You are on page 1of 24

Difficult

MCQs from 2003 to 2009


By: Ali Anwerzada
June 2003

5

The diagram shows a consumer's short-run and long-run demand curves for coconuts. Initially,
the consumer purchases quantity Q0 at price P0.

V
X

price P0

Z
W
Q0
quantity

If the price of coconuts increases from P0, the consumer's short-run response is greater than his
long-run response. If the price decreases from P0 his short-run response is smaller than his longrun response.
What is the consumer's short-run demand curve?
A

VYW

VYZ

XYZ

XYW

66
How would an economist establish the market demand curve for a private good?

13
mechanism, the
theeffect
effectofofaarising
risingprice
pricemust
mustbebetoto
13 For
For price
price to
to act
act as a rationing mechanism,
A by adding consumer surplus to total expenditure
attract
new firmsthe
theelasticity
market.
AAB attract
new
into
market. of individual demands
by combining
price
generate
additional
profits for
producers.
BBC generate
additional
for
producers.
by horizontally
combining
individual
demand curves
reduce
the quantity
some
CCD reduce
the
demanded
by
someindividuals.
individuals.
by multiplying
pricedemanded
by quantityby
demanded
signal the
the need for a reallocation
DD signal
reallocation of
of resources.
resources.
Other things being equal, which of the following would result in an increased demand by private
motorists
forfollowing
petrol (gasoline)?
14 Which
Which
of the
the
might explain
in in
14
of
following might
explain aa simultaneous
simultaneousincrease
increaseininboth
bothprice
priceand
andquantity
quantitytraded
traded
the
market
for
a
normal
good?
the
market
for
a
normal
good?
A an increase in the price of second-hand cars
7

the
removal
ofinan
an
effective
maximum
AAB the
effective
maximum price
priceon
onthe
thegood
good
anremoval
increaseof
road
toll charges
technological
progress
production
a reduction in
the pricein
steel
BBC technological
progress
inofthe
the
productionof
ofthe
thegood
good

CCD
DD

the
impositioninof
ofbus
a tax
on
a imposition
reduction
fares
the
a
tax
on the
the good
good
the
granting
of
a
subsidy
to
producers
the granting of a subsidy to producers of
ofthe
thegood
good

15 A financial investigation by a private firm finds that a new railway line would not be profitable.
15 A financial investigation by a private firm finds that a new railway line would not be profitable.
A cost-benefit analysis finds that the line is worth constructing.
A cost-benefit analysis finds that the line is worth constructing.

What could explain this difference?


What could explain this difference?
A There are external costs not included in the financial investigation.
A There are external costs not included in the financial investigation.
Jun03
B There are external benefits not included9708/1
in the
financial investigation.
B There are external benefits not included in the financial investigation.
C A higher rate of interest is used in cost-benefit analysis.
C A higher rate of interest is used in cost-benefit analysis.
D Cost-benefit analysis uses a higher estimate for wage costs.
D Cost-benefit analysis uses a higher estimate for wage costs.

[Turn over

price
technological progress in the production of the good
P1
the imposition of a tax on theSgood

B
C

Difficult
MCQs
from
to to
2009
D the
granting
of 2
a 003
subsidy
producers of the good
By: Ali Anwerzada
S1
2

Q3
Q1 Q2
O
15 A financial investigation by a private firm finds quantity
that a new railway line would not be profitable.
A cost-benefit
analysis
finds
that the
line
is worth constructing.
Bad
weather then
reduces
supply
to S
2S2.
What could explain this difference?
The government does not allow the price to rise above OP1.
A There are external costs not included in the financial investigation.
How much of the product will the government have to supply from a buffer stock if demand is to
be
B met?
There are external benefits not included in the financial investigation.
A higher
rate of B
interest
AC OQ
Q1Qis
C Q1Q2 analysis. D
1
3 used in cost-benefit
Cost-benefit analysis uses a higher estimate
8 for wage costs.

19
20
16

Q2Q3

Country X joins an existing customs union, comprising Y and W, which has a common external
The table
shows
levels
which three countries can produce.
tariff
equal
to following
X's the
initial
tariff.of output
Which
of the
statements
is correct?
After
joining theiscustoms
union,
X imports
from Yorwhich
it previously
country
25 tonnes
of maize
5 tractors
A Education
a public
goodXbecause
thecars
government
subsidises
schools.imported from country
V.
country
Y when
75 tonnes
of free
maize
or 15 tractors
B Healthcare is a public
good
provided
of charge.
How will this affect thecountry
price ofZcars225
in country
X
and
the
of producing the cars imported into
tonnes
of provided
maize orcost
45 the
tractors
C LawX?
and order is a public good because
it is
by
government.
country
D Street
lighting
is awould
publicbe
good
nooutcome?
one can be prevented from enjoying the benefits.
Which
of the
following
thebecause
most likely

price
cost of production
A Country X will specialise in maize and country Y in tractors.
lower
lower derive greater benefit from a good than consumers
17 AAgovernment
believes that consumers
B
Countryrealise.
Y will specialise in maize and country Z in tractors.
themselves
B
lower
higher
C Country Z will specialise in both maize and tractors.
Which
type
of
good
does
this
define?
C
no effect
lower
D There will be no gains from trade between the countries.
AD inferiorno
goods
effect
higher

B merit goods
21 A particular good in the Barbados market could be supplied by domestic producers, or producers
in
Tobago, or producers in the USA, at the following prices in US dollars:
C Trinidad
private&goods
superior goods

origin of production

price

Barbados

$1.00
9708/1 Jun03

Trinidad & Tobago

$0.85

USA

$0.75

Originally Barbados had a 20 % ad valorem duty on imports from Trinidad & Tobago and the
9708/1 Jun03
[Turn over
USA.
Barbados then formed a customs union with Trinidad & Tobago, with a common external tariff,
also of 20 %.
From which countries would Barbados import the good, before the formation of the customs
union and after the formation of the customs union?

before

after

USA

USA

USA

Trinidad & Tobago

neither

USA

neither

Trinidad & Tobago

a fall in invisible earnings

an appreciation of the countrys currency

Difficult
CQs
from
2003
to 2009
D aM
rise
in the
value
of imports
By: Ali Anwerzada
23 Which of the following is a measure of labour productivity?
total output
A
quantity of labour employed
total cost
B
quantity of labour employed
total wage cost
C
quantity of labour employed
total profit
D
quantity of labour employed

Nov 2003

24 The average consumer divides his expenditure between food, accommodation and clothing in the
1 The steel required for the construction of a new car-assembly plant in a fully employed economy
ratio 5:3:2.
is obtained by increasing the output of the domestic steel industry.
During the course of a year, the price of food rises by 10 %, the price of accommodation remains
What is the opportunity cost of producing the steel?
constant and the price of clothing falls by 5 %.

A the alternative benefits forgone by diverting additional resources to steel manufacture


Assuming that the weights of a price index reflect the expenditure of the average consumer, what
is
increase
in thebenefits
index over
the year?
B thethe
alternative
forgone
by increasing the capacity of the car industry
A
C

2.5
B 4 % that would have
C 5been
% obtained by
D putting
6 % the steel to other uses
the%
alternative benefits

3 supplied to other steel users


zero, since there is no reduction in the steel

25 Which factor will cause cost-push inflation?


5 The diagram shows the demand for and supply of a product.
2 A
The adiagram
shows
shifts in an economys production possibility curve.
higher level
of consumption
D
B an increase in trade union power
C

an increase in labour productivity

an appreciation of the exchange rate

price
consumer
goods

W
Y

O
O

quantity
capital goods

9708/1 Jun03

[Turn over

What can be deduced about the product?


Which change could have come about as a result of an improvement in technology?
A It has infinite price elasticity of demand.
A S to Y
B T to S
C W to T
D W to Y
B It has no substitutes.

C It is an inferior good.
What is meant by the ceteris paribus assumption?
D It takes a large proportion of consumer income.

B table
an assumption
consumers
act
rationally
The
shows thethat
price
elasticity of
demand
for four goods and services.
C
D

an assumption that is not supported by the facts

an assumption that two factors are in equilibrium


price elasticity
an assumption that other factors are held constant
motor cycles
1.6

telephone calls
1.0
What is the outcome for consumers and workers as a result of increased division of labour?
football tickets
0.3

consumers light bulbs

workers
0.0

W
Y
quantity

If the price is to be held at OP in year 2, how much must the government buy?

Difficult
MCQs from 2B003
to 2009
A OY
XW
By: Ali Anwerzada

WY

XY

18 In a world economy there are two goods, guns and butter, and two countries, X and Y. Country X
can produce both guns and butter with fewer resources per unit than country Y, but country X has
a higher opportunity cost in the production of guns than country Y.
Which statement is correct?
A

X has an absolute advantage in butter but not in guns.

X has an absolute advantage in guns but not in butter.

X has a comparative advantage in butter.

X has a comparative advantage in guns.

9
9

19 What will be the immediate effect of the removal of tariffs on imported consumer goods?
19 What will be the immediate effect of the removal of tariffs on imported consumer goods?
A a decrease in the cost of living
A a decrease in the cost of living
B a decrease in free trade
B a decrease in free trade
C an increase in customs revenues received by the government
C an increase in customs revenues received by the government
D an increase in the level of domestic employment
D an increase in the level of domestic employment
9708/1 Nov03

20 A group of countries introduce a single common currency to replace their national


20 Acurrencies.
group of countries introduce a single common currency to replace their national
currencies.
What will result from this policy?
What will result from this policy?
A easier price comparisons between countries
A easier price comparisons between countries
B higher transaction costs
B higher transaction costs
C increased interest rate differentials
C increased interest rate differentials
D identical prices in all countries
D identical prices in all countries

21 When is an economy likely to experience a deterioration in its terms of trade?


21 When is an economy likely to experience a deterioration in its terms of trade?
A when demand for its exports increases
A when demand for its exports increases
B when the trade weighted value of its currency depreciates
B when the trade weighted value of its currency depreciates
C when the interest rate is increased
C when the interest rate is increased
D when there is a fall in the average price of its imports
D when there is a fall in the average price of its imports
22 Country X has a comparative advantage in producing wheat and country Y in producing cars.
22 Country
X has
a comparative
advantage
in producing
wheat and country Y in producing cars.
However,
the countries
choose
not to specialise
and trade.
However, the countries choose not to specialise and trade.
What is a valid reason for this behaviour?
What is a valid reason for this behaviour?
A The exchange rate lies within the countries opportunity cost ratios.
A The exchange rate lies within the countries opportunity cost ratios.
B There is immobility of factors of production between the countries.
B There is immobility of factors of production between the countries.
C Trade is based on absolute rather than comparative advantage.
C Trade is based on absolute rather than comparative advantage.
D Transport costs are high relative to the opportunity cost differences between the countries.
D Transport costs are high relative to the opportunity cost differences between the countries.
23 What will cause an immediate rise in the size of a countrys labour force?
23 What will cause an immediate rise in the size of a countrys labour force?
A an increase in the birth rate

A an increase in the birth rate
B an increase in the age of retirement
B an increase in the age of retirement
C an increase in the school leaving age

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada
4
4

June 2004
6
6

The diagram shows the demand curve for a product.


The diagram shows the demand curve for a product.

N
N

M
M

price
price
R
R
O
O

S
S

Q
Q

L
L

P
P

D
D

quantity
10
quantity
If thetable
rectangle
is equalof
in goods
area toXthe
which statement
is correct?
22 The
showsOLMN
the numbers
andrectangle
Y which OPQR,
two countries
produce. Each
country uses
If the
OLMN
is equal
in good.
area to the rectangle OPQR, which statement is correct?
half
of rectangle
its resources
to make
each
A Total revenue falls by MSQ if the price rises from OR to ON.
A Total revenue falls by MSQ if the price rises from OR to ON.
B Consumer surplus falls by RSMN if thecountry
price rises
OR 2to ON.
1 from
country
B Consumer surplus falls by RSMN if the price rises from OR to ON.
C The price elasticity of demand
in price.
goodisX unitary for
100all changes
300
C The price elasticity of demand is unitary for all changes in price.
D A rise in price from OR to good
ON results
in the
fall in quantity demanded.
Y
200same proportionate
400
D A rise in price from OR to ON results in the same proportionate fall in quantity demanded.

Later, each country specialises in the product in which it has a comparative advantage.
During a certain period, 10 000 units of a normal good are sold at a price of 20 c. During a later
c.eachgood
period,
12
000
units
are would
sold
atbe
aunits
price
Duringrate
a certain
period,
10 000
ofofa22
normal
aregains
sold at
a price
of 20 c. During a later
Which
of exchange
suitable
so
country
from
trade?
period, 12 000 units are sold at a price of 22 c.
What1Xcould
A
= 1Yexplain this change?
What could explain this change?
A 1X
a reduction
B
= 1.5Y in consumers' incomes
A a reduction in consumers' incomes
B 1X
an increase
in the cost of raw materials
C
= 2Y
B an increase in the cost of raw materials
C 1X
an increase
in the price of a substitute commodity
D
= 3Y
C an increase in the price of a substitute commodity
D an increase in the productivity of factors of production
D anan
increaseboth
in the
productivityand
of factors
of production
23 In
economy,
employment
unemployment
rose over a ten year period.
7
7

What must have risen?


A

birth rate

life expectancy

unemployment benefits

working population


24 The diagram gives details of different aspects of productivity in the US and UK.
Which sector in the UK best fits the description a sector with a relatively fast growth rate in
productivity but which is less productive than its US equivalent?
productivity growth in the UK by sector, 1973-95
(% per annum)
UCLES 2004

agriculture

UCLES 2004

9708/01/M/J/04

productivity by sector in US relative to UK, 1995


(US = UK at 100)
agriculture

9708/01/M/J/04

utilities

utilities

C manufacturing

manufacturing

relaxation in planning controls on hotel construction in Mauritius

removal of sales tax on hotel accommodation in Mauritius

Difficult MCQs from 2003 to 2009


7 AThe
demand for a commodity has unitary price elasticity.
By:
li Anwerzada
25 A non-interest bearing asset is index-linked.
Which diagram shows the relationship between total expenditure on the commodity and its price?
25 During
A non-interest
assethow
is index-linked.
a periodbearing
of inflation,
will its money value and its real value change?
A
B
During a period of inflation, how will its money value and its real value change?
money value
real value

A
B

money
value
rises
total
rises
expenditure

staysrises
constant

B
C

staysrises
constant

stays falls
constant

C
D

O
stays constant
stays
constant

falls
stays
constant
price

stays constant

stays constant

realrises
value

total
expenditure

price

25 When
The figures
show thein
consumer
a country.
(1971 = 100)
C price index
D
26
will a reduction
unemployment
result(CPI)
in anofincrease
in inflation?
26 When will a reduction in unemployment result in an increase in inflation?
A when a high percentage of the increase in income is saved
CPI
A when a high percentage of the increase in income is saved
B when the economy reaches its production possibility curve
total
total
1998
200
B when expenditure
the economy reaches its production possibility
curve
expenditure
C when the jobs created are unskilled
1999
204
C when the jobs created are unskilled
D when the newly employed buy mainly imported goods
2000
206
O
O
D when the newly employed
buy mainly imported goods
price
price

2001
209
Nov 2004
27 The table gives information about the trade between Singapore and New Zealand during 2001,
8 the
Thefirst
cross-elasticity
of demand
between
two between
goods
willSingapore
beThe
higher
year
they
signed
free
trade
agreement.
values
are given
both
in Singapore
27
The
table
gives
information
about
the trade
and New
Zealand
during
2001,
What
can
beafter
deduced
from
theadata?
the first(S$)
yearand
after
they
signed dollars
a free (NZ$).
trade agreement. The values are given both in Singapore
dollars
New
Zealand
A the(S$)
greater
the difference
in price(NZ$).
between the two goods.
dollars
and New
Zealand dollars
A There was
hyperinflation
between 1971 and 1998.
percentage change
B the greater the income elasticities of demand
goods.
mthe two
NZ$
m percentage change
S$for
B The rate of inflation rose in 2000.
from 2000
NZ$
m
C the greater the price elasticities of demand S$
formthe two
goods.
from 2000
C The rate of inflation in 1999 was 4 %.
Singapore exports to New Zealand
508
618
+20 %
D the
more they
are regarded
as similar by consumers.
exports
to New inflation
Zealand
508 years down
618 to the end+20
%
D Singapore
The country
experienced
in the three
of 2001.
Singapore imports from New Zealand
331
403
17 %

Singapore imports from New Zealand 10 331
403
17 %

What
can be concluded
from the
table?
29
A
depreciation
of the
exchange
of of
the9708/01/O/N/04
pound
sterling
thebalance
US dollar
from 1[Turn
: $1.50
to

2004
over
26UCLES
What
is the
likely
consequence
an
increase
in a against
countrys
of payments
deficit?
What
can
be most
concluded
from
therate
table?
1 : $1.00 must mean that
A New Zealand gained more than Singapore from the trade agreement.
an increase
the foreign
valueSingapore
of the currency
of trade
the country
AA New
Zealand in
gained
more than
from the
agreement.
A
will betrade
undervalued.
B the
Newpound
Zealands
position with Singapore improved in 2001.
an increase
in trade
the level
of income
within theimproved
country in 2001.
BB New
Zealands
position
with Singapore
B
imports had
fromathe
UKsurplus
will become
moreZealand
expensive.
C US
Singapore
trade
with New
in 2001.
a reduction
in athe
quantity
of money
within
the country
CC Singapore
had
trade
surplus
with New
Zealand
in 2001.
C
fromrate
theinUS
will was
become
cheaper. NZ$ 1 = S$ 1.2.
D UK
Theimports
exchange
2001
approximately
a reduction
inrate
unemployment
the country
DD The
exchange
in 2001 waswithin
approximately
NZ$ 1 = S$ 1.2.
D dollars will become more expensive in terms of pounds.

27 Which factor determines the purchasing power parity of a currency?


30 Which policy would reduce a balance of payments deficit on the current account in the short run?
A relative costs of living
A a reduction in government subsidies to exporters
B relative rates of interest
B a reduction in the rate of interest
C the volume of trade creation
C a rise in direct taxation
D the visible balance of payments
D incentives to attract foreign capital


A 2004
an increase in country Xs demand9708/01/M/J/04
for
imports
UCLES
UCLES
2004
9708/01/M/J/04

B an increase in country Xs interest rate

28 Which is most likely to cause country Xs exchange rate to depreciate?

an increase in foreign demand for country Xs exports

an increase in tourist visits to country X

[Turn
over
[Turn
over

Only the demand for X will rise.

Demand for X, Y and Z will rise.

Difficult
CQs from
003
o 2for
009
C M
Demand
for Y 2
will
fall tand
Z will rise.
By: Ali Anwerzada
Demand for Y will rise and for Z will fall.

June 2005
10 The diagram shows the supply and demand curves for a product.
The government imposes an indirect tax on the 5
product.

11 The diagram shows the market for new houses.

S2
S1

price

price

D1

D2

quantity

quantity

What will be the outcome of this for the producers revenue and the incidence of the tax burden?

What would cause the change in the market equilibrium position from X to Y?
effect on revenue

consumer

fall

producer

a fall in population and a rise in taxes on building materials


C

fall

a fall in interest rates and an increased efficiency in house-building


B

main incidence of the tax

a fall in income tax and a rise in building costs

rise

8consumer

a rise in building subsidies and a fall in incomes

D
rise
producer
20 Why would a government introduce tariffs and quotas?

12 A
The to
market
demand
equation
for a good
is given by Qd = 310 - 20 p
increase
the level
of international
competition
and the supply equation by Qs = 10 + 10 p,
B to increase the demand for where
home-produced
p denotesgoods
the price of the good.
C

to reduce the price of home-produced goods

What is the equilibrium price?


D

to reduce the price of imports

10

15

20


21 In some parts of the world economic unions have been established. These have introduced a
currency. for consumer surplus to be zero?
13 common
What is necessary
What
could beisanperfectly
economic
disadvantage of introducing such a common currency?
A Demand
inelastic.
UCLES 2005

9708/01/M/J/05

A
B

Absolute
comparative
cost advantages would disappear as a basis for trade.
Demandand
is perfectly
elastic.

B
C

Devaluation
of a members
currency would no longer be possible.
Supply is perfectly
inelastic.

C
D

Prices
and elastic.
services would be the same over the whole union.
Supplyofisgoods
perfectly

Trade creation would take place.

14 The growing of flowers in a private garden results in a positive externality.


22 The terms of trade of a country refers to

What can be concluded from this?


A

the system of tariff rates levied by the government of the country.

External benefits exceed private costs.

the relationship between average import prices and average export prices.

External costs exceed private costs.

the rate at which domestic currency can be sold in foreign exchange markets.

Private costs exceed social benefits.

the difference between the value of exports and the value of imports.

Social benefits exceed private benefits.

UCLES 2005

9708/01/M/J/05

[Turn over

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada

9
23 The chart shows changes in employment by sector for a country between 1998 and 2003.
23 The chart shows changes in employment by sector for a country between 1998 and 2003.
6
6
4
4
2
tertiary
2
% change in
0
tertiary
employment
% change in
primary
secondary
0
employment
2
primary
secondary
2
4
4
6
6
Which statement about the period 1998 to 2003 must be true for this country?
Which statement about the period 1998 to 2003 must be true for this country?
A The primary sector lost more workers than the secondary sector.
A The primary sector lost more workers than the secondary sector.
B Unemployment stayed constant.
B Unemployment stayed constant.
C Employment in service industries increased.
C Employment in service industries increased.
D There was no change in the total working population.
D There was no change in the total working population.

24 The table shows the share of a workers income spent on three classes of good and the
change the
in the
prices
goods over
a year.
24 percentage
The table shows
share
of ofa the
workers
income
spent on three classes of good and the
percentage change in the prices of the goods over a year.
share of income change in prices of
spent
goods
goods
share on
of income
change
in prices of
spent on goods
goods
1

clothing
+25 %
41
clothing
+25 %
4
1
food
+50 %
21
food
+50 %
2
1
fuel
-25
%
41
fuel
-25
%
4
Over the same period the workers money income rises by 25 %.
Over the same period the workers money income rises by 25 %.
What happens to the workers real income?
What happens to the workers real income?
A It falls by 25 %.
A It falls by 25 %.
B It falls by 50 %.
B It falls by 50 %.
C It rises by 25 %.
C It rises by 25 %.
D It is unchanged.
D It is unchanged.

UCLES 2005
UCLES 2005

9708/01/M/J/05
9708/01/M/J/05

[Turn over
[Turn over

The price level rose.

The retail price index fell.

Difficult
MCQs from 2003 to 2009
D The value of money rose.
By: Ali Anwerzada

11
11

27 What
What
combination
is
likely
cause
aasurplus
ininaacountrys
in in
goods
and
services?
27
is most
most
likelyisto
tomost
cause
surplus
countrystrade
trade
goods
and
services?
26
Whichcombination
combination
of
events
likely
to cause
inflation?
inflation
inflation
exchange
rate
A
A
A
B
B
B
C
C
C
D
D
D

currency
currency
direct
taxes

money supply

high
high
falling

strong
strong
falling

high
high
falling
low
low

rising

weak
weak
falling
strong
strong

rising

rising

low
low
rising

weak
weak
rising

falling

falling
rising


28 The demand for US imports in Japan is price-inelastic.
28 The demand for US imports in Japan is price-inelastic.
Assuming there is no change in their dollar price, what would be the effect of a depreciation in the
Assuming
is no change
in their
dollar price,
what would be the effect of a depreciation in the
yen on thethere
total value
of US goods
imported
into Japan?
yen on the total value of US goods imported into Japan?
value
valuein yen
measured
measured in yen
A
decrease
A
decrease
B
decrease
B
decrease
C
increase
C
increase
UCLES 2005
D
increase
D
increase

value
valuein $
measured
measured in $
decrease
decrease
increase
increase
decrease
decrease 9708/01/M/J/05
increase
increase

29 The British monetary authorities are committed to maintaining the exchange rate of the UK
the diagram.
against
the Euro
between
P1 and Pare
29 The
British
monetary
authorities
to maintaining the exchange rate of the UK
2 on committed
against the Euro between P1 and P2 on the diagram.

S
P2
price of
P2
(in
Euros)
price
of
(in Euros)P1

P1

D2
D1

quantity of

D2

D1

O
quantity of
What might they do if demand changes from D1 to D2?
What
might they
do ifon
demand
changesoverseas
from D1 to D2?
A impose
controls
UK investment
A
B

impose
UK investment overseas
increasecontrols
interest on
rates

C
B

sell Eurosinterest
out of foreign
increase
rates exchange reserves

D
C

sell Euros
on the
exchange
markets
sell
outforeign
of foreign
exchange
reserves


D sell on the foreign exchange markets

UCLES 2005
9708/01/M/J/05

9708/01/M/J/05
UCLES 2005


[Turn over

[Turn over

a bank account held by a small firm to be used for future purchases

a forest of hardwood trees ideal for furniture making

Difficult
MCQs
from
2003
to 2009 shares
C the
market
value
of a companys
By: ADli Aword
nwerzada
processing software used by a writer to complete her new book
Nov 2005
4

The workers in a factory currently earn $240 for a 40-hour week. The management offers them a
choice between either a 10 per cent wage increase or an increase in the weekly wage to $260
along with a reduction from 40 to 39 hours.
Disregarding the value of leisure time, what is the opportunity cost to each worker of opting for
the 39-hour week?
A

$4

$6

$20
8

$24

18 The diagram shows the demand curve for an agricultural commodity that has unitary elasticity. S1
UCLES
is the2005
supply curve if there is a bad harvest9708/01/O/N/05
and S2 is the supply curve if there is a good harvest.

S1
S2

price
P

D
O

10

quantity

22 What is an export of services in Jamaicas current account?


What should the government do in order to stabilise the incomes of farmers?
an inflow
of funds
Jamaica to
to be
buydetermined
shares by the market
A A allow
the price
of the to
commodity
USfarmers
touristsatvisiting
Jamaica
B B fix earnings
the price from
paid to
price OP
earnings
of Haitian
workers inequal
Jamaica
sent to Haiti
C C introduce
a quota
on production
to OQ
the export
of Jamaican
coffee
D D subsidise
farmers
in bad years
and impose a tax on farmers in good years


23 The table shows the number of workers and the annual output of an industry.

Workers in 000s
Output in $m

year 1

year 2

year 3

120

130

100

12.00

14.30

13.00

Which statement is correct?


A

Labour productivity increases in year 2 and in year 3.

Labour productivity increases in year 2 and then declines in year 3.

Labour productivity is at its highest in year 1.

Labour productivity is at its lowest in year 3.

24 The table shows the weights used over three years in the UK consumer price index.

10
food

2001

2002

2003

116

114

109

13 The diagram shows the demand and supply curves for parking spaces in a hospital car park.

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada

S
12

28 Why is a balance of payments deficit a potential problem for an economy with a fixed exchange
rate?
price
P
A Domestic money supply will increase.
B

Rival producers may react with trade protection measures.

The economys foreign exchange reserves may run down. D


O
number of spaces
The economys short-run standard of living will be reduced.



The managers decide to rely on the price mechanism
to
allocate
parking
spaces
at
the
hospital
2
most
29 In
the effectively.
diagram the foreign exchange market is3initially in equilibrium at X.
June
2
006
D

A consumer allocates his expenditure over time.


What would
is required
order
for
this to
work?
What
could
be thein new
equilibrium
after an division
increaseofinlabour?
demand from US residents for
What
encourage
the
growth
of position
the international
holidays
in
Europe?
What would cause an increase in the opportunity cost of current consumption to the consumer?
A an
Alternative
means
of transport
must be provided for those unable to afford price OP.
A
improvement
in transport
systems
A a decrease in his current income
S2
B instability
A survey in
willinternational
be neededexchange
to find outrates
the amount users are
willing to pay.
B
S1
B a decrease in interest rates
C restrictions
The capacity
car parkof
will
need to be expanded.
on of
thethe
movement
resources
S3
C an increase in his current income
D the
introduction
of tariffs
Thewidespread
price charged
for parking
spaces must be OP.
D an increase in interest
price rates
A
B
of $ (in
5 In
Which
of information
would enable
you
to construct
the market demand curve for a
X externalities?
14
whichpiece
situation
areEuros)
there definitely
positive
C
2 product?
In the diagram the original production possibility curve is LM.
D
A Private benefits exceed private costs.
A the equilibrium price of the product
B Private benefits exceed social benefits.
B the number of consumersLwho would purchase the product
at D
each price
D1
2
C Social benefits exceed private benefits.
C the number of firms in the
O Nindustry
quantity of $
D Social benefits exceed private costs.
D the quantity that each
consumer
would be willing and able to buy at each price
good
X
1
4

30 Which policy would be most likely to reduce a balance of payments current account deficit?
15
use of
cost-benefit
analysis
should
outcome
where
6 Correct
What is most
likely
to increase
the demand
forproduce
compactan
disc
players?
A reducing income tax rates
A asocial
are minimised
A
fall incosts
disposable
incomes and social benefits are maximised.
M
P
O
B reducing subsidies to domestic
industriesgood Y
in excess
of social costs.
B asocial
fall inbenefits
the priceare
of cinema
tickets
C reducing the external value of the currency
What
might
cause
theof
curve
to equal
shift
tomarginal
NP?
private
benefits
social benefits.
C
amarginal
fall
in the
price
compact
discs
D reducing the level of tariffs
A amarginal
technological
progress
D
fall in thesocial
price
of video recorders
benefits
equal marginal social costs.
B

unemployment of resources

The
elasticityofofnatural
demand
for good X is 1. At a price of $12, quantity demanded is 4000 units.
C price
the depletion
resources
D awill
reallocation
of resources
What
be the price
when the quantity demanded is 20 000 units?

A $2.00
B $2.40
C $2.66
D $20.00
A government proposes to introduce a road congestion charge which would require private
motorists to pay a toll for road use.
Which statement relating to the proposal is normative?

Permission
reproduce
items where third-party
owned material
protected
by copyright
is included has been sought and cleared where possible. Every
A to Bus
passengers
will benefit
at the
expense
of motorists.
reasonable
holders, but if any items requiring clearance have unwittingly been included, the

UCLES effort
2006has been made by the publisher (UCLES) to trace copyright
9708/01/M/J/06
publisher will be pleased to make amends at the earliest possible opportunity.

Motorists with higher incomes will be prepared to pay the charge in return for reduced

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

C 2005
Motorists
UCLES
D

with lower incomes will not9708/01/O/N/05


be able to afford to use the roads.

The proposal will be unfair to motorists who have no alternative means of transport.

11

It causes external cost.

It is non-excludable.

Difficult
MCQs from 2003 to 2009
D There is rivalry in its use.
By: Ali Anwerzada
17 The diagram illustrates a market for wheat. The government sets a maximum price of OP.
S

P
price
D

10
quantity

24 The
percentage
forthe
a country's
Whattable
couldshows
causethe
theyear-on-year
maximum price
to have anchanges
impact on
market? consumer price index from
1999 to 2005.
A an increased wheat harvest
year

% change

a fall in the price of rice

an advertising campaign for bread 1999

18.0

2000 9
an increase in subsidies to wheat farmers

11.7

8.6
21 The table refers to a particular country.2001
18 A government wishes to encourage the2002
consumption 4.6
of a merit good and reduce the consumption
of a demerit good.
index of import
index of export
2003
4.9
prices
prices
year
Which policy should it adopt towards
each=good?
(2000
100)
(2000 = 100)
2004
6.1
merit
1995good

48.1
2005

4.5

demerit
57.0 good

2005price
122.4 produce only in
120.8
A impose a minimum
the public sector
Which statement about the price level is correct?
B increase advertising on the benefits of put legal controls on output
Which statement about the period 1995 to 2005 is correct?
A It fell
theover
goodthe first half of the period.
A
balance
of trade
improved.
confine
access
to at
certain
age groups
tax output
B C The
It was
at its
highest
the start
of the period.
B
balance
of payments
worsened.
subsidise
the
good
set a minimum level of output
C D The
It was
at its lowest
at the end
of the period.
C
D
D

The terms of trade worsened.


It was at its lowest at the start of the period.
The exchange rate appreciated.

25 What is most likely to cause demand-pull inflation?


UCLES
2006
9708/01/M/J/06
22
What
will improve Cubas current account
balance immediately?
A an increase in indirect taxes
A a Cuban buying sports equipment produced in the US
B an increase in interest rates
B a US resident investing in property in Cuba
C a reduction in direct taxes
C a US multi-national company building a new factory in Cuba
D a reduction in the money supply
D Cubans working in the US sending money to their relatives in Cuba

26 What might explain an increase in the volume of a countrys imports?


23 What will cause an immediate rise in the size of a countrys labour force?
A an appreciation of the countrys exchange rate
A an increase in the birth rate
B an increase in the countrys tariffs
B an increase in the age of retirement
C a recession in the country
C an increase in the school leaving age
D a rise in the countrys rate of income tax
D an increase in the number of redundancies


[Turn over

12

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada

11

27 Increased international competition leads to a worsening in a countrys current account balance.


3
In the absence of any offsetting factors, how is this likely to affect domestic inflation and the
rate?
6 exchange
The diagram
shows the demand curve for good X.
inflation

exchange rate

increase

appreciate

increase

decrease

depreciate
price
appreciate

decrease

depreciate

M
N


2 and Euros () which exchanged for one pound
28 2The
diagram shows the numberOof US dollarsquantity
($)
Nov
006
1

27

sterling () between 2002 and 2004.


Whatare
could
cause
a movement
along
the curve from M to N?
Why
there
no markets
for free
goods?
1.8
$ per
A Consumers
a change in consumer
tastes
favour
of Xsame at all levels of demand.
A
valuation of
free in
goods
is the

B
B

1.7
a decrease
costs of producing X
Free
goods in
arelabour
non-excludable.

C
C

a decrease
thefree
demand
The
demandinfor
goodsfor
is X
infinite.
1.6

D
D

an increase
the price
substitutetogood
The
supply ofinfree
goodsofisa sufficient
satisfy all demand at zero price.
1.5

1.4economy
From is
the
table below,
in which
price range
is in
demand for product X inelastic?
What
present
in a mixed
but not
pera planned economy?
1.3

capital goods

private
production
$ exchange
rate
against

product X
2002
2003
2004
B consumer surplus
price
quantity demanded
$ of the $ against the and during this period?
What
happened toborrowing
the exchange rate
C government

12
$ exchange rate
11
against

250
450

10 if
InAeconomics
a statement is positive
appreciated
appreciated

500

9
600
appreciated
A B it assumes
current economicdepreciated
conditions
remain unchanged.
8
650
depreciated
appreciated
B C it concerns
the factual outcomes
of an economic action.

depreciated
depreciated
AD it$12-11
B $11-10of
C $10-9
D $9-8
C
examines
the desirability
government
economic policy.

D it is based upon the opinion of an economic adviser.


Product R is an inferior good with no close substitutes. It is also a complement to product S.

Which
of money
Which characteristic
describes product
R? is essential, if it is to be used as a medium of exchange?
A
B

It must be durable.
income elasticity of demand
It must be legal tender.

cross elasticity of demand


with respect to product S

C A It must be limited
in supply.
negative

positive

positive value.
D B It must have intrinsic

negative

C
negative
negative
9708/01/M/J/06
[Turn over
The
market
demand
for
a
product
is
made
up
of
the
demand from three firms, X, Y and Z.
D
positive
positive

UCLES 2006

The table shows the demand from each firm and the market supply.
UCLES 2006

9708/01/O/N/06

[Turn over
market supply

13

price $

demand from X

demand from Y

demand from Z

3300

3300

3300

3300

3100

2900

3100

6200

41

13

28

44

12

25

32

37

Difficult MCQs from 2003 to 2009


D
15
17
By: Ali Anwerzada

28 Turkey can produce a good but also imports some of the good from Egypt. The Turkish currency
depreciates against the Egyptian currency.
How might this affect production of this good in Egypt and in Turkey?
production in Egypt

production in Turkey

decrease

decrease

decrease

increase

increase

decrease

increase

increase
11

29 The diagram shows the supply and demand for pounds sterling () in the foreign exchange
market with the initial US dollar ($) price of the being OP1.

$ price
of

P2
P1
D2
D1
O

UCLES 2006

Q1

Q2

9708/01/O/N/06

quantity of s

What will increase the $ price of the to OP2?


A

a large capital inflow into the UK

a large deficit on the UK current account

a reduction in interest rates in the UK

4
a speculative sale of s in the foreign exchange
market

7 A businessman had intended to borrow $5000 at 8 % per year for house purchase. When the
decided to borrow
$4000. of the external value of a countrys
rate
10 % hecircumstances
30 interest
In which
of rose
the to
following
will only
devaluation
currency have the greatest beneficial effects on its balance of trade?
Within what range is his interest elasticity of demand for loans?
A There is full employment in the country.
A
0.0 to 0.3
B The government has implemented expansionary fiscal policies.
B 0.4 to 0.7
C The demand for its imports is price-inelastic.
C 0.8 to 1.2
D There is a high price elasticity of demand for its exports.
D 1.3 to 1.7

A manufacturers ability to increase supply in the short run will be greater


A

if labour is immobile.

if the product is perishable.

if there is spare capacity.

if unemployment is low.

14

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada

19 The diagram shows the amounts of wheat and clothing that can be produced in countries X and Y
with a given quantity of resources.

100
country9X
22 The table shows the balance
for four items in a countrys current account for two years.
units of
wheat 50
visibles
invisibles
income
transfers
year 1

72

84

24

46
31000
44
units of clothing
What can be concluded about the changes between year 1 and year 2?
What does the diagram indicate about the production of these two commodities?
A Income has moved from a net inflow to a net outflow.
A Both countries have an absolute advantage in the production of clothing.
B The difference between the value of exported and imported services has increased.
B Both countries have a comparative advantage in the production of clothing.
C The value of exported goods has fallen.
C Country X has a comparative advantage in wheat and an absolute advantage in clothing.
D Transfers into the country have increased.
D Country Y has both an absolute and a comparative advantage in clothing.
year 2

87 0

country
Y
12

200

23 Company X reduces its workers from 250 to 200 and as a result its output decreases from 5000
4800 method
units perofday.
20 toWhich
protection would a government be most likely to use to increase the countrys
10
exports?
Company Y increases its workers from 800 to 1000 and as a result its output increases from
A
exchange
control
to 2200
units
perisday.
25 2000
Which
combination
likely to result from demand-pull inflation?

B quotas
What
happens to labour productivity of the workers in the two companies?

balance of trade
subsidies
company X
A
D tariffs worsening
AB
falls
improving

profits

company
risingY
rises
rising

risesof trade increasedfalls


21 ABcountrys
terms
from the base year value of 100 to 120 in the following year.
C
worsening
falling
C
rises
rises
D behaviour
improving
falling
Which
of export prices and
import prices would have caused this?
D
falls
falls
export prices
import prices

26 What would be likely to increase inflation in an economy?


10 % prices increased
10 %countries for years 2 and 3.
24 TheAtable decreased
shows the retail
index for four
(Year
1 index
= 100infor
all countries.)
A an
increase
consumer
saving
B
increased 10 %
decreased 10 %

B C an
increase
interest
rates
Which
country
had in
a 20
higher
of unchanged
inflation in year 2 than year 3?
increased
% rate
C D an increase
in labour productivity
unchanged
decreased
%
country
year 2 index
year 3 20
index
an increase in taxes on imports

D
A

100

115

110

132

27 In which situation must a countrys balance of trade in goods and services improve?
120

144

A D Export orders
rise more than import
130
150orders.
B

Export prices rise more than import prices.

UCLES 2007

9708/01/M/J/07

Export revenues rise more than import revenues.

Export volumes rise more than import volumes.

15
28 According to the Purchasing Power Parity theory, what determines the rate of exchange between
UCLES 2007
9708/01/M/J/07
[Turn over
two countries?

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada

11

30 A country with a freely floating exchange rate has a persistent deficit on the current account of its
balance of payments.
Which policy can be used to correct this disequilibrium?
A

devalue the currency

increase government spending

increase tax rates

reduce tariffs on imports

Nov 2007
1

Some people are shipwrecked on a tropical island and allocate their time between gathering
coconuts and fishing. Each individual is equally productive in collecting coconuts or catching fish.
Which diagram represents the production possibility curve of this community?

9
2

fish

coconuts

coconuts

coconuts

coconuts

fish

fish

fish

The government imposes a sales tax to reduce consumption of good X.


Which is a normative statement?
With which combination of price elasticity of demand and price elasticity of supply will this have
the
A greatest
Inflationeffect?
can be reduced only by increasing the level of unemployment.
An increase
in the
of inflation
AB elastic
demand
andrate
elastic
supply will lead inevitably to an increase in unemployment.
Unemployment
is more
harmful
than inflation.
BC elastic
demand and
inelastic
supply
If unemployment
is reduced
CD inelastic
demand and
elastic below
supplya certain level, this will lead to higher inflation.

D inelastic demand and inelastic supply


In which situation would an economist assume ceteris paribus?

A and
when
calculating
the retail and
prices
indexand beeswax are in joint supply.
10 Jam
honey
are substitutes
honey
B when
what to
include
in athe
cost
benefit
analysis
Other
thingsdeciding
being equal,
what
will be
result
of an
increase in the price of jam?
when making normative statements to advise the government
price of honey
price of beeswax
D when studying the effect of a price rise on demand
A
fall
fall
C

fall the nature of a typical


rise car assembly plant changed. Company mergers meant
InBthe 20th century
there were fewer firms, they operated on larger sites and they had more automated machinery
C robots. rise
fall
and
D
rise
rise
How is this change most likely to have affected the relative employment of factors of production in
the industry?

11 The number of passenger journeys per week by train on a certain route is shown by the demand
relative use decreased relative use
curve in increased
the diagram.
UCLES 2007

capital and enterprise

9708/01/M/J/07
labour
and land

enterprise and labour

land and capital

land and capital

enterprise and
V labour

labour and
land
fare

P
W

capital and enterpriseT


U

16
demand

fall

rise

rise

fall

Difficult
D MCQs from
rise 2003 to 2009
rise
By: Ali Anwerzada
11 The number of passenger journeys per week by train on a certain route is shown by the demand
curve in the diagram.

7
T
W
U
18 Brazil and Colombia attempt to control the supply of coffee in the
world market to help stabilise
demand
their incomes.
fare

What condition is essential for this to stabilise their incomes effectively?


O
R
S
A There must be large firms in the
industry.
number
of journeys / week
BInitially
It must
to store
the reduced
coffee and
stocks when necessary.
the be
farepossible
is OP, but
it is then
by release
PW.
C Other countries must supply a significant percentage of the total market.
Which area measures the amount spent on the extra journeys resulting from the lower fare?
D The demand for the product must be elastic.
A VUT
B PWTV
C VRST
D URST

19 Country X has a comparative advantage in producing wheat and country Y in producing cars.
However, the countries choose not to specialise and trade.
What is a valid reason for this behaviour?
A

The exchange rate lies within the countries opportunity cost ratios.

There is immobility of factors of production between the countries.

UCLES 2007

9708/01/O/N/07

Trade is based on absolute rather than comparative


advantage.
9

9
Transport
costs are high
relativeinflation
to the opportunity
differences
between
the countries.
25 DA country
experienced
an annual
rate of 4 % cost
for three
successive
years.
25 A country experienced an annual inflation rate of 4 % for three successive years.
Which statement is correct for the three-year period?
20 What would be an economic benefit to a country of imposing a tariff on imported goods?
Which statement is correct for the three-year period?
A The price level rose by 12 %.
A It would increase global productivity.
%. than 12 %.
A The
The price
price level
level rose
rose by
B
by 12
more
B It would make the countrys exports more competitive.
B The price level rose by more than 12 %.
C The real value of money rose by 12 %.
C It would put pressure on foreign suppliers to reduce their prices.
C The real value of money rose by 12 %.
D The real value of money rose by more than 12 %.
D It would reduce the prices paid by consumers for imported goods.
D The real value of money rose by more than 12 %.

Whatmust
would
beterms
likelyoftotrade
decrease
inflationchange?
in an economy?
2126 When
the
of a country
26 What would be likely to decrease inflation in an economy?
an increase
in consumer
AA when
the volume
of exportsspending
falls and the volume of imports rises
A an increase in consumer spending
B
an
increase
in
employment
B when the total value of exports falls and the total value of imports rises
B an increase in employment
an increase
in labour
productivity
CC when
the balance
of trade
moves from deficit to surplus
C an increase in labour productivity
D
an
increase
in
taxes
on
imports
D when the average price of exports rises and the average price of imports falls
D an increase in taxes on imports

27 A UK resident buys shares in a Spanish company.


27 A UK resident buys shares in a Spanish company.
What will be the immediate and subsequent effects on the UKs balance of payments?
What will be the immediate and subsequent effects on the UKs balance of payments?

A
A
B
B
C

immediate effect
effect
onimmediate
financial account
on financial account
credit
credit
credit
credit
debit

subsequent effect
subsequent
effect
on
current account
on current account
credit
credit
debit
debit
credit

17

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada

11

30 The diagram shows the market for sterling which is in equilibrium.


S

2.5
price of
in US$

2.0
D

20

25

30

quantity of s
(billions)
What must the UK government do to achieve an exchange rate of 1 = US$2.50?
A

buy 10 billion sterling

buy 20 billion sterling

sell 10 billion sterling

D sell
20 billionpolicy
sterling
13 Which
government
might limit the rationing function of the price mechanism?


A the imposition of tariffs on imported consumer
4 goods
June 2008
8

B the levy of indirect taxes at varying rates on different goods


The table shows how an individuals consumption of cola and nuts varies with income.
C the payment of subsidies to food producers

income
($)for rented
colahousing
(cans)
the setting of maximum
prices

50

nuts (packets)
0

14 What will be the result, from100


societys view, if 4the market price1for a product does not reflect the
negative externalities in its production?

Which
about income
elasticity
demand over the range of income shown is true?
A
toostatement
much consumption
and too
much of
production
A
B

For much
cola itconsumption
is less than 1.
too
and too little production

B
C

For little
colaconsumption
it is greater than
too
and 1.
too little production

C
D

For little
nutsconsumption
it is greater than
1. much production
too
and too

For nuts it is zero.

15 An increase in tuition fees paid by students has no effect on the number of students entering
higher education.
9 What would increase the price elasticity of supply of a firms products?
What
be theineffect
on theofprivate
ratestocks
of return
obtained
A a will
decrease
the period
time that
can be
kept by students from higher education
and on the social rate of return to society as a whole?
B a decrease in the time that it takes to produce the products
private rate of return
social rate of return
C an increase in the cost of capital goods employed by the firm
decrease
increase
D A an increase
in the level of employment
in the area
B

decrease

uncertain

increase
increase
10 InCthe diagram,
the supply curve shows
the number of spaces in a car park and the demand
curve shows the demand for spaces on four different days.
D
increase
uncertain
UCLES 2007

9708/01/O/N/07

16 The government has to choose the best one of four possible sites to locate a port.
P4
The benefits and costs of each
P3 site are shown in $m in the table.
D4
price
P2
Which site would be chosen?
D3

P1

D2

18

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada

20 When would the sale of cheap exports definitely be classed as dumping?


A

if the exports were produced profitably at a low price in the exporting country

if the exports were the result of a surplus caused by favourable weather conditions

if the exports were the result of improved technology that led to capital-intensive production
9
D if the exports were the result of government subsidies to producers that made loss-making
9
23 Thesales
chartprofitable
shows changes in employment by sector
for a country between 2000 and 2006.
C

23 The chart shows changes in


6 employment by sector for a country between 2000 and 2006.
21 A government removes the tariff on a product.
6
4
What will be the change in domestic
production?

4
2

D
% change in 2
0
employment
% change in
0
P
employment
2
price
P1
2
P2
4
S

domestic supply

tertiary
tertiary

primary

secondary

primary

secondary
world supply with tariff
world supply without tariff

4
6

domestic demand

O
6V W X Y Z
Which statement about the period 2000 to 2006 must be true for this country?
quantity
Which
statement
about the
2000 to 2006
must
be true forsector.
this country?
A
The
primary sector
lostperiod
more workers
than the
secondary
AA aThe
reduction
of sector
WV lost more workers than the secondary sector.
primary
B Unemployment
stayed constant.
BB aUnemployment
reduction of XVstayed constant.
C Employment in service industries increased.
C a reduction of XW
C There
Employment
serviceinindustries
D
was noinchange
the total increased.
working population.
D a reduction of ZY
D There was no change in the total working population.

24 A countrys Consumer Price Index increased from 100 to 200 over a five-year period.
22 Which item is recorded in the financial account of a countrys balance of payments?
24 A countrys Consumer Price Index increased from 100 to 200 over a five-year period.
What can be deduced from this?
A a receipt of a gift of cash from abroad
What can be deduced from this?
A The economy experienced creeping inflation.
B a receipt of a subsidy from abroad
A The
The standard
economy of
experienced
creeping inflation.
B
living halved.
C a receipt of interest from abroad
B The cost
standard
of living
halved.
living
felllong-term
by
50 %.investment from abroad
DC aThe
receipt ofoffunds
for
%.
C
The
cost
of
living
fell
by
50
D The purchasing power of money
halved.
D

The purchasing power of money halved.

UCLES 2008

9708/01/M/J/08

19

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada

11

27 In 2004, when international demand for oil was high, Bolivia encouraged investment by foreign
5
firms in order to exploit its oil and gas resources,
mainly to improve its balance of payments
position.
10 The table shows changes in a consumers expenditure on various goods when his income
What
impact
would
on000.
the balance of payments of Bolivia?
increases
from
$20 this
000have
to $24
definitely favourable, as Bolivia could increase its exports of gas and oil
income
income
definitely unfavourable, as the foreign
would
transfer profits out of the country
$24 000:
$20 companies
000:
good
amount
spent
uncertain, as there would
be inflows
andspent
outflowsamount
of currency
on good
on good
12
zero, as Bolivia itself would use the gas
($) and oil produced
($)

A
B
C
D

30 A country has a current account deficit.


W
100
96
28 What is most likely to cause Australias exchange rate to depreciate?
Which component of its current
balance will be made
X account100
100 less favourable as a direct result of
an increase
Australias
for imports
aA decision
by theincentral
bankdemand
to increase
interest rates?
Y
200
224
B net
an increase
in Australias
A
investment
income interest rate
Z
200
248
C net
an increase
in demand for Australias exports
B
current transfers
Assuming
all else
remains
unchanged,
for which goods is the consumers income elasticity of
D
an increase
in
visits
to Australia
C
the
balance
of tourist
trade
demand
greater than
1.0?in goods

D
balance of trade
services
A the
W only
B Zinonly
C W and Z only D W, Y and Z
29 The table shows observations of the exchange rate of an economy and its current account
June balance
2009 over six years.
11 The diagram shows a countrys domestic supply of, and demand for, a commodity that it both
consumes and exports.
exchange rate
current account balance
year
(US dollars per unit
(billions of US dollars)
of domestic currency)
2.0

3 S

1.5

1.5

1.5

1.5

0 D

1
2
3price

WP2
WP1

1.5

W
Y
Which concept does the data in the table illustrate?
quantity

+3
Z

A exchange rate appreciation


The world price changes from WP1 to WP2.
B purchasing power parity
What are the resulting changes in domestic consumption and exports?
C the J-curve effect

domestic consumption
trade-weighted
exchange rates quantity of exports

OX to OZ

OY to OX

OX to OZ

OY to OZ

OY to OW

YX to WZ

OY to OW

YX to OZ

UCLES 2008


UCLES 2009

9708/01/M/J/08

[Turn over

9708/01/M/J/09

[Turn over

20

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada

18 The market price of an agricultural commodity was so low that the government fixed a minimum
price for it above the market equilibrium price. However, the government did not buy any of the
commodity itself.
What would happen as a result?
A

There would be an equilibrium in the market but the change in farmers incomes would be
uncertain.

There would be a shortage on the market and farmers incomes would rise.

There would be a surplus on the market and farmers incomes would fall.

There would be a surplus on the market but the change in farmers incomes would be
uncertain.
9

20 Japan introduces import quotas on consumer durables imported from Malaysia. These goods
19 In
thea diagram,
is theof production
have
high priceMN
elasticity
demand. possibility curve of a country that has a comparative
advantage in the production of good Y.
What effect is this likely to have on the prices paid for these goods by Japanese consumers and
on the revenues received by Malaysian producers?
M
change in prices paid
change in revenues
R
by Japanese
received by Malaysian
consumers
producers
quantity of
A
decrease good X
uncertain
B

decrease

increase

decrease
11
D
increase
uncertain
11
N
O
26 A developed country has a price-inelasticquantity
demandoffor
oil, Y
all of which it imports. The oil-producing
good
26 Acountries
developed
country
has a price-inelastic
decide
to provide
more oil to thedemand
market. for oil, all of which it imports. The oil-producing
countries
decide
to
provide
more
oil
to
the
market.
21 What
Which
statement
about
economic
integration
is quantities
correct? of X and Y indicated by point R?
might enable the country to consume the
What is likely to happen as a result in the developed country to inflation, its balance of trade and
AWhat
Aquantity
customs
union
has aascommon
currency.
is likelyof
to
result
in the developed
A
specialisation
ina the
production
of good Xcountry to inflation, its balance of trade and
theincreased
oilhappen
demanded?
the quantity of oil demanded?
B international
A customs union
B
tradehas a common external tariff.
quantity of oil
inflation
balance
trade
C aA reduction
free trade
has internal
tradeofbarriers.
quantity
of oil
demanded
C
inarea
unemployment
inflation
balance of trade
demanded
D increased
A free trade
area has noin
external
trade barriers.
D
specialisation
theimproves
production
of good Y rises
A
less
likely
A
less likely
improves
rises
B
less likely
worsens
rises
B 2000 aless
likely export prices
worsens
22 Since
countrys
have increased onrises
average by 50 % and its import prices by
C
more likely
improves
falls
25 %.
C
more likely
improves
falls
D
more likely
worsens
falls
What
figure for the countrys
(2000 = 100)?
D is the current
more likely
worsens terms of tradefalls
C

increase

A 75
B 83
C 120
D 125
27 Why is it that a countrys balance of payments must always balance?
27 Why is it that a countrys balance of payments must always balance?
A will
Exchange
rate
changes rise
will correct
anyof
deficit
or surplus.
23 What
cause an
immediate
in the size
a countrys
labour force?
A Exchange rate changes will correct any deficit or surplus.
B One countrys deficit is matched by anothers surplus.
AB an
increase
in the
birthisrate
One
countrys
deficit
matched by anothers surplus.
C The current account is balanced by the capital and financial accounts.
BC an
increase
in
the
age
of
retirement
The current account is balanced
by the capital and financial accounts.
D
The
government
must
act
to
correct
C an increase in the school-leaving age any disequilibrium.
D The government must act to correct any disequilibrium.
UCLES 2009
9708/01/M/J/09
D an increase in the number of redundancies
28 In the diagram, D1D1 and S1S1 are the initial demand and supply curves of the pound sterling ()
S1S1 are the initial demand and supply curves of the pound sterling ()
28 In
D1D1 andmarket.
onthe
thediagram,
foreign exchange
on the foreign exchange market.
D2
D
D1 2
D1


price of

S2
S2 S
1
S1

21

in Egypt for EGP 100.


Assuming that the dollar price remains unchanged, what will be the price of the product in Egypt if
the Egyptian pound appreciates to 4 EGP = 1 US$?

Difficult
MCQs from B
2003
to 2009
A EGP 75
EGP 80
By: Ali Anwerzada

EGP 120

EGP 125

30 A country has a large current account deficit. Its government decides to devalue its currency.
3
In which circumstance would such a measure reduce the deficit?
3 The diagram shows a persons marginal costs and marginal benefits of making trips to the
cinema. price elasticity of
price elasticity of
demand for exports

demand for imports

0.0

0.0

0.0

0.5

0.5

0.5

costs,
benefits
($)

0.5
marginal cost

1.0


Nov 2009

marginal benefit
The diagram shows a persons marginal costs and marginal benefits of making trips to the
cinema.
0
1
2
3
4
number of trips

How many trips will the person make?


A

None, as each extra trip reduces marginal benefit.

costs,
One, as this maximises
the excess of marginal benefit over marginal cost.
marginal cost
benefits
Two, as this maximises
($) the net benefit of making trips.

Three, as all trips have a positive marginal benefit.

marginal benefit
A change in market conditions causes a reduction in supply. This results in a higher price for the
product, which has a downward-sloping
0
1demand
2 curve.
3
4
number of trips
What must be the outcome of this higher price?

tripsinwill
person
make? in the industry
A How
anmany
increase
thethe
factors
employed
as each
extra trip revenue
reduces marginal benefit.
B A anNone,
increase
in producers
as this
maximises
excess of marginal benefit over marginal cost.
C B a One,
reduction
in the
quantitythe
demanded
as this
maximises
benefit of making trips.
D C a Two,
reduction
in the
demandthe
fornet
substitutes
D

Three, as all trips have a positive marginal benefit.

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)
trace
copyright
holders,
if any
items
requiring clearance
been included,
the
5 A government
wishes
to impose
a totax
on
a good
so but
that
the
consumer
and have
notunwittingly
the producer
pays
publisher will be pleased to make amends at the earliest possible opportunity.

of the tax
increase.
4 most
A change
in market
conditions causes a reduction in supply. This results in a higher price for the
University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of
whichSyndicate
has a (UCLES),
downward-sloping
demand
Cambridgeproduct,
Local Examinations
which is itself a department
of thecurve.
University of Cambridge.

Which type of elasticity would best achieve this aim?


UCLES 2009

9708/01/M/J/09

What must be the outcome of this higher price?


high price elasticity of supply

anprice
increase
in theoffactors
B A low
elasticity
supplyemployed in the industry
an increase
in producers
revenue
C B unitary
price elasticity
of supply
a reduction
in theprice
quantity
demanded
D C perfectly
inelastic
elasticity
of supply
D

a reduction in the demand for substitutes

A government wishes to impose a tax on a good so that the consumer and not the producer pays
the tax increase.
9708/12/O/N/09
[Turn over

most
UCLES
2009 of

Which type of elasticity would best achieve this aim?


A

high price elasticity of supply

low price elasticity of supply

22

football tickets and light bulbs

motor cycles and telephone calls

Difficult
MCQs
from
2003 to 2009
D motor
cycles
only
By: Ali Anwerzada
7
8

5
Two goods, X and Y, are complementary goods. Column 1 of the table below shows the original
market
situation
at timeupon
period
1 and
column
2 shows
theInsituation
following
increase
the
A
specific
tax is placed
each
bottle
of perfume
sold.
the diagram,
SS isanthe
supply in
curve
price oftax,
good
before
StSY.
t the supply curve after tax.
1
St
10

price of good X
quantity demandedW
R
price
price of good Y
U
Q
quantity
P demanded T
St

50

10
S
40

20

30

80

60

D
The value of cross elasticity of demand
S for good X with respect to the price of good Y lies
between
O
Y Z
quantity
A 1.7 and 2.6.
B 0.8
and
1.3.
Which
area
represents
the revenue received by the government from the tax?

C
A

0.3 and 0.8. B


ORWY

+0.3 and +0.6.

PQUT

PRWT

QRWU

The table shows the maximum price a consumer would be willing to pay for successive cans of
fruit juice.
cans

first

second

third

fourth

fifth

price ($)

14

10

The price of a can of fruit juice is $4 and, having bought three cans, the consumer decides to buy
a fourth.
How does buying the fourth can affect his consumer surplus?
A

It leaves it unchanged.

UCLES
B 2009
It lowers

it by $2.

It raises it by $4.

It raises it by $34.

9708/12/O/N/09

10 What is generally considered to be one of the advantages of using the price mechanism as a
rationing device?
A

It ensures that goods are allocated in accordance with the needs of consumers.

It ensures that suppliers cannot make excessive profits.

No one can be prevented from consuming a good if they are willing and able to pay the
market price.

The allocation of goods is determined by consumers wealth.

UCLES 2009

9708/12/O/N/09

[Turn over

23

17 The government places a maximum price P1 on an agricultural product. The supply and demand
conditions for this product are shown.

Difficult MCQs from 2003 to 2009


By: Ali Anwerzada
P1

S
66

11 The
The demand
demand curve
curve in
in the
the diagram shows the relationship between the number of car journeys
11
price diagram shows the relationship between the number of car journeys
and
the
cost
of
a
car
journey.
and the cost of a car journey.

D
O
quantity
cost of a
cost of a
carthe
journey
What will be the outcome car
in
market for this product?
journey
There will be an equilibrium price and output.

D
D

O number of car journeys


There will be a surplus of the product.
O number of car journeys
C There will be higher than expected profits.
What would cause the demand curve to shift to the left?
What would cause the demand curve to shift to the left?
D There will be shortages of this product.
A a reduction in car tax
A a reduction in car tax
B a reduction in petrol prices
18 B
A country
has the
climate for growing tea, which is produced very cheaply and exported.
a reduction
in correct
petrol prices
Fruit
also grown,
but this
costs more
as the climate is not as suitable.
C aisreduction
in public
transport
prices
C a reduction in public transport prices
D the
tolls on
motorways
Fruit
canintroduction
be sold at aof
higher
price
than tea so some of the land used for tea is switched to fruit.
D the introduction of tolls on motorways

What will definitely happen as a result?


12 What would cause a failure of the market mechanisms rationing function?
12 What
wouldwill
cause
failure of in
the
market mechanisms
rationing function?
A There
be ana increase
specialisation
by the country.
A falling prices
A
prices
B falling
There will
be an increase in the imports of tea.
B price controls
B
C price
Therecontrols
will be an opportunity cost of the loss of the tea production.
C rising profits
C
D rising
There profits
will be production in line with absolute advantage.
D self interest
D self interest
19 A government has been protecting its domestic car industry with a quota on imported cars. It then
13 removes
The government
considering
flood defences
alongcar
a producers.
river. It has calculated the costs
the quotaisand
replaces building
it with a subsidy
to domestic
13 The
is considering building flood defences along a river. It has calculated the costs
and government
benefits as follows.
and
as follows.
Howbenefits
will this change
affect the price of cars and the level of consumer choice?
costs
benefits
$m
$m
costs
benefits
price of cars
level of choice
$m
$m
private
450
260
A
decrease
decrease
private
450
260
external
60
190
B
decrease
increase
external
60
190
C
increase
decrease
According
to cost-benefit analysis,
which decision and reasoning about flood defences is correct?
According
to cost-benefit analysis,
which decision and reasoning about flood defences is correct?
D
increase
increase
decision
reasoning
decision
reasoning
A
Build.
External benefits are greater than external costs.
AB
Build.
External
benefits
greater
than
external
costs.
Build.
Social benefits
areare
greater
than
private
benefits.

BC
CD

Do Build.
not build.

Do
Do not
not build.
build.

Social
are
greater
than
benefits.
Privatebenefits
costs are
greater
than
theprivate
external
benefits.
9708/12/O/N/09
Private
costsare
aregreater
greaterthan
thanthe
thesocial
external
benefits.
Social costs
benefits.

Do not build.

Social costs are greater than the social benefits.

UCLES 2009

UCLES 2009

UCLES 2009

9708/12/O/N/09

9708/12/O/N/09

24