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# CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS
PAPER 3 Multiple Choice (Extension)

9708/3
MAY/JUNE SESSION 2002
1 hour

Additional materials: Multiple choice answer sheet Soft clean eraser Soft pencil (type B or HB is recommended)

TIME

1 hour

## This question paper consists of 12 printed pages.

SP (KN/SLC) S23100/2 CIE 2002

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2 1 Which condition defines productive efficiency? A B C D All factors of production are fully employed. All firms are producing at their profit maximising levels of output. The output of all goods is produced at minimum cost. There are no further opportunities for substituting capital for labour.

The diagram shows a firms cost and revenue curves. At which level of output will the firm be making only normal profit?

## marginal cost average cost revenue/cost

average revenue

BC quantity

D marginal revenue

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3 3 The table shows the marginal utility derived by a consumer who devotes the whole of his weekly income of \$32 to two goods X and Y, whose unit prices are \$2 and \$4 respectively.

unit

## marginal utility of Y (units) 28 26 24 22 20 18 16 14

1 2 3 4 5 6 7 8

In order to maximise his utility, which quantities of X and Y should the consumer purchase? X A B C D 2 4 6 8 Y 7 6 4 3

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4 4 The diagram shows a consumers budget line PQ when the consumers income was \$20 per day and the prices of X and Y were \$2 and \$1.25 respectively.

16 P 12 R

Q 0 10

S 20 X

The consumers income increases to \$30 and, at the same time, the prices of X and Y change. If the consumers budget line is now RS, what are the new prices of X and Y? X A B C D \$1.50 \$1.80 \$2.50 \$3.00 Y \$2.50 \$1.00 \$1.50 \$2.50

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5 5 In the diagram, the curve shows the various combinations of labour and capital that can be employed to produce a given volume of output. A firm initially chooses the combination of labour and capital shown by point X on the curve. In a subsequent period the firm chooses the combination of labour and capital shown by point Y.

X labour Y

capital

What could explain this change? A B C D a decrease in capital productivity an increase in labour productivity an increase in the cost of labour an increase in the cost of capital

What could cause a perfectly competitive firms marginal revenue product of labour curve to shift to the right? A B C D an increase in wages a higher rate of sales tax an increase in labour supply a rise in the price of the final product

The workers in a firm have not previously belonged to a trade union but now join one. In which circumstance is this most likely to raise their wages? A B C D Capital is highly substitutable for labour. Labour costs constitute a large fraction of the firms costs. The demand for the firms product is price-elastic. The firm has enjoyed monopsony power in the market for its labour.

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6 8 Which of the following is an assumption underlying the kinked demand curve in oligopoly? A B C D A firm will increase its price in response to a price increase by a rival. A firm will not match a price cut by a rival. Consumers are less sensitive to price increases than price decreases. Rivals are expected to match any reduction in price.

What is the essential feature of a contestable market? A B C D ease of entry and exit interdependence between firms large number of buyers and sellers product homogeneity

10 A firm earns supernormal profit when its profit is above that A B C D earned by competing firms. needed to cover its fixed costs. needed to keep the firm in production in the short run. required to keep its resources in their present use.

11 A firm is producing at the level of output at which its average variable cost is equal to its marginal cost. What will happen initially to its average variable cost and to its average total cost if it increases its output? average variable cost A B C D decreases decreases increases increases average total cost decreases increases decreases increases

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7 12 The table below shows the relationship between total output and total costs of a firm given constant factor prices and fixed factor proportions. output 100 200 300 400 500 costs (\$) 80 180 300 440 600

It follows that, over this range of output, the firm experiences A B C D decreasing returns for output between 100 and 300 and increasing returns for output larger than 300. increasing returns for output between 100 and 300 and decreasing returns for output larger than 300. decreasing returns throughout. increasing returns throughout.

13 Which of the following characteristics is most likely to be present when collusion occurs between firms in an industry? A B C D low barriers to entry a large number of firms the absence of significant economies of scale product homogeneity

14 A firm produces only one product. Under which condition is it most likely to be able to pursue a policy of price discrimination? A B C D Both price and marginal revenue are identical in all markets. It is benefiting from economies of scale. Its product has a low elasticity of demand. There are separate and distinct markets for its product.

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8 15 The diagram shows the cost and revenue curves of a profit-maximising monopolist. Which area measures the deadweight loss arising from the exercise of monopoly power?

## MC x cost, revenue y z w AR MR O A B C D x+y y y+z w+y+z output AC

16 Which of the following elements of a tax and benefits system is regressive? A B C D the taxation of capital gains the payment of child benefits to families specific taxes on beer and tobacco rent subsidies to tenants of publicly owned housing

17 Over a given period, the nominal value of a countrys national income increased by 20% and the rate of inflation was 10%. Which of the following statements is correct? A B C D There was an increase in the volume of output. There was an increase in the income velocity of circulation. There was a reduction in the demand for money. The countrys money supply increased by 10%.

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9 18 In which circumstance will an increase in the public sector deficit not lead to an increase in the money supply, other things being equal? A B C D The deficit is financed by an increase in government borrowing from private individuals. The rate of interest is held constant. There is large-scale unemployment. Commercial bank lending to the private sector is held constant.

19 Why might GNP per capita of different countries, measured in US\$, be a poor indicator of their comparative standards of living? A B C D Their exchange rates are different from purchasing power parities. Their population growth rates are different. Their rates of inflation are different. Their ratios of imports to national income are different.

20 Which of the following is not a leakage from the circular flow of income? A B C D corporation tax expenditure on foreign goods personal saving retirement pensions

21 The marginal propensity to consume in a country is 0.9 and the average propensity is 0.8. What is the value of the multiplier? A 1.1 B 1.25 C 5 D 10

22 An aggregate demand curve slopes downwards from left to right. One reason for this is that a reduction in the average price level will lead to A B C D a reduction in the real value of money balances. a reduction in interest rates. a decline in the countrys international competitiveness. the expectation of further price falls.

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10 23 The diagram shows the aggregate demand and aggregate supply curves for an economy.

AS2 AS1

price level

output

What could cause the aggregate supply to shift from AS1 to AS2? A B C D an increase in the balance of payments deficit an increase in the price level an increase in raw material costs an increase in labour market flexibility

24 The diagram shows the determination of the rate of interest in the economy where M represents the money supply and LP represents liquidity preference.

LP1 LP2

rate of interest

r2 r1

quantity of money

What could cause the rise in the rate of interest from r1 to r2? A B C D an increase in national income an increase in the money supply a reduction in investment expenditure a reduction in the loans made by the private sector

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11 25 Which of the following combinations is usually found in less developed economies? low A B C D capital:output ratio external debt population growth saving ratio high saving ratio capital:output ratio external debt population growth

26 An economy is operating initially at its natural rate of unemployment. According to monetarist theory, compared to the initial position, what will be the effect on unemployment in the short run and in the long run of an unanticipated increase in the money supply? short run A B C D no change no change reduction reduction long run no change reduction no change reduction

27 What is likely to increase a countrys actual output but may reduce its long-run rate of growth of potential output? A B C D an increase in the size of the labour force increased government spending on education an increase in the size of the governments budget deficit increased female participation in the labour force

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12 28 A country has a floating exchange rate, full employment and an expansionary fiscal policy. The government decides to make the central bank independent with the power to determine monetary policy. If the central bank adopts a zero inflation target, what is likely to happen to interest rates and the exchange rate?

## exchange rate fall rise fall rise

29 Which measure could be expected to reduce the pressure of demand-pull inflation in an open economy? A B C D a depreciation of the foreign exchange rate a reduction in interest rates a reduction in the rate of tax on goods and services a removal of import controls

30 What is most likely to increase as a result of a rise in interest rates in a country? A B C D the level of house prices the inflow of short-term foreign capital the level of private investment the return on capital investment

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CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ECONOMICS Paper 3 Multiple Choice (Extension) May/June 2003 1 hour
Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

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## This document consists of 12 printed pages.

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2 1 In an economy, no one can be made better off without making someone else worse off. What does not necessarily follow from this? A B C D 2 The distribution of income is socially acceptable. The conditions for allocative efficiency have been met. The economy is operating at a point on its production possibility frontier. The conditions for productive efficiency have been met.

A household makes the following purchases of fruit. fruit bananas apples quantity purchased (kg) 5 10 price per kg (\$) 1.00 0.50

The household derives twice as much utility from the fifth kg of bananas as from the tenth kg of apples. What should the household do to maximise utility from the purchase of these fruits? purchase of bananas A B C D increase decrease increase no change purchase of apples decrease increase increase no change

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3 3 The diagrams show a change in a consumer's budget line from an initial position of LL1 to LL2. Which diagram shows the effect of a fall in the price of X, money income remaining unchanged?
A B

## L all other goods O L1 L 2 units of X

A given production process uses both labour and capital. What will be the effect on the quantities of labour and capital employed if the government introduces a subsidy on capital investment? quantity of labour A B C D decrease uncertain decrease uncertain quantity of capital uncertain uncertain increase increase

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4 5 Which of the following will necessarily cause the supply curve of labour in a particular industry to shift to the right? A B C D 6 a fall in wages paid in similar occupations a greater use of machinery an increase in demand for the product a strengthening of trade union influence in the industry

The introduction of equal pay legislation in a country increases the wages of female workers. What will be the most likely effect of this increase? A B C D a reduction of the rate of female unemployment a reduction in the wages of male workers an expansion in the supply of female workers substitution of female workers for male workers

Which of the following is an internal economy of scale? A B C D improved communications as a result of the growth of local industry lower risk associated with supplying a wider range of customers the training of skilled labour at a technical college financed by all local firms trade information from a new trade journal

An economist calculates that a firm has incurred the following costs over the course of a year. \$(000) wages and salaries opportunity cost of owner's time materials rent marketing fees interest on bank loans interest forgone on finance provided by owner depreciation 150 40 80 30 20 25 15 20

What would an accountant calculate to be the total cost incurred by the firm? A \$275 000 B \$305 000 C \$325 000 D \$340 000

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5 9 A monopolist faces a downward sloping, straight-line demand curve. Which diagram shows his total revenue curve (TR)?

## TR total revenue TR total revenue

output

output

10 The diagram shows the cost and revenue curves for the production of a textbook. The contract with the publisher entitles the author to a fixed percentage of the value of sales. Which price would maximise the author's income from the book?

## A cost / B revenue C D O AC AR number of copies MC

MR

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## 6 11 The diagram shows a firm's cost and revenue curves.

MC

cost / P revenue S

Q R

AC

MR output

AR

What does the shaded area SPQR measure? A B C D abnormal profit consumer surplus total revenue transfer earnings

12 The diagram shows the cost and revenue curves of an oligopolist. In the initial situation, AC1 is its average cost curve, MC1 is its marginal cost curve and the firm is in equilibrium at output OQ and price OP. The cost of labour rises, so that AC2 and MC2 become the relevant cost curves.
MC2 P MC1 AC2 AC1

cost / revenue

AR MR O Q output

What should the firm do to maximise profit in this new situation? A B C D leave both price and output unchanged leave price unchanged and increase output leave price unchanged and reduce output raise price and leave output unchanged

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7 13 A firm produces both X and Y in fixed proportions. A permanent increase in demand for X occurs. The entrepreneur will increase output of X as long as A B C D the addition to revenue in the X and Y markets combined is greater than the addition to costs. the cost of producing more X is offset by a decrease in the cost of producing Y. the marginal cost of X is less than the marginal cost of Y. there is a fall in average costs of production.

14 A perfectly competitive industry becomes a profit maximising monopoly. The marginal cost curve of the monopolist is identical to the supply curve of the perfectly competitive industry. How will output and price be affected? output A B C D increases increases decreases decreases price increases decreases decreases increases

15 In the diagram the imposition of a tax on a commodity causes its supply curve to shift from S1 to S2.

S2 S1

P2 price P1

J K

N M

Q2 Q1 quantity

Which area measures the resulting deadweight loss? A P1P2JK B JKQ1Q2 C JKM D JKN

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8 16 In what circumstances will the entry of additional fishing boats into the fishing industry necessarily result in a net loss in welfare? A B C D The entry of the new boats reduces fish caught by other boats. The entry of the new boats reduces the profits of other boat owners. The value of the increase in the fish caught is less than the loss in value of output elsewhere in the economy. The entry of the new boats reduces the overall fish stock.

17 The government of a centrally planned economy decides to replace central planning with a market system. What does the experience of the former Communist states suggest is likely to happen in the early stages of the transition process to national output and to the inflation rate? national output A B C D decrease decrease increase increase inflation rate decrease increase increase decrease

18 The graphs indicate economic performance in a country between 1996 and 1999.
yearly % increase in industrial production 16 12 % 8 4 0 yearly % increase in consumer prices yearly % increase in GDP

12 8 4 0

96

97

98

99

96

97

98

99

6 4 % 2 0

96

97

98

99

Which conclusion may be drawn from the graphs? A B C D Between 1996 and 1997 industrial production and GDP fell but prices rose. Between 1997 and 1998 the rates of growth of industrial production, GDP and prices all increased. GDP and industrial production were at their lowest in 1997. At no time did industrial production, GDP or prices fall.

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9 19 In the diagram, OP is the equilibrium level of income and OQ the full employment level of income in a closed economy.

V U T R C+I+G C+I C

expenditure

45 O

P income

## What is the deflationary gap? A RV B TV C UV D PQ

20 Which statement is consistent with a Keynesian view of the workings of the macroeconomy? A B C D Recessions can result from fluctuations in private investment expenditure. Interest rates move to ensure continuous equality between savings and investment plans. Money wages in the economy in the short run are perfectly flexible. Changes in aggregate demand cannot occur without equivalent changes in the money supply.

21 According to the accelerator theory A B C D net investment is positive if output is rising at an increasing rate. net investment may rise even if output rises at a declining rate. increases in investment occur when interest rates are falling. increases in investment will cause a more than proportionate increase in national income.

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10 22 In the diagram, C1 shows the initial relationship between consumption and national income.

C1

C2

consumption

national income

What could cause the consumption function to shift to C2? A B C D an increase in exports an increase in investment a decrease in the rate of unemployment benefits a decrease in the standard rate of income tax

23 In the diagram an economy is initially in equilibrium at point X. The government increases spending on education. This coincides with an increase in wage rate inflation. Which point shows the most likely new equilibrium of the economy?

C D price level X B

AS2

AS AS1

24 Assuming a constant income velocity of circulation of money, if real output grows by 3 %, and the rate of growth of the money supply is 10 %, what will be the approximate change in the price level? A 7% B +7% C + 10 % D + 13 %

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11 25 Which of the following is most likely to be found in a developing economy? A B C D a low capital : labour ratio a high capital : labour ratio a high capital : output ratio a low labour : output ratio

26 A government uses monetary policy in an attempt to keep actual unemployment continuously below the natural rate of unemployment. What is likely to be a consequence of this policy? A B C D a high but constant rate of inflation a low but constant rate of inflation a decelerating rate of inflation an accelerating rate of inflation

27 Workers in poor countries are often less productive than workers using the same technology in rich countries. What would be most likely to remedy this situation? A B C D an increase in the saving ratio in poor countries increased investment in education in poor countries increased freedom of migration from poor countries to rich countries the removal of trade barriers imposed by rich countries on imports from poor countries

28 Real output in an economy grows by 1.5 % but at the same time the level of unemployment increases. What can be deduced from this information? A B C D Labour productivity has decreased. Actual output has grown more slowly than potential output. Population of working age has fallen. There has been an increase in the rate of inflation.

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12 29 If the unemployment that exists in a country is judged to be mainly cyclical, which is the most effective policy the government could implement? A B C D cut welfare spending on benefits improve information about job vacancies reduce tax rates raise interest rates

30 Which policy is likely to reduce a balance of payments deficit without causing inflation? A B C D a reduction in government spending a devaluation of the exchange rate an increase in import tariffs an increase in indirect taxes

## Copyright Acknowledgements: Question 18 The Economist.

Cambridge International Examinations has made every effort to trace copyright holders, but if we have inadvertently overlooked any we will be pleased to make the necessary arrangements at the first opportunity.

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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ECONOMICS Paper 3 Multiple Choice (Extension) May/June 2004 1 hour
Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

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## This document consists of 10 printed pages and 2 blank pages.

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2 1 What does not pose a threat to the achievement of allocative efficiency? A B C D 2 imperfect information on the part of consumers income inequalities the existence of externalities the presence of monopolistic elements

What is not held constant when calculating the income effect of a change in the price of a good? A B C D the consumers money income the consumers preferences the consumers real income the prices of other goods

A firm is operating in an imperfectly competitive market. Why does the marginal revenue product of a factor of production employed by the firm fall as more of the factor is employed? A B C D Its marginal physical product alone falls. Its marginal revenue alone falls. Its marginal physical product and its marginal revenue both fall. The supply price of the factor rises.

To increase its labour force from 50 to 51 workers, a firm has to increase the daily wage rate from \$600 to \$610. What is the marginal cost of labour per day? A \$10 B \$510 C \$610 D \$1110

There is an increase in the supply of female labour. What will be the likely effect on male and female wages? male wages A B C D decrease decrease increase increase female wages decrease increase decrease increase

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3 6 In the diagram, MRPL is a firms marginal revenue product of labour curve, S is its supply of labour curve, and MCL its marginal cost of labour curve.

MCL W4 W3 W2 W1 MRPL O S

N1 N2 labour

Assuming profit maximisation, how many workers will the firm employ and what wage will it pay? number employed A B C D 7 N1 N1 N2 N2 wage W3 W1 W2 W4

An industry consists of a large number of firms, all of which produce an identical product. What could explain why the demand curve facing each individual firm is downward-sloping? A B C D diminishing marginal utility freedom of exit and entry imperfect knowledge on the part of consumers a limit on the amount consumers have available to spend

A firm operates in a contestable market. Which statement correctly describes the firms conduct? A B C D It will set a price to maximise profits in the short run. It will set a price to maximise its revenue. It will set a price to deter the entry of new firms. It will produce at minimum average cost.
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## 4 9 The diagram shows the cost and revenue curves of a monopolist.

MC AC

cost, revenue

P2 P1 AR O Q2 output Q1 MR

The monopolist is currently producing output OQ1 and charging a price OP1. How might the monopolist make a profit? A B C D by adopting marginal cost pricing by maximising sales revenue by practising price discrimination by reducing output to OQ2 and charging price OP2

## 10 The diagram shows a firms total revenue curve.

TR revenue

output

At the curves highest point A B C D marginal revenue is equal to marginal cost. average revenue is equal to average cost. marginal revenue is equal to average revenue. marginal revenue is zero.

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5 11 The diagram shows an industry producing under conditions of constant average costs.

X cost, revenue T

Z W

LRAC, LRMC

AR O S MR output
Under perfect competition, the industry produces output OV. Which area measures the increase in the industrys profits if it were to become a monopoly? A XYSO B XYWT C XYZT D YZW

12 A perfectly competitive firm is producing 2000 boxes of biscuits per week, which it sells for \$2.50 per box. The table shows the firms costs. total fixed cost total variable cost marginal cost \$2000 \$4000 \$2.50

In the short run, what should the firm do to maximise its profits or minimise its losses? A B C D cease production altogether increase its output lower its price maintain its output at the present level

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6 13 A firm employs three factors of production. The table shows the marginal products of these factors and their respective costs at the current level of output. land marginal product (units) marginal cost per unit of factor (\$) 1 4 labour 2 6 capital 9 3

Which adjustment in factor use would be most likely to bring the firm nearer to the least-cost combination of inputs for its current output level? land A B C D less less more more labour no change no change less less capital more no change no change more

14 The diagram shows the demand and cost curves of a monopolist who initially produces at his profit-maximising level of output.

MC cost, revenue

AC

D O output

If the monopolist were required by the government to adopt marginal cost pricing, what would be the effect on the price charged and the output produced? price A B C D increase increase decrease decrease output increase decrease increase decrease

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7 15 The diagram shows the market supply and demand curves for corn.
D P2 P1 price S

L output

What should a government do if it is to maintain a minimum price of OP2? A B C D buy quantity KR buy quantity LR sell quantity KL sell quantity OL

16 A country's national income per head falls, but there is a rise in consumption. What could explain this? A B C D a decrease in the net property income from abroad a fall in population an increase in the trade deficit a rise in negative externalities

17 In a closed economy with no government sector the multiplier shows the impact of a change in A B C D consumption on investment. investment on national income. national income on consumption. national income on investment.

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## 8 18 The diagram shows an economy's consumption function.

C consumption

income

What might explain why the consumption function shifts over time? A B C D Autonomous consumption is greater than zero. Income is only one of several variables that affect consumption. The average propensity to consume falls as income increases. The marginal propensity to consume falls as income increases.

19 In an economy, the marginal propensity to consume of the unemployed is higher than that of taxpayers. The government increases both expenditure on unemployment benefits and taxation by \$10 million. What will be the impact on aggregate demand? A B C D It will be unchanged. It will increase by less than \$10 million. It will increase by \$10 million. It will decrease by \$10 million.

20 A closed economy is initially in equilibrium with a national income of \$100 million, and a capital stock of \$25 million. Aggregate demand increases by \$10 million. According to the accelerator principle, by how much will net investment increase? A \$10 m B \$5 m C \$2.5 m D \$2 m

21 What will cause interest rates to rise? A B C D an unexpected increase in the prices of bonds an increase in the nominal money supply an increase in the volume of output a reduction in the price level
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9 22 According to monetarist theory, what will be the short-run effect of an unexpected increase in the money supply? A B C D an appreciation of the foreign exchange rate an increase in employment an increase in real wages an increase in the rate of interest

23 What is likely to cause a decrease in aggregate supply? A B C D a decrease in consumption expenditure an increase in labour productivity a decrease in rates of unemployment benefit an increase in wage costs per unit of output

24 A closed economy has a banking system consisting of a single bank. The bank operates with a cash ratio of 10 %. Customers deposit \$10 000 in cash. Assuming no subsequent change in notes and coins in circulation what is the maximum amount of loans that the bank can create? A \$1000 B \$9000 C \$90 000 D \$100 000

25 Between 2000 and 2002 national output in the United States increased by 2 %. Over the same period the unemployment rate increased from 4 % to 6 %. What would explain this? A B C D There was a decrease in labour productivity. There was a decrease in the size of the labour force. There was a fall in the rate of inflation. Potential growth in national output was above actual growth.

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10 26 The natural rate of unemployment in an economy is 5 %. What will happen if a government persists in trying to achieve a target rate of unemployment of 3 % by expansionary monetary policy? A B C D an accelerating rate of inflation a diminishing rate of inflation a high but constant rate of inflation a negative rate of inflation

27 Which policy is most likely to result in a decrease in the natural rate of unemployment? A B C D a reduction in interest rates an increase in government expenditure on goods and services an increase in trade union membership a decrease in the level of government payments to the unemployed

28 The monetary authorities increase interest rates in order to control inflation. What is likely to increase as a result of this? A B C D firms' sales revenue investment expenditure net capital outflows the exchange rate

29 What is most likely to be increased by a policy of increased direct taxes and lower government spending? A B C D the balance of payments deficit the budget deficit the rate of inflation the level of unemployment

30 What would represent a monetarist anti-inflationary policy? A B C D an increase in indirect taxation direct foreign exchange rate intervention the introduction of maximum prices the sale of securities on the open market

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University of Cambridge International Examinations is part of the University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ECONOMICS Paper 3 Multiple Choice (Extension) May/June 2005 1 hour
Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/03

## This document consists of 12 printed pages.

IB05 06_9708_03/RP UCLES 2005

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2 1 Which condition defines productive efficiency? A B C D 2 All factors of production are fully employed. All firms are producing at their profit-maximising levels of output. The output of all goods is produced at minimum cost. There are no further opportunities for substituting capital for labour.

The relative prices of goods reflect their marginal utilities rather than their total utilities. What is explained by this statement? A B C D the law of diminishing returns the limitations of marginal utility theory the paradox of value the role of prices as a rationing mechanism

## In the diagram a consumer's budget line shifts from GH to JK.

J G good Y

good X

Regardless of any other changes that might occur, what must be correct? A B C D There has been an increase in the consumer's money income. There has been an increase in the consumer's real income. There has been an equal proportionate increase in the price of X and Y. There has been an equal proportionate decrease in the price of X and Y.

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3 4 According to the law of diminishing returns, what happens as more of a variable factor is combined with a fixed factor? A B C D An increase in the price of the variable factor will eventually result in an increase in production costs. A reduction in the quality of the variable factor will eventually result in an increase in production costs. Fewer units of the variable factor will be needed to produce equal increases in output. The proportions in which the factors are combined will eventually result in progressively smaller increases in output.

When would a trade union be most likely to secure a wage rise for its members? A B C D when labour costs are a small proportion of total costs when the demand for the product is price-elastic when there are a large number of small producers when the supply of labour is elastic

## In the diagram S1 is an individual worker's initial supply of labour curve.

S2 S1 wage rate

hours of work

What could cause the curve to shift to S2? A B C D an increase in the hourly wage rate an increased preference for leisure an increase in the opportunity cost of leisure an increase in work satisfaction

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4 7 Wages in industry X are significantly higher than in industry Y. What could explain this difference? A B C D 8 Workers in industry Y are highly mobile. Trade union organisation in industry Y is relatively strong. Industries X and Y compete with each other for workers. There are non-pecuniary advantages to working in industry Y.

What is generally thought to be the main reason why firms might experience decreasing returns to scale when they grow beyond a certain size? A B C D financial diseconomies managerial diseconomies marketing diseconomies technical diseconomies

## In the diagram, XY is a firms total cost curve. Y

total costs

output

What happens to the firms costs as output is increased? average fixed costs A B C D decrease decrease constant constant marginal costs constant increase constant increase

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5 10 What is the shape of the long run average cost curve for a firm with economies of scale? A B C D It is horizontal. It is U shaped. It slopes downwards. It slopes upwards.

11 The diagram shows a firms demand curve and its marginal revenue curve.

price P

D O MR quantity
What is the price elasticity of demand at price OP? A B C D zero 0.5 1.0 infinity

12 What determines the contestability of a market? A B C D the degree of differentiation of the product the costs of entry and exit the price elasticity of demand for the product the number of firms in the industry

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6 13 The government imposes a specific tax equal to \$0.20 per unit on the output of a monopoly producer. What will be the effect on the price charged by the monopoly and on the quantity it produces? price A B C D increases by \$0.20 increases by less than \$0.20 increases by \$0.20 increases by less than \$0.20 quantity decreases decreases unchanged unchanged

14 In an economy no one can be made better off without making others worse off. What can be deduced from this? A B C D All markets are perfectly competitive. There are no externalities. The economy is operating on its production possibility curve. The distribution of income reflects what each individual deserves.

15 In the diagram D is a country's demand curve for an imported good. The world price of the good is OPW.

Pc price Pw z O quantity D x y

Which area measures the deadweight loss to the country of imposing an import tariff equal to PW PC on the good? A x B y C x+y D y+z

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7 16 The information in the table is taken from a countrys national income accounts. \$ million national income consumer spending investment spending government spending taxation exports What is the value of imports? A \$125 million B \$75 million C \$50 million D \$25 million 500 200 75 150 140 125

17 According to monetarist theory, which policy objectives are in conflict in the short run, but not in the long run? A B C D economic growth and full employment economic growth and price stability full employment and price stability price stability and equilibrium in the balance of payments

18 In a closed economy with no government, consumption is three-quarters of income at all levels of income. The present equilibrium level of income is \$220 million. The full employment level of income is \$240 million. By how much would investment have to increase to reach full employment? A \$5 million B \$15 million C \$20 million D \$30 million

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8 19 The diagram shows a shift in the economy's saving function from S1 to S2. S2

S1 saving O Y2 Y1 income

What can be deduced from the diagram? A B C D The multiplier has increased. The marginal propensity to save has increased. Autonomous consumption has increased. Equilibrium national income has fallen from OY1 to OY2.

## 20 The diagram shows an economy's aggregate demand curve.

J price level

output

Which change will occur as the economy moves from point J to point K? A B C D an increase in the money supply a decrease in the money supply an increase in interest rates a decrease in interest rates

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## 9 21 The diagram shows the market for loanable funds.

D2 D1 rate of interest E1

S1 S2 E2

loanable funds

Which changes could cause the equilibrium to move from E1 to E2? A B C D an increase in the propensity to save and an increase in bank lending the discovery of oil reserves and an increase in the propensity to save advances in technology and a decrease in bank lending a decrease in the propensity to save and the introduction of new products

22 In a closed economy, if the income velocity of circulation of money remains constant, what will be the result of an increase in the money supply? A B C D a proportionate increase in the level of money income a proportionate increase in the level of output a proportionate increase in the rate of growth of money income a proportionate increase in the rate of growth of output

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10 23 The diagram shows the determination of the rate of interest in an economy where MS represents the money supply and LP represents liquidity preference.
MS LP1 LP2

rate of interest

r2 r1

quantity of money

The rate of interest rises as a result of a shift in the liquidity preference curve from LP1 to LP2. Which policy might be used to try to maintain the rate at r1? A B C D the purchase of bonds in the open market reductions in income tax rates increases in indirect taxes increased government expenditure

24 A developing economy experiences a rapid growth in labour productivity. What is likely to result from this? A B C D an increase in the country's balance of trade deficit an increase in the country's relative labour costs a depreciation of the country's currency an increase in real income per head

25 What will assist a country's potential growth in national output? A B C D a reduction in cyclical unemployment an increase in the rate of inflation an increase in the government's budget deficit increased participation in the labour force

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11 26 In an economy with flexible exchange rates an increase in government spending is financed by borrowing from the public. What is likely to be the effect on interest rates and on the level of net exports? effect on interest rates A B C D increase increase decrease decrease effect on net exports increase decrease decrease increase

27 Which of the following is an appropriate government policy for closing a deflationary gap? A B C D an increase in the rate of interest an open market sale of bonds an increase in government spending an increase in income tax

28 In an economy with unemployed resources the government increases its expenditure. This would be least likely to increase national income by the full multiplier effect if the A B C D level of autonomous private investment is increased. marginal propensity to save is reduced. government allows money supply to expand. level of interest rates rises.

29 What is most likely to increase as a result of a rise in interest rates in a country? A B C D the inflow of short-term foreign capital the level of company profits the level of private investment the level of share prices

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12 30 A country introduces import quotas. The suppliers of imported goods charge market-clearing prices. Assuming the demand for imports is price-elastic, what will be the impact on the countrys balance of trade and on its terms of trade? balance of trade A B C D improves improves worsens worsens terms of trade improve worsen worsen improve

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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ECONOMICS Paper 3 Multiple Choice (Supplement) May/June 2006 1 hour
Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

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## 2 1 The diagram shows the production possibility curve for an economy.

L good Y

good X

What might make it possible for consumers in this economy to consume the combination of goods X and Y indicated by the point L? A B C D 2 a reduction in unemployment the attainment of productive efficiency the elimination of a monopoly in the production of good X trade with other economies

## In the diagram a consumer's budget line shifts from JK to GH.

G good Y J

K good X

What can definitely be deduced from the diagram? A B C D There has been an increase in the consumer's money income. There has been a reduction in the price of both X and Y. There has been no change in the price of X or Y. There has been no change in the price of X relative to the price of Y.

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3 3 The addition to revenue which results from employing one additional unit of a factor of production, the quantities of all other factors of production remaining constant. What does this define? A B C D 4 marginal factor cost marginal revenue marginal revenue product the law of diminishing returns

In which situation is it likely that the demand for labour would be inelastic? A B C D Labour and capital are close substitutes. Labour costs are only a small proportion of total costs. Demand for the final product that the labour produces is elastic. A large quantity of unemployed labour is available in the economy.

The table shows the main characteristics of employment in two occupations. occupation A average annual wage number of weeks annual leave average length of working week job security length of training course to obtain job qualification What can be deduced from the table? A B C D Those employed in occupation B attach greater importance to job security. Those employed in occupation A attach less importance to leisure activities. There will be more competition for places on training courses to enter occupation A than occupation B. Occupation B has greater non-pecuniary advantages than occupation A. \$100 000 5 weeks 48 hours low 1 year occupation B \$60 000 10 weeks 44 hours high 2 years

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4 6 As firm X grows in size, it specialises in a narrower range of products. Which economies of scale will the firm be less able to benefit from? A B C D 7 financial marketing risk-bearing technical

What is included in an economists definition of costs but not an accountants? A B C D advertising expenditure depreciation insurance normal profit

Samsung Electronics, which began as a semiconductor firm making simple memory chips, has used continuous research and investment to emerge as an industry leader. In addition, it has applied its strength in semiconductors to other markets including televisions and mobile phones. What has taken place? A B C D external growth and diversification external growth and sales revenue maximisation internal growth and diversification internal growth and sales revenue maximisation

A firm in perfect competition currently sells 100 units at \$5 each. What will be the revenue obtained by the firm if it increases its price to \$6? A zero B \$100 C \$500 D \$600

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## 5 10 The diagram shows the cost and revenue curves of a monopoly.

MC AC

MR O X quantity

AR

What is the firms objective if it produces output OX? A B C D to achieve normal profit to maximise profit to maximise total revenue to minimise average cost

11 A firm charges the maximum price it is able to charge without attracting competition from new entrants. In which type of market does this firm operate? A B C D a contestable market a monopolistically competitive market a monopsonistic market a perfectly competitive market

12 An example of forward vertical integration for a computer manufacturer would be a merger with A B C D another computer manufacturer. a computer retailer. a silicon chip manufacturer. a software developer.

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6 13 What will increase the likelihood that the firms in an industry will collude to maximise their joint profits? A B C D The industry has many differentiated products. The industry is characterised by rapid technological change. The industry consists of a large number of producers. There are significant barriers to prevent new firms entering the industry.

14 The maximum price that a privatised natural monopoly is allowed to charge its customers is determined by the following formula: the price charged in the previous year plus the annual % change in the consumer price index minus 2 %. Assuming the firm charges the maximum price allowed, how will an increase in productive efficiency affect customers and the company's shareholders? customers A B C D gain gain no effect no effect shareholders gain no effect gain no effect

15 The introduction of a minimum hourly wage for all workers over 21 years of age is expected to increase the average wages of these workers. What will be the likely effect on workers under 21? unemployment for under 21s A B C D falls rises falls rises average wages for under 21s fall fall rise rise

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7 16 The table gives data for an economy. 2000 Gross Domestic Product (GDP) at current prices (\$ billion) GDP deflator 200 100 2001 220 109 2002 240 118 2003 300 149 2004 320 154

In which year did real GDP decline compared with the previous year? A 2001 B 2002 C 2003 D 2004

17 Which of the following are injections into the circular flow of income? trade surplus A B C D     government budget deficit     private sector surplus (saving investment)    

18 What is a central assertion of Monetarist economics? A B C D Fiscal policy should be used for the continuous management of the economy. Major recessions can occur despite an unchanged money supply. The money supply dominates the determination of aggregate monetary expenditure. The velocity of circulation of money is unstable over time.

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## 8 19 The diagram shows an aggregate demand curve.

price level

What helps to explain why the curve is downward sloping? A B C D When exports increase there will be an increase in national income. When investment increases there will be an increase in consumption. When the price level increases there will be an increase in interest rates. When government expenditure increases there will be an increase in national output.

20 A closed economy with no government has an equilibrium level of national income of \$10 000 million. Consumption expenditure is \$8000 million. Assuming that the MPC = APC what will be the change in national income following an increase in investment of \$100 million? A \$100 m B \$120 m C \$400 m D \$500 m

21 What does the accelerator principle state? A B C D Consumption is a function of the rate of change of income. Income is a function of the rate of change of investment. Investment is a function of the rate of change of income. Investment is a function of the rate of interest.

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9 22 The diagram shows the demand curves and supply curves of loanable funds.

D2 D1 rate of interest E1

S1 S2 E2

loanable funds

Which changes could cause the equilibrium in the market for loanable funds to move from E1 to E2? A B C D an increase in the money supply combined with a decrease in the propensity to save a decrease in bank lending combined with an increase in the productivity of capital an increase in bank lending combined with an increase in business confidence a decrease in the money supply combined with an increase in the propensity to save

23 What is most likely to cause the public to hold less cash in relation to the level of money income? A B C D a fall in interest rates a fall in the level of output a greater availability of cash substitutes a rise in the general price level

24 Which change would best indicate that a country has experienced economic development? A B C D an improvement in the average citizens quality of life an increase in the countrys real GDP an improvement in the countrys trade balance an appreciation in the countrys currency

25 What is likely to increase a countrys actual output in the short run but may reduce its long-run rate of growth of potential output? A B C D an increase in the size of the labour force increased government spending on education an increase in the size of the governments budget deficit increased female participation in the labour force
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10 26 What is most likely to lead in the long run to an increase in world real GDP per head? A B C D faster population growth trade liberalisation a lower propensity to save faster growth of the money supply

27 Which type of unemployment is associated with a deficiency in aggregate demand? A B C D cyclical frictional structural voluntary

28 Which combination indicates that a country has a freely floating exchange rate? nominal exchange rate A B C D depreciates by 20 % depreciates by 20 % unchanged unchanged foreign currency reserves decrease by \$1 billion unchanged decrease by \$1 billion unchanged

29 A government decides to pursue a more deflationary fiscal policy and a more reflationary monetary policy. Which combination of changes in policy instruments is consistent with this? government expenditure A B C D decrease decrease increase increase interest rate decrease decrease increase increase taxation increase decrease decrease increase

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11 30 What is likely to be the effect of an oil price increase on the global economy? A B C D a strengthening of demand inflation a weakening of cost inflation a decrease in the rate of growth a decrease in unemployment

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12 BLANK PAGE

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB recommended)

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2 1 In an economy, no one can be made better off without making someone else worse off. What does not necessarily follow from this? A B C D 2 The conditions for allocative efficiency have been met. The conditions for productive efficiency have been met. The distribution of income is socially acceptable. The economy is operating at a point on its production possibility frontier.

A consumer seeks to maximise their utility. Up to what point should they continue to consume each good? A B C D until the marginal utility from each good is the same until the marginal utility per dollar from each good is the same until the marginal utility from each good reaches a maximum until the marginal utility from each good is zero

## In the diagram a consumer's budget line shifts from JK to JH.

J good Y

K good X

What can definitely be concluded from the diagram? A B C D There has been no change in the price of good Y. There has been a reduction in the price of good X. There has been an increase in the consumer's money income. There has been an increase in the consumer's real income.

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3 4 The diagram shows the total product curve for a single variable factor, assuming all other factor inputs are held constant.

total product

TP

## O quantity of variable factor

In which order do the total product (TP), average product (AP) and marginal product (MP) begin to decrease as the input of the variable factor is increased? first A B C D 5 AP AP MP MP second MP TP AP TP third TP MP TP AP

For a firm in imperfect competition, the marginal revenue product of labour at any given level of employment is equal to A B C D marginal revenue divided by the number employed. marginal revenue divided by the wage rate. the marginal physical product of labour multiplied by marginal revenue. the marginal physical product of labour multiplied by the wage rate.

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## 4 6 The diagram shows an individuals supply of labour curve.

S 80

w
60 hourly wage (\$) 40

y
20 0 40 number of hours
He is offered a job which would require him to work a standard 40-hour week. Which area measures the lowest amount he would have to be paid per week to get him to accept this job offer? A 7 w+z B x+y C x+y-z D w+x+z+y

In the diagram, S is a monopsonists supply of labour curve, MCL its marginal cost of labour curve and MRPL its marginal revenue product of labour curve.

MCL S

wage rate

MRPL

number employed

The firm's workers join a trade union which negotiates a wage rate, OW, with the firm's owners. What will be the effect on the firm's total wage bill and on the number of workers employed? total wage bill A B C D
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## increase increase decrease decrease

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5 8 Which of the following is a financial economy of scale? A B C D 9 lower risk due to diversification lower costs in raising capital lower costs of marketing lower variable costs of production

The short-run total costs of a firm are given by the formula SRTC = \$(10 000 + 5X2) where X is the level of output. What are the firms average fixed costs? A B C D \$10 000
\$(10 000 + 5X 2 ) X

\$10 000 X
\$(5 X 2 10 000) X

10 The table shows data for an owner-managed firm for a particular year. \$ total revenue raw material costs wages and salaries salary that the owner could have earned elsewhere interest paid on bank loan interest forgone on owner's capital What is the firms profit according to an economist? A \$10 000 B \$40 000 C \$80 000 D \$100 000 250 000 30 000 110 000 40 000 30 000 50 000

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6 11 How might a firm benefit from external economies? A B C D by increasing its expenditure on advertising by increasing its scale of production by locating in an area in which the industry is already established by merging with another domestic firm engaged in the same industry

12 A firm earns supernormal profit when its profit is A B C D above that earned by competing firms. above that needed to cover its fixed costs. above that needed to keep the firm in production in the short run. above that required to keep its resources in their present use in the long run.

## 13 The diagram shows a firms cost and revenue curves.

cost / revenue

MC AC

MR Q output

AR

What could explain why the firm produces output OQ? A B C D Its aim is to maximise profits. Its aim is to maximise sales revenue. It is operating in a contestable market. It is operating in a perfectly competitive market.

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7 14 An industry consists of a dominant producer and a number of smaller producers. The dominant producer joins with some of the other producers to form a cartel with a view to maximising their joint profits. Who will derive the greatest short-run benefit from this arrangement? A B C D the industry's suppliers the dominant firm smaller producers within the cartel the producers who do not join the cartel

15 A perfectly competitive industry becomes a monopoly. What would prevent a deadweight welfare loss resulting? A B C D The government converts it to a profit-maximising nationalised industry. The government places an indirect tax on the monopolists product. The monopolist uses marginal cost pricing. The monopolist charges the same price to all consumers.

16 Which combination of fiscal policy measures would be most effective in reducing income inequality? top rates of income tax A B C D increase reduce increase reduce indirect taxes increase increase reduce reduce value of state benefits increase reduce increase reduce

17 In 1995 the Canadian government increased the specific tax on each packet of cigarettes by \$3.50. What is the most likely explanation for the resulting fall in tax revenue from cigarette sales? A B C D Consumers switched to cheaper brands. The demand for cigarettes is price-inelastic. There was an increase in illegal imports of cigarettes from the USA. The whole of the increase in tax was borne by the cigarette manufacturers.

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8 18 The graphs indicate economic performance in a country between 2001 and 2004.

## annual % increase in GDP

01

02

03

04

Which conclusion may be drawn from the graphs? A B C D Between 2001 and 2002 industrial production and GDP fell but prices rose. Between 2002 and 2003 the rates of growth of industrial production, GDP and prices all increased. GDP and industrial production were at their lowest in 2002. At no time did industrial production, GDP or prices fall.

19 Why might GNP per capita of different countries in a given year, measured in US dollars, be a poor indicator of their comparative standards of living? A B C D Their exchange rates are different from purchasing power parities. Their population growth rates are different. Their rates of inflation are different. Their ratios of imports to national income are different.

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9 20 The diagram shows a governments revenue and expenditure for three years. 2002 revenue expenditure revenue expenditure revenue expenditure 0 1 2 \$m What can be concluded from the diagram? A B C D A budget deficit was replaced by a budget surplus. A government net borrowing requirement emerged. The economy moved from a recession into a boom period. The yield from taxation continuously increased. 3 4

2003

2004

21 Which assertion could be described as monetarist rather than Keynesian? A B C D Central banks must directly control interest rates to influence the money supply. The interest elasticity of investment expenditure is close to zero. The money supply is the main determinant of aggregate monetary expenditure. The velocity of circulation of money is unstable over time.

22 The diagram shows the equilibrium levels of national income in a closed economy with no government, at two levels of investment, I1 and I2.
S X T O U Y Z I2 I1

saving / investment

national income

## Which ratio gives the value of the multiplier? A

TX UZ

UZ TX

UZ XY

XY UZ

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10 23 An economy is currently in equilibrium at point X. Government expenditure is increased on retraining programmes for those out of work. This raises the productivity of the trainees. Which point shows the new equilibrium in the economy?

A B price level X D

AS2

AS1 AS3

output

24 What is likely to happen to interest rates and aggregate demand when a central bank sells government securities? interest rates A B C D fall fall rise rise aggregate demand fall rise fall rise

25 What will be most likely to decrease a countrys national output in the short run but to increase its potential for long-run growth? A B C D a decrease in the level of import tariffs a decrease in the rate of immigration an increase in female participation in the labour force an increase in the money supply

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11 26 In the diagram SRPC is an economy's short-run Phillips curve and LRPC is its long-run Phillips curve.
SRPC LRPC

rate of inflation

V W

unemployment rate

The economy is initially at point W. An increase in monetary growth moves the economy to point V. Why is it that the economy cannot stay at point V? rate of inflation at point V A B C D above the expected rate above the expected rate below the expected rate below the expected rate unemployment rate at point V above the natural rate below the natural rate above the natural rate below the natural rate

27 What is most likely to lead to an increase in the natural rate of unemployment? A B C D more rapid technological change a widening in inter-regional wage differentials a narrowing in inter-regional house price differentials a decrease in the number of workers who are members of trade unions

28 What is likely to be the effect on developing economies of an increase in inward foreign direct investment? A B C D an increase in the burden of debt a slowdown of rural-urban migration an increase in visible trade deficits an acceleration of technology transfers

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12 29 Legal reforms to reduce the power of trade unions have in many countries reduced inflationary pressures. Of which policy is this an example? A B C D monetary policy demand side policy fiscal policy supply side policy

30 Which combination of policy measures is most likely to reduce unemployment? A B C D lowering both the exchange rate and domestic interest rates lowering the exchange rate and increasing direct taxation raising both the exchange rate and domestic interest rates raising both the exchange rate and direct taxation

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

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2 1 What will happen if a firm is subsidised by an amount equal to the external benefits that it confers on the rest of society? A B C D 2 Resource allocation will be improved. The firm will produce less. There will be a misallocation of resources. There will be no effect upon production.

The table shows the total utility that an individual derives from consuming different quantities of a good. quantity of good (units) 1 2 3 4 5 6 total utility (units) 24 45 63 78 90 99

The individuals marginal utility of money is \$1 = 2 units of utility. What is the maximum quantity of the good that the individual will buy when its price is \$6? A 2 units B 3 units C 4 units D 5 units

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## 3 3 In the diagram a consumers initial budget line is JK.

J G

quantity of good Y

K quantity of good X

Assuming no change in the price of Y, what could explain a shift in the consumers budget line to GH? price of good X A B C D 4 decrease decrease increase increase consumers money income decrease increase decrease increase

The table shows the current position of a firm in a perfectly competitive industry. factor X marginal physical product factor price 2 \$5.00 factor Y 8 \$10.00

If the firm sells its product for \$1 and aims to maximise profits, what should it employ? A B C D more of both X and Y more of X and less of Y more of Y and less of X less of both X and Y

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4 5 The government imposes a maximum earnings limit on recording artists. What must result in the short run if the measure is effective? A B C D 6 a decrease in the economic rent earned by recording artists a decrease in the transfer earnings of recording artists a decrease in the supply of recording artists a decrease in the profits of record companies

What is the name for the relationship between a firms output and the quantities of factor inputs that it employs? A B C D a long-run production function a long-run average cost function productive efficiency returns to scale

## Which diagram shows a firms total fixed cost curve?

A B C D

costs

costs

costs

costs

output

output

output

output

What explains why both large and small firms are often found within the same industry? A B C D There are significant barriers to the entry of new firms into the industry. Firms that assemble the final product buy component parts from other specialist firms. Production is subject to diseconomies of scale. All firms in the industry produce identical products.

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5 9 The table shows some of the assumptions of perfect competition and monopolistic competition. Which pairing is correct? perfect competition A B C D barriers to entry differentiated products freedom of entry and exit large number of firms monopolistic competition small number of firms large number of firms differentiated products barriers to entry

10 A perfectly competitive industry becomes a profit-maximising monopoly. The marginal cost curve of the monopolist is identical to the supply curve of the perfectly competitive industry. How will output and price be affected? output A B C D increases increases decreases decreases price increases decreases decreases increases

11 Why might a firm introduce a policy of price discrimination? A B C D to achieve allocative efficiency to achieve productive efficiency to avoid diseconomies of scale to turn consumer surplus into producer surplus

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6 12 In the diagram the imposition of a tax on a commodity causes its supply curve to shift from S1 to S2.

S2 S1

P2 price P1

J K

N M

Q2 Q1 quantity

Which area measures the resulting deadweight loss? A P1P2JK B JKQ1Q2 C JKM D JKN

13 A good gives rise to external costs and is produced under conditions of monopolistic competition. Which statement must be true? A B C D Output of the good is at the socially optimum level. Output of the good is below the socially optimum level. Private costs of production exceed social costs. Social costs of production exceed private costs.

14 The government of a country decides to increase the proportion of its tax revenue that it obtains from income tax and to reduce the proportion it obtains from indirect taxes. Total tax revenue is left unchanged. What is likely to be the impact on the distribution of income and on work incentives? distribution of income A B C D more equal more equal less equal less equal work incentives increase decrease increase decrease

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7 15 A government decides to privatise a state monopoly. What should the government do to try to ensure that this will result in an improvement in efficiency? A B C D allocate vouchers to all citizens entitling them to a share in the ownership of the monopoly encourage competition impose a maximum profit margin privatise the monopoly as a going concern

16 The graphs show how consumer prices and real GDP changed in a country between 1995 and 2005.

## consumer prices % increase on a year earlier 6 4 2 0

1995 96 97 98 99 00 01 02 03 04 05

## GDP % increase on a year earlier 6 4 2 0

1995 96 97 98 99 00 01 02 03 04 05

Which conclusion may be drawn from the graphs? A B C D Living standards remained roughly constant between 1995 and 2005. The country experienced continuous economic growth between 1995 and 2005. The level of GDP was lower in 2005 than in 2000. The price level fell between 2000 and 2003.

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8 17 During a year, a countrys national income in money terms increased by 8 %, prices increased by 4 % and total population increased by 2 %. What was the approximate change in real income per head? A B C D a decrease of 2 % nil an increase of 2 % an increase of 4 %

18 The table shows data on a countrys gross domestic product at market prices and on domestic spending. year 1 (\$m) GDP at market prices private consumption government consumption gross investment 630 480 160 20 year 2 (\$m) 650 470 160 30 year 3 (\$m) 680 480 150 40

In which of these years will the country be faced with a balance of trade deficit? year 1 A B C D no yes no yes year 2 no yes yes no year 3 yes no yes no

19 An economy is operating initially at its natural rate of unemployment. According to monetarist theory, what will be the effect on unemployment in the short run and in the long run of an unanticipated increase in the money supply? short run A B C D no change no change reduction reduction long run no change reduction no change reduction

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## 9 20 In a closed economy, the full employment level of income is \$200 million. C =

3 4

Y,

I = \$(50 5r) million, where C = consumption, Y = income, I = investment, r = the rate of interest. If planned government expenditure is \$30 million, what rate of interest would be required for there to be full employment? A B C D 2 % per annum 4 % per annum 6 % per annum 8 % per annum

21 In the diagram, C1 shows the initial relationship between consumption and national income.

C2

C1

consumption

national income

What could cause the consumption function to shift to C2? A B C D an increase in exports an increase in investment a decrease in the rate of unemployment benefits a decrease in the standard rate of income tax

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## 10 22 The diagram shows an aggregate demand curve (AD).

price level

What is measured on the horizontal (X) axis? A B C D money national output nominal national income real disposable income real GDP

23 In a banking system, all banks maintain 20 % of deposits as cash. One bank receives a new cash deposit of \$200. Subsequent net withdrawals of cash from the banking system are zero. What will be the resulting increase in bank loans and the total increase in bank deposits? increase in bank loans A B C D \$160 \$160 \$800 \$1000 total increase in deposits \$200 \$360 \$1000 \$1000

24 What is likely to result in an increase in GDP per worker in a developing economy? A B C D an increase in the employment rate an increase in the population of working age a shift from working in subsistence agriculture to working in manufacturing a shift from working in manufacturing to working in subsistence agriculture

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## 11 25 The diagram shows the market for loanable funds.

D2 D1 rate of interest E1

S1 S2 E2

loanable funds

Which changes could cause the equilibrium to move from E1 to E2? A B C D an increase in the propensity to save and an increase in bank lending the discovery of oil reserves and an increase in the propensity to save advances in technology and a decrease in bank lending a decrease in the propensity to save and the introduction of new products

26 The table shows the figures for consumption, capital formation and depreciation in four economies, all measured in US \$. Assuming that the state of technology remains unchanged, which economy is most likely to experience economic growth? consumption (\$ m) A B C D 100 500 1 000 20 000 capital formation (\$ m) 20 200 1 200 5 000 depreciation (\$ m) 10 200 1 400 6 000

27 The number of people employed in a country and the level of unemployment both increase. What could make this possible? A B C D net inward immigration a decrease in the level of unemployment benefits a decrease in the age at which state pensions are payable an increase in the number of students

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12 28 The diagram shows the relationship between the rate of inflation and the rate of unemployment.

J F inflation rate

K G O unemployment rate

What would cause the curve FG to shift to JK? A B C D a decrease in government expenditure a fall in the level of employment an increase in the rate of change of wages the expectation of an increase in inflation

29 Other things being equal, what is likely to result from an increase in interest rates in a country? A B C D a capital outflow from the country a depreciation of the countrys currency a decrease in consumption an increase in investment

30 Why might a reduction in domestic interest rates improve the current account of a countrys balance of payments? A B C D It will cause an appreciation in the exchange rate. It will reduce the amount of interest paid to foreign holders of the countrys financial assets. The resulting higher level of economic activity is likely to increase imports. There will be an outflow of capital from the country.

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/03
May/June 2009 1 hour

*0273803258*

## This document consists of 12 printed pages.

IB09 06_9708_03/4RP UCLES 2009

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2 1 In the diagram, the firm is operating at point X on its long-run average cost curve.
LRAC

X cost

output

Which statement about the firm is correct? A B C D 2 It is operating at its optimal level of output. It is operating below its cost-minimising level of output. It is productively inefficient. It could produce its current level of output at a lower cost.

The table shows the marginal utility derived by a consumer who devotes the whole of his weekly income of \$42 to two goods X and Y, whose unit prices are \$3 and \$6 respectively. unit 1 2 3 4 5 6 7 8 marginal utility of X (units) 12 11 10 9 8 7 6 5 marginal utility of Y (units) 34 30 26 22 18 14 10 6

In order to maximise his utility, which quantities of X and Y should the consumer purchase? X A B C D 2 4 6 8 Y 6 5 4 3

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## 3 3 In the diagram a consumers budget line shifts from JK to GH.

J G

quantity of good Y

K quantity of good X

Which statement must be correct? A B C D 4 There has been an increase in the consumers money income. There has been a decrease in the consumers real income. Good Y has become relatively more expensive. The price of good X has increased.

To increase its labour force from 100 to 101 workers, a firm has to increase its daily wage rate from \$400 to \$405. What is the marginal cost of labour per day? A \$5 B \$405 C \$905 D \$40 905

An economist calculates that a firm has incurred the following costs over the course of a year. \$(000) wages and salaries opportunity cost of owners time materials rent marketing fees interest on bank loans interest forgone on finance provided by owner 150 40 80 30 20 25 15

By how much does total cost as defined by an economist exceed the total cost as defined by an accountant? A \$15 000 B \$40 000 C \$55 000 D \$85 000 [Turn over

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4 6 A manufacturing firm has one plant of optimum size. The firm builds a second plant identical to its first plant. The firm then finds that its long-run average cost has risen. What could account for the change in its long-run average cost? A B C D 7 diminishing returns external diseconomies of scale managerial diseconomies of scale technical diseconomies of scale

A firm estimates that, all else remaining unchanged, an increase in its output will result in an equal proportionate increase in its revenue. What can be deduced from this about the price elasticity of demand for the firms product? A B C D It is 1. It is +1. It is perfectly inelastic. It is perfectly elastic.

The diagram shows the initial cost and revenue curves of a profit-maximising monopolist.

MC

costs, revenue P AR

MR O J K L M

output

What output will the firm produce if the government fixes the price at OP? A OJ B OK C OL D OM

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5 9 What is a feature of monopolistic competition, but not of perfect competition? A B C D a small number of buyers product differentiation the existence of abnormal profits the existence of barriers to entry

10 Which assumption is essential for a market to be contestable? A B C D The market is supplied by a large number of firms. Firms are free to enter and leave the market. Firms cannot earn abnormal profits in the short run. Firms produce differentiated goods.

11 The diagram shows the long-run average cost curve of a typical firm in an industry and the demand curve for the industrys product.
LRACfirm Dindustry

revenue, cost

Dindustry O output

Which market structure is most likely to occur in this industry? A B C D monopolistic competition monopoly oligopoly perfect competition

12 In which circumstance will a firm cease production in the short run? A B C D It makes a profit that is less than its total variable costs. It makes a profit that is less than its total fixed costs. Its average revenue is less than its average cost. Its average revenue is less than its average variable cost.

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6 13 The diagram shows the cost and revenue curves of a profit-maximising monopolist.

MC J revenue, cost K M

ATC

AR MR O Q output
What measures the monopoly profit per unit of output made by the firm? A JM B JK C JM OQ D JK OQ

14 In the diagram the introduction of a government subsidy causes an industrys supply curve to shift from S1 to S2.
S1 D N L K J S2

P1 price P2

Q1

Q2

quantity

Which area measures the resulting deadweight loss to society? A P1NKP2 B JKN C NLK D Q1Q2JN

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7 15 A countrys national income per head increases. What could explain why this is accompanied by a fall in households standard of living? A B C D an increase in personal taxes an increase in the trade deficit an increase in population a rise in the exchange rate

16 Which of the following correctly identifies net leakages from the circular flow of income? trade surplus (exports - imports) A B C D     government budget deficit (government spending - taxes)     private sector surplus (saving - investment)    

17 According to monetarist theory, which policy objectives are in conflict in the short run, but not in the long run? A B C D economic growth and full employment economic growth and price stability price stability and full employment price stability and equilibrium in the balance of payments

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## 8 18 A countrys initial consumption function is C1.

C1 consumption C2

## personal disposable income

What would be most likely to cause the consumption function to shift from C1 to C2? A B C D a decrease in personal disposable income a decrease in the expected future rates of income tax an increase in interest rates an increase in wealth

19 In a closed economy with no government C = 30 + 0.7Y, where C is consumption and Y is income. The equilibrium level of income is 300. What is the level of investment? A 60 B 100 C 210 D 270

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9 20 The diagram shows the saving and investment curves of a closed economy with no government.

K S J L 45 O YP output G H I

saving, investment

The potential level of output is OYP. Which distance measures the gap between actual and potential output? A LG B GH C JH D KJ

## 21 The diagram shows a countrys aggregate demand curve.

price level

What could explain why the curve slopes downwards? A B C D A fall in the price level increases the real value of money balances. A fall in the price level leads to an increase in interest rates. A fall in the price level leads to a rise in the real exchange rate. A fall in the price level leads to the expectation of a further decrease in the price level.

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10 22 According to Keynesian theory, in which circumstance would there always be an increase in the demand for money? real income A B C D increase constant increase constant price level decrease constant increase decrease interest rates increase increase decrease decrease

23 How is outward migration from a developing economy likely to affect its balance of payments? A B C D It may improve its balance of payments by increasing its export capacity. It may improve its balance of payments by increasing inflows of current transfers. It may worsen its balance of payments by causing a currency depreciation. It may worsen its balance of payments by increasing consumer expenditure on imported goods.

24 The table shows the figures for consumption, gross capital formation and depreciation in four economies, all measured in US \$. Assuming that the state of technology remains unchanged, which economy is most likely to experience economic growth? economy consumption (\$ m) 200 500 1 000 20 000 gross capital formation (\$ m) 40 200 1 200 6 000 depreciation (\$ m) 50 150 1 400 6 000

A B C D

25 Which change would best indicate that a country has experienced economic development? A B C D an improvement in the average citizens quality of life an increase in the countrys real GDP an improvement in the countrys trade balance an appreciation in the countrys currency

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11 26 Which combination of factors is most likely to result in more rapid economic growth? A B C D increases in employment and in the balance of payments deficit increases in the level of investment and in the size of the working population more equal distribution of wealth and a higher level of unemployment benefits more rapid inflation and an increase in the national debt

27 How might a developing economy gain from a multilateral reduction in import tariffs and the removal by developed economies of subsidies on food exports? A B C D through increased specialisation leading to higher productivity through increased ability to protect infant industries through a reduction in the cost to the economy of imported food through increased tariff revenues

28 An economy with a floating exchange rate is in recession and at the same time has a deficit on the current account of its balance of payments. Which policy combination would be most likely to help with both of these problems? interest rates A B C D decrease decrease increase increase tax rates unchanged increase unchanged increase

29 In 2004 Chinas ability to exploit its comparative advantage in cotton production increased. What could explain this change? A B C D a fall in the value of the currency of India, a major cotton producer a reduction of the import quota on Chinese cotton into the European Union a rise in the wages of Brazilian cotton workers matched by an increase in their productivity the removal of the United States of Americas subsidy to its cotton growers

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12 30 In the diagram D is the demand curve for Indian tea exports and S1 is the initial supply curve.
D S2 S1 price x y O w

quantity

The Indian government imposes a tax on tea exports, which causes the supply curve to shift to S2. Which areas in the diagram measure the resulting gain in tax revenue to the Indian government and the resulting loss in producer surplus to its tea producers? gain in tax revenue A B C D x x+y x x+y loss in producer surplus w+y y y w+y

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/31
May/June 2010 1 hour

*6320949213*

## This document consists of 13 printed pages and 3 blank pages.

IB10 06_9708_31/3RP UCLES 2010

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2 1 Which is a correct statement about efficiency? A B C D Allocative efficiency occurs when marginal revenue equals marginal cost. An economy is productively efficient when it is producing at a point on its production possibility curve. An economy will improve its allocative efficiency when its production possibility curve moves outward. Productive efficiency occurs when the prices of goods equal their marginal cost of production.

The diagram shows the marginal utility (MU) that an individual derives from a good at different levels of consumption.

## 80 70 60 50 utility 40 (units) 30 20 10 0 1 2 3 4 5 6 quantity (kilos) 7 8

MU

The utility he derives from the last \$ he spends on every good is 3 units. Assuming the marginal utility of money is constant, which quantity will he purchase if the price of the good is \$10? A 4 kilos B 5 kilos C 6 kilos D 7 kilos

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## 3 3 In the diagram a consumers budget line shifts from GH to JK.

J G good Y

K good X

Which statement must be correct? A B C D 4 The price of good X has increased relative to the price of good Y. The prices of both goods have fallen. There has been an increase in the consumers real income. There has been an increase in the consumers money income.

What could cause the demand curve for labour to shift to the left? A B C D a decrease in immigration a decrease in labour productivity a fall in real wages a rise in the money wage rate

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## 4 5 In the diagram S1 is an individual workers supply of labour curve.

S1 S2 wage rate

hours of work

What could cause the curve to shift from S1 to S2? A B C D 6 a decrease in the hourly wage rate a decrease in work satisfaction a decrease in the opportunity cost of leisure a decreased preference for leisure

A firms workers join a trade union which negotiates an increase in the workers wage rate. The increase in the wage rate results in an increase in the number employed by the firm. What could explain this? A B C D The demand for the firms product is price-elastic. The firm is a monopsonist within its local labour market. The firm operates in a perfectly competitive labour market. There is a high degree of substitutability between capital and labour.

The schedule shows the short-run marginal cost of producing good X. units of X marginal cost (\$) 1 40 2 30 3 30 4 60 5 120

Given that the total fixed cost is \$20, what level of output minimises average total cost? A 2 units B 3 units C 4 units D 5 units

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5 8 Which is an example of an external diseconomy? A B C D 9 difficulties in co-ordinating activities in a large organisation difficulties in motivating workers in a large organisation higher transport costs as a firms market expands increased traffic congestion as industries expand

The diagram shows a firms demand curve and its marginal revenue curve.

P price

D O MR quantity

What is the approximate price elasticity of demand at price OP? A 0.25 B 0.5 C 1 D 2

10 In the absence of regulation, why is it likely that the market for air travel on the Singapore-Sydney route would be highly contestable? A B C D An airline entering the market would lose little if it later exited that market. The airline industrys capacity to expand its operations in the short-run is limited. The demand for air travel on the Singapore-Sydney route is price-elastic. There is no effective substitute for air travel for journeys between Singapore and Sydney.

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6 11 The table shows information about a profit-maximising firm. output price per unit fixed costs variable costs per unit What should the firm do? A B C D close down immediately because it is not covering its fixed costs close down immediately because it is not covering its average costs close down immediately because it is not covering its total costs continue production in the short run because it is covering its variable costs 17 000 units \$1.75 \$10 000 \$1.70

12 The diagram shows a firms marginal and average cost curves. The firm enters a collusive agreement with other firms in the industry. It is agreed that each firm will charge a common price, OP, and will restrict the level of its output to a production quota set by the industry cartel. The firm is allocated a production quota, Oq.

MC P \$ L M K N J G H

AC

q quantity

The firm decides to cheat in order to maximise its profits. What is its short-run increase in profits? A B C D PGKL PHJL PHJL minus PGNM PGKL minus LKNM

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7 13 A competitive market becomes a monopoly. What is likely to happen? A B C D Consumer surplus will be reduced by the amount of the deadweight loss. Producer surplus will be reduced by the amount of the deadweight loss. The loss in consumer surplus will be balanced by the increase in producer surplus. There will be a transfer of surplus from consumer to producer.

14 A government requires all its young citizens to undertake community service for a period of 6 months. The wages paid to those on the community service are below what they would otherwise have earned. What effect will this have on recorded GDP and on national welfare? effect on GDP A B C D reduction reduction unchanged unchanged effect on national welfare increase uncertain increase uncertain

15 Between 2008 and 2009 a countrys national income at current prices increased by 15 %. At the same time the country experienced 5 % inflation. Which index number most closely represents the countrys national income in 2009 at 2008 prices (2008 = 100)? A 103 B 110 C 115 D 120

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8 16 The diagram shows changes in broad and narrow measures of money supply between 2004 and 2006.

Narrow money 12 9 % 6 3 0 3

key 2004 2005 2006 Euro area Britain Broad money Japan United States

## 16 12 % 8 4 0 2004 2005 2006

Which is the only area to have experienced a contraction in either of its measures of money supply? A B C D Euro area Britain Japan United States

17 What is a central assertion of monetarist economics? A B C D Fiscal policy should be used for the continuous management of the economy. Major recessions can occur despite an unchanged money supply. The money supply is the main determinant of aggregate monetary expenditure. The velocity of circulation of money is unstable over time.

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9 18 The diagram shows the relationship between household income and household consumption.
C2 C1 household consumption

household income

What would be likely to cause the household consumption curve to shift from C1 to C2? A B C D a decrease in household income a decrease in the value of household assets an increase in interest rates an increase in the expected future level of household income

19 The diagram shows a consumption function for a closed economy with no government.

consumption

45 O Y income

What can be concluded from the diagram? A B C D At income levels below OY, saving is negative. At income levels below OY, there is an inflationary gap. The equilibrium level of income is OY. The marginal propensity to consume increases as income increases.

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10 20 When national income equals \$40 000 million and government spending equals \$15 000 million, an economy is in equilibrium below full employment. Out of every increase of \$100 in national income, \$15 is taken in taxes, \$30 is spent on imports and \$5 is saved. To raise national income to the full employment level of \$50 000 million, to which level will the government need to raise its own spending? A B C D \$15 500 million \$20 000 million \$25 000 million \$35 000 million

21 In the diagram AS1 is an economys long-run aggregate supply curve. AS1 AS2

price level

national output

What will cause the aggregate supply curve to shift from AS1 to AS2? A B C D an increase in consumer spending an increase in inflation an increase in productivity an increase in net exports

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11 22 The diagram shows the demand curves and supply curves of loanable funds.

D1 D2 rate of interest E2

S2 S1 E1

loanable funds

Which changes could cause the equilibrium in the market for loanable funds to move from E1 to E2? A B C D a decrease in bank lending combined with a decrease in business confidence a decrease in the money supply combined with an increase in the propensity to consume an increase in bank lending combined with an increase in the productivity of capital an increase in the money supply combined with a decrease in the productivity of labour

23 If the money supply is fixed, a decrease in economic activity A B C D increases interest rates. increases the transactions demand for money. raises the liquidity preference schedule. reduces the income velocity of circulation.

24 What could explain why the terms of trade of most developing economies tend to worsen over time? A B C D Their currencies are over-valued in foreign exchange markets. They impose lower barriers on imports than developed economies. They produce a narrower range of goods than developed economies. They produce goods with a low income elasticity of demand.

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12 25 An economy is operating at its natural rate of unemployment. According to monetarist theory, what will be the effect on unemployment in the short run and in the long run of an unanticipated increase in the money supply? short run A B C D no change no change reduction reduction long run no change reduction no change reduction

26 The diagram shows the relationship between the rate of increase in wages and the rate of unemployment.

## rate of increase in wages

rate of unemployment

What would be likely to cause the curve in the diagram to shift downwards and to the left? A B C D a reduction in regional differences in unemployment rates an increase in the proportion of the workforce belonging to trade unions an increase in the unemployment rate the expectation of a higher rate of inflation

27 Which policy is most likely to reduce a balance of payments deficit without causing inflation? A B C D a devaluation of the exchange rate an increase in import tariffs an increase in indirect taxes an increase in direct taxes

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13 28 Which is most likely to result in an increase in the natural rate of unemployment? A B C D a decrease in government expenditure on goods and services a decrease in the level of government payments to the unemployed an increase in trade union membership an increase in interest rates

29 An economy has underemployed resources. Which method of financing an increase in government expenditure is likely to have the greatest expansionary effect? A B C D borrowing from the central bank borrowing from the non-bank private sector increased direct taxation increased indirect taxation

30 What will be the impact of an increase in marginal tax rates? A B C D an increase in the propensity to save an increase in the value of the investment multiplier a strengthening of work incentives a strengthening in the operation of automatic stabilisers

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Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2010

9708/31/M/J/10

www.XtremePapers.net

## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/32
May/June 2010 1 hour

*4259294012*

## This document consists of 12 printed pages.

IB10 06_9708_32/FP UCLES 2010

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2 1 The diagram shows the marginal utility (MU) that an individual derives from a good at different levels of consumption.

## 80 70 60 50 utility 40 (units) 30 20 10 0 1 2 3 4 5 6 quantity (kilos) 7 8

MU

The utility he derives from the last \$ he spends on every good is 3 units. Assuming the marginal utility of money is constant, which quantity will he purchase if the price of the good is \$10? A 2 4 kilos B 5 kilos C 6 kilos D 7 kilos

## In the diagram a consumers budget line shifts from GH to JK.

J G good Y

K good X

Which statement must be correct? A B C D The price of good X has increased relative to the price of good Y. The prices of both goods have fallen. There has been an increase in the consumers real income. There has been an increase in the consumers money income.

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3 3 What could cause the demand curve for labour to shift to the left? A B C D 4 a decrease in immigration a decrease in labour productivity a fall in real wages a rise in the money wage rate

## In the diagram S1 is an individual workers supply of labour curve.

S1 S2 wage rate

hours of work

What could cause the curve to shift from S1 to S2? A B C D 5 a decrease in the hourly wage rate a decrease in work satisfaction a decrease in the opportunity cost of leisure a decreased preference for leisure

A firms workers join a trade union which negotiates an increase in the workers wage rate. The increase in the wage rate results in an increase in the number employed by the firm. What could explain this? A B C D The demand for the firms product is price-elastic. The firm is a monopsonist within its local labour market. The firm operates in a perfectly competitive labour market. There is a high degree of substitutability between capital and labour.

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4 6 The schedule shows the short-run marginal cost of producing good X. units of X marginal cost (\$) 1 40 2 30 3 30 4 60 5 120

Given that the total fixed cost is \$20, what level of output minimises average total cost? A 7 2 units B 3 units C 4 units D 5 units

Which is an example of an external diseconomy? A B C D difficulties in co-ordinating activities in a large organisation difficulties in motivating workers in a large organisation higher transport costs as a firms market expands increased traffic congestion as industries expand

The diagram shows a firms demand curve and its marginal revenue curve.

P price

D O MR quantity

What is the approximate price elasticity of demand at price OP? A 9 0.25 B 0.5 C 1 D 2

In the absence of regulation, why is it likely that the market for air travel on the Singapore-Sydney route would be highly contestable? A B C D An airline entering the market would lose little if it later exited that market. The airline industrys capacity to expand its operations in the short-run is limited. The demand for air travel on the Singapore-Sydney route is price-elastic. There is no effective substitute for air travel for journeys between Singapore and Sydney.

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5 10 The table shows information about a profit-maximising firm. output price per unit fixed costs variable costs per unit What should the firm do? A B C D close down immediately because it is not covering its fixed costs close down immediately because it is not covering its average costs close down immediately because it is not covering its total costs continue production in the short run because it is covering its variable costs 17 000 units \$1.75 \$10 000 \$1.70

11 The diagram shows a firms marginal and average cost curves. The firm enters a collusive agreement with other firms in the industry. It is agreed that each firm will charge a common price, OP, and will restrict the level of its output to a production quota set by the industry cartel. The firm is allocated a production quota, Oq.

MC P \$ L M K N J G H

AC

q quantity

The firm decides to cheat in order to maximise its profits. What is its short-run increase in profits? A B C D PGKL PHJL PHJL minus PGNM PGKL minus LKNM

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6 12 A competitive market becomes a monopoly. What is likely to happen? A B C D Consumer surplus will be reduced by the amount of the deadweight loss. Producer surplus will be reduced by the amount of the deadweight loss. The loss in consumer surplus will be balanced by the increase in producer surplus. There will be a transfer of surplus from consumer to producer.

13 A government requires all its young citizens to undertake community service for a period of 6 months. The wages paid to those on the community service are below what they would otherwise have earned. What effect will this have on recorded GDP and on national welfare? effect on GDP A B C D reduction reduction unchanged unchanged effect on national welfare increase uncertain increase uncertain

14 Between 2008 and 2009 a countrys national income at current prices increased by 15 %. At the same time the country experienced 5 % inflation. Which index number most closely represents the countrys national income in 2009 at 2008 prices (2008 = 100)? A 103 B 110 C 115 D 120

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7 15 The diagram shows changes in broad and narrow measures of money supply between 2004 and 2006.

Narrow money 12 9 % 6 3 0 3

key 2004 2005 2006 Euro area Britain Broad money Japan United States

## 16 12 % 8 4 0 2004 2005 2006

Which is the only area to have experienced a contraction in either of its measures of money supply? A B C D Euro area Britain Japan United States

16 What is a central assertion of monetarist economics? A B C D Fiscal policy should be used for the continuous management of the economy. Major recessions can occur despite an unchanged money supply. The money supply is the main determinant of aggregate monetary expenditure. The velocity of circulation of money is unstable over time.

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8 17 The diagram shows the relationship between household income and household consumption.
C2 C1 household consumption

household income

What would be likely to cause the household consumption curve to shift from C1 to C2? A B C D a decrease in household income a decrease in the value of household assets an increase in interest rates an increase in the expected future level of household income

18 The diagram shows a consumption function for a closed economy with no government.

consumption

45 O Y income

What can be concluded from the diagram? A B C D At income levels below OY, saving is negative. At income levels below OY, there is an inflationary gap. The equilibrium level of income is OY. The marginal propensity to consume increases as income increases.

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9 19 When national income equals \$40 000 million and government spending equals \$15 000 million, an economy is in equilibrium below full employment. Out of every increase of \$100 in national income, \$15 is taken in taxes, \$30 is spent on imports and \$5 is saved. To raise national income to the full employment level of \$50 000 million, to which level will the government need to raise its own spending? A B C D \$15 500 million \$20 000 million \$25 000 million \$35 000 million

20 In the diagram AS1 is an economys long-run aggregate supply curve. AS1 AS2

price level

national output

What will cause the aggregate supply curve to shift from AS1 to AS2? A B C D an increase in consumer spending an increase in inflation an increase in productivity an increase in net exports

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10 21 The diagram shows the demand curves and supply curves of loanable funds.

D1 D2 rate of interest E2

S2 S1 E1

loanable funds

Which changes could cause the equilibrium in the market for loanable funds to move from E1 to E2? A B C D a decrease in bank lending combined with a decrease in business confidence a decrease in the money supply combined with an increase in the propensity to consume an increase in bank lending combined with an increase in the productivity of capital an increase in the money supply combined with a decrease in the productivity of labour

22 If the money supply is fixed, a decrease in economic activity A B C D increases interest rates. increases the transactions demand for money. raises the liquidity preference schedule. reduces the income velocity of circulation.

23 What could explain why the terms of trade of most developing economies tend to worsen over time? A B C D Their currencies are over-valued in foreign exchange markets. They impose lower barriers on imports than developed economies. They produce a narrower range of goods than developed economies. They produce goods with a low income elasticity of demand.

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11 24 An economy is operating at its natural rate of unemployment. According to monetarist theory, what will be the effect on unemployment in the short run and in the long run of an unanticipated increase in the money supply? short run A B C D no change no change reduction reduction long run no change reduction no change reduction

25 The diagram shows the relationship between the rate of increase in wages and the rate of unemployment.

## rate of increase in wages

rate of unemployment

What would be likely to cause the curve in the diagram to shift downwards and to the left? A B C D a reduction in regional differences in unemployment rates an increase in the proportion of the workforce belonging to trade unions an increase in the unemployment rate the expectation of a higher rate of inflation

26 Which policy is most likely to reduce a balance of payments deficit without causing inflation? A B C D a devaluation of the exchange rate an increase in import tariffs an increase in indirect taxes an increase in direct taxes

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12 27 Which is most likely to result in an increase in the natural rate of unemployment? A B C D a decrease in government expenditure on goods and services a decrease in the level of government payments to the unemployed an increase in trade union membership an increase in interest rates

28 An economy has underemployed resources. Which method of financing an increase in government expenditure is likely to have the greatest expansionary effect? A B C D borrowing from the central bank borrowing from the non-bank private sector increased direct taxation increased indirect taxation

29 What will be the impact of an increase in marginal tax rates? A B C D an increase in the propensity to save an increase in the value of the investment multiplier a strengthening of work incentives a strengthening in the operation of automatic stabilisers

30 Which is a correct statement about efficiency? A B C D Allocative efficiency occurs when marginal revenue equals marginal cost. An economy is productively efficient when it is producing at a point on its production possibility curve. An economy will improve its allocative efficiency when its production possibility curve moves outward. Productive efficiency occurs when the prices of goods equal their marginal cost of production.

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2010

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## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/33
May/June 2010 1 hour

*3794987075*

## This document consists of 12 printed pages.

IB10 06_9708_33/FP UCLES 2010

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2 1 The diagram shows the marginal utility (MU) that an individual derives from a good at different levels of consumption.

## 80 70 60 50 utility 40 (units) 30 20 10 0 1 2 3 4 5 6 quantity (kilos) 7 8

MU

The utility he derives from the last \$ he spends on every good is 3 units. Assuming the marginal utility of money is constant, which quantity will he purchase if the price of the good is \$10? A 2 4 kilos B 5 kilos C 6 kilos D 7 kilos

## In the diagram a consumers budget line shifts from GH to JK.

J G good Y

K good X

Which statement must be correct? A B C D The price of good X has increased relative to the price of good Y. The prices of both goods have fallen. There has been an increase in the consumers real income. There has been an increase in the consumers money income.

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3 3 What could cause the demand curve for labour to shift to the left? A B C D 4 a decrease in immigration a decrease in labour productivity a fall in real wages a rise in the money wage rate

## In the diagram S1 is an individual workers supply of labour curve.

S1 S2 wage rate

hours of work

What could cause the curve to shift from S1 to S2? A B C D 5 a decrease in the hourly wage rate a decrease in work satisfaction a decrease in the opportunity cost of leisure a decreased preference for leisure

A firms workers join a trade union which negotiates an increase in the workers wage rate. The increase in the wage rate results in an increase in the number employed by the firm. What could explain this? A B C D The demand for the firms product is price-elastic. The firm is a monopsonist within its local labour market. The firm operates in a perfectly competitive labour market. There is a high degree of substitutability between capital and labour.

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4 6 The schedule shows the short-run marginal cost of producing good X. units of X marginal cost (\$) 1 40 2 30 3 30 4 60 5 120

Given that the total fixed cost is \$20, what level of output minimises average total cost? A 7 2 units B 3 units C 4 units D 5 units

Which is an example of an external diseconomy? A B C D difficulties in co-ordinating activities in a large organisation difficulties in motivating workers in a large organisation higher transport costs as a firms market expands increased traffic congestion as industries expand

The diagram shows a firms demand curve and its marginal revenue curve.

P price

D O MR quantity

What is the approximate price elasticity of demand at price OP? A 9 0.25 B 0.5 C 1 D 2

In the absence of regulation, why is it likely that the market for air travel on the Singapore-Sydney route would be highly contestable? A B C D An airline entering the market would lose little if it later exited that market. The airline industrys capacity to expand its operations in the short-run is limited. The demand for air travel on the Singapore-Sydney route is price-elastic. There is no effective substitute for air travel for journeys between Singapore and Sydney.

UCLES 2010

9708/33/M/J/10

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5 10 The table shows information about a profit-maximising firm. output price per unit fixed costs variable costs per unit What should the firm do? A B C D close down immediately because it is not covering its fixed costs close down immediately because it is not covering its average costs close down immediately because it is not covering its total costs continue production in the short run because it is covering its variable costs 17 000 units \$1.75 \$10 000 \$1.70

11 The diagram shows a firms marginal and average cost curves. The firm enters a collusive agreement with other firms in the industry. It is agreed that each firm will charge a common price, OP, and will restrict the level of its output to a production quota set by the industry cartel. The firm is allocated a production quota, Oq.

MC P \$ L M K N J G H

AC

q quantity

The firm decides to cheat in order to maximise its profits. What is its short-run increase in profits? A B C D PGKL PHJL PHJL minus PGNM PGKL minus LKNM

UCLES 2010

9708/33/M/J/10

[Turn over

www.XtremePapers.net

6 12 A competitive market becomes a monopoly. What is likely to happen? A B C D Consumer surplus will be reduced by the amount of the deadweight loss. Producer surplus will be reduced by the amount of the deadweight loss. The loss in consumer surplus will be balanced by the increase in producer surplus. There will be a transfer of surplus from consumer to producer.

13 A government requires all its young citizens to undertake community service for a period of 6 months. The wages paid to those on the community service are below what they would otherwise have earned. What effect will this have on recorded GDP and on national welfare? effect on GDP A B C D reduction reduction unchanged unchanged effect on national welfare increase uncertain increase uncertain

14 Between 2008 and 2009 a countrys national income at current prices increased by 15 %. At the same time the country experienced 5 % inflation. Which index number most closely represents the countrys national income in 2009 at 2008 prices (2008 = 100)? A 103 B 110 C 115 D 120

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7 15 The diagram shows changes in broad and narrow measures of money supply between 2004 and 2006.

Narrow money 12 9 % 6 3 0 3

key 2004 2005 2006 Euro area Britain Broad money Japan United States

## 16 12 % 8 4 0 2004 2005 2006

Which is the only area to have experienced a contraction in either of its measures of money supply? A B C D Euro area Britain Japan United States

16 What is a central assertion of monetarist economics? A B C D Fiscal policy should be used for the continuous management of the economy. Major recessions can occur despite an unchanged money supply. The money supply is the main determinant of aggregate monetary expenditure. The velocity of circulation of money is unstable over time.

UCLES 2010

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8 17 The diagram shows the relationship between household income and household consumption.
C2 C1 household consumption

household income

What would be likely to cause the household consumption curve to shift from C1 to C2? A B C D a decrease in household income a decrease in the value of household assets an increase in interest rates an increase in the expected future level of household income

18 The diagram shows a consumption function for a closed economy with no government.

consumption

45 O Y income

What can be concluded from the diagram? A B C D At income levels below OY, saving is negative. At income levels below OY, there is an inflationary gap. The equilibrium level of income is OY. The marginal propensity to consume increases as income increases.

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9 19 When national income equals \$40 000 million and government spending equals \$15 000 million, an economy is in equilibrium below full employment. Out of every increase of \$100 in national income, \$15 is taken in taxes, \$30 is spent on imports and \$5 is saved. To raise national income to the full employment level of \$50 000 million, to which level will the government need to raise its own spending? A B C D \$15 500 million \$20 000 million \$25 000 million \$35 000 million

20 In the diagram AS1 is an economys long-run aggregate supply curve. AS1 AS2

price level

national output

What will cause the aggregate supply curve to shift from AS1 to AS2? A B C D an increase in consumer spending an increase in inflation an increase in productivity an increase in net exports

UCLES 2010

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10 21 The diagram shows the demand curves and supply curves of loanable funds.

D1 D2 rate of interest E2

S2 S1 E1

loanable funds

Which changes could cause the equilibrium in the market for loanable funds to move from E1 to E2? A B C D a decrease in bank lending combined with a decrease in business confidence a decrease in the money supply combined with an increase in the propensity to consume an increase in bank lending combined with an increase in the productivity of capital an increase in the money supply combined with a decrease in the productivity of labour

22 If the money supply is fixed, a decrease in economic activity A B C D increases interest rates. increases the transactions demand for money. raises the liquidity preference schedule. reduces the income velocity of circulation.

23 What could explain why the terms of trade of most developing economies tend to worsen over time? A B C D Their currencies are over-valued in foreign exchange markets. They impose lower barriers on imports than developed economies. They produce a narrower range of goods than developed economies. They produce goods with a low income elasticity of demand.

UCLES 2010

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11 24 An economy is operating at its natural rate of unemployment. According to monetarist theory, what will be the effect on unemployment in the short run and in the long run of an unanticipated increase in the money supply? short run A B C D no change no change reduction reduction long run no change reduction no change reduction

25 The diagram shows the relationship between the rate of increase in wages and the rate of unemployment.

## rate of increase in wages

rate of unemployment

What would be likely to cause the curve in the diagram to shift downwards and to the left? A B C D a reduction in regional differences in unemployment rates an increase in the proportion of the workforce belonging to trade unions an increase in the unemployment rate the expectation of a higher rate of inflation

26 Which policy is most likely to reduce a balance of payments deficit without causing inflation? A B C D a devaluation of the exchange rate an increase in import tariffs an increase in indirect taxes an increase in direct taxes

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12 27 Which is most likely to result in an increase in the natural rate of unemployment? A B C D a decrease in government expenditure on goods and services a decrease in the level of government payments to the unemployed an increase in trade union membership an increase in interest rates

28 An economy has underemployed resources. Which method of financing an increase in government expenditure is likely to have the greatest expansionary effect? A B C D borrowing from the central bank borrowing from the non-bank private sector increased direct taxation increased indirect taxation

29 What will be the impact of an increase in marginal tax rates? A B C D an increase in the propensity to save an increase in the value of the investment multiplier a strengthening of work incentives a strengthening in the operation of automatic stabilisers

30 Which is a correct statement about efficiency? A B C D Allocative efficiency occurs when marginal revenue equals marginal cost. An economy is productively efficient when it is producing at a point on its production possibility curve. An economy will improve its allocative efficiency when its production possibility curve moves outward. Productive efficiency occurs when the prices of goods equal their marginal cost of production.

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2010

9708/33/M/J/10

www.XtremePapers.net

## ECONOMICS Paper 3 Multiple Choice (Supplement)

9708/31
May/June 2011 1 hour

Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

*7419926131*

## This document consists of 12 printed pages.

IB11 06_9708_31/4RP UCLES 2011

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## 2 1 In the diagram, LM is an economys production possibility curve.

L G good X F H O

good Y

Which statement is correct? A B C D E only is attainable. F is economically efficient. G may be economically efficient but is not productively efficient. H is productively efficient but may not be economically efficient.

A consumer seeks to maximise his utility. Up to what point should he continue to consume each good? A B C D until the marginal utility per dollar from each good is the same until the marginal utility from each good is the same until the marginal utility from each good reaches a maximum until the marginal utility from each good is zero

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## 3 3 In the diagram, a consumers initial budget line is JK.

G J good Y

good X

Assuming no change in the price of X, what could explain a shift in the consumers budget line to GH? consumers money income decrease increase decrease increase

## price of good Y A B C D decrease decrease increase increase

The table shows the main characteristics of employment in two occupations. occupation X average annual wage number of weeks annual leave average length of working week job security length of training course to obtain job qualification What can definitely be deduced from the table? A B C Those employed in occupation Y attach greater importance to job security. Those employed in occupation X attach less importance to leisure activities. There will be more competition for places on training courses to enter occupation X than occupation Y. Occupation Y has greater non-pecuniary advantages than occupation X. \$100 000 5 weeks 48 hours low 1 year occupation Y \$60 000 10 weeks 44 hours high 2 years

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4 5 Which diagram correctly shows the relationship between the average product (AP) and the marginal product (MP) of labour given that the quantities of other factor inputs remain constant?

A MP AP

product

product MP AP

labour

labour

C MP

D AP

product AP MP O labour

product

labour

What is the name for the relationship between a firms output and the quantities of factor inputs that it employs? A B C D a long-run average cost function a long-run production function productive efficiency returns to scale

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5 7 The diagram shows the supply and demand for labour in an industry.
S W

wage rate

D O L M N employment

Initially the industrys labour market is in equilibrium. What effect will the introduction of a minimum wage OW have on the level of employment in the industry? A B C D It will decrease by an amount LM. It will decrease by an amount LN. It will increase by an amount LN. It will increase by an amount MN.

A product with infinite elasticity of supply has sales of 1000 units a week at a price of \$1 per unit. Price elasticity of demand is 1.5 over the relevant range. The government imposes a tax of 10 %. What will be the governments weekly tax revenue? A \$15 B \$85 C \$100 D \$150

What is the likely outcome for producers and consumers when a market moves from being non-contestable to being a contestable market? producers A B C D gain from higher prices gain from likely higher profits lose from likely lower output lose from likely lower profits consumers gain from a wider choice of products lose from likely higher prices lose from a reduced choice of products gain from likely lower prices

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6 10 A firm is engaging in price discrimination. In order to maximise profits, what should the firm do? A B C D charge a higher price to consumers earning higher incomes charge a higher price to consumers earning lower incomes charge a higher price to consumers whose demand for the product is price inelastic charge a higher price to consumers whose demand for the product is price elastic

11 The diagram shows the private and social marginal costs and benefits at different volumes of traffic.
MSC

## MPB = MSB O volume of traffic

The imposition of a congestion tax raises the MPC curve to MPC + tax. Which area measures the resulting reduction in the deadweight loss? A x + y only B x+y+z C y only D z only

12 A government imposes a maximum price for electricity. Which statement justifying this measure might be considered valid on economic grounds? A B C D It will encourage electricity suppliers to invest in additional capacity. It will increase the incentive for consumers to conserve energy. It will prevent the monopolistic exploitation of consumers. It will prevent the rationing of electricity through power cuts.

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7 13 Individuals are free to choose the number of hours they work, how much of their income they save and which goods and services they buy. Which type of tax will not distort the choices individuals make? A B C D a tax levied on the wealth accumulated by individuals a uniform tax which raises the same fixed amount from all individuals indirect taxes on specific goods proportional income taxes

14 The table shows data on a countrys gross national product at market prices and on domestic spending. year 1 (\$m) GNP at market prices private consumption government consumption gross investment 420 200 120 90 year 2 (\$m) 440 260 120 80 year 3 (\$m) 560 300 140 130

In which of these years will the country be faced with a deficit on the current account of the balance of payments? year 1 A B C D     year 2     year 3    

15 An economy is operating at its natural rate of unemployment. According to monetarist theory, what will be the effect on unemployment in the short run and in the long run of an unanticipated increase in the money supply? short run A B C D no change no change reduction reduction long run no change reduction no change reduction

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8 16 What will reduce the value of the investment multiplier? A B C D a low marginal propensity to import automatic stabilisers low marginal tax rates low rates of unemployment benefit

C consumption

## 45 O personal disposable income

As income increases, what happens to the average propensity to save and the marginal propensity to save? average propensity to save A B C D decreases decreases increases increases marginal propensity to save decreases increases decreases increases

18 Other things being equal, what will result in a decrease in aggregate demand? A B C D a decrease in interest rates a decrease in the balance of trade deficit a decrease in the governments budget deficit a decrease in the household saving ratio

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9 19 What will expand the money supply in an open economy? A B C D a current account balance of payments deficit an increase in the cash reserve ratio of commercial banks government borrowing from domestic residents government intervention to prevent an appreciation in the foreign exchange value of domestic currency

20 According to Keynesian theory, in which circumstance will there always be an increase in the demand for money? real income A B C D constant constant increase increase price level decrease increase decrease increase interest rates increase decrease decrease increase

21 Which characteristics are usually found in developing countries? saving ratio A B C D low high low high capital output ratio low low high high

22 Which cause of economic growth would involve the least cost for present and future generations of a countrys population? A B C D increased exploitation of a countrys mineral resources investment financed by borrowing from abroad investment financed by high rates of domestic savings technological innovations in productive processes

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10 23 The table shows some indicators of macro-economic performance in the US economy for five decades. economic target real GDP growth (average %) inflation (average %) unemployment (average %) 1950s 4.18 2.07 4.51 1960s 4.43 2.33 4.78 1970s 3.28 7.09 6.22 1980s 3.02 5.66 7.27 1990s 3.03 3.00 5.76

Between which decades did the US government achieve an overall improvement in its performance with no trade-off between individual policy goals? A B C D 1950s to 1960s 1960s to 1970s 1970s to 1980s 1980s to 1990s

24 The diagram shows the relationship between the rate of inflation and the rate of unemployment.

F J inflation rate

G K O unemployment rate

What would cause the curve FG to shift to JK? A B C D a lower exchange rate a lower expected rate of inflation an increase in government expenditure a rise in the level of employment

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11 25 The diagram shows a governments revenue and expenditure for three years.
2008 revenue expenditure revenue expenditure revenue expenditure 0 1 2 \$m 3 4

2009

2010

What can be concluded from the diagram? A B C D A budget deficit was replaced by a budget surplus. A government borrowing requirement emerged. The economy moved from a recession into a boom period. The yield from taxation continuously increased.

26 Which tax is most likely to be regressive? A B C D an inheritance tax a property tax a sales tax income tax

27 Why might a reduction in domestic interest rates have an adverse effect on a countrys balance of payment on current account? A B C D It will cause a rise in the exchange rate. It will make the countrys industry less competitive. The resulting higher level of economic activity is likely to increase imports. There will be an outflow of capital from the country.

28 What would be classified as a supply side policy measure? A B C D additional legislation to restrict the power of trade unions a reduction in the governments fiscal deficit an open market sale of securities the imposition of a tariff on imported goods

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12 29 A country decides to join a group of countries which maintain fixed parities for their currencies and forbid any restriction on foreign trade and payments. What will the country have to forgo to maintain a fixed parity for its currency? A B C D an independent anti-monopoly policy an independent fiscal policy an independent interest rate policy an independent prices and incomes policy

30 What would be an economic benefit to a major economy of imposing a tariff on imported goods? A B C D It would increase labour productivity. It would increase pressure on foreign suppliers to reduce their prices. It would make the countrys exports more competitive. It would reduce the prices paid by consumers for imported goods.

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2011

9708/31/M/J/11

www.XtremePapers.net

## ECONOMICS Paper 3 Multiple Choice (Supplement)

9708/32
May/June 2011 1 hour

Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

*9013541548*

## This document consists of 11 printed pages and 1 blank page.

IB11 06_9708_32/FP UCLES 2011

[Turn over

www.XtremePapers.net

2 1 A consumer seeks to maximise his utility. Up to what point should he continue to consume each good? A B C D until the marginal utility per dollar from each good is the same until the marginal utility from each good is the same until the marginal utility from each good reaches a maximum until the marginal utility from each good is zero

## In the diagram, a consumers initial budget line is JK.

G J good Y

good X

Assuming no change in the price of X, what could explain a shift in the consumers budget line to GH? consumers money income decrease increase decrease increase

## price of good Y A B C D decrease decrease increase increase

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3 3 The table shows the main characteristics of employment in two occupations. occupation X average annual wage number of weeks annual leave average length of working week job security length of training course to obtain job qualification What can definitely be deduced from the table? A B C Those employed in occupation Y attach greater importance to job security. Those employed in occupation X attach less importance to leisure activities. There will be more competition for places on training courses to enter occupation X than occupation Y. Occupation Y has greater non-pecuniary advantages than occupation X. \$100 000 5 weeks 48 hours low 1 year occupation Y \$60 000 10 weeks 44 hours high 2 years

Which diagram correctly shows the relationship between the average product (AP) and the marginal product (MP) of labour given that the quantities of other factor inputs remain constant?

A MP AP

product

product MP AP

labour

labour

C MP

D AP

product AP MP O labour

product

labour

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4 5 What is the name for the relationship between a firms output and the quantities of factor inputs that it employs? A B C D a long-run average cost function a long-run production function productive efficiency returns to scale

The diagram shows the supply and demand for labour in an industry.
S W

wage rate

D O L M N employment

Initially the industrys labour market is in equilibrium. What effect will the introduction of a minimum wage OW have on the level of employment in the industry? A B C D It will decrease by an amount LM. It will decrease by an amount LN. It will increase by an amount LN. It will increase by an amount MN.

A product with infinite elasticity of supply has sales of 1000 units a week at a price of \$1 per unit. Price elasticity of demand is 1.5 over the relevant range. The government imposes a tax of 10 %. What will be the governments weekly tax revenue? A \$15 B \$85 C \$100 D \$150

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5 8 What is the likely outcome for producers and consumers when a market moves from being non-contestable to being a contestable market? producers A B C D gain from higher prices gain from likely higher profits lose from likely lower output lose from likely lower profits consumers gain from a wider choice of products lose from likely higher prices lose from a reduced choice of products gain from likely lower prices

A firm is engaging in price discrimination. In order to maximise profits, what should the firm do? A B C D charge a higher price to consumers earning higher incomes charge a higher price to consumers earning lower incomes charge a higher price to consumers whose demand for the product is price inelastic charge a higher price to consumers whose demand for the product is price elastic

10 The diagram shows the private and social marginal costs and benefits at different volumes of traffic.
MSC

## MPB = MSB O volume of traffic

The imposition of a congestion tax raises the MPC curve to MPC + tax. Which area measures the resulting reduction in the deadweight loss? A x + y only B x+y+z C y only D z only

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6 11 A government imposes a maximum price for electricity. Which statement justifying this measure might be considered valid on economic grounds? A B C D It will encourage electricity suppliers to invest in additional capacity. It will increase the incentive for consumers to conserve energy. It will prevent the monopolistic exploitation of consumers. It will prevent the rationing of electricity through power cuts.

12 Individuals are free to choose the number of hours they work, how much of their income they save and which goods and services they buy. Which type of tax will not distort the choices individuals make? A B C D a tax levied on the wealth accumulated by individuals a uniform tax which raises the same fixed amount from all individuals indirect taxes on specific goods proportional income taxes

13 The table shows data on a countrys gross national product at market prices and on domestic spending. year 1 (\$m) GNP at market prices private consumption government consumption gross investment 420 200 120 90 year 2 (\$m) 440 260 120 80 year 3 (\$m) 560 300 140 130

In which of these years will the country be faced with a deficit on the current account of the balance of payments? year 1 A B C D     year 2     year 3    

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7 14 An economy is operating at its natural rate of unemployment. According to monetarist theory, what will be the effect on unemployment in the short run and in the long run of an unanticipated increase in the money supply? short run A B C D no change no change reduction reduction long run no change reduction no change reduction

15 What will reduce the value of the investment multiplier? A B C D a low marginal propensity to import automatic stabilisers low marginal tax rates low rates of unemployment benefit

C consumption

## 45 O personal disposable income

As income increases, what happens to the average propensity to save and the marginal propensity to save? average propensity to save A B C D decreases decreases increases increases marginal propensity to save decreases increases decreases increases

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8 17 Other things being equal, what will result in a decrease in aggregate demand? A B C D a decrease in interest rates a decrease in the balance of trade deficit a decrease in the governments budget deficit a decrease in the household saving ratio

18 What will expand the money supply in an open economy? A B C D a current account balance of payments deficit an increase in the cash reserve ratio of commercial banks government borrowing from domestic residents government intervention to prevent an appreciation in the foreign exchange value of domestic currency

19 According to Keynesian theory, in which circumstance will there always be an increase in the demand for money? real income A B C D constant constant increase increase price level decrease increase decrease increase interest rates increase decrease decrease increase

20 Which characteristics are usually found in developing countries? saving ratio A B C D low high low high capital output ratio low low high high

21 Which cause of economic growth would involve the least cost for present and future generations of a countrys population? A B C D increased exploitation of a countrys mineral resources investment financed by borrowing from abroad investment financed by high rates of domestic savings technological innovations in productive processes

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9 22 The table shows some indicators of macro-economic performance in the US economy for five decades. economic target real GDP growth (average %) inflation (average %) unemployment (average %) 1950s 4.18 2.07 4.51 1960s 4.43 2.33 4.78 1970s 3.28 7.09 6.22 1980s 3.02 5.66 7.27 1990s 3.03 3.00 5.76

Between which decades did the US government achieve an overall improvement in its performance with no trade-off between individual policy goals? A B C D 1950s to 1960s 1960s to 1970s 1970s to 1980s 1980s to 1990s

23 The diagram shows the relationship between the rate of inflation and the rate of unemployment.

F J inflation rate

G K O unemployment rate

What would cause the curve FG to shift to JK? A B C D a lower exchange rate a lower expected rate of inflation an increase in government expenditure a rise in the level of employment

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10 24 The diagram shows a governments revenue and expenditure for three years.
2008 revenue expenditure revenue expenditure revenue expenditure 0 1 2 \$m 3 4

2009

2010

What can be concluded from the diagram? A B C D A budget deficit was replaced by a budget surplus. A government borrowing requirement emerged. The economy moved from a recession into a boom period. The yield from taxation continuously increased.

25 Which tax is most likely to be regressive? A B C D an inheritance tax a property tax a sales tax income tax

26 Why might a reduction in domestic interest rates have an adverse effect on a countrys balance of payment on current account? A B C D It will cause a rise in the exchange rate. It will make the countrys industry less competitive. The resulting higher level of economic activity is likely to increase imports. There will be an outflow of capital from the country.

27 What would be classified as a supply side policy measure? A B C D additional legislation to restrict the power of trade unions a reduction in the governments fiscal deficit an open market sale of securities the imposition of a tariff on imported goods

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11 28 A country decides to join a group of countries which maintain fixed parities for their currencies and forbid any restriction on foreign trade and payments. What will the country have to forgo to maintain a fixed parity for its currency? A B C D an independent anti-monopoly policy an independent fiscal policy an independent interest rate policy an independent prices and incomes policy

29 What would be an economic benefit to a major economy of imposing a tariff on imported goods? A B C D It would increase labour productivity. It would increase pressure on foreign suppliers to reduce their prices. It would make the countrys exports more competitive. It would reduce the prices paid by consumers for imported goods.

## 30 In the diagram, LM is an economys production possibility curve.

L G good X F H O

good Y

Which statement is correct? A B C D E only is attainable. F is economically efficient. G may be economically efficient but is not productively efficient. H is productively efficient but may not be economically efficient.

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12 BLANK PAGE

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## ECONOMICS Paper 3 Multiple Choice (Supplement)

9708/33
May/June 2011 1 hour

Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

*3234168359*

## This document consists of 11 printed pages and 1 blank page.

IB11 06_9708_33/FP UCLES 2011

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2 1 A consumer seeks to maximise his utility. Up to what point should he continue to consume each good? A B C D 2 until the marginal utility per dollar from each good is the same until the marginal utility from each good is the same until the marginal utility from each good reaches a maximum until the marginal utility from each good is zero

## In the diagram, a consumers initial budget line is JK.

G J good Y

good X

Assuming no change in the price of X, what could explain a shift in the consumers budget line to GH? price of good Y A B C D decrease decrease increase increase consumers money income decrease increase decrease increase

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3 3 The table shows the main characteristics of employment in two occupations. occupation X average annual wage number of weeks annual leave average length of working week job security length of training course to obtain job qualification What can definitely be deduced from the table? A B C D 4 Those employed in occupation Y attach greater importance to job security. Those employed in occupation X attach less importance to leisure activities. There will be more competition for places on training courses to enter occupation X than occupation Y. Occupation Y has greater non-pecuniary advantages than occupation X. \$100 000 5 weeks 48 hours low 1 year occupation Y \$60 000 10 weeks 44 hours high 2 years

Which diagram correctly shows the relationship between the average product (AP) and the marginal product (MP) of labour given that the quantities of other factor inputs remain constant?

A MP AP

product

product MP AP

labour

labour

C MP

D AP

product AP MP O labour

product

labour

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4 5 What is the name for the relationship between a firms output and the quantities of factor inputs that it employs? A B C D 6 a long-run average cost function a long-run production function productive efficiency returns to scale

The diagram shows the supply and demand for labour in an industry.
S W

wage rate

D O L M N employment

Initially the industrys labour market is in equilibrium. What effect will the introduction of a minimum wage OW have on the level of employment in the industry? A B C D 7 It will decrease by an amount LM. It will decrease by an amount LN. It will increase by an amount LN. It will increase by an amount MN.

A product with infinite elasticity of supply has sales of 1000 units a week at a price of \$1 per unit. Price elasticity of demand is 1.5 over the relevant range. The government imposes a tax of 10 %. What will be the governments weekly tax revenue? A \$15 B \$85 C \$100 D \$150

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5 8 What is the likely outcome for producers and consumers when a market moves from being non-contestable to being a contestable market? producers A B C D 9 gain from higher prices gain from likely higher profits lose from likely lower output lose from likely lower profits consumers gain from a wider choice of products lose from likely higher prices lose from a reduced choice of products gain from likely lower prices

A firm is engaging in price discrimination. In order to maximise profits, what should the firm do? A B C D charge a higher price to consumers earning higher incomes charge a higher price to consumers earning lower incomes charge a higher price to consumers whose demand for the product is price inelastic charge a higher price to consumers whose demand for the product is price elastic

10 The diagram shows the private and social marginal costs and benefits at different volumes of traffic.
MSC

## MPB = MSB O volume of traffic

The imposition of a congestion tax raises the MPC curve to MPC + tax. Which area measures the resulting reduction in the deadweight loss? A x + y only B x+y+z C y only D z only

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6 11 A government imposes a maximum price for electricity. Which statement justifying this measure might be considered valid on economic grounds? A B C D It will encourage electricity suppliers to invest in additional capacity. It will increase the incentive for consumers to conserve energy. It will prevent the monopolistic exploitation of consumers. It will prevent the rationing of electricity through power cuts.

12 Individuals are free to choose the number of hours they work, how much of their income they save and which goods and services they buy. Which type of tax will not distort the choices individuals make? A B C D a tax levied on the wealth accumulated by individuals a uniform tax which raises the same fixed amount from all individuals indirect taxes on specific goods proportional income taxes

13 The table shows data on a countrys gross national product at market prices and on domestic spending. year 1 (\$m) GNP at market prices private consumption government consumption gross investment 420 200 120 90 year 2 (\$m) 440 260 120 80 year 3 (\$m) 560 300 140 130

In which of these years will the country be faced with a deficit on the current account of the balance of payments? year 1 A B C D     year 2     year 3    

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7 14 An economy is operating at its natural rate of unemployment. According to monetarist theory, what will be the effect on unemployment in the short run and in the long run of an unanticipated increase in the money supply? short run A B C D no change no change reduction reduction long run no change reduction no change reduction

15 What will reduce the value of the investment multiplier? A B C D a low marginal propensity to import automatic stabilisers low marginal tax rates low rates of unemployment benefit

C consumption

## 45 O personal disposable income

As income increases, what happens to the average propensity to save and the marginal propensity to save? average propensity to save A B C D decreases decreases increases increases marginal propensity to save decreases increases decreases increases

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8 17 Other things being equal, what will result in a decrease in aggregate demand? A B C D a decrease in interest rates a decrease in the balance of trade deficit a decrease in the governments budget deficit a decrease in the household saving ratio

18 What will expand the money supply in an open economy? A B C D a current account balance of payments deficit an increase in the cash reserve ratio of commercial banks government borrowing from domestic residents government intervention to prevent an appreciation in the foreign exchange value of domestic currency

19 According to Keynesian theory, in which circumstance will there always be an increase in the demand for money? real income A B C D constant constant increase increase price level decrease increase decrease increase interest rates increase decrease decrease increase

20 Which characteristics are usually found in developing countries? saving ratio A B C D low high low high capital output ratio low low high high

21 Which cause of economic growth would involve the least cost for present and future generations of a countrys population? A B C D increased exploitation of a countrys mineral resources investment financed by borrowing from abroad investment financed by high rates of domestic savings technological innovations in productive processes

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9 22 The table shows some indicators of macro-economic performance in the US economy for five decades. economic target real GDP growth (average %) inflation (average %) unemployment (average %) 1950s 4.18 2.07 4.51 1960s 4.43 2.33 4.78 1970s 3.28 7.09 6.22 1980s 3.02 5.66 7.27 1990s 3.03 3.00 5.76

Between which decades did the US government achieve an overall improvement in its performance with no trade-off between individual policy goals? A B C D 1950s to 1960s 1960s to 1970s 1970s to 1980s 1980s to 1990s

23 The diagram shows the relationship between the rate of inflation and the rate of unemployment.

F J inflation rate

G K O unemployment rate

What would cause the curve FG to shift to JK? A B C D a lower exchange rate a lower expected rate of inflation an increase in government expenditure a rise in the level of employment

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10 24 The diagram shows a governments revenue and expenditure for three years.
2008 revenue expenditure revenue expenditure revenue expenditure 0 1 2 \$m 3 4

2009

2010

What can be concluded from the diagram? A B C D A budget deficit was replaced by a budget surplus. A government borrowing requirement emerged. The economy moved from a recession into a boom period. The yield from taxation continuously increased.

25 Which tax is most likely to be regressive? A B C D an inheritance tax a property tax a sales tax income tax

26 Why might a reduction in domestic interest rates have an adverse effect on a countrys balance of payment on current account? A B C D It will cause a rise in the exchange rate. It will make the countrys industry less competitive. The resulting higher level of economic activity is likely to increase imports. There will be an outflow of capital from the country.

27 What would be classified as a supply side policy measure? A B C D additional legislation to restrict the power of trade unions a reduction in the governments fiscal deficit an open market sale of securities the imposition of a tariff on imported goods

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11 28 A country decides to join a group of countries which maintain fixed parities for their currencies and forbid any restriction on foreign trade and payments. What will the country have to forgo to maintain a fixed parity for its currency? A B C D an independent anti-monopoly policy an independent fiscal policy an independent interest rate policy an independent prices and incomes policy

29 What would be an economic benefit to a major economy of imposing a tariff on imported goods? A B C D It would increase labour productivity. It would increase pressure on foreign suppliers to reduce their prices. It would make the countrys exports more competitive. It would reduce the prices paid by consumers for imported goods.

## 30 In the diagram, LM is an economys production possibility curve.

L G good X F H O E

good Y

Which statement is correct? A B C D E only is attainable. F is economically efficient. G may be economically efficient but is not productively efficient. H is productively efficient but may not be economically efficient.

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12 BLANK PAGE

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS
PAPER 3 Multiple Choice (Extension)

9708/3
OCTOBER/NOVEMBER 2002
1 hour

Additional materials: Multiple Choice answer sheet Soft clean eraser Soft pencil (type B or HB is recommended)

TIME

1 hour

## This question paper consists of 12 printed pages.

SP (AT/JB) S25749/2 CIE 2002

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2 1 New technology makes it possible to produce more of a good at every given price. What effect will this have on equilibrium price and output in a competitive industry?

## output decrease increase decrease increase

The table shows the marginal utility that a consumer obtains from consuming successive units of good X. quantity (units) 1 2 3 4 5 6 mu (units of utility) 10 18 24 28 30 31

The price of good X is \$4. What additional information is needed to determine the quantity of X that the consumer will purchase? A B C D the consumers income elasticity of demand for good X the consumers price elasticity of demand for good X the marginal utility of money to the consumer the marginal utility that the consumer obtains from substitute goods

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3 3 In the diagram, KN is a budget line showing the different combinations of two normal goods, X and Y, that a consumer is able to purchase. A consumer initially chooses point L on the budget line.

good X

L M

good Y

In a subsequent period, the consumer chooses the combination of X and Y shown by point M. What could explain this change? A B C D a change in the consumers preferences an increase in the consumers income and an increase in the price of Y a reduction in the consumers income a reduction in the consumers income and a reduction in the price of X

In the diagram, HN is the initial supply of labour curve faced by a firm, and RM is its initial marginal cost of labour curve.

## M wage/ cost of labour W R H O quantity of labour

What will be the firm's new labour supply curve, if the workers join a trade union and achieve a union negotiated wage, OW? A RJX B HKX C WJM D WKN

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4 5 An individual works 40 hours per week when the wage rate is \$7 per hour. When the wage rate is increased to \$9 per hour, the individual works 36 hours per week. What explains the change in the number of hours worked? A B C D a negative income elasticity of demand for leisure an income effect offsetting a substitution effect an income effect reinforcing a substitution effect a zero income effect

Which of the following is a financial economy of scale? A B C D less risk due to diversification lower costs in raising capital lower costs of marketing lower variable costs of production

## The diagram shows the short-run cost curves of a firm.

costs

4 3 2

1 O output

Which statement is correct? A B C D Curve 1 is the average fixed cost curve. Curve 2 is the marginal cost curve. Curve 3 is the average variable cost curve. Curve 4 is the average total cost curve.

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5 8 In which of the following market situations will a firm take account of the reactions of its competitors before deciding to cut its price? A B C D monopoly monopolistic competition oligopoly perfect competition

If a profit-maximising company believes that the market price of a good will not be affected by its own output, it will A B C D produce until marginal cost equals price. produce until average cost equals price. produce until marginal revenue is zero. sell as much as it can produce.

10 Which of the following items would not appear in a firms financial accounts but would be included in an economists calculation of the cost incurred by the firm? A B C D interest on bank loans used to purchase assets that have no alternative uses interest forgone on finance provided by the firms owner depreciation rent

11 When is allocative efficiency achieved in an economy? A B C D when nobody can become better off without somebody else becoming worse off when the economy is operating at its natural rate of unemployment when the level of social costs is minimised when the rate of economic growth is maximised

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6 12 The diagram shows the supply and demand curves for a good. The curve labelled MSC shows the marginal social cost of producing the good.

MSC S

price, costs y

z O Q2 Q1 output

Which area measures the net welfare gain to society from reducing output from OQ1 to OQ2? A x B y C x+y D x+y+z

13 The table shows the marginal tax rates paid by a countrys taxpayers at different levels of income.

income first \$4000 \$4001 \$20 000 above \$20 000 Which of the following correctly describes this tax? A B C D It is regressive over the entire range of income.

## tax rate zero 20% 40%

It is proportional over the income range \$4001 \$20 000. It is proportional over the range of income above \$20 000. It is progressive over the range of income above \$4000.

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7 14 Assuming that all indexes have 1990 as 100, the national income figures for 2000 at 1990 prices may be obtained by multiplying 2000 national income at current prices by A B C D the index for 2000 prices the index for 1990 prices the index for 2000 prices the index for 1990 output the index for 1990 output the index for 2000 output the index for 1990 prices the index for 2000 prices

15 During a year, a country's national income in money terms increased by 6%, prices increased by 4% and total population increased by 2%. What was the approximate change in real income per head? A B C D a decrease of 2% nil an increase of 2% an increase of 4%

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8 16 The diagram shows a number of expenditure functions. The original expenditure function is shown by E. E1 E2 E3 E E4

expenditure

income

The government announces an increase in government expenditure on goods and services and increases the standard rate of income tax. Which line shows the new expenditure function resulting from these changes? A E1 B E2 C E3 D E4

17 In the diagram AD1 and AS1 are an economys initial aggregate demand and aggregate supply curves.

What will cause the aggregate demand curve to shift to AD2? A B C D a depreciation of the currency an increase in the price level an increase in the real wage a reduction in the money supply

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9 18 One of the reasons why a countrys aggregate demand curve slopes downwards is that a fall in the average price level A B C D leads to an increase in interest rates. reduces the real value of money balances. makes the countrys goods cheaper relative to foreign goods. leads to the expectation of further price falls.

19 In the diagram, the curve I depicts the accelerator relationship between net investment and the change in national output.

net investment

## change in national output

What does the slope of the curve measure? A B C D the capital-output ratio the marginal propensity to invest the marginal propensity to save the multiplier
2

20 In a closed economy, the full employment level of income is \$90 million, C = 3Y and I = \$ (40-3r) million, where C = consumption, Y = income, I = investment and r = the rate of interest. If planned government expenditure is \$20 million, what rate of interest would be required for there to be full employment? A B C D 10% per annum 12% per annum 14% per annum 16% per annum

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10 21 A 6% increase in the money supply leads to a 4% increase in the level of money income. What can be deduced from this? A B C D There has been an increase in interest rates. There has been a decrease in the level of output. There has been a decrease in the velocity of circulation. The price level has increased by 2%.

22 What would result in a reduction in the volume of bank deposits? A B C D an increase in the publics desire to hold cash an increase in government expenditure financed by borrowing from the central bank a reduction in the proportion of their deposits that banks hold in cash an open market purchase of securities by the central bank

23 If a country has a surplus in its balance of payments, all else being equal, what is likely to happen to its money supply? A B C D It will fall, because more of its goods were purchased by foreign consumers than by consumers at home. It will remain unchanged, because its exports are bought with foreign currency. It will remain unchanged, because the surplus is automatically offset by a loan for the deficit countries. It will rise, because the foreign currency received for exports will be exchanged for domestic currency.

24 In a closed economy with no government the full employment level of output is \$25 million, the actual level of output is \$20 million, and the marginal propensity to consume is 4/5. What is the size of the deflationary gap? A \$1 million B \$4 million C \$5 million D \$16 million

25 Which of the following is likely to intensify a recession following an initial fall in aggregate demand? A B C D Unemployment benefits increase as the level of activity falls. The yield from income tax falls as incomes fall. Firms maintain a constant ratio of stocks to sales. Interest rates fall as the demand for money falls.

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11 26 What would explain why the prices of the primary commodities produced by less developed countries fluctuate widely from year to year? A B C D the development of artificial substitutes for natural products the introduction of more capital-intensive methods of production by mineral producers inelasticity of both the supply and demand for these products improvements in agricultural productivity

27 Which of the following policies is specifically designed to reduce the level of structural unemployment? A B C D a reduction in interest rates a reduction in the level of direct taxation the provision of retraining schemes an increase in the level of state benefit paid to the unemployed

28 The diagram shows the relationship between the rate of increase in wages and the rate of unemployment.

## rate of increase in wages

rate of unemployment

Which of the following would be likely to cause the curve in the diagram to shift upwards and to the right? A B C D a reduction in regional differences in unemployment rates a reduction in the proportion of the workforce belonging to trade unions an increase in the unemployment rate the expectation of a higher rate of inflation

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12 29 Which of the following is most likely to lead to an increase in a developing countrys long-run rate of growth of income per head? A B C D a higher birth rate a higher saving ratio the imposition of import controls an increase in government spending on defence

30 Which of the following is not an automatic stabiliser? A B C D income tax profits tax state retirement pension unemployment benefit

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CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ECONOMICS Paper 3 Multiple Choice (Extension) October/November 2003 1 hour
Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/03

## This document consists of 12 printed pages.

CIE 2003

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2 1 An economy is operating at a point inside its production possibility curve. Why is this described as inefficient? A B C D Individuals are enjoying too much leisure. Labour and capital are combined in the wrong proportions. More of one good can be produced without decreasing production of another. There are shortages of some goods and an excess supply of others.

A utility-maximising consumer spends his disposable income on food and clothing. When his weekly income is \$40 he buys 5 units of food at a unit price of \$5. His marginal utility from food consumption is 10 utility units. If the price of a clothing unit is \$0.50, the consumer's marginal utility from clothing is A B C D equal to that derived from food.
1 10

utility unit.

## In the diagram a consumer's budget line shifts from JK to GH.

J G good Y

K good X

Which of the following must be correct? A B C D There has been a change in the consumer's money income. There has been a change in the consumer's real income. The prices of both goods have changed. The price of good Y has increased relative to the price of good X.

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3 4 The diagram shows the total product curve for a single variable factor, assuming all other factor inputs are held constant.

total product

TP

## quantity of variable factor

In which order do the total product (TP), average product (AP) and marginal product (MP) begin to decrease as the input of the variable factor is increased? first A B C D AP AP MP MP second MP TP AP TP third TP MP TP AP

The table shows the marginal revenue product of labour schedule of a profit-maximising firm producing under conditions of perfect competition. number of workers marginal revenue product (\$) 1 135 2 140 3 145 4 150 5 145 6 140 7 135

If the wage is \$140, what is the maximum number of workers the firm will employ? A 2 B 4 C 5 D 6

To increase the labour force from 30 to 31 workers, an entrepreneur is forced to increase the daily wage rate from \$40 to \$42. What is the marginal cost of labour per day? A \$2 B \$42 C \$62 D \$102

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4 7 The diagram shows the supply and demand for labour in an industry.
S W

wage rate

D O L M N employment

Initially the industry's labour market is in equilibrium. What effect will the introduction of a minimum wage OW have on the level of employment in the industry? A B C D It will decrease by an amount LM. It will decrease by an amount LN. It will increase by an amount LN. It will increase by an amount MN.

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5 8 In the diagram the heights of the vertical broken lines show levels of output corresponding to different combinations of labour and capital.

outp

ut

u labo

cap

ital

What does the diagram show? A B C D a cost function a long-run production function an input function a production possibility function

An entrepreneur takes out a \$500 000 loan at a rate of interest of 10 %, and invests a further \$500 000 of his own funds to set up a new firm. In the first year he pays himself a salary of \$40 000. The rate of interest he could have obtained by investing his funds elsewhere is 8 %, and the wage he could have earned in alternative employment is \$30 000. By how much will an economists calculation of the firms first year costs exceed an accountant's calculation? A \$20 000 B \$30 000 C \$40 000 D \$50 000

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6 10 The schedule shows the short-run marginal cost of producing good X. units of X marginal cost (\$) 1 40 2 30 3 26 4 34 5 50 6 90

Given that the total fixed cost is \$30 what is the level of output that minimises average total cost? A 2 units B 3 units C 4 units D 5 units

11 Which statement about the long-run average cost curve of a firm is correct? A B C D It falls continuously because of economies of scale. It passes through the minimum points of the firm's short-run average cost curves. It assumes that factor input proportions are held constant as output increases. It indicates the minimum average cost at which each level of output can be produced.

12 The proportion of total employment in an economy accounted for by small firms increases. Which explanation for this is least likely to be valid? A B C D a trend towards the use of sub-contractors to produce specialised components growing technical diseconomies of scale in manufacturing growth of the manufacturing sector and a decline in services the opening up of market niches as real incomes rise

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7 13 The diagram shows the relationship between a firm's total revenue and the quantity of goods sold.

revenue

TR

quantity

What is the price elasticity of demand for the good? A B C D zero between zero and one one between one and infinity

## 14 The diagram shows a firm's cost and revenue curves.

MC cost / revenue AC

MR O output

AR

The firm changes its objective from profit maximisation to sales revenue maximisation. Which groups are likely to be winners and losers as a result of this change? winners A B C D customers managers workers shareholders losers shareholders customers managers workers

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8 15 The diagram shows how a firm's average profit and marginal profit vary at differing levels of output. At which level of output does the firm maximise total profit?

profit 0

output

## marginal average profit profit

16 When will a firm in a perfectly competitive industry cease to produce in the short run? A B C D if it earns less than normal profits if total revenue is less than the total cost of production if marginal revenue is less than the average total cost of production if total revenue is less than the total variable cost of production

17 By reallocating resources an economy produces more of one good but no less of other goods. What change has necessarily occurred? A B C D improved technology improved efficiency increased equity increased employment

18 A regressive tax is defined as one which requires A B C D all taxpayers to pay the same absolute amount of their income in taxation. high income earners to pay less in taxes than low income earners. high income earners to pay more in taxes than low income earners. high income earners to pay a lower proportion of their income in taxes than low income earners.

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9 19 Over a given period the nominal value of a country's national income increased by 10 % and its value of output by 12 %. What could explain this? A B C D The country's money supply fell by 2 %. There was an increase in the income velocity of circulation. There was an increase in the balance of trade deficit. The country's general price level fell by 2 %.

20 An economy is operating initially at its natural rate of unemployment. According to monetarist theory, what will be the effect on unemployment in the short run and in the long run of an unanticipated increase in the money supply? short run A B C D no change no change reduction reduction long run no change reduction no change reduction

21 The table shows the level of consumption at various levels of national income for a closed economy with no government. national income (\$ million) 10 12 14 16 18 20 consumption (\$ million) 11 12 13 14 15 16

What happens to the average and marginal propensities to consume as income increases? average propensity to consume A B C D constant falls falls rises marginal propensity to consume constant constant falls falls
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10 22 Out of any addition to national income, 20 % is spent on imports, 25 % is paid in taxes, 5 % is saved and the rest is spent on domestically produced goods. What is the value of the multiplier? A 20 B 5 C 2 D 0.5

23 An economy is currently in equilibrium at point X. Government expenditure is increased on retraining programmes for those out of work. This raises the productivity of the trainees. Which point shows the new equilibrium in the economy?

D B price level X C

AS2

AS AS1

output

24 Which method of financing a government deficit will leave the money supply unchanged? A B C D the sale of government securities to the central bank the sale of government securities to the commercial banks the sale of government securities to domestic residents the sale of government securities to overseas residents

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11 25 The diagram shows three different levels of money supply (MS) and three different demand curves for holding money balances (LP). The initial equilibrium is at point X. Banks create more credit and people decide to hold more money as a precaution against emergencies. What is the new equilibrium point?

A rate of interest D X B C

LP LP LP

MS O

MS

MS

quantity of money

26 The table shows the figures for consumption, capital formation and depreciation in four economies, all measured in US \$. Assuming that the state of technology remains unchanged, which economy is most likely to experience economic growth? economy A B C D consumption (\$ m) 100 500 1 000 20 000 capital formation (\$ m) 20 200 1 200 5 000 depreciation (\$ m) 10 200 1 400 6 000

27 What is the major cause of high rates of inflation in many developing economies? A B C D balance of payments deficits budget deficits low levels of unemployment overvalued exchange rates

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12 28 Which type of unemployment arose from the worldwide decline in the demand for electronic goods beginning in the summer of 2001? A B C D seasonal voluntary frictional structural

29 What is most likely to result from foreign direct investment in developing economies? A B C D a deterioration in the visible trade balances of developing economies a reduction in migration to urban areas a reduction in the transfer of technology to developing economies a rise in per capita levels of consumption in developing economies

30 When might the effectiveness of fiscal expansion in increasing the level of output be reduced? A B C D when it leads to the appreciation of the currency when it results in an increase in the price of government bonds when it is accompanied by an increase in the money supply when the price level remains unchanged

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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ECONOMICS Paper 3 Multiple Choice (Extension) October/November 2004 1 hour
Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

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2 1 A firm is operating in a perfectly competitive market. What would ensure that it is both productively and allocatively efficient? A B C D 2 It is in long-run equilibrium. It is maximising total revenue. It is producing where marginal revenue is equal to marginal cost. Long-run average costs are falling and sales are rising.

A consumer allocates his expenditure between three goods, X, Y and Z. The table shows the prices of goods and the consumer's marginal utilities. good price (\$) marginal utility (units) X 20 40 Y 15 30 Z 10 15

How should the consumer's expenditure be reallocated in order to maximise his utility? X A B C D 3 more more less less Y more less more less Z less more less more

What explains the slope of an individuals demand curve for a normal good? A B C D market imperfections the law of variable proportions diminishing returns diminishing marginal utility

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## 3 4 In the diagram a consumers initial budget line is JK.

J G good Y

good X

Assuming no change in the price of X, what could explain a shift in the consumers budget line to GH? price of good Y A B C D 5 decrease decrease increase increase consumers money income decrease increase decrease increase

Which statement explains why in the short run labour is subject to the law of diminishing returns? A B C D As additional workers are hired, output decreases. As employment increases, the capital-labour ratio falls. As employment increases, wage rates will have to be increased. As output expands, sooner or later diseconomies of scale will set in.

What will cause the demand curve for labour to shift to the right? A B C D a fall in the money wage rate a rise in real wages an increase in immigration an increase in labour productivity

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4 7 A worker responds to an increase in his hourly wage rate by reducing the number of hours he works per week. What would explain this? A B C D 8 The income effect of the wage rate increase outweighs the substitution effect. The opportunity cost of leisure has increased. The worker prefers leisure to work. The workers supply of labour is wage inelastic.

## The diagram shows an individual workers supply curve of labour.

S W hourly wage z x

number of hours

40

The hourly wage is OW and the worker is required to work a standard 40-hour week. Which area measures the difference between the total amount the worker is paid per week and the minimum amount he would be willing to accept? A 9 x B z C x+z D zx

A firms long-run production function describes the relationship between A B C D the firms output and the quantities of factor inputs employed. the firms long-run average cost of production and the level of output. the firms long-run average cost of production and the quantities of factor inputs employed. the prices of factor inputs and the quantities of factor inputs employed.

10 What is marginal cost? A B C D the difference between the total cost of producing n and n -1 units of output the difference between the average variable cost of producing n units and n -1 units of output the difference between the average total cost of producing n units and n -1 units of output the average variable cost of producing one more unit

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5 11 To maximise total revenue, up to which point should a monopolist increase output? A B C D where marginal revenue equals average revenue where marginal revenue is maximised where marginal revenue is zero where price elasticity of demand is zero

12 A monopolist finds that at his current level of output, marginal revenue is \$2.00 and marginal cost is \$2.50. In order to increase his current level of profits, which strategy should the monopolist adopt? price A B C D decrease decrease increase increase output unchanged increase decrease unchanged

13 A perfectly competitive firm is currently producing at a level of output where its marginal cost is above its average total cost but below the market price. What would be the effect on price and output if the firm were to maximise its profit? effect on output A B C D decrease decrease increase increase effect on price increase unchanged decrease unchanged

14 In which way does monopolistic competition differ from perfect competition? A B C D Average revenue exceeds average cost in long-run equilibrium. Barriers exist to the entry of new firms. Marginal revenue exceeds marginal cost in long-run equilibrium. Products are differentiated.

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6 15 A discriminating monopolist, faced with two demand curves of differing elasticity, will equate the combined marginal cost of production with A B C D marginal revenue in each market. average revenue in each market. the difference between the marginal revenues in the two markets. the difference between the average revenues in the two markets.

16 What might prevent an economy in which all firms are required to equate price and marginal cost from achieving allocative efficiency? A B C D differences in preferences between consumers divergences between private and social costs inequalities of income and wealth product differentiation

17 A good gives rise to external benefits and is produced under conditions of imperfect competition. Which statement must be true? A B C D Consumers of the good are paying too low a price. Firms producing the good will make a loss. Output of the good is below the socially optimum level. Social costs of production exceed private costs.

18 Which of the following will directly result in an increase in China's Gross National Product? A B C D increased wages earned in a Malaysian-owned factory in China increased imports of goods and services increased outflows of net property income increased taxes on domestic expenditure

19 A countrys GDP declines but the welfare of its population rises. What could explain this? A B C D a fall in leisure time a fall in the size of the subsistence sector a rise in positive externalities a rise in the size of the population

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7 20 The accelerator principle refers to a relationship between investment and A B C D the level of GDP. changes in GDP. the level of interest rates. changes in interest rates.

21 In a closed economy, households pay \$0.40 in tax on every \$1 increase in their gross income, and spend 5/6 of every increase in their disposable income. What is the value of the multiplier? A 2 B 21/2 C 3 D 6

## 22 A country's initial consumption function is C1C1.

C2 consumption C2 C1 C1

## personal disposable income

What will cause the consumption function to shift from C1C1 to C2C2? A B C D an increase in wealth an increase in interest rates an increase in personal disposable income an increase in the expected future rates of income tax

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## 8 23 The diagram shows an economy's aggregate demand curve.

price level

What is held constant when drawing an AD curve? A B C D the exchange rate the money supply the rate of interest the price level

24 Assuming a constant income velocity of circulation of money, if real output grows by 5 %, and the money supply grows by 2 %, what will be the approximate change in the price level? A 3 % B +2 % C +3 % D +7 %

25 What would cause an increase in the transactions demand for money? A B C D an increase in the rate of interest an increase in nominal national income a fall in the price of bonds an increase in unemployment

26 In the long run, productive potential in an economy grows at an average rate of 3 % per year. In a particular year actual growth is zero because of a fall in domestic consumption. What is likely to occur? A B C D an increase in the rate of inflation an increase in the trade deficit an increase in unemployment a reduction in the government budget deficit

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9 27 The diagram shows the relationship between the rate of inflation and the rate of unemployment.

J F inflation rate

K G O unemployment rate

What would cause the curve FG to shift to JK? A B C D a decrease in government expenditure a fall in the level of employment an increase in the rate of change of wages the expectation of an increase in inflation

28 Why might a rise in domestic interest rates improve a countrys balance of payments on current account? A B C D Domestic firms will become more competitive. It will result in a fall in the exchange rate. It will result in a reduction in spending. There will be an inflow of short-term capital.

29 Without any change in government policy, what will be the effect of an economic recession on tax revenue and on government expenditure? tax revenue A B C D decrease decrease increase increase government expenditure decrease increase increase decrease

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10 30 An economy has a low level of unemployment. The government increases its expenditure. Which method of financing the additional expenditure is most likely to cause inflation? A B C D an increase in borrowing from the Central Bank an increase in income taxes an increase in sales of state assets to the non-bank public an issue of bonds to the non-bank public

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Every reasonable effort has been made to trace all copyright holders. The publishers would be pleased to hear from anyone whose rights we have unwittingly infringed. University of Cambridge International Examinations is part of the University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ECONOMICS Paper 3 Multiple Choice (Extension) October/November 2005 1 hour
Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

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## This document consists of 11 printed pages and 1 blank page.

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2 1 What will happen if a firm is subsidised by an amount equivalent to the external benefits that it confers on the rest of society? A B C D 2 Resource allocation will be improved. The firm will produce less. There will be a misallocation of resources. There will be no effect upon production.

The table shows the total utility that an individual derives from consuming different quantities of a good. quantity of good (units) 1 2 3 4 5 6 total utility (units) 20 36 50 62 72 80

The individual's marginal utility of money is \$1 = 2 units of utility. What is the maximum quantity of the good that the individual will buy when its price is \$6? A 2 units B 3 units C 4 units D 5 units

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## 3 3 In the diagram a consumer's budget line shifts from GH to JK.

G J good Y

H good X

What must be true? A B C D 4 The prices of both goods have changed. There has been no change in the consumers real income. There has been no change in the consumers money income. The price of good Y has increased relative to the price of good X.

The table shows the output of chairs at a factory when different numbers of workers are employed. number of workers number of chairs produced 0 0 1 7 2 17 3 29 4 38 5 42

Diminishing marginal returns to labour will set in when A B C D 5 the second worker is employed. the third worker is employed. the fourth worker is employed. the fifth worker is employed.

What could cause a perfectly competitive firm's marginal revenue product of labour curve to shift to the right? A B C D an increase in wages a higher rate of sales tax an increase in labour supply a rise in the price of the final product

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4 6 What is likely to be the direction of the income and substitution effects of a wage rate increase on the number of hours workers will choose to work? income effect A B C D 7 decrease decrease increase increase substitution effect decrease increase decrease increase

A trade union seeks to increase the wages that a firm pays to its workers while at the same time preserving jobs. What will strengthen the unions negotiating position? A B C D Capital and labour are perfect substitutes. The firm operates in a competitive market. The demand for the good produced by the firm is price-inelastic. The supply of labour to the firm is perfectly elastic.

The table below shows the relationship between total output and total costs of a firm given constant factor prices and fixed factor proportions. output 100 200 300 400 500 costs (\$) 80 180 300 440 600

It follows that, over this range of output, the firm experiences A B C D decreasing returns for output between 100 and 300 and increasing returns for output larger than 300. increasing returns for output between 100 and 300 and decreasing returns for output larger than 300. decreasing returns throughout. increasing returns throughout.

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5 9 Which item would not appear in a firms financial accounts but would be included in an economists calculation of the costs incurred by the firm? A B C D interest on bank loans used to purchase assets that have no alternative uses interest forgone on finance provided by the firms owner depreciation rent

10 As a firm expands, what is most likely to prevent its long run average costs falling? A B C D increased interest rates on borrowing increased labour specialisation increased labour supervision costs substitution of capital for labour

## 11 The diagram shows the position of a firm in a perfectly competitive industry.

MC AC AR = MR costs, revenue

Q output

What describes the position of the firm and the industry at output OQ? firm A B C D disequilibrium disequilibrium equilibrium equilibrium industry disequilibrium equilibrium disequilibrium equilibrium

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6 12 The diagram shows the demand curve and the long-run cost curves of a firm that operates in a perfectly contestable market.

LRMC

P4 P3 \$ P2 P1

LRAC

output

Which price will the firm charge for its product? A OP1 B OP2 C OP3 D OP4

## 13 The diagram shows a firms cost and revenue curves.

P costs, revenue MC

MR D MR

Q output

Which features are associated with the situation shown in the diagram? A B C D economies of scale and allocative efficiency interdependence and allocative efficiency price rigidity and economies of scale price rigidity and interdependence

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7 14 The value of government benefits that households are able to claim currently depends on their level of income. What would reduce the extent of the resulting poverty trap? A B C D a campaign to encourage more households to apply for the benefits to which they are entitled an increase in the level of government benefits a reduction in the rate at which benefits are withdrawn as a households income increases the targeting of benefits on those in greatest need

15 Which area of skill possessed by the managers of government-owned enterprises in a planned economy is less relevant when industries are privatised? A B C D financial management marketing production targeting stock quality and control

16 Over a given period, money income in an economy increased by 8 %. Over the same period, prices rose on average by 6 %. What can be deduced from this? A B C D Real income decreased by 2 %. The income velocity of circulation decreased by 2 %. The money supply increased by 14 %. The volume of output increased by 2 %.

17 According to monetarist theory, when will an increase in the money supply leave the level of output unchanged? A B C D when the increase in the money supply was not anticipated when the exchange rate is flexible when the liquidity trap is operative when there is an immediate adjustment to expectations about future price levels

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8 18 According to the accelerator theory, what determines this years net investment? A B C D last years consumption last years output the change in last years output the change in last years investment

19 What is the value of the multiplier in an economy with no government where the marginal 1 1 propensity to save is 6 , and the marginal propensity to import is 3 ? A
1 2

1 12

20 An aggregate demand curve slopes downwards from left to right. One reason for this is that a reduction in the average price level will lead to A B C D an increase in the real value of money balances. an increase in interest rates. a decline in the countrys international competitiveness. the expectation of further price falls.

21 A government uses real personal disposable income as a measure of the standard of living. What does this measure not take into account? A B C D the distribution of income the level of national income the size of the population the average price level

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9 22 The diagram shows three different levels of the supply of money (MS) and three different demand for money curves (LP). The initial equilibrium is at point X. There is an increase in the level of money income and at the same time there is a contraction in bank credit. Which point could be the new equilibrium point?

rate of interest

## D LP3 C LP1 LP2

MS2 O

MS1

MS3

quantity of money

23 What is likely to increase GDP per worker in a developing economy? A B C D a decrease in the numbers engaged in subsistence agriculture a decrease in the numbers engaged in manufacturing an increase in the employment rate an increase in the population of working age

24 In an economy the long-run rate of growth of potential output is 2.5 %. What must happen in the short run if actual output grows at 5 %? A B C D an increase in employment an increase in the rate of inflation a deterioration in the balance of trade an increase in labour productivity

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10 25 All else remaining unchanged, which measure would be most likely to increase the natural rate of unemployment? A B C D an increase in expenditure on education and training an increase in the rate of unemployment benefits a reduction in the governments budget deficit a reduction in the general level of interest rates

## SRPC inflation rate

unemployment rate

What is assumed to remain constant when drawing this curve? A B C D the average price level the money supply the exchange rate the natural rate of unemployment

27 The economy of a country is simultaneously experiencing a balance of payments deficit, a budget deficit, demand inflation and unemployment. The government decides to cut personal income taxes. What does this suggest is its main macroeconomic objective? A B C D to improve the balance of payments position to reduce the budget deficit to reduce the level of unemployment to reduce the rate of inflation

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11 28 A developing economy attracts additional foreign direct investment. What is likely to be the effect on its visible trade balance and on its invisibles balance? visible trade balance A B C D improve improve worsen worsen invisibles balance improve worsen improve worsen

29 How do automatic stabilisers work? A B C D by reducing government deficits in times of recession by reducing fluctuations in disposable income by reducing fluctuations in the exchange rate by increasing the size of the investment multiplier

30 Which government policy will increase aggregate demand? A B C D raising indirect taxation reducing the budget surplus removing import quotas removing subsidies

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Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ECONOMICS Paper 3 Multiple Choice (Supplement) October/November 2006 1 hour
Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

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## This document consists of 11 printed pages and 1 blank page.

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2 1 An economy is operating at a point on its production possibility curve. What is true about the way the economys resources are being used at this point? allocatively efficient A B C D possibly yes possibly yes productively efficient yes possibly yes possibly socially desirable yes possibly possibly yes

The diagram shows the marginal utility that an individual derives from a good at different levels of consumption.

utility (units)

80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 quantity (units)

MU

The utility he derives from the last \$ he spends on every good is 2 units. Assuming the marginal utility of money is constant, which quantity will he purchase if the price of the good is \$20? A 4 units B 5 units C 6 units D 7 units

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3 3 The diagram shows the marginal product of labour curve (MPL) for a firm.

## marginal product of labour

MPL

N number of workers

Labour is the only variable factor and the firm pays its workers the market wage. At the level of employment ON, which statement is correct? A B C D 4 The firm is maximising its output. The firm is minimising its total costs. The firm is minimising its wage bill. The firm is minimising its marginal cost of production.

A firm working in perfect competition sells its product for \$1. The table gives the average physical product with different numbers of workers. number of workers 1 2 3 4 average physical product 20 18 16 14

Which wage rise would cause the firm to employ two instead of three workers? A 5 \$8 to \$10 B \$10 to \$14 C \$14 to \$18 D \$16 to \$18

An individual works 40 hours per week when the wage rate is \$7 per hour. When the wage rate is increased to \$9 per hour, the individual works 36 hours per week. What explains the change in the number of hours worked? A B C D a negative income elasticity of demand for leisure an income effect outweighing a substitution effect an income effect reinforcing a substitution effect a zero income effect [Turn over

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4 6 If a firm experiences an increase in its fixed costs, how will its average variable cost and its marginal cost be affected? average variable cost A B C D rise rise no change no change marginal cost rise no change rise no change

Which of the following is an example of an external diseconomy? A B C D difficulties in co-ordinating activities in a large organisation difficulties in motivating workers in a large organisation higher transport costs as a firms market expands increased traffic congestion as industries expand

Which small firms are most likely to survive for only a relatively short period? A B C D those producing components for large firms those producing specialised products for small markets those engaged in activities with low start-up costs those engaged in activities that require flexibility in meeting customer requirements

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## 5 9 The diagram shows a firms average revenue curve.

revenue

AR O output

What can be deduced from the average revenue curve about the firms total revenue as it increases output? A B C D It will rise continuously. It will fall continuously. It will rise initially then fall. It will fall initially then rise.

10 A firm decides to aim to maximise sales revenue rather than profits. What is likely to be one of the consequences of this decision? A B C D an increase in the price of the firms product a reduction in the price of the firms shares a reduction in the firms market share a reduction in the number employed by the firm

11 Which assumption is essential for a market to be contestable? A B C D The market is supplied by a large number of firms. Firms are free to enter and leave the market. Firms cannot earn abnormal profits in the short run. Firms produce differentiated goods.

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6 12 A firm wishes to acquire some of the consumer surplus its customers currently enjoy. How might it achieve this? A B C D by charging a price that maximises revenue by introducing price discrimination by reducing operating costs by taking advantage of economies of scale

13 The price that a firm obtains for its product is not affected by the volume of goods that it produces. What should it do to maximise profits? A B C D produce until marginal cost equals price produce until average cost equals price produce until marginal revenue is zero sell as much as it can produce

14 The diagram shows the cost and revenue curves of a profit-maximising monopolist.

## MC x costs, revenue y z w AR MR O output AC

Which area measures the deadweight loss arising from the exercise of monopoly power? A x+y B y C y+z D w+z

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7 15 The diagram shows the initial cost and revenue curves of a monopoly supplier.
MC

P costs, revenue AR

MR O J K L M output

What will be the firm's profit-maximising level of output if the government fixes the price at OP? A OJ B OK C OL D OM

16 Over a given period, the nominal value of a countrys national income increased by 20 % and the rate of inflation was 10 %. Which statement is correct? A B C D There was an increase in the volume of output. There was an increase in the income velocity of circulation. There was a reduction in the demand for money. The countrys money supply increased by 10 %.

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8 17 The table shows data on a country's gross national product at market prices and on domestic spending. year 1 (\$m) GNP at market prices private consumption government consumption gross investment 400 200 120 90 year 2 (\$m) 480 260 120 80 year 3 (\$m) 560 300 140 130

In which of these years will the country be faced with a deficit on the current account of the balance of payments? year 1 A B C D     year 2     year 3    

18 Which statement is consistent with a Keynesian view of the workings of the macroeconomy? A B C D Recessions can result from fluctuations in private investment expenditure. Interest rates move to ensure continuous equality between savings and investment plans. Money wages in the economy in the short run are perfectly flexible. There is no short-run trade off between inflation and unemployment.

19 What would explain why an economy's short-run aggregate supply curve is upward sloping? A B C D a constant price level constant money wages diseconomies of scale economies of scale

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9 20 The national income is initially in equilibrium. If there were a decrease in exports, which change of equivalent value would restore national income to its initial equilibrium level? A B C D an increase in investment an increase in saving a reduction in government expenditure on goods and services a reduction in taxation

21 In a closed economy with no government C = 30 + 0.8 Y and I = 50, where C is consumption, Y is income and I is investment. What is the equilibrium level of income? A 64 B 80 C 250 D 400

22 According to Keynesian theory, what would cause individuals to want to hold more idle money balances? A B C D an increase in bond prices an increase in the rate of interest an increase in the rate of inflation an increase in the level of output

## 23 The diagram shows the market for loanable funds.

D2 D1 rate of interest E1

S2 S1 E2

loanable funds

Which changes could cause the equilibrium to move from E1 to E2? A B C D an increase in bank lending and a depletion of natural resources an increase in the propensity to save and the discovery of new mineral deposits advances in technology and a reduction in the propensity to save a decline in business confidence and a decrease in bank lending
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10 24 Which of the following are characteristics of most developing economies? high government debt: GDP ratio A B C D     a high average propensity to save    

25 What would cause an expansionary fiscal policy to be relatively ineffective? A B C D a low marginal propensity to import a fixed exchange rate a fixed money supply large-scale unemployment of resources

26 An economy has unemployed resources and a flexible exchange rate. It lowers interest rates below the level prevailing in other countries. What will be the likely effect on the level of domestic demand for goods and services and on the demand for the countrys exports? domestic demand A B C D increase increase decrease decrease export demand increase decrease decrease increase

27 In an economy the proportion of the working age population in employment increases from 70 % to 80 %. What is likely to be the effect on labour productivity and on GDP per head? labour productivity A B C D increase increase decrease decrease GDP per head increase decrease increase decrease

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11 28 What would be most likely to result in an increase in an economy's long-run rate of growth of potential output? A B C D an appreciation of the currency an increase in interest rates an increase in the government's budget deficit an increase in the level of private investment

29 An economy with a floating exchange rate is in recession and at the same time has a deficit on the current account of its balance of payments. Which policy combination would be most likely to help with both of these problems? interest rates A B C D decrease decrease increase increase tax rates unchanged increase unchanged increase

30 What does a government need to do to maintain a balanced budget? A B C D allow automatic stabilisers to work keep tax rates and benefit rates unchanged raise taxes in a slump and lower taxes in a boom aim to keep output close to the full employment level

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12 BLANK PAGE

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/03
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## This document consists of 12 printed pages.

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MC

## costs and revenue AR O

Z output

Which statement about the effect on economic efficiency is correct? A B C D 2 It will increase because a greater quantity will be produced and higher total revenue will be earned. It will increase because the value that consumers place on the product comes closer to the cost of producing the last unit. It will decline because both average and marginal revenue will fall. It will decline because both total and marginal cost will rise.

A consumer allocates his expenditure between three goods, X, Y and Z. The table shows the consumer's marginal utilities for these goods and their prices. good marginal utility (units) price (\$) X 50 20 Y 30 15 Z 25 10

How should the consumer's expenditure be reallocated in order to maximise his utility? X A B C D more more less less Y more less more less Z less more less more

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3 3 What is not held constant when calculating the substitution effect of a change in the price of a good? A B C D 4 the consumers expenditure on other goods the consumers money income the consumers tastes the prices of other goods

The diagram shows the short-run relationship between the total output of a firm and the quantity of labour.

## total output total output

quantity of labour

What can be concluded about the firm? A B C D 5 It is experiencing increasing returns to scale. It is experiencing constant returns to scale. The marginal physical product of capital is constant. The marginal physical product of labour eventually diminishes.

The introduction of equal pay legislation in a country increases the wages of female workers. What will be the most likely effect of this increase? A B C D a reduction of the rate of female unemployment a reduction in the wages of male workers an expansion in the supply of female workers substitution of female workers for male workers

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## 4 6 The diagram shows an industrys demand for and supply of labour.

S W0 wage rate

D O L M employment
Initially the labour market is in equilibrium. The workers then form a trade union which negotiates a wage equal to OW0 with the employers. What will be the effect on the level of employment in the industry? A B C D 7 an increase equal to MN an increase equal to LM a decrease equal to LN a decrease equal to LM

The table shows a firms total and marginal costs. output 1 2 3 4 5 total cost (\$) 200 215 225 240 260 marginal cost (\$) 20 15 10 15 20

What is the average fixed cost of producing 6 units? A 8 \$20 B \$30 C \$180 D \$200

Which of the following costs of a firm is most likely to rise as it expands? A B C D the rate of interest paid on borrowing the price of components the cost of monitoring workers inputs energy costs per unit of output

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5 9 A monopolist faces a downward-sloping straight-line demand curve. Which diagram shows his total revenue curve (TR)?

D TR

total revenue

TR

total revenue

output

output

## 10 The diagram shows a firms cost and revenue curves.

cost / revenue

MC AC

MR Q output

AR

Which policy objective is consistent with a decision by the firm to produce output OQ? A B C D maximising profit maximising revenue subject to earning a normal profit maximising sales revenue satisficing profits

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6 11 Which feature of oligopoly is being assumed when the demand curve for an individual firm is as shown in the diagram?

price D

O
A B C D price discrimination price leadership by the dominant firm interdependence between firms collusion between firms

quantity

12 Instead of charging all its customers the same price, a firm decides to charge different prices in different markets. How is this likely to affect consumers' surplus and the firm's marketing costs? consumers' surplus A B C D decrease decrease increase increase marketing costs decrease increase increase decrease

13 At its current level of output a monopolist is on the price-inelastic part of its demand curve. Which changes should it make to price and output in order to maximise its profits? price A B C D increase increase decrease decrease output increase decrease decrease increase

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7 14 What is not an example of market failure? A B C D inequality in the distribution of income a monopolist charging prices above marginal cost the damage to common land due to overgrazing aircraft noise affecting individuals living near airports

15 In the diagram, D is a countrys demand curve for an imported good which cannot be produced domestically. The world market price is OPw.

Pc price Pw x y

D O quantity

Which area measures the deadweight loss to the country of imposing an import tariff equal to PwPc on the good? A x+y B x C y D xy

16 What should an industry regulator control if it wishes to provide an incentive for a privatised firm to improve its productive efficiency? A B C D dividends output prices profits

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8 17 The introduction of a congestion charge on private motorists entering a city centre results in a significant reduction in traffic congestion. What will be the net welfare effects on the following groups of car users? those who continue to use their cars A B C D uncertain uncertain lose lose those who no longer travel lose uncertain lose uncertain those who switch to public transport uncertain gain gain uncertain

18 What will directly result in an increase in China's Gross National Product? A B C D increased wages earned in a Malaysian-owned factory in China increased imports of goods and services increased outflows of net property income increased taxes on domestic expenditure

19 Over a given period, the nominal value of a countrys national income increased by 10 % and the average price level increased by 20 %. What can be deduced from this information? A B C D The countrys money supply increased by 10 %. There was an increase in the income velocity of circulation. There was a reduction in the demand for money. There was a reduction in the volume of output.

20 A countrys government runs a budget surplus of \$10 billion. What must the countrys central bank do to prevent cash reserves of the commercial banks from falling? A B C D buy bonds of a value at least equal to \$10 billion buy bonds of a value less than \$10 billion sell bonds of a value at least equal to \$10 billion sell bonds of a value less than \$10 billion

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9 21 The diagram shows a two-sector economy. Initially consumption is C, investment is I1 and the equilibrium level of income is Y1. Investment increases to I2 giving a new equilibrium level of income, Y2.

U consumption, investment T R S

C + I2 C + I1

## 45 O Y1 Y2 real national income

What is the value of the multiplier? A

RS TU

RS RU

RU TU

TU RU

22 What is likely to cause a decrease in aggregate supply? A B C D a decrease in consumption expenditure an increase in labour productivity a decrease in rates of unemployment benefit an increase in wage costs per unit of output

23 The diagram shows the two main components (X and Y) of the liquidity preference curve. XY

rate of interest

quantity of money

What can be concluded about component X? A B C D It is an active balance and is interest-elastic. It is an active balance and is interest-inelastic. It is an idle balance and is interest-elastic. It is an idle balance and is interest-inelastic.
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10 24 Between 2000 and 2004 Botswana experienced economic growth but there was a fall in its Human Development Index. Which combination of events could explain this apparent paradox? aggregate demand A B C D increase increase decrease decrease productive capacity increase increase decrease decrease life expectancy increase decrease increase decrease

25 What would explain why the prices of the primary commodities produced by less developed countries fluctuate widely from year to year? A B C D the development of artificial substitutes for natural products the introduction of more capital-intensive methods of production by producers inelasticity of both the supply and demand for these products improvements in agricultural productivity

26 The diagram shows the relationship between the rate of increase in wages and the rate of unemployment.

## rate of increase in wages

rate of unemployment

What would be likely to cause the curve in the diagram to shift upwards and to the right? A B C D a reduction in regional differences in unemployment rates a reduction in the proportion of the workforce belonging to trade unions an increase in the unemployment rate the expectation of a higher rate of inflation

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11 27 What would be most likely in the short run to cause an increase in a countrys unemployment rate? A B C D an increase in its potential output an increase in its balance of trade surplus an increase in the governments budget deficit an increase in the money supply

28 What is an example of an expansionary supply side policy? A B C D an increase in tariffs an increase in interest rates an increase in spending on welfare an increase in spending on training benefits

29 In which combination of circumstances is an increase in government expenditure likely to result in the largest increase in output? initial level of unemployment A B C D high high low low means of financing additional expenditure borrowing from the banking system increase in tax rates increase in tax rates issues of bonds to non-bank private sector

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12 30 In the diagram, D1 is the initial demand curve for a countrys currency, S1 is the initial supply curve, and OE1 is the initial exchange rate.

S1

exchange rate

E2 E1 D2 D1 O quantity of currency

The demand curve then shifts to D2 and the exchange rate moves to E2. What can be deduced from this? A B C D Exchange rates are freely fluctuating. The countrys authorities are operating a managed float. At E2, the countrys foreign exchange reserves will fall. Interest rates have fallen.

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/03
October/November 2008 1 hour

*4652225289*

## This document consists of 11 printed pages and 1 blank page.

IB08 11_9708_03/3RP UCLES 2008

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2 1 Which condition must be met for economic efficiency to be achieved? A B C D 2 Marginal social costs are zero in the production of all goods. Marginal social costs equal marginal social benefits in the production of all goods. Marginal social benefits are at a maximum in the production of all goods. Marginal social costs are at a minimum in the production of all goods.

The diagram shows the levels of utility corresponding to different allocations of resources between two people. The initial allocation is Z. Which reallocation of resources would definitely be more Pareto efficient?

A B person Ys utility Z C D

45 O person Xs utility

## In the diagram a consumers budget line shifts from GH to JK.

J G good Y

good X

Regardless of any other changes that might occur, what must be correct? A B C D There has been an equal proportionate increase in the price of X and Y. There has been an equal proportionate decrease in the price of X and Y. There has been an increase in the consumers money income. There has been an increase in the consumers real income.

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3 4 Which statement explains why labour is subject to the law of diminishing returns in the short run? A B C D 5 As additional workers are hired, total output decreases. As employment increases, the capital-labour ratio falls. As employment increases, wage rates will have to be increased. As output increases, eventually diseconomies of scale will occur.

A firm currently employs 30 workers at a daily wage rate of \$40. It calculates that the marginal cost per day of hiring an additional worker would be \$102. By how much would the daily wage rate have to be increased to attract an extra worker? A \$2 B \$42 C \$62 D \$102

In which circumstances is a trade union most likely to be successful in raising wage rates? A B C D The demand for the good produced is price-elastic. The industry faces substantial foreign competition. The industrys cost structure is capital-intensive. The workers are unskilled.

When a firm increases all its inputs by 300 %, its output increases by 200 %. What does this illustrate? A B C D the law of diminishing returns increasing returns to scale diseconomies of scale the law of variable proportions

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4 8 The table shows the production of a firm. production (tonnes) 0 1 2 3 4 5 total cost (\$) 20 30 35 40 45 50

What is the average variable cost of producing 5 tonnes of output? A 9 \$4.00 B \$5.00 C \$6.00 D \$10.00

Which feature does a contestable market share with a perfectly competitive market? A B C D Firms must be price takers. Firms must operate on a small scale. There must be freedom of entry to and exit from the industry. There must be many firms in the industry.

10 Which characteristic would make it easier for firms in an industry to collude? A B C D low barriers to entry a large number of firms rapid technological change product homogeneity

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5 11 The diagram shows the cost and revenue curves of a profit-maximising monopolist. The monopolists average cost curve is identical to the long-run supply curve which would exist if the industry was perfectly competitive.

W \$ Z Y

X V

AC = MC

AR MR O T output U

Which area shows the deadweight loss resulting from this monopoly situation? A WXYZ B WXVZ C XVY D XVUT

12 The diagram shows the demand and cost curves of a monopolist who initially produces at the profit-maximising level of output.

MC

AC

D O output

The monopolist is required by the government to adopt marginal cost pricing. What will be the effect on the price charged and the output produced? price A B C D increase increase decrease decrease output increase decrease increase decrease

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6 13 The table shows the costs of two milk producers. costs per litre firm X firm Y \$9 \$7

The price received by producers is \$10 per litre. Both firms have been given quotas allowing them to produce 200 litres per day. Firm X sells its quota to firm Y. Assuming constant costs of production and zero costs of entry and exit, what price did firm Y pay (per day) to buy Xs quota? A B C D \$200 \$600 \$700 between \$200 and \$600

14 During a year, a countrys national income in money terms increased by 6 %, prices increased by 4 % and total population increased by 2 %. What was the approximate change in real income per head? A B C D a decrease of 2 % nil an increase of 2 % an increase of 4 %

15 What will be the short-run effect on the level of output of an increase in the money supply, according to Keynesian theory (assuming the liquidity trap does not apply) and according to monetarist theory (assuming the increase is unanticipated)? effect on output Keynesian theory A B C D increase increase unchanged unchanged monetarist theory increase unchanged increase unchanged

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7 16 The table shows some data for an economy. investment \$m 200 200 200 200 exports \$m 100 100 100 100 government expenditure \$m 50 50 50 50 savings \$m 50 60 75 100 imports \$m 120 140 160 180 taxation \$m 100 150 200 275 national income \$m 700 800 900 1000

What is the equilibrium level of national income? A \$700 m B \$800 m C \$900 m D \$1000 m

17 In the diagram an economy is initially in equilibrium at point X. The government increases spending on education. At the same time there is a decrease in money wage rates. Which point shows the most likely new equilibrium of the economy?

C D price level X B

AS2

AS AS1

18 In an economy, the volume of output rises by 3 % in a year, while the quantity of money rises by 5 %. If the velocity of circulation of money remains the same, what will be the approximate increases in the money value of national income and the price level? increase in money value of national income A B C D
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## increase in price level 2% 3% 2% 3%

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5% 5% 8% 8%

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8 19 What is likely to be the effect on interest rates and the supply of money of a sale of government securities to the public by a central bank? interest rates A B C D increase increase decrease decrease money supply increase decrease decrease increase

20 The diagram shows three different levels of money supply (MS) and three different demand curves for holding money balances (LP). The initial equilibrium is at point X.

A D X B C

rate of interest

LP LP LP

MS O

MS

MS

quantity of money

Banks create more credit and people decide to hold less money as a precaution against emergencies. What is the new equilibrium point? 21 Real output in an economy grows by 1.5 % but at the same time the level of unemployment increases. What can be deduced from this information? A B C D Labour productivity has decreased. Actual output has grown more slowly than potential output. Population of working age has fallen. There has been an increase in the rate of inflation.

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9 22 Which pattern of labour market data is likely to indicate an increase in cyclical unemployment? changes in compulsory redundancies A B C D decrease increase decrease increase voluntary resignations increase increase increase decrease

23 The natural rate of unemployment in an economy is 5 %. What will happen if a government persists in trying to achieve a target rate of unemployment of 3 % by expansionary monetary policy? A B C D an accelerating rate of inflation a diminishing rate of inflation a high but constant rate of inflation a negative rate of inflation

24 A developing economy experiences a rapid growth in labour productivity. What is most likely to result from this? A B C D an increase in the countrys balance of trade deficit an increase in the countrys relative labour costs a depreciation of the countrys currency an increase in real income per head

25 What would increase an economys actual output but not its potential output? A B C D an increase in the capital available to the labour force an increase in the labour forces skill level an increase in the number in the labour force an increase in the proportion of the labour force employed

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10 26 The chart shows the rates of economic growth and unemployment in a country for the period 2000 to 2003.

## 10 9 8 7 6 % 5 4 3 2 1 0 2000 2001 year

What does the chart show? A B C D Real GDP was lowest in 2003. The total labour force declined between 2000 and 2002. The standard of living fell between 2002 and 2003. The unemployment rate fell when the growth rate increased.

## percentage change in real GDP percentage rate of unemployment

2002

2003

27 What is a necessary feature of economic growth? A B C D the elimination of an economys output gap a continuing increase in the level of employment a continuing outward shift in an economys production possibility frontier an increase in an economys nominal GDP

28 The European Union imposes a quota on the volume of garments imported from China. What is likely to be a consequence? A B C D a reduction in the profit margins on garments produced by Chinese textile firms a reduction in the inflation rate in the EU a switch to producing higher-value garments by Chinese textile firms the closure of Chinese-owned textile factories in Thailand

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11 29 Without any change in government policy, what will be the effect of an economic recession on tax revenue and on government expenditure? tax revenue A B C D decrease decrease increase increase government expenditure decrease increase increase decrease

30 A countrys government wishes to switch demand away from private consumption towards investment and net exports. Which combination of policy measures would be most likely to help it achieve this objective? interest rates A B C D increase increase decrease decrease rate of income tax increase decrease increase decrease

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12 BLANK PAGE

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## ECONOMICS Paper 3 Multiple Choice (Supplement)

9708/31
October/November 2009 1 hour

Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

*7304702477*

## This document consists of 12 printed pages.

IB09 11_9708_31/FP UCLES 2009

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2 1 An economy is operating at a point on its production possibility curve. What is true about the way the economys resources are being used at this point? allocatively efficient A B C D 2 possibly yes possibly yes productively efficient yes possibly yes possibly socially desirable yes possibly possibly yes

The schedule shows the total utility derived by a consumer of a good X at different levels of consumption. quantity of X consumed total utility (units) 1 28 2 40 3 50 4 58 5 64 6 68 7 71 8 73

The consumer obtains two units of satisfaction from the last cent she spends on each good that she purchases. What is the maximum number of units of X that she will consume if the price of X is 6 cents? A 3 2 B 5 C 7 D 8

In the diagram, an individual initially chooses combination N on budget line LM. An increase in his money income accompanied by an increase in the price of good Y causes his budget line to shift to RS, and he now chooses combination T.

L R good Y N T

O good X
How does this affect his economic welfare? A B C D

He is definitely better off because his money income has increased. He is definitely worse off because he has to pay more for good Y. He is better off since combination T, which he now chooses, was not previously available to him. He is worse off since combinations of X and Y along LN are no longer available to him.
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3 4 Which statement describes a situation in which a rise in input of factor X, all other factors being constant, results in no change in a firms output? A B C D 5 There are diminishing returns to factor X. Returns to scale are constant. There are diseconomies of scale. The marginal product of X is zero.

What could cause a perfectly competitive firms marginal revenue product of labour curve to shift to the right? A B C D an increase in wages a higher rate of sales tax an increase in labour supply a rise in the price of the final product

In the diagram, MRPL is a firms marginal revenue product of labour curve, S is its supply of labour curve, and MCL its marginal cost of labour curve.

MCL W4 W3 W2 W1 MRPL O N1 N2 S

labour
Assuming profit maximisation, how many workers will the firm employ and what wage will it pay? number employed A B C D N1 N1 N2 N2 wage W3 W1 W2 W4

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4 7 What is an example of a wage differential that compensates for the disadvantages associated with particular jobs? A B C D 8 male workers earning more than female workers in the same job the tendency for wage rates negotiated by trade unions to exceed those for non-unionised labour labourers on off-shore oil rigs earning more than those employed on-shore government office workers being paid more than private sector office workers

## The diagram shows the initial position of a labour market.

D weekly wage

number of workers

The government introduces a law reducing the statutory working week from 39 hours to 36 hours. How will this affect the supply and demand curves in the diagram? employers demand curve A B C D shifts to right shifts to right shifts to left shifts to left workers supply curve shifts to left shifts to right shifts to left shifts to right

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5 9 The table shows the inputs of the two factors of production, capital and labour, needed to produce varying levels of output. output 100 200 300 400 500 capital 5 8 14 20 26 labour 10 16 28 40 52

Over which output range do increasing returns to scale occur? A 100 to 200 B 200 to 300 C 300 to 400 D 400 to 500

10 The diagram shows an industry producing under conditions of constant average costs.

X \$ T

Z W

LRAC, LRMC

AR O S MR V

output
Under perfect competition, the industry produces output OV. Which area measures the loss in consumer surplus if it were to become a monopoly? A YWZ B XYWT C XYZT D SYZV

11 The price elasticity of demand for a firms product is zero. What will be the effect on the firms revenue if it increases its price by 5 %? A B C D Its revenue will be unchanged. Its revenue will increase by 5 %. Its revenue will decrease by 5 %. Its revenue will fall to zero.
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6 12 The diagram shows the short-run position of a monopolist who believes that, in the long run, excessive profits might attract new entrants to the industry. If the monopolist believes that at prices above Pe new competitors would enter, which output would he choose to protect his long-run profits?

\$ Pe MC = AC AR MR O A B C output
13 The diagram shows the cost and revenue curves of a monopoly producer whose only cost of production is a fixed cost.

X Y AFC AR O MR output

What will such a monopolist do? A B C D set a price of OX in the short run and the long run set a price of OY in the short run and the long run set a price of OX in the short run, but discontinue production in the long run set a price of OY in the short run, but discontinue production in the long run

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7 14 A countrys steel producers are members of a cartel. Each member is allocated a production quota, and initially produces the maximum allowed under its quota. What will be the effect on total steel production and the industrys total profits of allowing the producers to trade the quotas among themselves? effect on production A B C D increase increase no change no change effect on total profits increase no change increase no change

15 What could prevent a market economy achieving allocative efficiency? A B C D disagreement among consumers over resource allocation inequalities in the distribution of income and wealth an inability to produce free goods an inability to produce public goods

16 The information in the table is taken from a countrys national income accounts. \$ million national income consumer spending investment spending government spending on goods and services taxation imports What is the value of exports? A \$100 million B \$120 million C \$140 million D \$230 million 600 400 80 100 90 120

17 Assuming a constant income velocity of circulation of money, if the rate of growth of the money supply is 8 % and the average price level increases by 5 %, what will be the approximate change in real output? A 3 % B +3 % C +8 % D +13 %

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8 18 According to monetarist theory, what will be the short-run effect of an unexpected increase in the money supply? A B C D an appreciation of the foreign exchange rate an increase in employment an increase in real wages an increase in the rate of interest

19 The table gives the national income of a country over six years. year 1 2 3 4 5 6 national income (Y) 2100 2110 2125 2145 2160 2170

According to the accelerator principle, in which year did net investment first fall to a level below that of the previous year? A year 3 B year 4 C year 5 D year 6

20 Out of any addition to national income, 20 % is spent on imports, 15 % is paid in taxes, 5 % is saved and the rest is spent on domestically-produced goods. What is the value of the multiplier? A 2.5 B 5 C 6 D 20

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9 21 The diagram shows a number of expenditure functions. The original expenditure function is shown by E.

E1 E2 E E3 E4

expenditure

income

The government announces a decrease in government expenditure on goods and services and reduces the standard rate of income tax. Which line shows the new expenditure function resulting from these changes? A E1 B E2 C E3 D E4

## 22 The diagram shows an economys aggregate supply curve.

AS

price level

output

What is likely to cause the curve to shift to the left? A B C D improvements in technology schemes to increase the geographical mobility of labour an increase in investment due to a reduction in interest rates an increase in the marginal rate of income tax

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10 23 The government sells \$1 million of bonds to the commercial banks. It uses the proceeds from the sale to provide subsidies to sugar producers who pay them into their bank accounts. Assuming that notes and coins in circulation remain unchanged, what will be the immediate effect on the assets and liabilities of the commercial banks? assets A B C D bonds +\$1 million reserves \$1 million bonds +\$1 million reserves \$1 million unchanged liabilities unchanged deposits +\$1 million deposits \$1 million unchanged

24 According to loanable funds theory, what will cause the rate of interest to rise? A B C D an increase in the rate of investment an increase in liquidity preference an increase in the level of savings an increase in the supply of money

25 In the diagram, the curve X1 shows an economys initial trade-off between inflation and unemployment.

X1 rate of inflation

X2

unemployment rate
What could cause the curve to shift to X2? A B C D an increase in the natural rate of unemployment a decrease in the money supply the expectation of a decrease in the inflation rate an increase in the rate of interest
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11 26 An economys GDP per capita grows over a certain period of time, but its development when measured by the Human Development Index remains unchanged. What could explain the difference? A B C D longer working hours increased pollution an increased crime rate a decline in life expectancy

27 What is most likely to be the impact on economic growth and on the rate of inflation in developed economies of an inflow of migrant labour from developing economies? impact on economic growth A B C D increase increase decrease decrease impact on rate of inflation increase decrease increase decrease

28 An economy has unemployed resources and a flexible exchange rate. It lowers interest rates below the level prevailing in other countries. What will be the likely effect on the level of domestic demand for goods and services and on the demand for the countrys exports? domestic demand A B C D increase increase decrease decrease export demand increase decrease decrease increase

29 Which policy is most likely to help to correct an adverse balance on the current account of the balance of payments? A B C D abolishing tariffs devaluing the currency reducing direct taxes reducing indirect taxes

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12 30 A government decides to pursue a more deflationary fiscal policy and a more reflationary monetary policy. Which combination of changes in policy instruments is consistent with this? government expenditure A B C D decrease decrease increase increase interest rate decrease decrease increase increase taxation increase decrease decrease increase

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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## ECONOMICS Paper 3 Multiple Choice (Supplement)

9708/32
October/November 2009 1 hour

Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

*8113106021*

## This document consists of 12 printed pages.

IB09 11_9708_32/FP UCLES 2009

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2 1 The schedule shows the total utility derived by a consumer of a good X at different levels of consumption. quantity of X consumed total utility (units) 1 28 2 40 3 50 4 58 5 64 6 68 7 71 8 73

The consumer obtains two units of satisfaction from the last cent she spends on each good that she purchases. What is the maximum number of units of X that she will consume if the price of X is 6 cents? A 2 2 B 5 C 7 D 8

In the diagram, an individual initially chooses combination N on budget line LM. An increase in his money income accompanied by an increase in the price of good Y causes his budget line to shift to RS, and he now chooses combination T.

L R good Y N T

O good X
How does this affect his economic welfare? A B C D 3

He is definitely better off because his money income has increased. He is definitely worse off because he has to pay more for good Y. He is better off since combination T, which he now chooses, was not previously available to him. He is worse off since combinations of X and Y along LN are no longer available to him.

Which statement describes a situation in which a rise in input of factor X, all other factors being constant, results in no change in a firms output? A B C D There are diminishing returns to factor X. Returns to scale are constant. There are diseconomies of scale. The marginal product of X is zero.

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3 4 What could cause a perfectly competitive firms marginal revenue product of labour curve to shift to the right? A B C D 5 an increase in wages a higher rate of sales tax an increase in labour supply a rise in the price of the final product

In the diagram, MRPL is a firms marginal revenue product of labour curve, S is its supply of labour curve, and MCL its marginal cost of labour curve.

MCL W4 W3 W2 W1 MRPL O N1 N2 S

labour

Assuming profit maximisation, how many workers will the firm employ and what wage will it pay? number employed A B C D 6 N1 N1 N2 N2 wage W3 W1 W2 W4

What is an example of a wage differential that compensates for the disadvantages associated with particular jobs? A B C D male workers earning more than female workers in the same job the tendency for wage rates negotiated by trade unions to exceed those for non-unionised labour labourers on off-shore oil rigs earning more than those employed on-shore government office workers being paid more than private sector office workers

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## 4 7 The diagram shows the initial position of a labour market.

D weekly wage

number of workers

The government introduces a law reducing the statutory working week from 39 hours to 36 hours. How will this affect the supply and demand curves in the diagram? employers demand curve A B C D 8 shifts to right shifts to right shifts to left shifts to left workers supply curve shifts to left shifts to right shifts to left shifts to right

The table shows the inputs of the two factors of production, capital and labour, needed to produce varying levels of output. output 100 200 300 400 500 capital 5 8 14 20 26 labour 10 16 28 40 52

Over which output range do increasing returns to scale occur? A 100 to 200 B 200 to 300 C 300 to 400 D 400 to 500

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5 9 The diagram shows an industry producing under conditions of constant average costs.

X \$ T

Z W

LRAC, LRMC

AR O S MR V

output
Under perfect competition, the industry produces output OV. Which area measures the loss in consumer surplus if it were to become a monopoly? A YWZ B XYWT C XYZT D SYZV

10 The price elasticity of demand for a firms product is zero. What will be the effect on the firms revenue if it increases its price by 5 %? A B C D Its revenue will be unchanged. Its revenue will increase by 5 %. Its revenue will decrease by 5 %. Its revenue will fall to zero.

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6 11 The diagram shows the short-run position of a monopolist who believes that, in the long run, excessive profits might attract new entrants to the industry. If the monopolist believes that at prices above Pe new competitors would enter, which output would he choose to protect his long-run profits?

\$ Pe MC = AC AR MR O A B C output
12 The diagram shows the cost and revenue curves of a monopoly producer whose only cost of production is a fixed cost.

X Y AFC AR O MR output

What will such a monopolist do? A B C D set a price of OX in the short run and the long run set a price of OY in the short run and the long run set a price of OX in the short run, but discontinue production in the long run set a price of OY in the short run, but discontinue production in the long run

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7 13 A countrys steel producers are members of a cartel. Each member is allocated a production quota, and initially produces the maximum allowed under its quota. What will be the effect on total steel production and the industrys total profits of allowing the producers to trade the quotas among themselves? effect on production A B C D increase increase no change no change effect on total profits increase no change increase no change

14 What could prevent a market economy achieving allocative efficiency? A B C D disagreement among consumers over resource allocation inequalities in the distribution of income and wealth an inability to produce free goods an inability to produce public goods

15 The information in the table is taken from a countrys national income accounts. \$ million national income consumer spending investment spending government spending on goods and services taxation imports What is the value of exports? A \$100 million B \$120 million C \$140 million D \$230 million 600 400 80 100 90 120

16 Assuming a constant income velocity of circulation of money, if the rate of growth of the money supply is 8 % and the average price level increases by 5 %, what will be the approximate change in real output? A 3 % B +3 % C +8 % D +13 %

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8 17 According to monetarist theory, what will be the short-run effect of an unexpected increase in the money supply? A B C D an appreciation of the foreign exchange rate an increase in employment an increase in real wages an increase in the rate of interest

18 The table gives the national income of a country over six years. year 1 2 3 4 5 6 national income (Y) 2100 2110 2125 2145 2160 2170

According to the accelerator principle, in which year did net investment first fall to a level below that of the previous year? A year 3 B year 4 C year 5 D year 6

19 Out of any addition to national income, 20 % is spent on imports, 15 % is paid in taxes, 5 % is saved and the rest is spent on domestically-produced goods. What is the value of the multiplier? A 2.5 B 5 C 6 D 20

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9 20 The diagram shows a number of expenditure functions. The original expenditure function is shown by E.

E1 E2 E E3 E4

expenditure

income

The government announces a decrease in government expenditure on goods and services and reduces the standard rate of income tax. Which line shows the new expenditure function resulting from these changes? A E1 B E2 C E3 D E4

## 21 The diagram shows an economys aggregate supply curve.

AS

price level

output

What is likely to cause the curve to shift to the left? A B C D improvements in technology schemes to increase the geographical mobility of labour an increase in investment due to a reduction in interest rates an increase in the marginal rate of income tax

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10 22 The government sells \$1 million of bonds to the commercial banks. It uses the proceeds from the sale to provide subsidies to sugar producers who pay them into their bank accounts. Assuming that notes and coins in circulation remain unchanged, what will be the immediate effect on the assets and liabilities of the commercial banks? assets A B C D bonds +\$1 million reserves \$1 million bonds +\$1 million reserves \$1 million unchanged liabilities unchanged deposits +\$1 million deposits \$1 million unchanged

23 According to loanable funds theory, what will cause the rate of interest to rise? A B C D an increase in the rate of investment an increase in liquidity preference an increase in the level of savings an increase in the supply of money

24 In the diagram, the curve X1 shows an economys initial trade-off between inflation and unemployment.

X1 rate of inflation

X2

unemployment rate
What could cause the curve to shift to X2? A B C D an increase in the natural rate of unemployment a decrease in the money supply the expectation of a decrease in the inflation rate an increase in the rate of interest
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11 25 An economys GDP per capita grows over a certain period of time, but its development when measured by the Human Development Index remains unchanged. What could explain the difference? A B C D longer working hours increased pollution an increased crime rate a decline in life expectancy

26 What is most likely to be the impact on economic growth and on the rate of inflation in developed economies of an inflow of migrant labour from developing economies? impact on economic growth A B C D increase increase decrease decrease impact on rate of inflation increase decrease increase decrease

27 An economy has unemployed resources and a flexible exchange rate. It lowers interest rates below the level prevailing in other countries. What will be the likely effect on the level of domestic demand for goods and services and on the demand for the countrys exports? domestic demand A B C D increase increase decrease decrease export demand increase decrease decrease increase

28 Which policy is most likely to help to correct an adverse balance on the current account of the balance of payments? A B C D abolishing tariffs devaluing the currency reducing direct taxes reducing indirect taxes

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12 29 A government decides to pursue a more deflationary fiscal policy and a more reflationary monetary policy. Which combination of changes in policy instruments is consistent with this? government expenditure A B C D decrease decrease increase increase interest rate decrease decrease increase increase taxation increase decrease decrease increase

30 An economy is operating at a point on its production possibility curve. What is true about the way the economys resources are being used at this point? allocatively efficient A B C D possibly yes possibly yes productively efficient yes possibly yes possibly socially desirable yes possibly possibly yes

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2009

9708/32/O/N/09

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## ECONOMICS Paper 3 Multiple Choice (Supplement)

9708/31
October/November 2010 1 hour

Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

*1437656649*

## This document consists of 12 printed pages.

IB10 11_9708_31/4RP UCLES 2010

[Turn over

www.XtremePapers.com

2 1 In an economy no one can be made better off without making others worse off. What can be concluded from this? A B C D All markets are perfectly competitive. There are no externalities. The economy is operating on its production possibility curve. The distribution of income reflects what each individual deserves.

The schedule shows the total utility derived by a consumer of a good X at different levels of consumption. quantity of X consumed total utility (units) 1 30 2 50 3 65 4 75 5 80 6 83 7 84

The consumer obtains three units of utility from the last \$ she spends on each good that she purchases. What is the maximum number of units of X that she will consume if the price of X is \$5? A 3 B 4 C 5 D 6

The line RS in the diagram shows the different combinations of goods X and Y that a consumer can afford with his present income.

R quantity of Y N M S O quantity of X

The consumers original equilibrium is at M. What could explain a change in his equilibrium position to N? A B C D a change in his tastes a decrease in the price of X and a bigger percentage increase in the price of Y an increase in the price of X and an increase in his income equal percentage increases in his income and in both prices

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3 4 A firm in a perfectly competitive industry employs two factors of production, X and Y. The table shows the factor price and the current marginal physical product of these two factors. factor X factor price marginal physical product \$2.50 2 factor Y \$6.00 8

If the firm sells its product for \$1 and aims to maximise profits, what should it do? A B C D employ less of both X and Y employ less of X and more of Y employ more of both X and Y employ more of X and less of Y

In the diagram, the curve shows the various combinations of labour and capital that can be employed to produce a given level of output. A firm chooses the combination of labour and capital shown by point X on the curve.

X capital Y

labour

What could explain why the firm later chooses the combination of labour and capital shown by point Y? A B C D an increase in capital productivity an increase in interest rates an increase in labour productivity an increase in wage rates

To increase its labour force from 100 to 101 workers, a firm has to increase the daily wage rate from \$300 to \$302. What is the marginal cost of labour per day? A \$2 B \$202 C \$302 D \$502

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10

20

30

40

## hours per week

The worker is required to work a minimum of 40 hours a week at the hourly wage, 0W. Which area measures the economic rent obtained by the worker? A xy B x+y C yx D y+z

## The diagram shows a firms short-run marginal cost curve.

SRMC

cost

Q output

What explains why the curve is upward sloping at output levels above OQ? A B C D diseconomies of scale inelasticity of supply rising fixed costs the law of variable proportions

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## 5 9 The diagram shows a firms cost and revenue curves.

MC \$ AC

MR Q output

AR

What could explain why the firm produces output OQ? A B C D It is operating in a contestable market. It is operating in a perfectly competitive market. It is seeking to maximise profits. It is seeking to maximise sales revenue.

10 A firm wishes to acquire some of the consumer surplus its customers currently enjoy. How might it achieve this? A B C D by introducing price discrimination by reducing operating costs by setting a price that maximises revenue by taking advantage of economies of scale

11 A perfectly competitive firm finds that at its current level of output, marginal revenue is \$2.00 and marginal cost is \$2.50. If the firm is a profit maximiser, what will happen to its price and output? price A B C D increases increases unchanged unchanged output decreases unchanged decreases unchanged

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6 12 The diagram shows the outcome when a perfectly competitive market is taken over by a monopoly.

\$ X AC MR O quantity D

What does area X represent? A B C D monopoly profit the reduction in consumer surplus the resulting deadweight loss transfer earnings

13 A tax is said to be regressive when A B C D low income earners pay a higher proportion of their income in tax than high income earners. marginal tax rates exceed average tax rates. the cost of collecting the tax exceeds the revenue raised. the marginal rate of tax is higher for high income earners than low income earners.

14 Which is not a policy designed to correct market failure? A B C D competition policy free inoculation against infectious diseases minimum wage policy regulations to limit river pollution

15 What is meant by real wages? A B C D the marginal physical product of labour the opportunity cost of labour the purchasing power of money wages wages net of tax

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7 16 What is not a leakage from the circular flow of income? A B C D expenditure on foreign goods indirect taxes undistributed profits unemployment benefits

17 According to Keynesian theory, when will an increase in the money supply leave the level of output unchanged? A B C D when the liquidity trap is operative when the money supply increase was not anticipated when there is a floating exchange rate when there is an immediate adjustment to expectations about future price levels

18 According to monetarist theory, what will be the short-run and the long-run effect of an unexpected increase in the money supply on the real wage level? short-run A B C D decrease decrease unchanged unchanged long-run increase unchanged increase unchanged

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8 19 The diagram shows the relationship between consumption expenditure and income.

consumption

income

Which statement is correct? A B C D The average propensity to consume is constant. The average propensity to consume is rising. The marginal propensity to consume is equal to the average propensity to consume. The marginal propensity to consume is less than the average propensity to consume.

20 In a closed economy with no government the full employment level of income = \$400 billion and the equilibrium level of income = \$380 billion. If the deflationary gap is \$4 billion, what is the marginal propensity to consume? A

1 5

1 4

3 4

4 5

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## 9 21 The diagram shows an aggregate demand curve.

price level

What helps to explain why the curve is downward sloping? A B C D When exports increase there will be an increase in national income. When government expenditure increases there will be an increase in national output. When investment increases there will be an increase in consumption. When the price level increases there will be an increase in interest rates.

22 An increase in the money supply leads to a fall in interest rates. What else will decrease as a result of these changes? A B C D the desire to hold idle money balances the price of equities the price of government bonds the velocity of circulation of money

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## 10 23 The diagram shows the market for loanable funds.

D1 D2 rate of interest E2

S1 S2 E1

loanable funds

Which changes could cause the equilibrium to move from E1 to E2? A B C D a decline in business confidence and an increase in bank lending a decrease in bank lending and depletion of natural resources an increase in the propensity to save and the discovery of new mineral deposits improvements in technology and reduction in the propensity to save

24 Which feature of the Indian economy could explain why the purchasing power parity exchange rate of the Rupee is much higher than its market exchange rate? A B C D high levels of duty on imported goods high levels of rural unemployment the relatively low price of goods not traded internationally the relatively low rate of inflation

25 What is likely to be the effect of a fall in oil prices on the global economy? A B C D a decrease in the rate of economic growth a decrease in unemployment a strengthening of cost-push inflation a weakening of demand-pull inflation

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11 26 What is an unavoidable cost of long-run economic growth? A B C D an increase in inflation an increase in the working hours of the population a sacrifice of potential present consumption greater inequality in the distribution of income

27 What could be expected to increase the pressure of demand-pull inflation in an open economy? A B C D an appreciation of the foreign exchange rate an increase in indirect taxes an increase in interest rates the imposition of import controls

28 When will taxes be most effective in dampening cyclical changes in national output? A B C D when the tax yield is independent of national income when the tax yield varies inversely with national income when the tax yield varies less than proportionately with national income when the tax yield varies more than proportionately with national income

29 The government of a country decides to increase the proportion of its tax revenue it obtains from direct taxes and to reduce the proportion it obtains from indirect taxes. What is likely to be the impact on the distribution of income and on work incentives? distribution of income A B C D less equal less equal more equal more equal

## work incentives decrease increase decrease increase

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12 30 A country introduces import quotas. The suppliers of imported goods charge market-clearing prices. Assuming the demand for imports is price-inelastic, what will be the impact on the countrys balance of trade and on its terms of trade? balance of trade A B C D improves improves worsens worsens terms of trade improve worsen improve worsen

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2010

9708/31/O/N/10

www.XtremePapers.com

## ECONOMICS Paper 3 Multiple Choice (Supplement)

9708/32
October/November 2010 1 hour

Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

*9274140355*

## This document consists of 12 printed pages.

IB10 11_9708_32/RP UCLES 2010

[Turn over

www.XtremePapers.com

2 1 In an economy no one can be made better off without making others worse off. What can be concluded from this? A B C D All markets are perfectly competitive. There are no externalities. The economy is operating on its production possibility curve. The distribution of income reflects what each individual deserves.

The schedule shows the total utility derived by a consumer of a good X at different levels of consumption. quantity of X consumed total utility (units) 1 30 2 50 3 65 4 75 5 80 6 83 7 84

The consumer obtains three units of utility from the last \$ she spends on each good that she purchases. What is the maximum number of units of X that she will consume if the price of X is \$5? A 3 B 4 C 5 D 6

The line RS in the diagram shows the different combinations of goods X and Y that a consumer can afford with his present income.

R quantity of Y N M S O quantity of X

The consumers original equilibrium is at M. What could explain a change in his equilibrium position to N? A B C D a change in his tastes a decrease in the price of X and a bigger percentage increase in the price of Y an increase in the price of X and an increase in his income equal percentage increases in his income and in both prices

UCLES 2010

9708/32/O/N/10

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3 4 A firm in a perfectly competitive industry employs two factors of production, X and Y. The table shows the factor price and the current marginal physical product of these two factors. factor X factor price marginal physical product \$2.50 2 factor Y \$6.00 8

If the firm sells its product for \$1 and aims to maximise profits, what should it do? A B C D employ less of both X and Y employ less of X and more of Y employ more of both X and Y employ more of X and less of Y

In the diagram, the curve shows the various combinations of labour and capital that can be employed to produce a given level of output. A firm chooses the combination of labour and capital shown by point X on the curve.

X capital Y

labour

What could explain why the firm later chooses the combination of labour and capital shown by point Y? A B C D an increase in capital productivity an increase in interest rates an increase in labour productivity an increase in wage rates

To increase its labour force from 100 to 101 workers, a firm has to increase the daily wage rate from \$300 to \$302. What is the marginal cost of labour per day? A \$2 B \$202 C \$302 D \$502

UCLES 2010

9708/32/O/N/10

[Turn over

www.XtremePapers.com

10

20

30

40

## hours per week

The worker is required to work a minimum of 40 hours a week at the hourly wage, 0W. Which area measures the economic rent obtained by the worker? A xy B x+y C yx D y+z

## The diagram shows a firms short-run marginal cost curve.

SRMC

cost

Q output

What explains why the curve is upward sloping at output levels above OQ? A B C D diseconomies of scale inelasticity of supply rising fixed costs the law of variable proportions

UCLES 2010

9708/32/O/N/10

www.XtremePapers.com

## 5 9 The diagram shows a firms cost and revenue curves.

MC \$ AC

MR Q output

AR

What could explain why the firm produces output OQ? A B C D It is operating in a contestable market. It is operating in a perfectly competitive market. It is seeking to maximise profits. It is seeking to maximise sales revenue.

10 A firm wishes to acquire some of the consumer surplus its customers currently enjoy. How might it achieve this? A B C D by introducing price discrimination by reducing operating costs by setting a price that maximises revenue by taking advantage of economies of scale

11 A perfectly competitive firm finds that at its current level of output, marginal revenue is \$2.00 and marginal cost is \$2.50. If the firm is a profit maximiser, what will happen to its price and output? price A B C D increases increases unchanged unchanged output decreases unchanged decreases unchanged

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6 12 The diagram shows the outcome when a perfectly competitive market is taken over by a monopoly.

\$ X AC MR O quantity D

What does area X represent? A B C D monopoly profit the reduction in consumer surplus the resulting deadweight loss transfer earnings

13 A tax is said to be regressive when A B C D low income earners pay a higher proportion of their income in tax than high income earners. marginal tax rates exceed average tax rates. the cost of collecting the tax exceeds the revenue raised. the marginal rate of tax is higher for high income earners than low income earners.

14 Which is not a policy designed to correct market failure? A B C D competition policy free inoculation against infectious diseases minimum wage policy regulations to limit river pollution

15 What is meant by real wages? A B C D the marginal physical product of labour the opportunity cost of labour the purchasing power of money wages wages net of tax

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7 16 What is not a leakage from the circular flow of income? A B C D expenditure on foreign goods indirect taxes undistributed profits unemployment benefits

17 According to Keynesian theory, when will an increase in the money supply leave the level of output unchanged? A B C D when the liquidity trap is operative when the money supply increase was not anticipated when there is a floating exchange rate when there is an immediate adjustment to expectations about future price levels

18 According to monetarist theory, what will be the short-run and the long-run effect of an unexpected increase in the money supply on the real wage level? short-run A B C D decrease decrease unchanged unchanged long-run increase unchanged increase unchanged

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8 19 The diagram shows the relationship between consumption expenditure and income.

consumption

income

Which statement is correct? A B C D The average propensity to consume is constant. The average propensity to consume is rising. The marginal propensity to consume is equal to the average propensity to consume. The marginal propensity to consume is less than the average propensity to consume.

20 In a closed economy with no government the full employment level of income = \$400 billion and the equilibrium level of income = \$380 billion. If the deflationary gap is \$4 billion, what is the marginal propensity to consume? A

1 5

1 4

3 4

4 5

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## 9 21 The diagram shows an aggregate demand curve.

price level

What helps to explain why the curve is downward sloping? A B C D When exports increase there will be an increase in national income. When government expenditure increases there will be an increase in national output. When investment increases there will be an increase in consumption. When the price level increases there will be an increase in interest rates.

22 An increase in the money supply leads to a fall in interest rates. What else will decrease as a result of these changes? A B C D the desire to hold idle money balances the price of equities the price of government bonds the velocity of circulation of money

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## 10 23 The diagram shows the market for loanable funds.

D1 D2 rate of interest E2

S1 S2 E1

loanable funds

Which changes could cause the equilibrium to move from E1 to E2? A B C D a decline in business confidence and an increase in bank lending a decrease in bank lending and depletion of natural resources an increase in the propensity to save and the discovery of new mineral deposits improvements in technology and reduction in the propensity to save

24 Which feature of the Indian economy could explain why the purchasing power parity exchange rate of the Rupee is much higher than its market exchange rate? A B C D high levels of duty on imported goods high levels of rural unemployment the relatively low price of goods not traded internationally the relatively low rate of inflation

25 What is likely to be the effect of a fall in oil prices on the global economy? A B C D a decrease in the rate of economic growth a decrease in unemployment a strengthening of cost-push inflation a weakening of demand-pull inflation

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11 26 What is an unavoidable cost of long-run economic growth? A B C D an increase in inflation an increase in the working hours of the population a sacrifice of potential present consumption greater inequality in the distribution of income

27 What could be expected to increase the pressure of demand-pull inflation in an open economy? A B C D an appreciation of the foreign exchange rate an increase in indirect taxes an increase in interest rates the imposition of import controls

28 When will taxes be most effective in dampening cyclical changes in national output? A B C D when the tax yield is independent of national income when the tax yield varies inversely with national income when the tax yield varies less than proportionately with national income when the tax yield varies more than proportionately with national income

29 The government of a country decides to increase the proportion of its tax revenue it obtains from direct taxes and to reduce the proportion it obtains from indirect taxes. What is likely to be the impact on the distribution of income and on work incentives? distribution of income A B C D less equal less equal more equal more equal

## work incentives decrease increase decrease increase

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12 30 A country introduces import quotas. The suppliers of imported goods charge market-clearing prices. Assuming the demand for imports is price-inelastic, what will be the impact on the countrys balance of trade and on its terms of trade? balance of trade A B C D improves improves worsens worsens terms of trade improve worsen improve worsen

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2010

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## ECONOMICS Paper 3 Multiple Choice (Supplement)

9708/33
October/November 2010 1 hour

Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

*2391785909*

## This document consists of 12 printed pages.

IB10 11_9708_33/RP UCLES 2010

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2 1 The schedule shows the total utility derived by a consumer of a good X at different levels of consumption. quantity of X consumed total utility (units) 1 30 2 50 3 65 4 75 5 80 6 83 7 84

The consumer obtains three units of utility from the last \$ she spends on each good that she purchases. What is the maximum number of units of X that she will consume if the price of X is \$5? A 3 B 4 C 5 D 6

The line RS in the diagram shows the different combinations of goods X and Y that a consumer can afford with his present income.

R quantity of Y N M S O quantity of X

The consumers original equilibrium is at M. What could explain a change in his equilibrium position to N? A B C D a change in his tastes a decrease in the price of X and a bigger percentage increase in the price of Y an increase in the price of X and an increase in his income equal percentage increases in his income and in both prices

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3 3 A firm in a perfectly competitive industry employs two factors of production, X and Y. The table shows the factor price and the current marginal physical product of these two factors. factor X factor price marginal physical product \$2.50 2 factor Y \$6.00 8

If the firm sells its product for \$1 and aims to maximise profits, what should it do? A B C D employ less of both X and Y employ less of X and more of Y employ more of both X and Y employ more of X and less of Y

In the diagram, the curve shows the various combinations of labour and capital that can be employed to produce a given level of output. A firm chooses the combination of labour and capital shown by point X on the curve.

X capital Y

labour

What could explain why the firm later chooses the combination of labour and capital shown by point Y? A B C D an increase in capital productivity an increase in interest rates an increase in labour productivity an increase in wage rates

To increase its labour force from 100 to 101 workers, a firm has to increase the daily wage rate from \$300 to \$302. What is the marginal cost of labour per day? A \$2 B \$202 C \$302 D \$502

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10

20

30

40

## hours per week

The worker is required to work a minimum of 40 hours a week at the hourly wage, 0W. Which area measures the economic rent obtained by the worker? A xy B x+y C yx D y+z

## The diagram shows a firms short-run marginal cost curve.

SRMC

cost

Q output

What explains why the curve is upward sloping at output levels above OQ? A B C D diseconomies of scale inelasticity of supply rising fixed costs the law of variable proportions

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## 5 8 The diagram shows a firms cost and revenue curves.

MC \$ AC

MR Q output

AR

What could explain why the firm produces output OQ? A B C D It is operating in a contestable market. It is operating in a perfectly competitive market. It is seeking to maximise profits. It is seeking to maximise sales revenue.

A firm wishes to acquire some of the consumer surplus its customers currently enjoy. How might it achieve this? A B C D by introducing price discrimination by reducing operating costs by setting a price that maximises revenue by taking advantage of economies of scale

10 A perfectly competitive firm finds that at its current level of output, marginal revenue is \$2.00 and marginal cost is \$2.50. If the firm is a profit maximiser, what will happen to its price and output? price A B C D increases increases unchanged unchanged output decreases unchanged decreases unchanged

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6 11 The diagram shows the outcome when a perfectly competitive market is taken over by a monopoly.

\$ X AC MR O quantity D

What does area X represent? A B C D monopoly profit the reduction in consumer surplus the resulting deadweight loss transfer earnings

12 A tax is said to be regressive when A B C D low income earners pay a higher proportion of their income in tax than high income earners. marginal tax rates exceed average tax rates. the cost of collecting the tax exceeds the revenue raised. the marginal rate of tax is higher for high income earners than low income earners.

13 Which is not a policy designed to correct market failure? A B C D competition policy free inoculation against infectious diseases minimum wage policy regulations to limit river pollution

14 What is meant by real wages? A B C D the marginal physical product of labour the opportunity cost of labour the purchasing power of money wages wages net of tax

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7 15 What is not a leakage from the circular flow of income? A B C D expenditure on foreign goods indirect taxes undistributed profits unemployment benefits

16 According to Keynesian theory, when will an increase in the money supply leave the level of output unchanged? A B C D when the liquidity trap is operative when the money supply increase was not anticipated when there is a floating exchange rate when there is an immediate adjustment to expectations about future price levels

17 According to monetarist theory, what will be the short-run and the long-run effect of an unexpected increase in the money supply on the real wage level? short-run A B C D decrease decrease unchanged unchanged long-run increase unchanged increase unchanged

UCLES 2010

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www.XtremePapers.com

8 18 The diagram shows the relationship between consumption expenditure and income.

consumption

income

Which statement is correct? A B C D The average propensity to consume is constant. The average propensity to consume is rising. The marginal propensity to consume is equal to the average propensity to consume. The marginal propensity to consume is less than the average propensity to consume.

19 In a closed economy with no government the full employment level of income = \$400 billion and the equilibrium level of income = \$380 billion. If the deflationary gap is \$4 billion, what is the marginal propensity to consume? A

1 5

1 4

3 4

4 5

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## 9 20 The diagram shows an aggregate demand curve.

price level

What helps to explain why the curve is downward sloping? A B C D When exports increase there will be an increase in national income. When government expenditure increases there will be an increase in national output. When investment increases there will be an increase in consumption. When the price level increases there will be an increase in interest rates.

21 An increase in the money supply leads to a fall in interest rates. What else will decrease as a result of these changes? A B C D the desire to hold idle money balances the price of equities the price of government bonds the velocity of circulation of money

UCLES 2010

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www.XtremePapers.com

## 10 22 The diagram shows the market for loanable funds.

D1 D2 rate of interest E2

S1 S2 E1

loanable funds

Which changes could cause the equilibrium to move from E1 to E2? A B C D a decline in business confidence and an increase in bank lending a decrease in bank lending and depletion of natural resources an increase in the propensity to save and the discovery of new mineral deposits improvements in technology and reduction in the propensity to save

23 Which feature of the Indian economy could explain why the purchasing power parity exchange rate of the Rupee is much higher than its market exchange rate? A B C D high levels of duty on imported goods high levels of rural unemployment the relatively low price of goods not traded internationally the relatively low rate of inflation

24 What is likely to be the effect of a fall in oil prices on the global economy? A B C D a decrease in the rate of economic growth a decrease in unemployment a strengthening of cost-push inflation a weakening of demand-pull inflation

25 What is an unavoidable cost of long-run economic growth? A B C D an increase in inflation an increase in the working hours of the population a sacrifice of potential present consumption greater inequality in the distribution of income

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11 26 What could be expected to increase the pressure of demand-pull inflation in an open economy? A B C D an appreciation of the foreign exchange rate an increase in indirect taxes an increase in interest rates the imposition of import controls

27 When will taxes be most effective in dampening cyclical changes in national output? A B C D when the tax yield is independent of national income when the tax yield varies inversely with national income when the tax yield varies less than proportionately with national income when the tax yield varies more than proportionately with national income

28 The government of a country decides to increase the proportion of its tax revenue it obtains from direct taxes and to reduce the proportion it obtains from indirect taxes. What is likely to be the impact on the distribution of income and on work incentives? distribution of income A B C D less equal less equal more equal more equal

## work incentives decrease increase decrease increase

29 A country introduces import quotas. The suppliers of imported goods charge market-clearing prices. Assuming the demand for imports is price-inelastic, what will be the impact on the countrys balance of trade and on its terms of trade? balance of trade A B C D improves improves worsens worsens terms of trade improve worsen improve worsen

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12 30 In an economy no one can be made better off without making others worse off. What can be concluded from this? A B C D All markets are perfectly competitive. There are no externalities. The economy is operating on its production possibility curve. The distribution of income reflects what each individual deserves.

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2010

9708/33/O/N/10

www.XtremePapers.com

## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/31
May/June 2012 1 hour

*8211770087*

## This document consists of 11 printed pages and 1 blank page.

IB12 06_9708_31/FP UCLES 2012

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2 1 Which condition must be met for economic efficiency to be achieved? A B C D 2 Marginal social costs are zero in the production of all goods. Marginal social costs are at a minimum in the production of all goods. Marginal social benefits are at a maximum in the production of all goods. Marginal social costs equal marginal social benefits in the production of all goods.

The table shows the total utility that an individual obtains from consuming different quantities of a good. quantity of good (units) 1 2 3 4 5 6 total utility (units) 20 36 50 62 72 80

The individuals marginal utility of money is \$1 = 3 units of utility. What is the maximum quantity of the good that the individual will buy when its price is \$4? A 2 units B 3 units C 4 units D 5 units

UCLES 2012

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## 3 3 The curve JK in the diagram is a consumers initial budget line.

G J good Y

H good X

Which combination could cause the budget line to shift to GH? consumers money income A B C D 4 decrease decrease increase increase price of good Y decrease increase decrease increase

The diagram shows a perfectly competitive firms average product of labour (APL) and marginal product of labour (MPL) curves.

## wage (\$), labour product (units)

W APL MPL O

N1

N2

N3

N4

workers employed

The market price of the firms product is \$1. How many workers will the firm employ at a wage of OW? A ON1 B ON2 C ON3 D ON4

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4 5 The diagram shows the total product of labour curve for a firm whose only variable factor input is labour.

TPL

## total product of labour

O
What explains the shape of the curve? A B C D 6 diminishing marginal disutility of work increasing marginal disutility of work technical diseconomies of scale the law of variable proportions

number employed

Which is a financial economy of scale? A B C D lower costs in raising capital lower costs of marketing lower risk due to diversification lower variable costs of production

There is an increase in the supply of female labour. What will be the likely effect on male and female wages? male wages A B C D decrease decrease increase increase female wages decrease increase decrease increase

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5 8 An economist calculates that a firm has incurred the following costs over the course of a year. \$(000) wages and salaries opportunity cost of owners time materials rent marketing fees interest on bank loans interest forgone on finance provided by owner 150 35 80 30 20 25 10

By how much does total cost as defined by an economist exceed the total cost as defined by an accountant? A 9 \$75 000 B \$45 000 C \$35 000 D \$10 000

The price elasticity of demand for a firms product is zero. What will be the effect on the firms revenue if it reduces its price by 5 %? A B C D Its revenue will fall to zero. Its revenue will be unchanged. Its revenue will decrease by 5 %. Its revenue will increase by 5 %.

10 The five firm concentration ratio for an industry changes from 50 % to 60 %. Which statement about the industry is correct? A B C D Each firm has become more efficient. The industry has become more oligopolistic. The industry has benefited from external economies of scale. The industry now has fewer barriers to entry.

11 Which condition must apply before a market can be regarded as perfectly contestable? A B C D All firms in the industry produce an identical product. All firms in the industry are price-takers. There are a large number of firms in the industry. There are zero costs of entry to, and exit from, the industry.

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6 12 A perfectly competitive firm is currently producing at a level of output where its marginal cost is above both its average total cost and the market price. What will be the effect on price and output if the firm were to maximise its profit? effect on output A B C D decrease decrease increase increase effect on price increase unchanged decrease unchanged

13 An industry moves from monopolistic competition to oligopoly. How will this affect barriers to entry and the degree of interdependence between firms? barriers to entry A B C D strengthen strengthen weaken weaken interdependence between firms strengthen weaken strengthen weaken

14 In the diagram the imposition of a tax on a commodity causes its supply curve to shift from S1 to S2.
D S2 S1 P2 price P1 N M O Q2 Q1 quantity K J

Which area measures the resulting deadweight loss? A P1P2JK B JKQ1Q2 C JKM D JKN

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7 15 A government decides to privatise a state monopoly. What should the government do to try to ensure that this will result in an improvement in efficiency? A B C D allocate vouchers to all citizens entitling them to a share in the ownership of the monopoly encourage competition impose a maximum profit margin privatise the monopoly as a going concern

16 The diagram shows the long-run cost and revenue curves of a monopolist.

AR

## revenue, costs LRAC LRMC O W X Y Z

MR output

Which level of output satisfies the condition for an efficient allocation of resources? A OW B OX C OY D OZ

17 Due to a cyclical downturn, a government is experiencing a budget deficit. If the government wishes to stimulate aggregate demand, which policy would be most effective? A B C D financing the deficit by borrowing from the Central Bank financing the deficit by selling bonds to individuals financing the deficit by selling state assets to private firms increasing tax rates to eliminate the deficit

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8 18 The graphs indicate economic performance in a country between 2007 and 2010.

## annual % increase in GDP

07

08

09

10

Which conclusion may be drawn from the graphs? A B C D Between 2007 and 2008 industrial production and GDP fell but prices rose. Between 2008 and 2009 the rates of growth of industrial production, GDP and prices all increased. GDP and industrial production were at their lowest in 2008. At no time did industrial production, GDP or prices fall.

19 Which represents an injection into an economys circular flow of income? A B C D a balance of trade surplus a government budget surplus the retained profits of private companies household saving

20 According to monetarist theory, what will be the short-run effect of an unexpected increase in the money supply? A B C D an appreciation of the foreign exchange rate an increase in output an increase in real wages an increase in the rate of interest

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9 21 In the diagram, C1 shows the initial relationship between consumption and national income.

C1

C2

consumption

national income

What could cause the consumption function to shift to C2? A B C D an increase in the rate of unemployment benefits an increase in the standard rate of income tax an increase in exports an increase in investment

22 Other things being equal, the money supply in an open economy will increase if A B C D domestic banks increase their lending to foreign borrowers. the central bank buys foreign currency in the foreign exchange market. the government sells bonds to domestic residents. there is an increase in the volume of imports to the economy.

23 According to Keynesian theory, in which circumstance would there always be an increase in the demand for money? real income A B C D increase constant increase constant price level decrease constant increase decrease interest rates increase increase decrease decrease

24 In a banking system all banks maintain 10 % of deposits as cash. Customers withdraw \$20 000 in cash. Assuming no subsequent net change in notes and coins in circulation, by how much will the banks have to reduce their net loans? A \$2000 B \$18 000 C \$180 000 D \$220 000

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10 25 The table shows the figures for consumption, capital formation and depreciation in four economies, all measured in US \$. Assuming that the state of technology remains unchanged, which economy is most likely to experience economic growth? consumption (\$ m) A B C D 100 500 1 000 20 000 capital formation (\$ m) 20 200 1 400 5 000 depreciation (\$ m) 30 200 1 200 6 000

26 What is likely to result from the discovery of oil reserves in a developing economy? A B C D a more equal distribution of income and wealth an increase in the real exchange rate an increase in the competitiveness of commercial agriculture a reduction in the volume of imports of manufactured goods

27 A governments priority is to reduce the natural rate of unemployment (NAIRU). Which policy would be most likely to help it achieve this objective? A B C D an increase in interest rates an increase in rates of unemployment benefit the introduction of minimum wage rates the introduction of subsidised travel for unemployed workers to search for jobs

28 The number of people employed in a country and the level of unemployment both decrease. What could explain this? A B C D net inward immigration an increase in the level of unemployment benefits an increase in the age at which state pensions are payable an increase in the number of students

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11 29 The European Union imposes a quota on the volume of garments imported from China. What is likely to be a consequence? A B C D an increase in the prices received by Chinese textile firms a reduction in the prices paid by EU consumers a switch to producing lower-value garments by Chinese textile firms a reduction in the volume of garments exported from China to non-EU markets

30 The government of Lesotho introduces a programme to promote exports and to encourage firms to grow by subsidising local entrepreneurs. What effect is this likely to have on incomes, the balance of payments current account deficit and government expenditure in Lesotho? balance of payments current account deficit uncertain reduce reduce uncertain government expenditure rise no change rise rise

## incomes A B C D fall rise fall rise

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12 BLANK PAGE

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2012

9708/31/M/J/12

## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/32
May/June 2012 1 hour

*0332722167*

## This document consists of 12 printed pages.

IB12 06_9708_32/4RP UCLES 2012

[Turn over

2 1 When is economic efficiency achieved in an economy? A B C D 2 when nobody can become better off without somebody else becoming worse off when the economy is operating at its natural rate of unemployment when the level of social costs is minimised when the rate of economic growth is maximised

The table shows the total utility that an individual obtains from consuming different quantities of a good. quantity of good (units) 1 2 3 4 5 6 total utility (units) 20 36 50 62 72 80

The individuals marginal utility of money is \$1 = 3 units of utility. What is the maximum quantity of the good that the individual will buy when its price is \$4? A 2 units B 3 units C 4 units D 5 units

UCLES 2012

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## 3 3 The curve GH in the diagram is a consumers initial budget line.

G J good Y

H good X

Which combination could cause the budget line to shift to JK? price of good X A B C D 4 decrease decrease increase increase consumers money income decrease increase decrease increase

The diagram shows a perfectly competitive firms average product of labour (APL) and marginal product of labour (MPL) curves.

## wage (\$), labour product (units)

W APL MPL O

N1

N2

N3

N4

workers employed

The market price of the firms product is \$1. How many workers will the firm employ at a wage of OW? A ON1 B ON2 C ON3 D ON4

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4 5 A firm experiences diseconomies of scale over its entire range of output. What is the shape of its long-run average cost curve? A B C D 6 It is horizontal. It is U shaped. It slopes downwards. It slopes upwards.

Which is a financial economy of scale? A B C D lower costs in raising capital lower costs of marketing lower risk due to diversification lower variable costs of production

The table shows a firms total costs of production. production (tonnes) 0 1 2 3 4 5 total cost (\$) 40 60 70 80 90 100

What is the average variable cost of producing 5 tonnes of output? A \$8.00 B \$10.00 C \$12.00 D \$20.00

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5 8 An economist calculates that a firm has incurred the following costs over the course of a year. \$(000) wages and salaries opportunity cost of owners time materials rent marketing fees interest on bank loans interest forgone on finance provided by owner 150 35 80 30 20 25 10

By how much does total cost as defined by an economist exceed the total cost as defined by an accountant? A 9 \$75 000 B \$45 000 C \$35 000 D \$10 000

The diagram shows a firms short-run and long-run average cost curves.

J K cost L

M N

output

Which curve is the firms long-run average cost curve? A JLN B JLM C KLM D KLN

10 The five firm concentration ratio for an industry changes from 50 % to 60 %. Which statement about the industry is correct? A B C D Each firm has become more efficient. The industry has become more oligopolistic. The industry has benefited from external economies of scale. The industry now has fewer barriers to entry.

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6 11 The diagram shows the cost curves of a firm in a perfectly competitive market.
MC Z

ATC AVC X

cost W V U O output

Which segment of a curve shows the quantity that the firm would be willing to supply to the market in the short-run? A VX B UZ C VZ D WZ

12 A perfectly competitive firm is currently producing at a level of output where its marginal cost is above both its average total cost and the market price. What will be the effect on price and output if the firm were to maximise its profit? effect on output A B C D decrease decrease increase increase effect on price increase unchanged decrease unchanged

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## 7 13 The diagram shows a firms short-run total cost curve (TC).

TC

total cost

O output

What is minimised at output OQ? A B C D average fixed cost average total cost average variable cost marginal cost

14 In the diagram the imposition of a tax on a commodity causes its supply curve to shift from S1 to S2.
D S2 S1 P2 price P1 N M O Q2 Q1 quantity K J

Which area measures the resulting deadweight loss? A P1P2JK B JKQ1Q2 C JKM D JKN

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8 15 A good gives rise to external benefits and is produced under conditions of imperfect competition. Which statement must be true? A B C D Benefits to consumers exceed the benefits to society. Firms producing the good will make a loss. Output of the good is below the socially optimum level. Social costs of production exceed private costs.

16 The diagram shows the long-run cost and revenue curves of a monopolist.

AR

## revenue, costs LRAC LRMC O W X Y Z

MR output

Which level of output satisfies the condition for an efficient allocation of resources? A OW B OX C OY D OZ

17 A government uses real personal disposable income per head as a measure of the standard of living. What does this measure not take into account? A B C D the distribution of income the level of national income the size of the population the average price level

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9 18 The graphs indicate economic performance in a country between 2007 and 2010.

## annual % increase in GDP

07

08

09

10

Which conclusion may be drawn from the graphs? A B C D Between 2007 and 2008 industrial production and GDP fell but prices rose. Between 2008 and 2009 the rates of growth of industrial production, GDP and prices all increased. GDP and industrial production were at their lowest in 2008. At no time did industrial production, GDP or prices fall.

19 Which represents an injection into an economys circular flow of income? A B C D a balance of trade surplus a government budget surplus the retained profits of private companies household saving

20 According to monetarist theory, what will be the short-run effect of an unexpected increase in the money supply? A B C D an appreciation of the foreign exchange rate an increase in output an increase in real wages an increase in the rate of interest

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10 21 In the diagram, YE indicates the equilibrium level of income corresponding to different levels of investment.
YE

equilibrium income

investment

What does the slope of the line YE measure? A B C D the investment multiplier the marginal propensity to save the rate of growth of investment the rate of growth of national income

22 In the diagram, C is an economys initial relationship between consumption and national income.
C4 C3 C C2 C1 consumption

national income

Which curve could show the economys new consumption function following a reduction in the rate of unemployment benefits? A C1 B C2 C C3 D C4

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11 23 What would result in an increase in the volume of bank deposits? A B C D an increase in the publics desire to hold cash an increase in government expenditure financed by borrowing from the central bank an increase in the proportion of their deposits that banks hold in cash an open market sale of securities by the central bank

24 In a banking system all banks maintain 10 % of deposits as cash. Customers withdraw \$20 000 in cash. Assuming no subsequent net change in notes and coins in circulation, by how much will the banks have to reduce their net loans? A \$2000 B \$18 000 C \$180 000 D \$220 000

25 Which change is most likely to increase both economic growth and economic development in the long-run? A B C D a decrease in the savings ratio an increase in investment in human capital the depletion of non-renewable resources the greater use of compulsory overtime working of labour

26 What is likely to result from the discovery of oil reserves in a developing economy? A B C D a more equal distribution of income and wealth an increase in the real exchange rate an increase in the competitiveness of commercial agriculture a reduction in the volume of imports of manufactured goods

27 What will be most likely to decrease a countrys national output in the short run but to increase its potential for long-run growth? A B C D a decrease in the level of import tariffs a decrease in the rate of immigration an increase in female participation in the labour force an increase in the money supply

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12 28 The number of people employed in a country and the level of unemployment both decrease. What could explain this? A B C D net inward immigration an increase in the level of unemployment benefits an increase in the age at which state pensions are payable an increase in the number of students

29 What would be an appropriate government action to reduce both a balance of payments current account surplus and the rate of inflation? A B C D increase the money supply increase direct taxes remove tariffs on imports devalue the currency

30 The government of Lesotho introduces a programme to promote exports and to encourage firms to grow by subsidising local entrepreneurs. What effect is this likely to have on incomes, the balance of payments current account deficit and government expenditure in Lesotho? balance of payments current account deficit uncertain reduce reduce uncertain government expenditure rise no change rise rise

## incomes A B C D fall rise fall rise

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2012

9708/32/M/J/12

## UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level

ECONOMICS Paper 3 Multiple Choice (Supplement) Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

9708/33
May/June 2012 1 hour

*2549170235*

## This document consists of 11 printed pages and 1 blank page.

IB12 06_9708_33/4RP UCLES 2012

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2 1 Which condition must be met for economic efficiency to be achieved? A B C D 2 Marginal social costs are zero in the production of all goods. Marginal social costs are at a minimum in the production of all goods. Marginal social benefits are at a maximum in the production of all goods. Marginal social costs equal marginal social benefits in the production of all goods.

A utility maximising consumer spends the whole of his disposable income of \$40 on food and clothing. The table shows the price of food, the quantity purchased by the consumer, and the marginal utility he derives from food consumption. food price per unit quantity demanded marginal utility (units) His marginal utility from clothing is 2 units. What is the price of clothing per unit and the quantity purchased by the consumer? clothing price (\$) A B C D 0.5 1.0 3.0 5.0 quantity (units) 30 15 5 3 \$5 5 10

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## 3 3 The curve JK in the diagram is a consumers initial budget line.

G J good Y

H good X

Which combination could cause the budget line to shift to GH? consumers money income A B C D 4 decrease decrease increase increase price of good Y decrease increase decrease increase

A firm employs two factors, X and Y, to produce a good which is sold for \$4. The table shows its factor productivities and factor prices. factor X Y What should the firm do? A B C D employ less of both X and Y employ more of X and less of Y employ more of Y and less of X employ more of both X and Y marginal physical product 3 5 factor price (\$) 15 12

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4 5 The diagram shows the total product of labour curve for a firm whose only variable factor input is labour.

TPL

## total product of labour

O
What explains the shape of the curve? A B C D 6 diminishing marginal disutility of work increasing marginal disutility of work technical diseconomies of scale the law of variable proportions

number employed

A worker responds to an increase in his hourly wage rate by reducing the number of hours he works per week. What would explain this? A B C D The income effect of the wage rate increase outweighs the substitution effect. The substitution effect of the wage rate increase outweighs the income effect. The workers supply of labour is wage elastic. The workers supply of labour is wage inelastic.

There is an increase in the supply of female labour. What will be the likely effect on male and female wages? male wages A B C D decrease decrease increase increase female wages decrease increase decrease increase

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5 8 Samsung Electronics, which began as a semiconductor firm making simple memory chips, has used continuous research and investment to emerge as an industry leader. In addition, it has applied its strength in semiconductors to other markets including televisions and mobile phones. What has taken place? A B C D 9 external growth and diversification external growth and sales revenue maximisation internal growth and diversification internal growth and sales revenue maximisation

The price elasticity of demand for a firms product is zero. What will be the effect on the firms revenue if it reduces its price by 5 %? A B C D Its revenue will fall to zero. Its revenue will be unchanged. Its revenue will decrease by 5 %. Its revenue will increase by 5 %.

10 What explains why both large and small firms are often found within the same industry? A B C D All firms in the industry produce identical products. Firms that assemble the final product buy components from specialist firms within the industry. Production within the industry is subject to diseconomies of scale. There are significant barriers to the entry of new firms into the industry.

11 Which condition must apply before a market can be regarded as perfectly contestable? A B C D All firms in the industry produce an identical product. All firms in the industry are price-takers. There are a large number of firms in the industry. There are zero costs of entry to, and exit from, the industry.

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6 12 The table shows the total revenue and marginal cost of a firm at different levels of production. production (tonnes) 2 3 4 5 6 7 total revenue (\$) 100 120 140 160 180 200 marginal cost (\$) 5 10 15 20 25 30

Within which output range will the firms profits be maximised? A B C D 2-3 tonnes 3-4 tonnes 4-5 tonnes 5-6 tonnes

13 An industry moves from monopolistic competition to oligopoly. How will this affect barriers to entry and the degree of interdependence between firms? barriers to entry A B C D strengthen strengthen weaken weaken interdependence between firms strengthen weaken strengthen weaken

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7 14 In the diagram, D is a countrys demand curve for an imported good. The world price of the good is OPW.

Pc price Pw z O D x y

quantity

Which area measures the deadweight loss to the country of imposing an import tariff equal to PW PC on the good? A x B y C z D x+y

15 A government decides to privatise a state monopoly. What should the government do to try to ensure that this will result in an improvement in efficiency? A B C D allocate vouchers to all citizens entitling them to a share in the ownership of the monopoly encourage competition impose a maximum profit margin privatise the monopoly as a going concern

16 What might make Gross National Product (GNP) per capita a misleading indicator when comparing living standards in different countries? A B C D differences between market exchange rates and purchasing power parity exchange rates differences in capital investment as a proportion of GNP differences in exports and imports as a proportion of GNP differences in net property income from abroad

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8 17 Due to a cyclical downturn, a government is experiencing a budget deficit. If the government wishes to stimulate aggregate demand, which policy would be most effective? A B C D financing the deficit by borrowing from the Central Bank financing the deficit by selling bonds to individuals financing the deficit by selling state assets to private firms increasing tax rates to eliminate the deficit

18 Which represents a leakage from a countrys circular flow of income? A B C D a government budget deficit bank loans to private companies the purchase of foreign assets by the countrys households unemployment benefits

19 Which statement would be consistent with a monetarist view of the workings of the macroeconomy? A B C D The demand for money function can shift in an unpredictable way. The velocity of circulation of money is unstable over time. Interest rates have little effect on aggregate money expenditure. A sustained inflation is always associated with an increasing money supply.

20 In a closed economy with no government, the equilibrium level of income is \$25 million, the full employment level of income is \$30 million and there is a deflationary gap of \$1 million. What can be deduced from this information? A B C D The level of investment is \$5 million. The marginal propensity to consume is The marginal propensity to consume is
4 5 5 6

. .

## The value of the investment multiplier is 1.5.

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9 21 In the diagram, C1 shows the initial relationship between consumption and national income.

C1

C2

consumption

national income

What could cause the consumption function to shift to C2? A B C D an increase in the rate of unemployment benefits an increase in the standard rate of income tax an increase in exports an increase in investment

22 Other things being equal, the money supply in an open economy will increase if A B C D domestic banks increase their lending to foreign borrowers. the central bank buys foreign currency in the foreign exchange market. the government sells bonds to domestic residents. there is an increase in the volume of imports to the economy.

23 According to Keynesian theory, in which circumstance would there always be an increase in the demand for money? real income A B C D increase constant increase constant price level decrease constant increase decrease interest rates increase increase decrease decrease

24 Which change would best indicate that a country has experienced economic development? A B C D an appreciation in the countrys currency an improvement in the average citizens quality of life an improvement in the countrys trade balance an increase in the countrys real GDP

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10 25 The table shows the figures for consumption, capital formation and depreciation in four economies, all measured in US \$. Assuming that the state of technology remains unchanged, which economy is most likely to experience economic growth? consumption (\$ m) A B C D 100 500 1 000 20 000 capital formation (\$ m) 20 200 1 400 5 000 depreciation (\$ m) 30 200 1 200 6 000

26 How will outward migration from a developing economy affect its balance of payments? A B C D It may improve its balance of payments by increasing its export capacity. It may improve its balance of payments by increasing inflows of current transfers. It may worsen its balance of payments by causing its currency to depreciate. It may worsen its balance of payments by increasing consumer expenditure on imported goods.

27 A governments priority is to reduce the natural rate of unemployment (NAIRU). Which policy would be most likely to help it achieve this objective? A B C D an increase in interest rates an increase in rates of unemployment benefit the introduction of minimum wage rates the introduction of subsidised travel for unemployed workers to search for jobs

28 Other things being equal, what is likely to result from a reduction in interest rates in a country? A B C D an appreciation of the countrys currency a decrease in consumption a decrease in investment an outflow of short-term capital

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11 29 The European Union imposes a quota on the volume of garments imported from China. What is likely to be a consequence? A B C D an increase in the prices received by Chinese textile firms a reduction in the prices paid by EU consumers a switch to producing lower-value garments by Chinese textile firms a reduction in the volume of garments exported from China to non-EU markets

30 A government responds to cyclical fluctuations in output by keeping tax rates and benefit rates unchanged. What is the government seeking to achieve by adopting this fiscal policy? A B C D to allow automatic stabilisers to work to keep output at the full employment level to maintain a constant balanced budget to ensure that its budget is in surplus over the trade cycle

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Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2012

9708/33/M/J/12

w w w e tr .X m ap eP
UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level 9708/31
October/November 2011 1 hour Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

s er om .c

*1222540763*

## This document consists of 13 printed pages and 3 blank pages.

IB11 11_9708_31/6RP UCLES 2011

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2 1 Which statement describes the operation of the law of variable proportions? A B C D As all factors are increased in proportion, the marginal cost of production increases. As all factors are increased in proportion, total product rises at a diminishing rate. As more of a variable factor is added to a fixed factor, the marginal cost of production diminishes. As more of a variable factor is added to a fixed factor, total product rises at a diminishing rate.

In the diagram, a firm is operating at point X on its long-run average cost curve.

LRAC cost X

output

Which statement is not correct? A B C D 3 The firm is employing the least-cost combination of factor inputs to produce OQ. The firm is operating below its minimum efficient scale. The firm is producing at its cost-minimising level of output. The firm is producing output OQ at minimum cost.

To maximise the satisfaction he derives from a given level of expenditure on two goods, X and Y, a consumer should allocate his expenditure between the two goods so that A B C D marginal utility of X = price of X and marginal utility of Y = price of Y. marginal utility of X plus marginal utility of Y is maximised. marginal utility of X = marginal utility of Y. marginal utility of X marginal utility of Y =

price of X price of Y.

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## 3 4 In the diagram PQ is a consumers original budget line.

16 quantity of Y 12

P R

Q 0 10

S 20

quantity of X
The consumers income increases from \$80 to \$120 and, at the same time, the prices of X and Y change. If the consumers budget line is now RS, what are the new prices of X and Y? price of X (\$) A B C D 5 4 6 10 12 price of Y ( \$) 12 10 8 6

What will cause the supply curve of labour in a particular industry to shift to the left? A B C D a fall in demand for the industrys product a greater use of machinery in the production of the industrys output a rise in wages paid in similar occupations in other industries a weakening of trade union influence in the industry

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4 6 A firm employs two factors of production, capital and labour. The curves in the diagram show the different combinations of capital and labour a firm needs to produce given levels of output.

capital

## Q = 300 units Q = 200 units Q = 100 units

O
What does the diagram show? A B C D the firms long-run production function the firms long-run total cost function the firms short-run production function the firms short-run total cost function

labour

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## 5 7 The diagram shows a firms short-run total cost curve (TC).

TC

total cost

Q1 output

Q2

Q3

Which statement is correct? A B C D 8 Average total cost is minimised at output OQ1. Average variable cost is minimised at output OQ2. Average variable cost is minimised at output OQ3. Marginal cost is minimised at output OQ2.

What is not one of the roles prices play in a perfectly competitive market economy? A B C D to provide a rationing mechanism for allocating goods between consumers to provide incentives to producers to respond to changes in consumer demands to provide information to consumers about the quality of different products to provide information to producers about changes in consumer preferences

Which practices would be classified as price discrimination? charging lower return fares from Kuala Lumpur to Hong Kong for passengers who stay overnight on a Saturday in Hong Kong no yes no yes

charging higher rail fares for peak period travel to meet the additional costs of train companies A B C D no no yes yes

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6 10 The diagram illustrates the working of a negative income tax system (NIT), where households with incomes above Yt pay tax and those with incomes below Yt receive a tax credit.
+ tax paid O _ Yt NIT1 NIT2

household income

What would be the effects of decreasing the effective tax rate, thereby causing the NIT schedule to shift from NIT1 to NIT2? effect on work incentives A B C D decrease decrease increase increase effect on net tax revenue increase uncertain increase uncertain

11 Which commodities should a government tax if it wishes to make the tax system more progressive? A B C D those for which demand is price elastic those for which demand is price inelastic those with an income elasticity of demand greater than one those with an income elasticity of demand less than one

12 The Chinese government is increasing the role of market forces in its economy. However, in 2008 it imposed temporary maximum price controls on energy and transport. Why might a government, committed to reducing central planning, introduce price controls? A B C D to increase allocative efficiency to increase the incentive for producers to raise supply to reduce consumer demand to reduce expectations of inflation

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7 13 The table gives information about two countries in 1994 and 2004. GNP (local currencies) 1994 1 2 5 000 10 000 2004 18 000 20 000 1994 5 000 3 000 population (thousands) 2004 5 500 3 300 prices (1994 = 100) 2004 300 200

country

From the data in the table, what can be concluded about the real GNP per head? A B C D It fell in country 2 only. It fell in countries 1 and 2. It rose in countries 1 and 2. It rose in country 2 only.

14 According to monetarist theory, if there is an unanticipated increase in the money supply what will be the short-run effect on money wages, real wages and the level of employment? money wages A B C D increase increase decrease decrease real wages decrease increase increase decrease employment increase decrease decrease increase

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8 15 In the diagram, C1 shows the relationship between consumption and national income.
C2 C1

consumption

national income

What could cause the consumption function to shift to C2? A B C D an increase in exports an increase in the rate of interest an increase in the rate of unemployment benefits an increase in the standard rate of income tax

16 In a closed economy with no government, the value of the investment multiplier is 5. By how much will consumption increase, if investment increases by \$300? A \$540 B \$1000 C \$1200 D \$1500

17 In the diagram, AD1 and AS are an economys original aggregate demand and aggregate supply curves.

What will cause the aggregate demand curve to shift to AD2? A B C D an appreciation of the currency an increase in the money supply an increase in the price level an increase in the real wage

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9 18 In an economy, the volume of output rises by 2 % in a year, while the quantity of money rises by 5 %. If the velocity of circulation of money remains the same, what will be the approximate increases in the price level and the money value of national income? increase in price level A B C D 2% 2% 3% 3% increase in money value of national income 5% 7% 5% 7%

19 The diagram shows three different levels of money supply (MS) and three different demand curves for holding money balances (LP). The initial equilibrium is at point X. Banks create more credit and people decide to hold more money as a precaution against emergencies. What is the new equilibrium point?

A D X B C

rate of interest

LP LP LP

MS O

MS

MS

quantity of money

20 What is typically associated with a relatively low level of income per capita in a country? A B C D a high rate of saving a low rate of economic growth in past periods a low rate of inflation a low rate of population growth

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10 21 What is likely to increase a countrys actual output in the short run but may reduce its long-run rate of growth of potential output? A B C D an increase in the size of the governments budget deficit an increase in the size of the labour force increased female participation in the labour force increased government spending on education

22 What is a likely consequence of an increase in cyclical unemployment? A B C D a deficit on the current account of the balance of payments a deterioration in the fiscal balance of the government an increased rate of inflation an increase in immigration

23 The chart shows the rates of economic growth and unemployment in a country for the period 2007 to 2010.

## 10 9 8 7 6 % 5 4 3 2 1 0 2007 2008 year

What does the chart show? A B C D Real GDP was lowest in 2010. The standard of living fell between 2009 and 2010. The total labour force declined between 2007 and 2009. The unemployment rate fell when the growth rate increased.

## percentage change in real GDP percentage rate of unemployment

2009

2010

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11 24 Why are high and variable rates of inflation likely to be harmful to long-run economic growth? A B C D They hide relative price changes leading to a misallocation of resources. They increase the real burden of household debt leading to lower consumption. They lead to an increase in the household saving ratio. They result in an increase in real interest rates.

25 Economists have proposed that the best policy to promote development is trade not aid. What is implied by this proposal? A B C D Developing countries should become self-sufficient and not rely on aid. Developing countries should be given greater access to markets in developed countries. Developing countries should use foreign aid to invest in their export industries. Developing countries should use trade barriers to promote import substitution.

26 What is likely to result from foreign direct investment in developing economies? A B C D a reduction in local wage levels a reduction in tax revenues in developing economies a reduction in the range of consumer goods available to the local population a worsening of net income flows from investments

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12 27 The graphs show the changes in the exchange rate of the sterling against the US \$ and against the Euro between 1998 and 2003.

1.70

1.70

1.60

1.60

1.50

1.50

1.40

1.40

## 1.30 1999 2000 2001 2002 2003

Which statement is incorrect? A B C D

## 1.30 1999 2000 2001 2002 2003

Between 1998 and 2001 the sterling depreciated against the US \$. Between 1998 and 2001 the sterling appreciated against the Euro. Between 1998 and 2001 the Euro depreciated against the US \$. Between 2001 and 2003 the US \$ appreciated against the Euro.

28 A regressive tax is defined as one where A B C D all taxpayers pay the same absolute amount of their income in taxation. high income earners pay a lower proportion of their income in taxes than low income earners. high income earners pay less in taxes than low income earners. high income earners pay more in taxes than low income earners.

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13 29 The diagram shows the time path of actual output and of long-term potential output of an economy.

## potential output output actual output

time

What would help to reduce the divergence of actual output from potential output? A B C D a balanced budget a stable exchange rate automatic stabilisers stable interest rates

30 When might the effectiveness of fiscal expansion in increasing the level of output be increased? A B C D when it is accompanied by an increase in the money supply when it leads to an appreciation of the countrys exchange rate when it results in a decrease in the price of government bonds when the price level increases

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Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

UCLES 2011

9708/31/O/N/11

w w w e tr .X m ap eP
UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level 9708/32
October/November 2011 1 hour Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

s er om .c

*6947059768*

## This document consists of 10 printed pages and 2 blank pages.

IB11 11_9708_32/2RP UCLES 2011

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2 1 Why does a normal demand curve for a product slope downwards from left to right? A B C D 2 Buyers additional satisfaction declines as consumption rises. Consumers are faced with choices between competing products. Sellers are willing to accept lower prices on larger orders. The average cost of production falls as the scale of production increases.

## LRMC costs, revenue

LRAC

AR MR O AB output C D

At which level of output is the firm both allocatively and productively efficient? A 3 OA B OB C OC D OD

To prevent a surplus of milk, each milk producer is given a production quota which specifies the volume of milk he is allowed to supply. Initially the quotas are not tradable, but then trade in quotas is allowed. Who would gain or lose when trade in quotas takes place? purchasers of quotas A B C D gain gain lose lose sellers of quotas gain lose gain lose

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3 4 For the purposes of measuring the income effect of a change in the price of a good, what is not held constant? A B C D 5 consumer preferences relative prices the consumers money income the consumers real income

An actor is paid \$100 000 a year. The next best paid job he could get is as a lecturer at \$60 000 a year. What are his transfer earnings and his economic rent? transfer earnings A B C D \$60 000 \$60 000 \$40 000 \$40 000 economic rent \$40 000 zero \$60 000 zero

The table shows the labour market for an economy in four separate years. In which year was there excess demand in the labour market? working population (millions) A B C D 19 19 20 20 unemployment rate (%) 1.0 2.0 1.1 1.5 job vacancies (thousands) 180 80 240 100

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4 7 The table shows the levels of output of a good which can be produced with different combinations of labour and capital. capital (number of machines) 2 2 2 4 labour (number of workers) 6 7 8 12 output (units) 100 106 108 200

Which characteristic of the production function for this good does the table show? A B C D 8 a fixed ratio between capital and labour inputs constant returns to scale increasing marginal productivity of labour technical economies of scale

The short-run total costs (SRTC) of a firm are given by the formula SRTC = \$(10 000 + 5X2) where X is the level of output. What are the firms average fixed costs? A B C D \$10 000

## \$(10 000 + 5X2 ) X \$10 000 X \$10 000 5X2

What would be most likely to constrain a firms ability to grow? A B C D the increased difficulty faced by the firm in marketing its product the increased risks arising from product diversification the increasing costs of distributing goods from a given location the increased difficulties faced by the management in coordinating production

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5 10 Which would be least likely to practise price discrimination? A B C D a baker a cinema a hairdressing salon a restaurant

## 11 The diagram shows the cost and revenue curves of a monopoly.

MC

AC

cost, revenue

AR

XYZ MR output

Which movement between levels of output would indicate a wish to change from unit cost minimisation to earning a normal profit? A W to Y B W to Z C X to W D X to Z

12 What will increase the likelihood that the firms in an industry will collude to maximise their joint profits? A B C D The industry consists of a large number of producers. The industry has many differentiated products. The industry is characterised by rapid technological change. There are significant barriers to prevent new firms entering the industry.

13 What would economists agree should be the aim of any health care system? A B C D to meet all the health care demands of the population to provide every patient with the latest and best available treatment to provide free medical treatment to secure the maximum health gain from the resources available

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6 14 The government of a country decides to increase the proportion of its tax revenue that it obtains from indirect taxes and to reduce the proportion it obtains from income tax. Total tax revenue is left unchanged. What is likely to be the impact on the distribution of income and on work incentives? distribution of income A B C D less equal less equal more equal more equal work incentives decrease increase decrease increase

15 The diagram shows the supply and demand curves of a commodity. A government subsidy causes the supply curve to shift from S1 to S2. Which area measures the difference between the cost to the economy of producing the resulting increase in output (Q1 Q2) and the value consumers place on this increase in output?

D S1 S2 price B C D O Q1 Q2 A

quantity
16 Which change would directly affect a countrys Human Development Index? A B C D a change in average hours worked by the labour force a change in life expectancy of the population a change in the level of carbon dioxide emissions a change in the size of the population

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7 17 Despite a government budget deficit, a countrys money supply remains unchanged. What could explain this? A B C D The country has a balance of payments surplus equal to the government budget deficit. The countrys foreign exchange rate is fixed. The government budget deficit is financed by borrowing from the central bank. The government budget deficit is financed by selling government bonds to members of the public.

18 In a closed economy, households pay \$0.10 in tax on every \$1 increase in their gross income, and spend 5/6 of every increase in their disposable income. What is the value of the multiplier? A 1.5 B 4.0 C 6.0 D 7.5

19 The table shows some data for an economy. investment \$m 200 200 200 200 exports \$m 100 100 100 100 government expenditure \$m 50 50 50 50 savings \$m 125 150 175 200 imports \$m 62.5 75 87.5 100 taxation \$m 62.5 75 87.5 100 national income \$m 600 700 800 900

What is the equilibrium level of national income? A \$600 m B \$700 m C \$800 m D \$900 m

20 What will be the effect, in the short run, on the price level and on national output of an increase in aggregate demand if firms are working at full capacity? price level A B C D rise rise unchanged unchanged national output rise unchanged rise unchanged

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8 21 The diagram shows an economys aggregate demand and aggregate supply curves.
AS

What could cause the aggregate demand curve to shift from AD1 to AD2? A B C D an appreciation in the exchange rate an increase in the money supply a decrease in the interest rate a fall in the unemployment level

22 According to Keynesian analysis, what will be the result of a decrease in the money supply? A B C D The rate of interest will be reduced, thereby reducing the levels of investment and income. The rate of interest will be increased, thereby reducing the levels of investment and income. The level of income will be increased as a result of a lower rate of interest and a higher level of investment. The price level will fall by the same percentage change as the decrease in the money supply.

23 What will be the likely effects on interest rates and bond prices of an increase in the demand for money? interest rates A B C D fall fall rise rise bond prices fall rise fall rise

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9 24 A developing country experiences a rapid growth in labour productivity. What is likely to result from this? A B C D an appreciation of the countrys nominal exchange rate an increase in the countrys balance of trade deficit an increase in the countrys inflation rate an increase in the countrys relative labour costs

25 A government currently has a balanced budget. It is considering the possible variations in tax revenue and government expenditure shown. options W X Y Z tax revenue increase increase reduce reduce government expenditure increase reduce increase reduce

Which three options have the potential to move the budget into surplus? A W, X and Y B W, X and Z C W, Y and Z D X, Y and Z

## SRPC the rate of change in money wages

unemployment rate

What is assumed to remain constant when drawing this curve? A B C D the average price level the exchange rate the expected rate of inflation the money supply

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10 27 The economy of a country is simultaneously experiencing a balance of payments deficit, a budget deficit, demand-pull inflation and unemployment. The government decides to cut personal income taxes. What does this suggest is its main macroeconomic objective? A B C D to improve the balance of payments position to reduce the budget deficit to reduce the level of unemployment to reduce the rate of inflation

28 What is not a valid economic argument for developing economies to pursue a policy of import substitution? A B C D to embark on industrialisation as a basis for export-led growth to exploit their relative abundance of labour in order to produce labour intensive manufacturing goods to increase the opportunities for exporting goods in which they already have a comparative advantage to reduce their dependence on a narrow range of primary products

29 Assuming no change in tax rates or tax-free allowances, for which tax would the amount paid in tax become a smaller proportion of taxpayers income during a period of wage and price inflation? A B C D a progressive income tax a specific tax on tobacco capital gains tax value added tax

30 An economy has a flexible exchange rate. It raises interest rates above the level existing in other countries. What will be the likely effect on the level of domestic demand for goods and services and on the demand for the countrys exports? domestic demand A B C D decrease decrease increase increase export demand decrease increase decrease increase

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Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level 9708/33
October/November 2011 1 hour Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended)

s er om .c

*9326843145*

## This document consists of 13 printed pages and 3 blank pages.

IB11 11_9708_33/FP UCLES 2011

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2 1 In the diagram, a firm is operating at point X on its long-run average cost curve.

LRAC cost X

output

Which statement is not correct? A B C D 2 The firm is employing the least-cost combination of factor inputs to produce OQ. The firm is operating below its minimum efficient scale. The firm is producing at its cost-minimising level of output. The firm is producing output OQ at minimum cost.

To maximise the satisfaction he derives from a given level of expenditure on two goods, X and Y, a consumer should allocate his expenditure between the two goods so that A B C D marginal utility of X = price of X and marginal utility of Y = price of Y. marginal utility of X plus marginal utility of Y is maximised. marginal utility of X = marginal utility of Y. marginal utility of X marginal utility of Y =

price of X price of Y.

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## 3 3 In the diagram PQ is a consumers original budget line.

16 quantity of Y 12

P R

Q 0 10

S 20

quantity of X
The consumers income increases from \$80 to \$120 and, at the same time, the prices of X and Y change. If the consumers budget line is now RS, what are the new prices of X and Y? price of X (\$) A B C D 4 4 6 10 12 price of Y ( \$) 12 10 8 6

What will cause the supply curve of labour in a particular industry to shift to the left? A B C D a fall in demand for the industrys product a greater use of machinery in the production of the industrys output a rise in wages paid in similar occupations in other industries a weakening of trade union influence in the industry

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4 5 A firm employs two factors of production, capital and labour. The curves in the diagram show the different combinations of capital and labour a firm needs to produce given levels of output.

capital

## Q = 300 units Q = 200 units Q = 100 units

O
What does the diagram show? A B C D the firms long-run production function the firms long-run total cost function the firms short-run production function the firms short-run total cost function

labour

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## 5 6 The diagram shows a firms short-run total cost curve (TC).

TC

total cost

Q1 output

Q2

Q3

Which statement is correct? A B C D 7 Average total cost is minimised at output OQ1. Average variable cost is minimised at output OQ2. Average variable cost is minimised at output OQ3. Marginal cost is minimised at output OQ2.

What is not one of the roles prices play in a perfectly competitive market economy? A B C D to provide a rationing mechanism for allocating goods between consumers to provide incentives to producers to respond to changes in consumer demands to provide information to consumers about the quality of different products to provide information to producers about changes in consumer preferences

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6 8 Which practices would be classified as price discrimination? charging lower return fares from Kuala Lumpur to Hong Kong for passengers who stay overnight on a Saturday in Hong Kong no yes no yes

charging higher rail fares for peak period travel to meet the additional costs of train companies A B C D 9 no no yes yes

The diagram illustrates the working of a negative income tax system (NIT), where households with incomes above Yt pay tax and those with incomes below Yt receive a tax credit.
+ tax paid O _ Yt NIT1 NIT2

household income

What would be the effects of decreasing the effective tax rate, thereby causing the NIT schedule to shift from NIT1 to NIT2? effect on work incentives A B C D decrease decrease increase increase effect on net tax revenue increase uncertain increase uncertain

10 Which commodities should a government tax if it wishes to make the tax system more progressive? A B C D those for which demand is price elastic those for which demand is price inelastic those with an income elasticity of demand greater than one those with an income elasticity of demand less than one

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7 11 The Chinese government is increasing the role of market forces in its economy. However, in 2008 it imposed temporary maximum price controls on energy and transport. Why might a government, committed to reducing central planning, introduce price controls? A B C D to increase allocative efficiency to increase the incentive for producers to raise supply to reduce consumer demand to reduce expectations of inflation

12 The table gives information about two countries in 1994 and 2004. GNP (local currencies) 1994 1 2 5 000 10 000 2004 18 000 20 000 1994 5 000 3 000 population (thousands) 2004 5 500 3 300 prices (1994 = 100) 2004 300 200

country

From the data in the table, what can be concluded about the real GNP per head? A B C D It fell in country 2 only. It fell in countries 1 and 2. It rose in countries 1 and 2. It rose in country 2 only.

13 According to monetarist theory, if there is an unanticipated increase in the money supply what will be the short-run effect on money wages, real wages and the level of employment? money wages A B C D increase increase decrease decrease real wages decrease increase increase decrease employment increase decrease decrease increase

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8 14 In the diagram, C1 shows the relationship between consumption and national income.
C2 C1

consumption

national income

What could cause the consumption function to shift to C2? A B C D an increase in exports an increase in the rate of interest an increase in the rate of unemployment benefits an increase in the standard rate of income tax

15 In a closed economy with no government, the value of the investment multiplier is 5. By how much will consumption increase, if investment increases by \$300? A \$540 B \$1000 C \$1200 D \$1500

16 In the diagram, AD1 and AS are an economys original aggregate demand and aggregate supply curves.

What will cause the aggregate demand curve to shift to AD2? A B C D an appreciation of the currency an increase in the money supply an increase in the price level an increase in the real wage

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9 17 In an economy, the volume of output rises by 2 % in a year, while the quantity of money rises by 5 %. If the velocity of circulation of money remains the same, what will be the approximate increases in the price level and the money value of national income? increase in price level A B C D 2% 2% 3% 3% increase in money value of national income 5% 7% 5% 7%

18 The diagram shows three different levels of money supply (MS) and three different demand curves for holding money balances (LP). The initial equilibrium is at point X. Banks create more credit and people decide to hold more money as a precaution against emergencies. What is the new equilibrium point?

A D X B C

rate of interest

LP LP LP

MS O

MS

MS

quantity of money

19 What is typically associated with a relatively low level of income per capita in a country? A B C D a high rate of saving a low rate of economic growth in past periods a low rate of inflation a low rate of population growth

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10 20 What is likely to increase a countrys actual output in the short run but may reduce its long-run rate of growth of potential output? A B C D an increase in the size of the governments budget deficit an increase in the size of the labour force increased female participation in the labour force increased government spending on education

21 What is a likely consequence of an increase in cyclical unemployment? A B C D a deficit on the current account of the balance of payments a deterioration in the fiscal balance of the government an increased rate of inflation an increase in immigration

22 The chart shows the rates of economic growth and unemployment in a country for the period 2007 to 2010.

## 10 9 8 7 6 % 5 4 3 2 1 0 2007 2008 year

What does the chart show? A B C D Real GDP was lowest in 2010. The standard of living fell between 2009 and 2010. The total labour force declined between 2007 and 2009. The unemployment rate fell when the growth rate increased.

## percentage change in real GDP percentage rate of unemployment

2009

2010

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11 23 Why are high and variable rates of inflation likely to be harmful to long-run economic growth? A B C D They hide relative price changes leading to a misallocation of resources. They increase the real burden of household debt leading to lower consumption. They lead to an increase in the household saving ratio. They result in an increase in real interest rates.

24 Economists have proposed that the best policy to promote development is trade not aid. What is implied by this proposal? A B C D Developing countries should become self-sufficient and not rely on aid. Developing countries should be given greater access to markets in developed countries. Developing countries should use foreign aid to invest in their export industries. Developing countries should use trade barriers to promote import substitution.

25 What is likely to result from foreign direct investment in developing economies? A B C D a reduction in local wage levels a reduction in tax revenues in developing economies a reduction in the range of consumer goods available to the local population a worsening of net income flows from investments

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12 26 The graphs show the changes in the exchange rate of the sterling against the US \$ and against the Euro between 1998 and 2003.

1.70

1.70

1.60

1.60

1.50

1.50

1.40

1.40

## 1.30 1999 2000 2001 2002 2003

Which statement is incorrect? A B C D

## 1.30 1999 2000 2001 2002 2003

Between 1998 and 2001 the sterling depreciated against the US \$. Between 1998 and 2001 the sterling appreciated against the Euro. Between 1998 and 2001 the Euro depreciated against the US \$. Between 2001 and 2003 the US \$ appreciated against the Euro.

27 A regressive tax is defined as one where A B C D all taxpayers pay the same absolute amount of their income in taxation. high income earners pay a lower proportion of their income in taxes than low income earners. high income earners pay less in taxes than low income earners. high income earners pay more in taxes than low income earners.

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13 28 The diagram shows the time path of actual output and of long-term potential output of an economy.

## potential output output actual output

time

What would help to reduce the divergence of actual output from potential output? A B C D a balanced budget a stable exchange rate automatic stabilisers stable interest rates

29 When might the effectiveness of fiscal expansion in increasing the level of output be increased? A B C D when it is accompanied by an increase in the money supply when it leads to an appreciation of the countrys exchange rate when it results in a decrease in the price of government bonds when the price level increases

30 Which statement describes the operation of the law of variable proportions? A B C D As all factors are increased in proportion, the marginal cost of production increases. As all factors are increased in proportion, total product rises at a diminishing rate. As more of a variable factor is added to a fixed factor, the marginal cost of production diminishes. As more of a variable factor is added to a fixed factor, total product rises at a diminishing rate.

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