as transportation, education, and healthcare. This
reduction in public spending can have indirect consequences for businesses, such as limited infrastructure
development, decreased public services, and potential constraints on economic growth.
Options B, C, and D represent other potential challenges or impacts that businesses may face due to tax cuts, but they
are generally considered less directly related to the policy itself.

The correct answer is C.
EXPLANATION

The equilibrium price is the price where demand equals supply. Also, an inferior good is a good whose demand falls
as people’s incomes rise. A rise in consumer income shifts the demand curve to the left for an inferior good. Further,
the higher the costs of production, the less profit will be made at any price. As costs rise, firms will cut back on
production, probably switching to alternative products whose costs have not risen so much. This shifts the supply
curve to the left.
Hence, the combined effect of an increase in the cost of production and a rise in consumer income on the
equilibrium price and quantity of an inferior good is that the effect on price is indeterminate, but quantity will
fall. The correct answer is option C.

The correct answer is D.
EXPLANATION

The most straightforward way to approach this question is to recall the profit-maximising rule, which states that the
level of output produced when MC=MR maximizes profit. In other words, as long as MR exceeds MC, profit can be
increased by increasing production ( output). Option E best represents this and thus options B, D and E are not
chosen.
For option A, MC= 25 >MR= 10, so profit could be increased, but by cutting back on production.
Therefore, the option that indicates that the firm could increase its output and increase its profits is E.

The correct answer is B.
EXPLANATION

The unemployment rate is the percent of the labor force who are currently unemployed but are available for work
and have been actively seeking work for the previous four weeks.
Labor force: This is the total number of those who are either employed or unemployed (Unemployed + Employed).
Unemployment rate: This is the number of unemployed divided by the labor force, expressed as a percent.
From the question,16 million are employed, and 2 million are unemployed, the unemployment rate would be:
$\frac {\text {Unemployed}}{\text {Labor force}} \times 100 = \frac {24937}{24937+568793} \times 100 = 4.2 \%$

The correct answer is A.
EXPLANATION

The national income identity for an open economy can be written in this form:
S-I=X-M
Where S – I is the net capital outflow and X – M is the net exports or trade balance.
Sis national saving which is a sum of public saving (T – G) and private saving (Y – C – T).
Public saving = 80 – 80 = £0 billion.
This implies that National savings= 160 + 0 = £160 billion.
Now from the identity,
160 – 240 = X – M
X – M = -80 billion pounds
Given M = £120 billion => M = £40 billion.

The correct answer is C.
EXPLANATION

In the short run, an expansionary monetary policy will cause an increase in the money supply, thereby lowering
short-term interest rates, which leads to increasing aggregate demand. An increase in aggregate demand is
represented by a rightward shift of the aggregate demand. The increase in aggregate demand will push up the price
level and level of real income in the short run. In the long run, the rise in the aggregate price level will mean that
workers will seek to get wage increments which will shift the aggregate supply curve to the left, somewhat reducing
the increase in the real level of real output, possibly even back to its original level.

The correct answer is D.
EXPLANATION

If the United States imposes import tariffs, American consumers will likely decrease their purchases of goods from
India. As a result, there will be a reduced demand for the Rupee, leading to a decrease in the supply of US dollars in
exchange for rupees–a leftward shift of the supply curve for US dollars. This, in turn, will cause the US dollar to
appreciate, i.e., the Rupee will decpreciate.

The correct answer is D.
EXPLANATION

When the central bank purchases government securities from commercial banks, this transaction expands their cash
reserves, which they can now use to create additional loans. Since the monetary base is the sum of cash (notes and
coins) in circulation and bank reserves, an open market purchase also increases the monetary base.

The correct answer is D.
EXPLANATION

Let’s carefully consider each of the options given:
– Option A: Firstly, we need to calculate the bank deposits multiplier, which measures the extent to which bank deposits expand in relation to the additional liquidity introduced into the banks. In other words, it is the reciprocal of the liquidity ratio ( $l$ ), which is $25 \%$. So,
Bank deposits multiplier $=\frac{1}{l}=\frac{1}{0.25}=4 \rightarrow$ Option A is False.
– Option B: The total increase in the money supply resulting from an additional deposit of $£ 10$ million is determined by multiplying the bank deposits multiplier by the initial deposit. That is, the total increase in the money supply is $£ 40$ million (4* $£ 10$ million) $\rightarrow$ Option B is False.
– Option C: Given an initial additional deposit of $£ 10$ million and a liquidity requirement of 0.25 (implying a minimum balance of $£ 2.5$ billion with the central bank), the remaining $75 \%$ ( $£ 7.5$ billion) is available as surplus funds for banks to lend to customers. If all of this surplus liquidity is used for advances to customers, the process of credit creation would expand loans to customers by $£ 30$ billion ( $£ 2.5$ billion * 4) $\rightarrow$ Option C is also false.

The correct answer is C.
EXPLANATION

The marginal propensity to consume,
$
\text { MPC }=\frac{\text { Change in Consumption }}{\text { Change in Disposable Income }}=\frac{£ 21,000-£ 17,000}{£ 25,000-£ 20,000}=0.8
$

Since a household’s only two options are to spend income or to save it, MPC + MPS $=1,1-$ MPC $=$ MPS, then MPS $=0.2$.

The correct answer is D.
EXPLANATION

During economic boom or expansion, the citizens who are able and willing to work find jobs and earn income. By
implication, the welfare of the average working population improves and lesser government intervention on the
ecomomy would be needed. Additionally, the government’s budget improves because it is able to balance its budget
and reduce debts.

The correct answer is A.
EXPLANATION

Factors affecting the supply side of the economy contribute to expansion in production of outputs in the economy.
These factors include natural endowments, increases in labour force, and government policies that cause people to
work and invest. Therefore, reducing social security benefits by the government will cause people to increase the
number of work hours and/or increase labour supply in order to make up for the fall in income received from the
government.

The correct answer is A.
EXPLANATION

The question prompt contains interest rates and two components of aggregate demand: consumption and investment
spending. This suggests we can approach this question using the AS-AD framework and the liquidity preference
model. For consumption to rise, all else constant, the policy must have been a fiscal stimulus, implying that the
aggregate demand shifted rightward such that real GDP increases relative to its potential output level. It could not
have been an expansionary monetary policy, as investments would rise due to the lower opportunity cost of the
spending.
From the liquidity preference model, an increase in the level of real output will shift the money demand curve to the
right since households and firms will demand a larger quantity of money to facilitate purchases at any given interest
rate. All else equal, a rightward shift of the MD curve results in a rise in the rate of interest. The higher rate of
interest would lower investment demand.

The correct answer is D.
EXPLANATION

Supply-side policies are policies designed to increase the quantity and/or productivity of the inputs used in
production. These policies attempt to influence aggregate supply directly rather than through aggregate demand, and
if effective, will increase potential output. We can evaluate each option to check for the correct answer.
l. increases in social security benefits designed to increase expenditures of unemployed workers ➔ This a type of
government spending (transfer payments to households), which will impact aggregate demand through
consumption.
2. measures designed to increase trade union powers so that real wage rises can increase expenditures of employed
workers ➔ This option is misleading since supply-side policies are usually designed to reduce the monopoly
power of trade unions so as to encourage greater flexibility in both wages and working practices and to allow
labour markets to clear.
3. increases in tariffs designed to increase production of domestic goods ➔ This type of tariff is a trade barrier that
will increase net exports, thus affecting aggregate demand.
4. reduction in corporate taxation ➔ This increases incentives for firms to take risks and develop new products
and new techniques, thus increasing aggregate supply and long-run growth.

The correct answer is C.
EXPLANATION

Capital goods are the assets used by businesses in the course of producing their products and services, such as
buildings, machinery, equipment, vehicles, and tools. By investing in new equipment or technology, companies can
improve their efficiency, thus lower costs and increasing output. Hence investment leads to increased future capital
goods.
However, increased investment in capital goods reduces consumption in the short-term as there is generally a
trade-off between consumption and investing in capital goods.

The correct answer is C.
EXPLANATION

The Austrian school of thought emphasizes that the value of a product is in the utility it provides a consumer. This
makes the value of a product completely subjective and depends solely on its ability to satisfy wants. This makes the
concept of marginal utility a central part of the thinking of Austrian economics. Proponents of this school of thought
are generally in support of a laissez-faire economy, hence market forces are key in driving the prices of goods and
services. Proponents of this school are very critical of centrally planned economies.

The correct answer is B.
EXPLANATION

Moral hard is a situation where one party is more likely to take risks because it does not have to bear the full
consequences of those actions. In insurance, a moral hazard occurs when a policyholder acts in ways that make the
insured even more likely to occur.

The correct answer is A.
EXPLANATION

Under a perfectly competitive industry, whether the firm is prepared to continue making a loss in the short run or
whether it will close down immediately depends on whether it can cover its variable costs – assuming all fixed costs
are also sunk costs.
With the information provided, the price (400) has been reduced to a point below the average variable cost
(420). Thus, the firm will shut down in the short run.

The correct answer is A.
EXPLANATION

Recall that the opportunity cost of something is what you have to give up in order to get it. It is often measured in terms of the value of the best alternative foregone.

The correct answer is C.
EXPLANATION

The production possibility curve shows all the possible combinations of two goods that an economy can produce in a specified time period assuming that all resources are fully employed and working to maximum efficiency. It therefore shows the limits to production; only combinations on or inside the frontier curve can be produced. Consequently, combinations of goods on the outside of the curve are unattainable.

The correct answer is C.
EXPLANATION

The marginal revenue curve is the revenue that is realised as quantity of a good sold increases by one unit.

On the other hand, the demand curve (price line) is the relationship between the price of a good and the quantity of
that good.
Generally, the demand curve facing a monopolist slopes downward because the quantity demanded increases as the
price of the good decreases. More so, marginal revenue also slopes downwards, but it is below the price because for
monopolist to sell additional units of commodity, the price for additional unit of the product must decrease. This
causes the total revenue to increase at a declining rate.
As a result, the marginal revenue generated from selling an additional unit of a good will be less than the price at
each level of output produced.

The correct answer is C.
EXPLANATION

A reduction in advertising expenditure will reduce the level of public awareness of the product. This will reduce the
demand for the product and cause the demand curve to shift to the left. Also, the low advertisement will reduce the
number of consumers that will develop loyalty to the product. Hence, consumers will be more willing to substitute
other products for the product in question. This implies that the demand curve will be more elastic. The correct
answer is option C.

The correct answer is B.
EXPLANATION

Advertising campaigns generally have two main objectives: (i) to shift the product’s demand curve to the right and
(ii) to make it less price elastic. If successful, these campaigns increase people’s awareness of the product, which
increases the market for the good and the demand curve shifts to the right. Additionally, effective advertising can
enhance consumers’ desire for the product, making them more willing to pay a higher price for each unit purchased.
Advertising can impact the elasticity of demand by fostering greater brand loyalty. By emphasizing the product’s
superiority and positioning competitors’ brands as inferior or lacking comparable alternatives, advertising can create
a perception that no other product can compete. As a result, the firm can potentially raise its price without
experiencing a significant decline in sales, i.e., demand becomes less elastic. This is because consumers are
convinced that there are no close substitutes available, reducing the substitution effect.

The correct answer is C.
EXPLANATION

In market 1 the profit-maximising firm should produce where MR1 =MC. In market 2 the profit-maximising firm
should produce where MR2 =MC.Then, when profit maximising, marginal revenue in Market 1 is equal to
the marginal revenue in Market 2.

The correct answer is B.
EXPLANATION

A free-market economy is one in which there is no government intervention. Instead, all allocation decisions are made by the interaction of demand and supply, driven by consumers (aiming to maximise their utility) and suppliers (aiming to maximise their profits).

The correct answer is C.
EXPLANATION

One of the major characteristics of an oligopoly is the price war among the firms in the market. The kinked demand
curve model of an oligopoly is based on this price rivalry among the firms, which causes them to react differently to
price increases and decreases. In an oligopoly market, if one firm increases its price, other firms will not, but will
instead maintain their current prices in order to gain a larger market share. On the other hand, if the firm lowers its
price, other firms will also decrease their prices in order to avoid losing market share to the firm that decreases the
price of its product. This behaviour causes the demand curve facing oligopoly firms to be kinked.

The correct answer is C.
EXPLANATION

Liquidity risk refers to the risk that a bank may not be able to meet its short-term funding obligations or have
sufficient cash to honor customer withdrawals. A sudden increase in customer withdrawals can strain the bank’s
liquidity position, potentially leading to a shortage of available cash. This represents a liquidity risk exposure for the
bank.
Options A, B, and D are more related to interest rate risk, market risk, and credit risk, respectively, rather than
liquidity risk.

The correct answer is A.
EXPLANATION

The size of the multiplier depends on the slope of the Withdrawal (W) function. The slope of the W function is given
by the marginal propensity to withdraw (mpw), $\Delta W /\Delta Y$. The lower the mpw, the bigger will be the rise in national
income: the bigger will be the multiplier.
Since W = S + T + M, where S is net savings, T is net taxes, and M is import spending. Then mpw=mps + mpt +
mpm.
Given, the rate of income tax is cut from 30% to 25% while the marginal propensity to import falls from 20% to
15%, this implies that mpt and mpm reduce, which reduces mpw, then the multiplier will rise.

The correct answer is D.
EXPLANATION

Draw a diagram to prove this to yourself. Prices move a lot when supply and demand curves are both steep, ie relatively inelastic. When both are elastic, quantity would change a lot.

The correct answer is C.
EXPLANATION

Structural unemployment occurs due to the mismatch between the skills labour posses and the skills demanded in the
labour market. This is usually caused by major shifts in the structure of the economy such as technological
advancements. The best way to reduce long-term structural unemployment is to retrain workers and restructure the
educational system to meet the demands of the market. The right answer is option C.

The correct answer is C.
EXPLANATION

Expansionary fiscal policy involves an increase in government spending, a decrease in taxes, or a combination of
both. Government spending can be directed towards consumption or investment, or it can provide a stimulus to
citizens.
The formula for aggregate demand is:
AD = C +I+ G + NX
This formula shows that aggregate demand rises when government spending (G) increases. As a result, real output
(Y) also increases, since an increase in government spending usually has a trickle-down effect on consumption and
the purchasing power of citizens.
In addition, if the government cuts taxes for businesses, it reduces their operational costs, which stimulates them to
employ more laborers to produce goods and services.

The correct answer is B.
EXPLANATION

Good X is an inferior good because it has a negative income elasticity of demand, indicating that demand for the good decreases as consumer income increases.

Good X is a substitute for Good Y because it has a positive cross-price elasticity of demand. This indicates that an increase in the price of Good Y will lead to an increase in the demand for Good X , as consumers switch from buying Good Y to buying Good X instead.

The correct answer is C.
EXPLANATION

A Taylor rule takes two objectives into account- (1) inflation and (2) either real national income or unemployment – and seeks to get the optimum degree of stability of the two. The degree of importance attached to each of the two objectives can be decided by the government or central bank. The central bank adjusts interest rates when either the rate of inflation diverges from its target or the level of real national income ( or unemployment) diverges from its potential ( or natural) level.
Hence, a central bank’s use of the “Taylor Rule” attempts to take inflation and economic growth into account.

The correct answer is A.
EXPLANATION

A potential drawback or challenge for businesses resulting from a policy of tax cuts is the potential reduction in
government spending on public infrastructure projects. Tax cuts can lead to lower government revenues, which may
result in reduced funding for public investments in areas such as transportation, education, and healthcare. This
reduction in public spending can have indirect consequences for businesses, such as limited infrastructure
development, decreased public services, and potential constraints on economic growth.
Options B, C, and D represent other potential challenges or impacts that businesses may face due to tax cuts, but they
are generally considered less directly related to the policy itself.

The correct answer is C.
EXPLANATION

We need to add together the marginal utilities of each extra Twix or Mars bar to find out which combination of chocolate bars maximises the consumer’s utility. Because the consumer’s budget is $£ 4.50$ and all chocolate bars cost 90 pence, we know that they can only buy a total of five chocolate bars.

For 3 Mars and 2 Twix bars, the consumer’s total utility is $90+60+40+50+40=280$. Any other combination gives a lower level of utility.

An alternative method is to equate the ratio of the prices of the two goods with the ratios of their marginal utilities. Here, we need:
$$
\frac{M U_{\text {Mars }}}{M U_{\text {Twix }}}=\frac{P_{\text {Mars }}}{P_{\text {Twix }}}
$$

Because the prices are the same, we need to find the levels of consumption where the marginal utilities are equal, bearing in mind the total cost constraint. This occurs where:
$$
M U_{\text {Mars }}=M U_{\text {Twix }}=40
$$
$i e$ three Mars bars and two Twix bars.

The correct answer is A.
EXPLANATION

A risk-averse individual will be prepared to pay more for insurance than the long-run average value of claims that will be made. Consequently, they will on average be less well off in monetary terms. However, insurance will be bought if it makes the individual better off in terms of expected utility.

While a risk-averse investor might buy insurance if the expected return is negative, zero or positive, a risk-neutral investor will buy insurance only if the expected return is zero or positive. A risk-seeking investor will buy insurance only if the expected return is positive.

The correct answer is D.
EXPLANATION

Profit is the difference between total revenue and total cost. From the information given, the total revenue can be
computed as
Total revenue= 20 x £1000 = £20,000
Total cost is computed as the product of the average cost and the units of output. Since the average cost is not given,
the total cost cannot be determined. Notice that what is given is the average variable cost which can be used to
compute the total variable cost. However, the total cost is the sum of variable cost and fixed cost. There is no
information about the fixed cost, so the total cost cannot be determined. The correct answer is option D