This Paper Is Not To Be Removed From The Examination Hall

This paper is not to be removed from the Examination Hall
UNIVERSITY OF LONDON EC1002 ZA
BSc degrees and Diplomas for Graduates in Economics, Management, Finance

and the Social Sciences, the Diplomas in Economics and Social Sciences
Introduction to Economics
Wednesday, 2 May 2018: 14:30 to 17:30
This paper consists of THREE sections:
Section A (40 marks): TEN multiple choice questions, each worth FOUR marks. Candidates
must answer all questions. No explanation is needed.
Section B (30 marks): Candidates must answer ONE of TWO questions on microeconomics.
It is essential that candidates explain their answers.
Section C (30 marks): Candidates must answer ONE of TWO questions on

macroeconomics. It is essential that candidates explain their answers.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
PLEASE TURN OVER
© University of London
2018 UL18/0170 Page 1 of 10 D0
SECTION A: Multiple choice questions
Please mark the correct answer in the special multiple choice answer sheet
provided using an HB pencil.
Candidates should write their candidate number in the boxes and then mark up their
appropriate letter and numbers in the grid.
The date, candidate first name(s) and surnames should be written in the appropriate
space.
Candidates should use an eraser to remove any unwanted marks as fully as possible.
If an eraser is unavailable, please put a cross (X) through the incorrect mark.
The sheets should not be folded or creased in any way as this will make them
unreadable.
Candidates should not write anywhere else on the sheet other than to mark their
answers as shown on the sheet; any writing or marks in an inappropriate place could
make the sheet unreadable.
2018 UL18/0170 Page 2 of 10 D0
Answer all questions from this section.
Choose one answer for each question: no explanation is needed.
Note that some questions ask you to choose which statement IS correct and other
questions ask you to choose which statement IS NOT correct.
1. Matthew needs to decide whether to go to work today or call in sick. If he goes

to work, he will get his daily wage of £73. It costs £20 to get to work. If he calls in
sick, he will stay at home and invite his friends over to watch a movie, which he
values at £80. The cost of renting a movie and getting snacks is £30. What is the
best thing for Matthew to do given this information?
(a) Go to work as his opportunity cost of working is £30.

(b) Call in sick as his opportunity cost of staying at home is £53.
(c) Go to work as his opportunity cost of working is £50.
(d) Call in sick as his opportunity cost of staying at home is £73.
2. Two firms, A and B, produce the same product and compete by setting prices.
They are the only firms that produce the product. Both firms have a marginal
and average cost of £2. If both firms set the same price, they share the market
equally. If they charge different prices, the firm charging the lower price takes the
entire market. Which one of the following statements is not correct?
(a) The equilibrium price is equal to marginal cost.

(b) In equilibrium both firms set the same price.
(c) In equilibrium the two firms share the market equally.
(d) Because the number of firms in the industry is small firms make profits in
equilibrium.
3. The price of cake has increased. Which of the following statements about the
effects on the demand for oranges is correct?
(a) Demand for oranges increases if cake and oranges are complements.
(b) Demand for oranges decreases if cake and oranges are substitutes.
(c) If you know the income elasticity of demand for oranges, you can predict
whether demand for oranges increases or decreases when the price of cake
increases.
(d) Some health conscious consumers eat oranges regularly but never eat
cake. The increase in the price of cake has no effect on their demand for
oranges.
2018 UL18/0170 Page 3 of 10 D0
4. A tax of £2 per kilo on a good is introduced. Which of the following statements is
correct?
(a) The price paid per kilo of the good always increases by £2 when the tax is
introduced.
(b) The price received by producers for each kilo of the good always falls by £2
when the tax is introduced.
(c) In some circumstances introducing the tax makes the economy more efficient.
(d) The tax revenue is always equal to the amount lost by consumers and
producers when the tax is introduced.
5. Figure 1 shows graphs of total cost and total revenue as a function of quantity
Q. What value of Q maximises profits?
Figure 1: question 5
(a) 1
(b) 2
(c) 3
(d) 4
6. Which of the following statements about the rate of inflation is correct?
(a) The numerical value of the consumer price index is the rate of inflation.
(b) The increase in the numerical value of the consumer price index is the rate of
inflation.
(c) The percentage change in the numerical value of the consumer price index is
the rate of inflation.
(d) If the rate of inflation is positive then the price of every type of good has
increased.
2018 UL18/0170 Page 4 of 10 D0
7. Which of the following statements about the balance of payments is not correct?
(a) The current account measures the difference between payments for goods
manufactured in the UK and exported, and payment for goods
manufactured outside the UK and imported by the UK. It does not include
services.
(b) The capital account is the international flow of transfer payments relating to
capital items.
(c) The financial account records international purchases and sales of financial
assets.
(d) The UK has a floating exchange rate. If all transactions between the UK and
the rest of the world are correctly measured, then the UK balance of payments
is
current account + capital account + financial account = 0.
8. In the simple model of national income determination investment, government

expenditure, and tax revenue, are all taken to be exogenous. A more sophisticated
model recognises that there are automatic stabilisers. Which of the following
statements about the model with automatic stabilisers is correct?
(a) Tax rates must change for automatic stabilisers to work.

(b) In the model with automatic stabilisers tax revenue automatically falls when
national income increases.
(c) In the model with automatic stabilisers government expenditure automatically
increases when national income increases.
(d) The multiplier is lower in the model with automatic stabilisers than it
is in the model without automatic stabilisers.
9. Which of the following statements about banking crises is correct?
(a) In a solvency crisis depositors are anxious about whether a bank will be able
to repay the money they have deposited in the bank. Many depositors try to
withdraw money at the same time. The assets of the bank are greater than its
liabilities.
(b) In a liquidity crisis depositors are anxious about whether a bank will be able
to repay the money they have deposited in the bank. Many depositors try to
liabilities.
(c) Central banks can resolve a solvency crisis by lending to the bank in difficulties.
(d) It is easy for central bankers to tell whether a bank has a liquidity crisis or a
solvency crisis.
2018 UL18/0170 Page 5 of 10 D0
10. Which of the following statements about the Phillips curve model with
expectations is correct?
(a) An expected high rate of inflation is associated with high levels of

output and employment.
(b) An unexpected high rate of inflation is associated with high levels of
(c) In the long run governments can increase real output and employment by
using monetary policy to increase the rate of inflation.
(d) In the long run there is nothing governments can do to increase real
2018 UL18/0170 Page 6 of 10 D0
Section B: Microeconomics
Answer one of the two following long questions. It is essential that you explain
your answers.
11. [30 marks]
(a) Figure 2 shows the short run marginal cost (SMC), short run average total
cost (SATC) and short run average variable cost (SAVC) curves for a firm.
Explain why the cost curves have the following properties:
• SAVC is decreasing if SMC < SAVC and increasing if SMC > SAVC.
• SATC is greater than SAVC for all values of q.
• SATC is decreasing if SMC < SATC and increasing if SMC > SATC.
[6 marks]
(b) Assume that the firm operates in a perfectly competitive industry and in the
short run the firm has to cover its fixed costs even if it produces zero. What is
the relationship between the curves shown in figure 2 and the supply curve of
the firm? What is the lowest price at which the firm will produce?
[6 marks]
2018 UL18/0170 Page 7 of 10 D0
(c) Now assume that the firm operates in a perfectly competitive industry and in
the short run the firm does not have to cover its fixed costs if it produces zero.
What is the relationship between the curves shown in figure 2 and the supply
curve of the firm? What is the lowest price at which the firm will produce?
[6 marks]
(d) Explain the distinction between long and short run costs. Is it possible for the
long run average cost to be larger than the short run average total cost?
[6 marks]
(e) What are economies and diseconomies of scale? For what levels of output
does the firm with cost curves shown in figure 2 exhibit economies and
diseconomies of scale? What causes economies of scale? What causes
diseconomies of scale?
[6 marks]
12. [30 marks]
(a) Use a supply and demand diagram to show the equilibrium in the labour
market. What is the effect of an increase in demand for the output of the
industry?
[6 marks]
(b) Under what circumstances is a firm a price taker in its labour market? What is
the effect of introducing a minimum wage in a perfectly competitive market?
[6 marks]
(c) Under what circumstances is the firm a monopsonist in its labour market,
that is the only employer of a particular type of worker? What is the effect of
introducing a minimum wage in a labour market in which firms are
monopsonists?
[6 marks]
(d) Consider labour supply in a market in which workers are paid by the hour and
can choose how many hours to work for. Use an indifference curve diagram
to discuss whether an increase in the hourly wage increases labour supply.
[12 marks]
2018 UL18/0170 Page 8 of 10 D0
Section C: Macroeconomics
Answer one of the two following long questions. It is essential that you explain
your answers.
13. [30 marks]
(a) After the financial crisis in 2007-2009 many central banks reduced the interest
rate. Is this a change in fiscal policy? Is this a change in monetary policy?
[4 marks]
(b) What is the difference between a closed economy model and an open
economy model?
[4 marks]
(c) Explain the derivation of the IS curve in a closed economy model. Use the
IS-LM model to analyse the effect of a fall in investment, due to a lack of
confidence, on national income if there is no change in fiscal policy and no
change in the interest rate.
[10 marks]
(d) Continue to assume a closed economy. Assume now that the central bank
sets the interest rate, setting a higher interest rate when output is higher.
Discuss, using your IS-LM diagram, how monetary and fiscal policy can be
used to reduce the impact of the fall in investment on national income.
[6 marks]
(e) In June 2016 a referendum in the UK resulted in a decision that the UK

should leave the European Union. Following the referendum there was
concern that firms would reduce their investment in the UK. Monetary policy
in the UK is determined by the Bank of England, which sets the interest rate.
The interest rate was cut from 0.5% to 0.25% in August 2016. How does the
fact that the UK is an open economy with a floating exchange rate change your
analysis of the effects of monetary policy?
[6 marks]
2018 UL18/0170 Page 9 of 10 D0
14. [30 marks]
(a) Why do households hold money? What type of bank deposits are included in
the money supply?
[7 marks]
(b) Contactless cards make it possible to make a payment by holding the card
near a reader, with no requirement to enter a PIN number or provide a
signature. They allow customers to make a transaction more quickly and
conveniently than using cash. However there is a limit on the size of the
transaction and some shops will not accept cards for very small transactions.
Are contactless cards a perfect substitute for cash? What effect is the
introduction of contactless cards likely to have on holdings of cash and bank
deposits? What are the risks of contactless cards? Which sectors of the
economy prefer working with cash rather than electronic payments involving
banks?
[7 marks]
(c) What is a reserve requirement for a bank? What determines the reserve ratio
of a bank? If a bank has a reserve ratio of 3%, starts with zero cash, and
then receives a cash deposit of £3,000 how much can it lend? What is the
effect of the lending on the money supply in the economy?
[7 marks]
(d) What is quantitative easing? Why did the Bank of England adopt a policy of
quantitative easing after the financial crisis of 2007-2009? Was the policy
successful?
[9 marks]
END OF PAPER
2018 UL18/0170 Page 10 of 10 D0
This paper is not to be removed from the Examination Hall
UNIVERSITY OF LONDON EC1002 ZB
BSc degrees and Diplomas for Graduates in Economics, Management, Finance

and the Social Sciences, the Diplomas in Economics and Social Sciences
Introduction to Economics
Wednesday, 2 May 2018: 14:30 to 17:30
Section A (40 marks): TEN multiple choice questions, each worth FOUR marks. Candidates
Section B (30 marks): Candidates must answer ONE of TWO questions on microeconomics.
It is essential that candidates explain their answers.
Section C (30 marks): Candidates must answer ONE of TWO questions on

macroeconomics. It is essential that candidates explain their answers.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
PLEASE TURN OVER
© University of London 2018 Page 1 of 9 D0

UL18/0171
SECTION A: Multiple choice questions
Please mark the correct answer in the special multiple choice answer sheet
provided using an HB pencil.
Candidates should write their candidate number in the boxes and then mark up their
appropriate letter and numbers in the grid.
The date, candidate first name(s) and surnames should be written in the appropriate
space.
Candidates should use an eraser to remove any unwanted marks as fully as possible.
If an eraser is unavailable, please put a cross (X) through the incorrect mark.
The sheets should not be folded or creased in any way as this will make them
unreadable.
Candidates should not write anywhere else on the sheet other than to mark their
answers as shown on the sheet; any writing or marks in an inappropriate place could
make the sheet unreadable.

UL18/0171
Note that some questions ask you to choose which statement IS correct and other
questions ask you to choose which statement IS NOT correct.
1. Bubble tea is a popular drink in Singapore. Which of the following statements

about the effects of an increase in the price of bubble tea on demand for chicken
soup is not correct?
(a) Demand for chicken soup decreases if bubble tea and chicken soup are
complements.
(b) Demand for chicken soup increases if bubble tea and chicken soup are
substitutes.
(c) The cross price elasticity of demand for chicken soup with respect to bubble
tea is
change in the quantity of chicken soup demanded
∙
change in the price of bubble tea
(d) Some people dislike bubble tea and never drink it. The increase in the price of
bubble tea has no effect on their demand for chicken soup.
2. Amil needs to decide whether to go to work today or call in sick. If he goes to

work, he will get his daily wage of £70. It costs £10 to get to work. If he calls in
values at £90. The cost of renting a movie and getting snacks is £20. What is the best
thing for Amil to do given this information?

3. Which of the following statements is implied by the assumption that consumers

prefer more to less?
(a) If the consumer prefers bundle A to bundle B and bundle B to bundle C,

then the consumer prefers bundle A to bundle C.
(b) Moving along an indifference curve, increasing the amount of good 1 and
decreasing the amount of good 2, the indifference curve becomes flatter.
(c) A consumer comparing any two bundles of goods A and B can always say
whether A is better than B, B is better than A, or A and B are exactly as good
as each other.
(d) Indifference curves are downward sloping.

UL18/0171
4. Figure 1 shows graphs of total cost and total revenue as a function of quantity ܳ.
What value of Q maximises profits?
(a) 2
(b) 3
(c) 4
(d) 6
5. A tax of £10 per kilo on a good is introduced. Which of the following statements is
correct?
(a) The price paid per each kilo of the good always increases by £10 when the tax
is introduced.
(d) The tax revenue is always equal to the amount lost by consumers and
producers when the tax is introduced.
6. Which of the following statements about banking crises is correct?
(a) Central banks can resolve a solvency crisis by lending to the bank in difficulties.
(b) In a solvency crisis depositors are anxious about whether a bank will be able to
repay the money they have deposited in the bank. Many depositors try to
liabilities.
(c) It is easy for central bankers to tell whether a bank has a liquidity crisis or a
solvency crisis.
(d) In a liquidity crisis depositors are anxious about whether a bank will be able to
liabilities.

UL18/0171
7. Which of the following statements about the rate of inflation is correct?
(a) If the rate of inflation is positive, then the price of every type of good has
increased.
(b) The percentage change in the numerical value of the consumer price index is
the rate of inflation.
(c) The numerical value of the consumer price index is the rate of inflation.
(d) The increase in the numerical value of the consumer price index is the rate of
inflation.
8. Which of the following statements about the balance of payments is not correct?
(a) The capital account is the international flow of transfer payments relating to
capital items.
(b) The financial account records international purchases and sales of financial
assets.
(c) The current account measures the difference between payments for goods
manufactured in the UK and exported, and payment for goods manufactured
outside the UK and imported by the UK. It does not include services.
the rest of the world are correctly measured then the UK balance of payments
is
9. Which of the following statements about the Phillips curve model with
expectations is correct?
(a) An unexpected high rate of inflation is associated with high levels of

(b) An expected high rate of inflation is associated with high levels of output
and employment.
(c) In the long run governments can increase real output and employment by
using monetary policy to increase the rate of inflation.
(d) In the long run there is nothing governments can do to increase real
10. In the simple model of national income determination investment, government

expenditure and tax revenue are all taken to be exogenous. A more sophisticated
(a) In the model with automatic stabilisers tax revenue automatically falls when
(b) The multiplier is lower in the model with automatic stabilisers
than it is in the model without automatic stabilisers.
(c) Tax rates must be changed for automatic stabilisers to work.
(d) In the model with automatic stabilisers government expenditure automatically

UL18/0171
Answer one of the two following questions. It is essential that you explain your
answers.
11. [30 marks]
(a) People generally believe that oligopolies (and in particular duopolies) are
always inefficient. Are they correct?
[6 marks]
(b) Two firms A and B produce the same good. Each sets the price of the good. If
the two firms set the same price, they share the market equally. If they set
different prices, the firm with the lowest price takes the entire market. Both
firms have a marginal and average cost of £10. Explain what the price is in
equilibrium. Do the firms make profits in equilibrium?
[6 marks]
(c) The demand for the output of the industry is Q = 90 − p where p is the price.
The two firms observe that they can both increase profits if they set up a cartel
which produces the level of industry output which maximises industry profits.
Recall that both firms have a marginal and average cost of £10. What is the
output of the cartel? What is the industry price? Assume that the two firms
share the market equally. What profit does each firm make?
[6 marks]
(d) Suppose firm B believes that firm A will remain at its cartel level of output.
What is the profit maximizing level of output for firm B?
[6 marks]
(e) Under what conditions is it difficult for firms to sustain a cartel?

[6 marks]

UL18/0171
12. [30 marks]
Ivan earns £80 per week and needs to decide how many cans of Coke and
sandwiches to buy. Each sandwich costs £4 and every can of Coke costs £2. His
utility function is Uሺs,cሻ = sc, where s stands for sandwich and c for can of Coke.
(a) Find an equation for Ivan’s budget constraint and show the budget constraint in
a diagram.
[6 marks]
(b) Calculate the optimal weekly amounts of sandwiches and cans of Coke for
Ivan and show the optimal bundle on a graph.
[6 marks]
(c) Ivan has worked hard this year and his boss decides to give him a raise. He
now earns £100 per week. Show the increase in income on a graph and
discuss how it affects his demand for sandwiches and Coke.
[6 marks]
(d) Explain what would happen if the price of sandwiches went up by £5 and
income remained at £100 per week. Show Ivan’s new budget line on a
graph. Would Ivan still demand the same amounts of sandwiches and cans of
Coke?
[6 marks]
(e) Explain the difference between normal, inferior, and Giffen goods and what
sign the income and substitution effects are in each of these cases. Are
sandwiches a normal good in this case?
[6 marks]

UL18/0171
Answer one of the two following questions. It is essential that you explain your
answers.
13. [30 marks]
The USA has decided to increase government expenditure and reduce taxes.
(a) Is this a change in fiscal policy? Is this a change in monetary policy?

[4 marks]
(b) What is meant by the natural level of output? What, if any, is the relationship
between the natural level of output and the rate of inflation?
[4 marks]
(c) Explain the derivation of the IS curve in a closed economy model with a
government. Assume that the interest rate is set by a central bank which sets
a higher interest rate when output is higher. Use the IS-LM model to analyse
the effect of increasing government expenditure and cutting taxes if the
economy is producing less than its natural level of output.
[12 marks]
(d) How would your analysis change if the economy is producing its natural level
of output? What action would you recommend a central bank with an inflation
target take in these circumstances?
[10 marks]

UL18/0171
14. [30 marks]
(a) Consider the balance sheet of a nonfinancial firm. Explain the distinction
between assets and liabilities. What are inventories? Are inventories an asset
or a liability? Is a loan made to the firm by a bank an asset or a liability of the
firm?
[4 marks]
(b) In the balance sheet of a bank are deposits assets or liabilities? Are loans to
other firms assets or liabilities?
[4 marks]
(c) What is the required reserve ratio for a bank? If a bank has a required
reserve ratio of 5%, starts with zero cash, and then receives a deposit of
£20,000 how much can it lend? What is the effect of the lending on the
quantity of money in the economy?
[5 marks]
(d) Banks earn a zero rate of interest on their cash holdings and a rate of
interest greater than zero on the amount they lend. Despite this fact banks
sometimes choose to have a higher ratio of cash to deposits to than is required
by the central bank. Why do they choose to do this?
[4 marks]
(e) The Bank of England is the central bank of the UK. What does the statement
that the Bank of England is the lender of last resort in the UK mean? Why is it
possible for the Bank of England to act as the lender of last resort?
[4 marks]
(f) What is quantitative easing? Why did the Bank of England adopt a policy of
quantitative easing after the financial crisis of 2007-2009? Was the policy
successful?
[9 marks]
END OF PAPER

UL18/0171
Examiners’ commentaries 2018

EC1002 Introduction to economics
Important note
This commentary reflects the examination and assessment arrangements for this course in the
academic year 2017–18. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading

references
Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2018). You
should always attempt to use the most recent edition of any Essential reading textbook, even if the
commentary and/or online reading list and/or subject guide refer to an earlier edition. If different
editions of Essential reading are listed, please check the VLE for reading supplements – if none are
available, please use the contents list and index of the new edition to find the relevant section.
General remarks
Learning outcomes
At the end of this course and having completed the Essential reading and activities you should be
able to:
• define the main concepts and describe the models and methods used in economic analysis
• formulate the real world in the language of economic modelling
• apply and use the economic models to analyse these issues
• assess the potential and limitations of the models and methods used in economic analysis.
Format of the examination
This paper consists of three sections:
• Section A (40 marks): Ten multiple choice questions, each worth four marks. Candidates
• Section B (30 marks): Candidates must answer one of two questions on microeconomics. It
is essential that candidates explain their answers.
• Section C (30 marks): Candidates must answer one of two questions on macroeconomics. It
is essential that candidates explain their answers.
1
Textbook
The answers make extensive reference to the textbook for the course, referred to as BVFD. The
textbook is:
• Begg, D., G. Vernasca, D. Fischer, and R. Dornbusch, Economics (2014) McGraw–Hill (11th
edition).
Key steps to improvement
When answering the long questions (Sections B and C), some candidates had problems because they
were not familiar with the material. The examiners look for clear and logical arguments which
explain the material and answer the precise question asked – putting in irrelevant material makes for
a less clear answer. Some candidates found this difficult, and it was obvious that they had not fully
understood the material.
Examination strategy
Make the most of what you know in the examination room.
• Read the wording of the questions very carefully and answer the exact question asked.
• Explain your answer.
• Answer the right number of questions.
• Plan your time. Do not spend too much time on any question. If you get stuck on part of a
question move on to the next question you answer and come back to the original question if
you have time.
• Start each answer on a new double page. Arrange your answer so that you do not have to
turn over a page to see a diagram you are discussing.
• Practice drawing diagrams when you are studying. Draw your diagrams large enough and
carefully enough that the examiner can easily see what you are doing.
Examination revision strategy
Many candidates are disappointed to find that their examination performance is poorer than they
expected. This may be due to a number of reasons, but one particular failing is ‘question
spotting’, that is, confining your examination preparation to a few questions and/or topics which
have come up in past papers for the course. This can have serious consequences.
We recognise that candidates might not cover all topics in the syllabus in the same depth, but you
need to be aware that examiners are free to set questions on any aspect of the syllabus. This
means that you need to study enough of the syllabus to enable you to answer the required number of
examination questions.
The syllabus can be found in the Course information sheet available on the VLE. You should read
the syllabus carefully and ensure that you cover sufficient material in preparation for the
examination. Examiners will vary the topics and questions from year to year and may well set
questions that have not appeared in past papers. Examination papers may legitimately include
questions on any topic in the syllabus. So, although past papers can be helpful during your revision,
you cannot assume that topics or specific questions that have come up in past examinations will
occur again.
If you rely on a question-spotting strategy, it is likely you will find yourself in difficulties
when you sit the examination. We strongly advise you not to adopt this strategy.
2

Important note

references
Comments on specific questions – Zone A
Section A (40 marks): TEN multiple choice questions, each worth FOUR marks. Candidates must
answer all questions. No explanation is needed.
Section B (30 marks): Candidates must answer ONE of TWO questions on microeconomics. It is
essential that candidates explain their answers.
Section C (30 marks): Candidates must answer ONE of TWO questions on macroeconomics. It is
Section A
Note that some questions ask you to choose which statement IS correct and other questions ask you
to choose which statement IS NOT correct.
Question 1
Matthew needs to decide whether to go to work today or call in sick. If he goes to

work, he will get his daily wage of £73. It costs £20 to get to work. If he calls in
values at £80. The cost of renting a movie and getting snacks is £30. What is the
best thing for Matthew to do given this information?
3

Reading for this question
See BVFD Section 1.1.
Approaching the question
(c) is correct.
The opportunity cost of an action is the best foregone alternative. If Matthew stays at home his
best alternative is going to work for which he would get £73 but pay £20 to reach his work place.
Hence his opportunity cost of staying at home is £73 − £20 = £53. On the other hand if
Matthew decides to go to work his best alternative is staying at home. His opportunity cost of
working is £80 − £30 = £50. Matthew should go to work as that is the activity with the lower
opportunity cost.
Question 2
Two firms, A and B, produce the same product and compete by setting prices.
They are the only firms that produce the product. Both firms have a marginal and
average cost of £2. If both firms set the same price, they share the market equally.
If they charge different prices, the firm charging the lower price takes the entire
market. Which one of the following statements is not correct?
(a) The equilibrium price is equal to marginal cost.

(b) In equilibrium both firms set the same price.
(c) In equilibrium the two firms share the market equally.
(d) Because the number of firms in the industry is small firms make profits in
equilibrium.
(d) is not correct.
If one firm sets a price above £2 the other firm can set a slightly lower price, get the entire
market and make profits, so will do so. This argument works so long as either price is above £2
so an equilibrium with either price above £2 is impossible. If one firm sets a price of £2 the
other firm will not set a price above £2 because it loses the entire market. It will not set a price
below £2 because it gets the entire market but makes a loss on each unit it sells. Therefore, it
will set a price of £2. In equilibrium both firms set a price of £2, which is marginal cost. They
share the market equally.
Question 3
The price of cake has increased. Which of the following statements about the effects
on the demand for oranges is correct?
4
(a) Demand for oranges increases if cake and oranges are complements.
(b) Demand for oranges decreases if cake and oranges are substitutes.
(c) If you know the income elasticity of demand for oranges, you can predict
whether demand for oranges increases or decreases when the price of cake
increases.
(d) Some health conscious consumers eat oranges regularly but never eat cake. The
increase in the price of cake has no effect on their demand for oranges.
(d) is correct.
Two goods are substitutes if the demand for one increases when the price of the other increases.
They are complements if demand for one decreases when the demand for the other increases.
Knowing the income elasticity of the consumer gives no information about the change in demand
due to a change in price of another good. Intuitively, if a consumer does not eat cake an increase
in the price of cake cannot affect the demand for oranges.
Question 4
A tax of £2 per kilo on a good is introduced. Which of the following statements is

correct?
introduced.
(d) The tax revenue is always equal to the amount lost by consumers and producers
See BVFD Sections 13.5 and 14.3.
(c) is correct.
A tax is efficient if it is used to internalise a negative externality.
Question 5
Figure 1 shows graphs of total cost and total revenue as a function of quantity Q.
5
(a) 1
(b) 2
(c) 3
(d) 4
(c) is correct.
The quantity that maximises profits is the one where the distance between total costs and total
revenues is maximised. This is also the point at which the tangents to the total cost and total
revenue curves are parallel.
Question 6
Which of the following statements about the rate of inflation is correct?
(a) The numerical value of the consumer price index is the rate of inflation.
(b) The increase in the numerical value of the consumer price index is the rate of
inflation.
(c) The percentage change in the numerical value of the consumer price index is the
rate of inflation.
(d) If the rate of inflation is positive then the price of every type of good has
increased.
See BVFD Section 2.2 for a discussion of price indices.
(c) is correct.
6
Inflation is measured as the percentage rate of change of the price of a bundle of goods. You can
think of the inflation rate as a weighted average of the percentage increases in the prices of the
goods. As with any average the average may increase, even though some of the things averaged
fall. Here the rate of inflation might be positive even if the prices of some goods fall.
Question 7
Which of the following statements about the balance of payments is not correct?
(a) The current account measures the difference between payments for goods
(b) The capital account is the international flow of transfer payments relating to
capital items.
(c) The financial account records international purchases and sales of financial
assets.
is
(a) is not correct.
The current account includes services.
Question 8
In the simple model of national income determination investment, government

(a) Tax rates must change for automatic stabilisers to work.

(b) In the model with automatic stabilisers tax revenue automatically falls when
(c) In the model with automatic stabilisers government expenditure automatically
(d) The multiplier is lower in the model with automatic stabilisers than it is in the
model without automatic stabilisers.
(d) is correct.
7
Question 9
Which of the following statements about banking crises is correct?
(a) In a solvency crisis depositors are anxious about whether a bank will be able to
liabilities.
(b) In a liquidity crisis depositors are anxious about whether a bank will be able to
liabilities.
(c) Central banks can resolve a solvency crisis by lending to the bank in difficulties.
(d) It is easy for central bankers to tell whether a bank has a liquidity crisis or a
solvency crisis.
(b) is correct.
Question 10
Which of the following statements about the Phillips curve model with expectations
is correct?
(a) An expected high rate of inflation is associated with high levels of output and
employment.
(b) An unexpected high rate of inflation is associated with high levels of output and
employment.
(c) In the long run governments can increase real output and employment by using
monetary policy to increase the rate of inflation.
(d) In the long run there is nothing governments can do to increase real output and
employment.
See BVFD Sections 22.4, 23.3.
(b) is correct.
8
Answer one of the two following long questions. It is essential that you explain your answers.
Question 11
(a) Figure 2 shows the short run marginal cost (SMC), short run average total cost
(SATC) and short run average variable cost (SAVC) curves for a firm. Explain
why the cost curves have the following properties:
• SAVC is decreasing if SMC < SAVC and increasing if SMC > SAVC.
• SATC is greater than SAVC for all values of q.
• SATC is decreasing if SMC < SATC and increasing if SMC > SATC.
(6 marks)
(b) Assume that the firm operates in a perfectly competitive industry and in the
short run the firm has to cover its fixed costs even if it produces zero. What is
the relationship between the curves shown in Figure 2 and the supply curve of
the firm? What is the lowest price at which the firm will produce?
(6 marks)
(c) Now assume that the firm operates in a perfectly competitive industry and in
the short run the firm does not have to cover its fixed costs if it produces zero.
What is the relationship between the curves shown in Figure 2 and the supply
curve of the firm? What is the lowest price at which the firm will produce?
(6 marks)
(d) Explain the distinction between long and short run costs. Is it possible for the
long run average cost to be larger than the short run average total cost?
(6 marks)
(e) What are economies and diseconomies of scale? For what levels of output does
the firm with cost curves shown in Figure 2 exhibit economies and diseconomies
of scale? What causes economies of scale? What causes diseconomies of scale?
(6 marks)
9
For (a), see BVFD Section 7.3. For (b) and (c), see BVFD Section 8.2. For (d), see BVFD
Section 7.9. For (e), see BVFD Section 7.8.
(a) Intuitively, increasing output increases the average cost if marginal cost (the cost of
producing one more unit) is greater than the average cost of producing previous units.
Similarly, increasing output decreases the total cost if marginal cost (the cost of producing
one more unit) is less than the average cost of producing previous units. When first learning
about this some people find it helpful to think about average scores in sport. Where there is
a fixed cost which does not change with output the increase in the total cost is the same as
the increase in variable cost; both are equal to marginal cost.
A good calculus-based answer is very helpful. Using notation C(q) for short run total cost,
V (q) for short run variable cost and F for short run fixed cost:
C(q) = V (q) + F.
As F is a fixed cost, so does not depend on q, we have:

dF
=0
dq
so short run marginal cost is:
dC dV
SMC = = .
dq dq
SAVC = V (q)/q, so using the quotient rule:

d(SAVC) q dV /dq − V (q) 1 dV V (q) 1
= = − = (SMC − SAVC).
dq q2 q dq q q
Therefore, d(SAVC)/dq > 0 so SAVC is increasing if SMC > SAVC. Similarly,

d(SAVC)/dq < 0 so SAVC is decreasing if SMC < SAVC.
Now we explain why SATC is greater than SAVC for all values of q.
Intuitively, short run total cost is the sum of variable cost and fixed cost. Assuming that the
fixed cost is greater than zero this implies that short run total cost is greater than short run
variable cost and hence that short run average total cost is greater than short run average
fixed cost. More mathematically:
C(q) = V (q) + F
so if F > 0, we have:
C(q) V (q) F V (q)

SATC = = + > = SAVC.
q q q q
SATC is decreasing if SMC < SATC and increasing if SMC > SATC.
The intuition is the same as for average variable cost. Using calculus:
C(q) V (q) + F
SATC = =
q q
dC dV
SMC = =
dq dq
d(SAT C) q dC/dq − C(q) 1
= 2
= (SMC − SATC).
dq q q
(b) If the firm produces q > 0 its total cost is V (q) + F and it sells q at price p so its profits are:
π(q) = qp − F − V (q).
10
If it produces zero it has to pay out F so it is willing to produce if:
pq − F − V (q) ≥ −F
so pq ≥ V (q). This requires p ≥ V (q)/q so price ≥ SAVC. From Figure 2 this requires that
p ≥ 2. Therefore, 2 is the lowest price at which the firm will produce. As the firm is a
price-taker it maximises profits by setting:
dπ dV
=p− = 0.
dq dq
Equivalently, it maximises profits by producing at the level where price = marginal cost.
Hence the supply curve is the part of the SMC above 2.
(c) Here, by assumption if the firm produces zero its total cost is zero and it sells zero. If the
firm produces q > 0 its total cost is V (q) + F and it sells q at price p so its profits are:
π(q) = qp − F − V (q) ≥ 0.
If it produces zero it has to pay out 0 so it is willing to produce if pq − F − V (q) ≥ 0 so:
pq ≥ V (q) + F = C(q).
This requires p ≥ C(q)/q so price ≥ SATC. From Figure 2 this requires that p ≥ 5.
As the firm is a price-taker it maximises profits by setting:
dπ dC
=p− .
dq dq
Equivalently, it maximises profits by producing at the level where price = marginal cost.
Hence the supply curve is the part of the SMC above 5.
(d) In general in the short run at least one input is fixed, while in the long run all inputs are
variable. At the level of this course there are two inputs, capital and labour. In the short
run capital is fixed, while in the long run both capital and labour are variable.
It is not possible for long run average cost to be greater than short run average cost. This is
because the level of capital is fixed in the short run, while the greater flexibility in the long
run allows capital to be set at its cost-minimising level for each level of output.
(e) Economies of scale – average cost falls as output increases; diseconomies of scale – average
cost increases as output increases.
In Figure 2 the firm exhibits economies of scale when q < 4 and diseconomies of scale when
q > 4.
Economies of scale are due to the following.
• Indivisibilities. BVFD gives the example of a telephone in a very small firm. Others may
be workers with an essential skill which for some reason cannot be bought in, for
example it is not possible to employ half a manager.
• A more important fixed cost is research and development which has to be done before a
product is brought to market. For example, the costs of drug development and clinical
trials are very high.
• Specialisation. In a large firm workers can specialise in a single or small number of tasks
at which they become very skilled.
Diseconomies of scale are largely managerial. There is a need to coordinate the activities of
different workers and this becomes very much more difficult as the numbers increase.
Diseconomies of scale may also be due to geography, or more generally access to resources.
For example, an oil firm needs to use the lowest cost source of oil at low levels of output, but
has to bring on stream more expensive sources as output expands.
11
Question 12
(a) Use a supply and demand diagram to show the equilibrium in the labour
market. What is the effect of an increase in demand for the output of the
industry?
(6 marks)
(b) Under what circumstances is a firm a price taker in its labour market? What is
the effect of introducing a minimum wage in a perfectly competitive market?
(6 marks)
(c) Under what circumstances is the firm a monopsonist in its labour market, that
is the only employer of a particular type of worker? What is the effect of
introducing a minimum wage in a labour market in which firms are
monopsonists?
(6 marks)
(d) Consider labour supply in a market in which workers are paid by the hour and
can choose how many hours to work for. Use an indifference curve diagram to
discuss whether an increase in the hourly wage increases labour supply.
(12 marks)
For (a), see BVFD Section 10.5. For (b), see BVFD Section 10.4. For (c), see BVFD Section 10.5,
in particular concept 10.2. For (d), see BVFD Section 10.4, in particular Mathematics box 10.2.
(a) The labour supply curve depends on the wages and opportunities of work in other
industries, and moving in and out of the labour market. The labour demand curve in an
industry depends on the demand for the output of the industry and the prices of other
inputs. If the demand for the good produced by the industry increases then the demand
curve for labour in the industry shifts out from D0 to D1 . The wage and the quantity of
labour supplied both increase.
(b) A firm is a price-taker in the labour market if its size is small relative to its industry, or it
employs workers with common skills. The effect of introducing a minimum wage in a
competitive labour market depends on whether the minimum wage is above or below the
market wage. If the market wage is above the minimum wage there is no effect. If the
market wage is below the minimum wage, the wage workers in the industry receive is higher
(wm rather then w0 ) but the number employed is lower (Lm rather than L1 ).
12
(c) A firm is a monopsonist in its labour market if it is the only firm employing a particular
type of labour. This may be for geographical reasons, for example in a small town where it
is difficult or expensive to move to find jobs outside the town. It may also be because the
firm requires highly specialised skills. Firms choose the level of output at which the
increased revenue from increasing the amount of labour employed is equal to the increased
cost from employing more labour. The increased revenue is the marginal revenue product,
the increased cost is the marginal cost of labour.
For a firm which is a price-taker in both its output market and its input market the
marginal revenue product is the price of the good multiplied by the marginal product of
labour. The marginal cost of labour is the wage. However, if the firm is a monopsonist it
will take into account the fact that in order to increase the number of workers it employs it
has to increase the wage, so the cost of increasing employment is greater than the wage. See
the figure below. The firm will employ at the level where the marginal revenue product of
labour, MRPL, is equal to the marginal cost of labour, MCL. The wage will be wM and the
amount of labour hired LM . However, if the firm is forced to pay a wage wC the marginal
cost of labour becomes wC and the firm uses labour LC . In this situation introducing the
minimum wage increases both the wage and employment.
(d) The diagrams should show leisure on the horizontal axis and consumption on the vertical
access. Leisure is the standard term for time spent not working for money. The textbook
does not discuss the fact that this is a bad choice of language, people spend their ‘leisure’,
for example, looking after children, or ageing relatives, and on housework. The budget
constraint meets the horizontal axis at 24 hours, and has gradient −w (w is the real wage,
money wage divided by the price of goods). When the wage increases the budget line
becomes steeper. The effect of this can be decomposed into the substitution effect (A to B
13
in the diagram) and the income effect (B to C in the diagram). The substitution effect
reduces leisure and increases labour supply. Under the standard assumption that leisure is a
normal good the income effect increases leisure and decreases labour supply. Therefore, the
income and substitution effects on labour supply work in opposite directions. In the first
figure the substitution effect dominates, leisure falls and labour supply increases. In the
second figure the income effect dominates, leisure increases and labour supply decreases.
14
Question 13
(a) After the financial crisis in 2007–2009 many central banks reduced the interest
rate. Is this a change in fiscal policy? Is this a change in monetary policy?
(4 marks)
(b) What is the difference between a closed economy model and an open economy
model?
(4 marks)
(c) Explain the derivation of the IS curve in a closed economy model. Use the
IS–LM model to analyse the effect of a fall in investment, due to a lack of
confidence, on national income if there is no change in fiscal policy and no
change in the interest rate.
(10 marks)
(d) Continue to assume a closed economy. Assume now that the central bank sets
the interest rate, setting a higher interest rate when output is higher. Discuss,
using your IS–LM diagram, how monetary and fiscal policy can be used to
reduce the impact of the fall in investment on national income.
(6 marks)
(e) In June 2016 a referendum in the UK resulted in a decision that the UK should
leave the European Union. Following the referendum there was concern that
firms would reduce their investment in the UK. Monetary policy in the UK is
determined by the Bank of England, which sets the interest rate. The interest
rate was cut from 0.5% to 0.25% in August 2016. How does the fact that the
UK is an open economy with a floating exchange rate change your analysis of
the effects of monetary policy?
(6 marks)
For (a), see BVFD Chapter 18 for monetary policy and Section 17.1 for fiscal policy. For (b), see
BVFD Section 25.1. For (c) and (d), see BVFD Sections 17.2 and 20.2. For (e), see BVFD
Section 25.4.
(a) Monetary policy is the setting of interest rates, the determination of the money supply, and
since the financial crisis quantitative easing, that it the purchase of financial assets by the
central bank. This is a change in monetary policy. Fiscal policy is government policy on
taxes and spending.
(b) A closed economy model has no foreign sector, there are no economic interactions with other
countries. In an open economy model there are economic interactions with other countries,
for example imports, exports, capital flows and exchange rates.
(c) Use notation:
• Y = income and output
• t = tax rate
• C = consumption = A + c(1 − t)Y , where A is the autonomous component of
consumption.
• I = investment
• G = government expenditure
• S = saving.
15
Hence:
Y = C + I + G.
This is an accounting identity. Equilibrium requires that this equation holds with all the
variables at their planned levels. As C = A + c(1 − t)Y , we have:
Y = A + c(1 − t)Y + I + G
implying that:
A+I +G
Y = .
1 − c(1 − t)
To get the IS curve note that both the autonomous component of consumption, A, and
investment are decreasing functions of the interest rate, r. Therefore, an increase in r is
associated with a decrease in A and I and hence in Y implying that the IS curve is
downward sloping (see the first figure below).
A fall in investment due to a fall in confidence results in a lower value of I for each level of
the interest rate r and hence a lower value of Y for each value of r resulting in a leftward
shift of the IS curve. With no change in the interest rate, the result is a fall in income from
Y0 to Y1 .
Note that for clarity there are three figures shown in these answers. However, these show
the steps in building to the final figure. Showing only the final figure is fine so long as you
explain what is happening at each stage in the argument.
16
(d) The central bank policy is given by the LM curve, with an increase in the interest rate r
when income increases giving an upward-sloping LM curve. (Note this is the modern
approach to the LM curve. The course does not cover the money supply story for the LM
curve on the grounds that this is not how central banks such as the Bank of England now
conduct monetary policy.) The second figure above shows the LM curve. The effect of the
fall in investment given this LM curve results in a reduction of income from Y0 to Y2 and a
fall in the interest rate from r0 to r1 .
In this model the government could offset the fall in investment completely by increasing
expenditure. However the government may not wish to do this if it is concerned about the
budget deficit and debt. There are issues of crowding out here – the increase in government
expenditure might further decrease consumption and investment. This is inevitable in the
classical model in which output is supply-determined, but not in the Keynesian model in a
situation in which the economy is operating below its potential output.
The central bank could loosen monetary policy, setting a lower interest rate at each level of
output, shifting the LM curve from LM0 to LM1 (see the final figure above). This has the
effect of restoring income Y to its original level Y0 and cutting the interest rate from r0 to
r2 . The risk here is inflation.
(e) The textbook discusses this in terms of short-term capital flows and expectations of how
quickly these will reverse. Depositors move money in response to real interest rates, so take
into account both the nominal interest rate and expected changes in the exchange rate.
Other things equal a decrease in the nominal interest rate will result in capital outflows.
However, the outflows result in a depreciation of the exchange rate which is potentially
inflationary, thereby reducing the real interest rate. In the long run the exchange rate is
assumed to adjust to a level at which their are no net inflows or outflows which requires that
the real interest rate is the same in the UK and other countries. However, in the short run
exchange rates can be very volatile.
17
Question 14
(a) Why do households hold money? What type of bank deposits are included in
the money supply?
(7 marks)
(b) Contactless cards make it possible to make a payment by holding the card near
a reader, with no requirement to enter a PIN number or provide a signature.
They allow customers to make a transaction more quickly and conveniently than
using cash. However, there is a limit on the size of the transaction and some
shops will not accept cards for very small transactions. Are contactless cards a
perfect substitute for cash? What effect is the introduction of contactless cards
likely to have on holdings of cash and bank deposits? What are the risks of
contactless cards? Which sectors of the economy prefer working with cash
rather than electronic payments involving banks?
(7 marks)
(c) What is a reserve requirement for a bank? What determines the reserve ratio of
a bank? If a bank has a reserve ratio of 3%, starts with zero cash, and then
receives a cash deposit of £3,000 how much can it lend? What is the effect of
the lending on the money supply in the economy?
(7 marks)
(d) What is quantitative easing? Why did the Bank of England adopt a policy of
quantitative easing after the financial crisis of 2007–2009? Was the policy
successful?
(9 marks)
See BVFD Sections 18.1, 18.3 and 19.5.
(a) Households hold money as:

• a medium of exchange, i.e. for making transactions
• a unit of account, i.e. for keeping track of prices. In hyperinflations when prices change
very fast the unit of account might be another currency, for example US dollars.
• a store of value, i.e. as an asset.
A bank deposit is included in the money supply if it can be used to make transactions.
BVFD makes a distinction between sight deposits and time deposits. (This is US
terminology, in the UK sight deposits are current accounts and time deposits are savings
accounts.)
Depositors can withdraw cash instantly from a sight deposit account, and it can be used to
make payments. BVFD describes cheques as the way of making payments. However,
payments are increasingly done electronically. Sight deposits generally pay no interest. Time
deposits pay some interest but there are restrictions on when and how much can be
withdrawn and they cannot be used for making transactions. In practice there is not a clear
distinction between sight and time deposits, in particular arrangements for automatic
transfers from time to sight deposits in effect allow time deposits to be used for transactions
(although there may be fees for this service). This is why there are several measures of
money supply depending on exactly which accounts are included.
(b) Contactless cards are a close substitute for cash and are, therefore, likely to reduce demand
for cash, and possibly increase demand for bank deposits. They are not a perfect substitute
for cash partly due to the risk of theft and fraud. The most likely short-term problem is
failure of the card reader system. It is worth carrying some cash.
18
Card transactions are more easily traceable than cash transactions so the black economy
works largely, but not entirely, with cash. This is a big deal from the law enforcement point
of view.
(c) Some candidates struggled with fractional reserve banking which is one of the more difficult
concepts to understand at this level. It is described in the textbook.
The required ratio is:
reserves
deposits
so with a 3% reserve ratio and deposits of £3,000 the common sense answer is that the bank
can lend 97% of the deposit, i.e. £2,910.
See BVFD Section 18.3 for a story which is closer to reality. Suppose a bank receives a
deposit of £3,000 in cash. Banks can expand their balance sheets, simultaneously creating
loans, which are assets, and deposits in the borrower’s account, which are liabilities. The
assets are then cash + loans. The liabilities are deposits. The bank is constrained by its
reserve ratio and:
cash
reserve ratio =
deposits
which as assets = cash + loans = liabilities = deposits:
cash
reserve ratio = .
cash + loans
Therefore, with a cash deposit of £3,000 and a reserve ratio of 3% the banks can create
loans of £97,000 so the money supply is now £97,000 + £3,000 = £100,000.
(d) Quantitative easing is the purchase by a central bank of government bonds and ‘safe’ private
sector bonds. The objective was to push up the price of bonds and hence reduce the
long-run interest rate, thereby encouraging investment and consumption. This was done in
the context of the financial crisis at which point the official interest rate was very low (close
to the zero lower bound) so there was no further scope for stimulating the economy in the
standard monetary policy way by cutting the interest rate. The UK government was
reluctant to use fiscal policy to stimulate the economy. It embarked on a policy of austerity.
The US government in contrast undertook both quantitative easing and a boost to
government expenditure.
Saying whether the policy was successful requires thinking about what would have happened
if central banks had not undertaken quantitative easing. The Bank of England calculated
that the long-term interest rate was 1% lower than it would have been otherwise. However,
given the pessimism of households and firms it is unclear how effective this was in increasing
consumption and investment above the level which they would have been in the absence of
quantitative easing.
19

Important note

references
Comments on specific questions – Zone B
Section A (40 marks): TEN multiple choice questions, each worth FOUR marks. Candidates must
answer all questions. No explanation is needed.
Section B (30 marks): Candidates must answer ONE of TWO questions on microeconomics. It is
Section C (30 marks): Candidates must answer ONE of TWO questions on macroeconomics. It is
Section A
Note that some questions ask you to choose which statement IS correct and other questions ask you
to choose which statement IS NOT correct.
Question 1
Bubble tea is a popular drink in Singapore. Which of the following statements

about the effects of an increase in the price of bubble tea on demand for chicken
soup is not correct?
(a) Demand for chicken soup decreases if bubble tea and chicken soup are
complements.
20
(b) Demand for chicken soup increases if bubble tea and chicken soup are
substitutes.
(c) The cross price elasticity of demand for chicken soup with respect to bubble tea
is
change in the quantity of chicken soup demanded
.
change in the price of bubble tea
(d) Some people dislike bubble tea and never drink it. The increase in the price of
bubble tea has no effect on their demand for chicken soup.
(c) is not correct.
Two goods are complements if demand for one decreases when the demand for the other
increases. They are substitutes if the demand for one increases when the price of the other
increases. Intuitively, if a consumer does not drink bubble tea an increase in the price of bubble
tea cannot affect the demand for chicken soup.
The cross-price elasticity of demand is the percentage change in the quantity of one good to the
percentage change in the price of the other.
Question 2
Amil needs to decide whether to go to work today or call in sick. If he goes to work,
he will get his daily wage of £70. It costs £10 to get to work. If he calls in sick, he
will stay at home and invite his friends over to watch a movie, which he values at
£90. The cost of renting a movie and getting snacks is £20. What is the best thing
for Amil to do given this information?

(b) is correct.
The opportunity cost of an action is the best foregone alternative. If Amil stays at home his best
alternative is going to work for which he would get £70 but pay £10 to reach his work place.
Hence his opportunity cost of staying at home is £70 − £10 = £60. On the other hand if Amil
decides to go to work his best alternative is staying at home. His opportunity cost of working is
£90 − £20 = £70. Amil should call in sick as that is the activity with the lower opportunity cost.
Question 3
Which of the following statements is implied by the assumption that consumers

prefer more to less?
21
(a) If the consumer prefers bundle A to bundle B and bundle B to bundle C, then
the consumer prefers bundle A to bundle C.
(b) Moving along an indifference curve, increasing the amount of good 1 and
decreasing the amount of good 2, the indifference curve becomes flatter.
(c) A consumer comparing any two bundles of goods A and B can always say
whether A is better than B, B is better than A, or A and B are exactly as good
as each other.
(d) Indifference curves are downward sloping.
See BVFD Chapter 5.
(d) is correct.
Statement (a) follows from the assumpton of transitivity. Statement (b) follows from the
assumption of a diminishing marginal rate of substitution. Statement (c) satifies completeness,
meaning any two bundles can be compared. Statement (d) implies that consumers prefer more to
less.
Question 4
Figure 1 shows graphs of total cost and total revenue as a function of quantity Q.
(a) 2
(b) 3
(c) 4
(d) 6
22
(b) is correct.
The quantity that maximises profits is the one where the distance between total costs and total
revenues is maximised. This is also the point at which the tangents to the total cost and total
revenue curves are parallel.
Question 5
A tax of £10 per kilo on a good is introduced. Which of the following statements is
correct?
introduced.
(d) The tax revenue is always equal to the amount lost by consumers and producers
(c) is correct.
A tax is efficient if it is used to internalise a negative externality.
Question 6
Which of the following statements about banking crises is correct?
(a) Central banks can resolve a solvency crisis by lending to the bank in difficulties.
(b) In a solvency crisis depositors are anxious about whether a bank will be able to
liabilities.
(c) It is easy for central bankers to tell whether a bank has a liquidity crisis or a
solvency crisis.
(d) In a liquidity crisis depositors are anxious about whether a bank will be able to
liabilities.
(d) is correct.
23
Question 7
Which of the following statements about the rate of inflation is correct?
(a) If the rate of inflation is positive, then the price of every type of good has
increased.
(b) The percentage change in the numerical value of the consumer price index is the
rate of inflation.
(c) The numerical value of the consumer price index is the rate of inflation.
(d) The increase in the numerical value of the consumer price index is the rate of
inflation.
See BVFD Section 2.2 for a discussion of price indices.
(b) is correct.
Inflation is measured as the percentage rate of change of the price of a bundle of goods. You can
think of the inflation rate as a weighted average of the percentage increases in the prices of the
goods. As with any average the average may increase, even though some of the things averaged
fall. Here the rate of inflation might be positive even if the prices of some goods fall.
Question 8
Which of the following statements about the balance of payments is not correct?
(a) The capital account is the international flow of transfer payments relating to
capital items.
(b) The financial account records international purchases and sales of financial
assets.
(c) The current account measures the difference between payments for goods
is
(c) is not correct.
The current account includes services.
Question 9
Which of the following statements about the Phillips curve model with expectations
is correct?
24
(a) An unexpected high rate of inflation is associated with high levels of output and
employment.
(b) An expected high rate of inflation is associated with high levels of output and
employment.
(c) In the long run governments can increase real output and employment by using
monetary policy to increase the rate of inflation.
(d) In the long run there is nothing governments can do to increase real output and
employment.
See BVFD Sections 22.4, 23.3.
(a) is correct.
Question 10
In the simple model of national income determination investment, government

(a) In the model with automatic stabilisers tax revenue automatically falls when
(b) The multiplier is lower in the model with automatic stabilisers than it is in the
model without automatic stabilisers.
(c) Tax rates must be changed for automatic stabilisers to work.
(d) In the model with automatic stabilisers government expenditure automatically
(b) is correct.
25
Question 11
(a) People generally believe that oligopolies (and in particular duopolies) are always
inefficient. Are they correct?
(6 marks)
(b) Two firms A and B produce the same good. Each sets the price of the good. If
the two firms set the same price, they share the market equally. If they set
different prices, the firm with the lowest price takes the entire market. Both
firms have a marginal and average cost of £10. Explain what the price is in
equilibrium. Do the firms make profits in equilibrium?
(6 marks)
(c) The demand for the output of the industry is Q = 90 − p where p is the price.
The two firms observe that they can both increase profits if they set up a cartel
which produces the level of industry output which maximises industry profits.
Recall that both firms have a marginal and average cost of £10. What is the
output of the cartel? What is the industry price? Assume that the two firms
share the market equally. What profit does each firm make?
(6 marks)
(d) Suppose firm B believes that firm A will remain at its cartel level of output.
What is the profit maximising level of output for firm B?
(6 marks)
(e) Under what conditions is it difficult for firms to sustain a cartel?
(6 marks)
For (a), see BVFD Section 8.7. For (b), see BVFD Section 9.5. For (c) and (d), see BVFD
Section 9.3. For (e), see BVFD Section 9.4.
(a) See BVFD Section 8.7 for a discussion of the social cost of monopoly. This explains why
price > marginal cost is inefficient in the sense that total surplus (consumer surplus +
producer surplus) is lower than when price = marginal cost. This applies to any situation in
which price > marginal cost. In a Cournot–Nash model the price is greater than marginal
cost so the outcome is not efficient. (See BVFD Section 9.5). In a cartel the price is at the
monopoly level so again there is inefficiency. (See BVFD Section 9.3.)
However, in the Bertrand model (see below and BVFD Section 9.5) if both firms produce
the same good and have the same constant MC = AC then price = MC = AC which is
efficient. Therefore, duopoly does not necessarily lead to inefficiency.
(b) This is the standard Bertrand model. If one firm sets price > MC = AC = 10 the other firm
can charge a slightly lower price which is still above average cost, take the entire market and
make profits. However, then the first firm will cut its price. So long as the price is above
marginal cost = average cost this process will happen so this is not an equilibrium. If one
firm sets price < MC = AC and the other firm sets a lower price it can take the entire
market. However, it makes a loss because it sets price < AC.
The equilibrium price is £10 = MC = AC because if one firm sets its price at this level and
the other sets price p > MC = AC it sells nothing. If it sets price p < MC = AC it makes a
loss. The best response to the other firm setting p = MC = AC is to set price = MC = AC.
Therefore, the equilibrium is where both firms set p = MC = AC. Firms make zero profits in
equilibrium.
26
(c) See BVFD Section 9.3 for a discussion of cartels and Section 8.6 for profit maximisation for
a monopolist.
You can do this entirely mathematically, in which case you do not need to draw a diagram.
Alternatively, you can work with a diagram. You do not have to do both.
In a cartel industry quantity is set at a level which maximises industry profits which are
then shared between the two firms. Working mathematically, demand Q = 90 − p implies
that p = 90 − Q, where Q is the cartel output. As the marginal and average costs are both
10, total cost is 10Q and industry profits are:
π(Q) = pQ − 10Q = (90 − Q)Q − 10Q = 80Q − Q2 .
This is a quadratic with a negative coefficient of Q2 so profits are maximised when the
first-order condition:
dπ
= 80 − 2Q = 0
dQ
is satisified so Q = 40, p = 90 − Q = 50 and industry profits are:
pq − 10Q = 50 × 40 − 10 × 40 = 1600.
As the firms share the market equally, each firm produces 20 and makes profits of 1600/2 =
800.
Alterntively, you can work with a diagram, see below. The diagram should show demand
and marginal revenue as straight lines and marginal cost as a horizontal straight line. It
should show the point where MR = MC. Profit maximisation occurs where MR = MC.
Good answers explain why MR = MC gives a maximum. Here MR > MC so increases in
output increase profits if Q < 40. If Q > 40 then MR < MC so increasing output decreases
profits. Therefore, Q = 40 maximises industry profits. The firms split the market equally so
each firm makes 20 units.
Here total revenue is R(Q) = (90 − Q)Q = 90Q − Q2 so marginal revenue is:
dR
MR = = 90 − 2Q
dQ
so MR = MC, where 90 − 2Q = 10, so Q = 40 and p = 50. Profits are pQ − 10Q = 1600. As

firms share the market equally each produces 20 units and makes profits of 800.
(d) If firms A and B produce QA and QB the price is p = 90 − QA − QB . Therefore, firm B

makes profits:
πB = pQB − 10QB = (90 − QA − QB )QB − 10QB
= (80 − QA )QB − Q2B .
27
If firm B believes that firm A will produce QA then firm B chooses the level which
maximises πB . As πB is a quadratic in QB with a negative coefficient on Q2B profits are
maximised when the first-order condition:
∂πB
= 80 − QA − 2QB = 0
∂QB
is satisfied. If QA is at its cartel level 20 then QB = 40 − QA /2 which is greater than the

cartel level of 20. Hence:
πB = pQB − 10QB = (90 − 20 − QB )QB − 10QB = 60QB − Q2B .
(e) As shown in (d) if firm B expects firm A to produce its cartel level of output 20 then firm B
will produce 30 which is greater than its cartel level of output. More generally in the cartel
situation each firm has an incentive to deviate, producing a larger level of output. If the
other firm stays at the cartel level of output this increases the profits of the firm which
deviates but decreases the profits of the other firm and industry profits.
If the cartel agreement is legally binding then if one firm deviates from the agreement the
other can sue it, although this can be very expensive. In many countries national law makes
cartels illegal, although this does not entirely deter cartels. International law does not
prohibit cartels between countries such as OPEC. However, OPEC does not have a
mechanism for making countries stick within agreed limits on production. There are also
major producers, notably the US with fracking, which are not part of OPEC. This limits
OPEC’s power to limit output and keep the oil price up.
28
Question 12
Ivan earns £80 per week and needs to decide how many cans of Coke and
sandwiches to buy. Each sandwich costs £4 and every can of Coke costs £2. His
utility function is U (s, c) = sc, where s stands for sandwich and c for can of Coke.
(a) Find an equation for Ivan’s budget constraint and show the budget constraint in
a diagram.
(6 marks)
(b) Calculate the optimal weekly amounts of sandwiches and cans of Coke for Ivan
and show the optimal bundle on a graph.
(6 marks)
(c) Ivan has worked hard this year and his boss decides to give him a raise. He now
earns £100 per week. Show the increase in income on a graph and discuss how
it affects his demand for sandwiches and Coke.
(6 marks)
(d) Explain what would happen if the price of sandwiches went up by £5 and
income remained at £100 per week. Show Ivan’s new budget line on a graph.
Would Ivan still demand the same amounts of sandwiches and cans of Coke?
(6 marks)
(e) Explain the difference between normal, inferior, and Giffen goods and what sign
the income and substitution effects are in each of these cases. Are sandwiches a
normal good in this case?
(6 marks)
See BVFD Chapter 5.
(a) See BVFD Section 5.1 for the derivation of the budget line and budget constraint.
If the price of a can of coke is £2, the price of a sandwich is £4 and with income £80 the
equation of the budget line is 2c + 4s = 80. This is the equation of a straight line. With
cans of coke on the horizontal axis and sandwiches on the vertical axis the budget line meets
the horizontal axis at 80/2 = 40 and the vertical axis at 80/4 = 20. The line has slope
−2/4 = −1/2. See the figure below.
29
At this point all you need is the lower of the two budget lines. You can draw a separate
diagram for each part of the question, but you may find it easier to show everything on the
same diagram as here.
(b) See BVFD appendix to Chapter 5 and the figure on consumer choice in action. Using M Uc
and M Us for the marginal utility of a can of coke and a sandwich, respectively, and pc and
ps for the respective prices, the appendix explains that if M Uc /pc > M Us /ps switching £1
from spending on sandwiches to spending on cans of coke increases utility. Similarly, if
M Uc /pc < M Us /ps switching £1 from spending on cans of coke to spending on sandwiches
increases utility. So utility maximisation requires that M Uc /pc = M Us /ps . As
M Uc = ∂u/∂c = s and M Us = ∂u/∂s = c, this implies that:
s c
=
pc ps
so as pc = 2 and ps = 4, s/2 = c/4, so s = c/2.
Another approach here works with the fact the negative of the slope of the indifference
curve, that is the marginal rate of substitution, is given by:
∂u/∂c s
MRS = = .
∂u/∂s c
As the budget line has slope −pc /ps = −1/2, the tangency condition requires that:
∂u/∂c s 1
MRS = = =
∂u/∂s c 2
so again s = c/2.
The consumer’s chosen bundle must also lie on the budget line so 2c + 4s = 80. Solving
simultaneously:
c
s=
2
2c + 4s = 80
gives c = 20 and s = 10.
You should show this in your diagram, the indifference curve should be downward-sloping
and become flatter as you move from left to right. The indifference curve is tangent to the
budgt line at the point (20, 10).
(c) The increase in income results in a parallel shift up in Ivan’s budget constraint. Show where
the budget lines meet the axes.
As prices and preferences have not changed, but income has, demand will be at the point
where:
c = 2s
2c + 4s = 100
so c = 25 and s = 12.5. Note that in both cases s = c/2 so the points the consumer chooses
both lie on the straight line through the origin s = c/2.
30
(d) The price of sandwiches goes up to £5, but the price of cans of Coke stays at £2. This
changes the slope of the budget line from −2/4 = −1/2 to −2/5. This implies that
s/c = 2/5 = 0.4, so s = 0.4c.
The new budget line, with c on the horizontal axis, is flatter. The budget constraint is now
2c + 5s = 100. Solving simultaneously with the condition c = 1.25s gives c = 25 and s = 10.
(e) Diagrams illustrating the ideas in an indifference curve diagram are helpful here.
A normal good is a good for which demand increases when income increases. Sandwiches are
a normal good. Income and substitution effects both decrease demand when price increases.
An inferior good is a good for which demand decreases when income increases. The income
effect increases demand, the substitution effect decreases demand.
A Giffen good is a good for which demand increases when its price increases. The
substitution effect of a price increase always decreases demand for that good. If the good is
inferior the income effect increases demand for the good so the income and substitution
effects work in opposite directions. It is theoretically possible that the income effect is larger
than the substitution effect so the effect of the price increase is an increase in the demand
for the good. In this case the good is a Giffen good. As BVFD says, Giffen goods are very
rare, if they exist at all.
31
Question 13
The USA has decided to increase government expenditure and reduce taxes.
(a) Is this a change in fiscal policy? Is this a change in monetary policy?

(4 marks)
(b) What is meant by the natural level of output? What, if any, is the relationship
between the natural level of output and the rate of inflation?
(4 marks)
(c) Explain the derivation of the IS curve in a closed economy model with a
government. Assume that the interest rate is set by a central bank which sets a
higher interest rate when output is higher. Use the IS–LM model to analyse the
effect of increasing government expenditure and cutting taxes if the economy is
producing less than its natural level of output.
(12 marks)
(d) How would your analysis change if the economy is producing its natural level of
output? What action would you recommend a central bank with an inflation
target take in these circumstances?
(10 marks)
For (a), see BVFD Chapter 18 and Section 17.1. For (b), see BVFD Sections 21.2 and 21.4. For
(c), see BVFD Sections 17.7 and 20.2. For (d), see BVFD Section 21.1.
(a) Monetary policy is the setting of interest rates, the determination of the money supply and,
since the financial crisis, quantitative easing, that is the large scale purchase of financial
assets by the central bank. Fiscal policy is government policy on taxes and spending.
Therefore, this is a change in fiscal policy. It is not a change in monetary policy.
(b) The natural level of output is the long-run equilibrium level of output which occurs when
physical production inputs are fully employed. It depends on the level of technology and the
quantities of available inputs, labour, capital, land and energy. It is unaffected by inflation.
(c) The IS curve represents goods market equilibrium in a diagram with income on the
horizontal axis and the interest rate on the vertical axis. Intuitively, holding government
expenditure and taxation constant, and given expectations, lower interest rates are
associated with higher investment and consumption and hence higher aggregate demand
which in equilibrium is equal to income. If government expenditure increases or taxation
decreases or people become more optimistic about the future of the economy, expenditure is
higher for each level of the interest rate and the IS curve shifts outwards.
A more mathematical argument uses notation:
• Y = income and output
• C = consumption assumed to be A + c(1 − t)Y , where A is the autonomous component
of consumption and t is the tax rate
• I = investment
• G = government expenditure.
32
The argument is in BVFD Mathematics box 17.1. However, the mathematics box includes
imports, Z, and exports, X, which should not be included here because the question asks
you to work with a closed economy model. If the economy is producing less than its natural
level of output income is determined by the equation:
Y = C + I + G.
As C = A + c(1 − t)Y , we have:
Y = A + c(1 − t)Y + I + G
implying that:
A+I +G
Y = . (*)
1 − c(1 − t)
To get the IS curve note that both the autonomous component of consumption, A, and
investment are decreasing functions of the interest rate, r. Therefore, an increase in r is
associated with a decrease in A and I and hence in Y implying that the IS curve is
downward-sloping. See the figure below.
A decrease in the tax rate, t, decreases the denominator in equation (*) so increases Y . The
increases in government expenditure increases the numerator in equation (*). Both these
shift the IS curve outwards.
The diagram should show an upward-sloping LM curve and a discussion of the fact that the
effect is an increase in both Y and r. With no change in monetary policy, and so no change
in the LM curve, the result is an increase in income from Y0 to Y1 which in this figure are
both below the natural level of output, Yn . The situation in which Y1 is greater than Yn is
discussed in the next part of the question and does not need to be discussed here.
The question does not ask for a derivation of the LM curve, however note for future
reference that there are two ways of approaching the LM curve. The traditional theory
works with control of the money supply and is discussed in BVFD Sections 19.1 to 19.4.
The LM curve follows from equilibrium in the money market. However, for reasons
discussed in BVFD Section 19.5, it is hard for the central bank to control the money supply,
and central banks such as the Bank of England in the UK, and the Federal Reserve in the
US, now work by setting the interest rate. The LM curve then represents monetary policy,
the link between interest rates and output, see BVFD Section 20.2. The traditional theory
is not part of this course.
(d) Suppose the economy starts at the natural level of output Yn and there is no change in
monetary policy so the LM curves stays at LM0 . Applying the IS–LM model mechanically,
the shift in the IS curve moves output to Y1 , above the natural level of output Yn . There is
then a risk of inflation. This may start as an increase in nominal wages as the labour market
tightens. If prices then increase, inflation may take off. A central bank with an inflation
33
target will wish to avoid inflation. It can do this by tightening monetary policy, shifting the
LM curve from LM0 to LM1 , taking the economy back to its natural level of output, but
with a higher interest rate.
34
Question 14
(a) Consider the balance sheet of a nonfinancial firm. Explain the distinction
between assets and liabilities. What are inventories? Are inventories an asset or
a liability? Is a loan made to the firm by a bank an asset or a liability of the
firm?
(4 marks)
(b) In the balance sheet of a bank are deposits assets or liabilities? Are loans to
other firms assets or liabilities?
(4 marks)
(c) What is the required reserve ratio for a bank? If a bank has a required reserve
ratio of 5%, starts with zero cash, and then receives a deposit of £20,000 how
much can it lend? What is the effect of the lending on the quantity of money in
the economy?
(5 marks)
(d) Banks earn a zero rate of interest on their cash holdings and a rate of interest
greater than zero on the amount they lend. Despite this fact banks sometimes
choose to have a higher ratio of cash to deposits to than is required by the
central bank. Why do they choose to do this?
(4 marks)
(e) The Bank of England is the central bank of the UK. What does the statement
that the Bank of England is the lender of last resort in the UK mean? Why is it
possible for the Bank of England to act as the lender of last resort?
(4 marks)
(f ) What is quantitative easing? Why did the Bank of England adopt a policy of
quantitative easing after the financial crisis of 2007–2009? Was the policy
successful?
(9 marks)
For (a) and (b), see BVFD Section 6.2. For (c), see BVFD Section 18.3. For (d), see BVFD
Section 19.2. For (e), see BVFD Section 19.3. For (f), see BVFD Section 19.5.
(a) Assets are things that the firm owns, for example capital goods. Liabilities are things for
which the firm is responsible, i.e. things for which it will have to make payments in the
future. BVFD defines inventories as holdings of final products by a firm. More generally,
they also include stocks of inputs and partially completed output. They are an asset
because the firm owns them. A loan made by a bank to a firm is a liability of the firm
because it commits the firm to make payments to the bank in the future.
(b) See the discussion of Northern Rock in BVFD Section 6.2.
Deposits are liabilities, because they require banks to make payments to its depositors if
they request it. Loans are assets because they require the firm receiving the loan to make
payments to the bank.
(c) Some candidates struggled with fractional reserve banking which is one of the more difficult
concepts to understand at this level. It is described in the textbook.
This course follows BVFD defining the reserve ratio as the ratio of cash held by the bank to
total deposits. This simplifies reality somewhat. The government sets a minimum reserve
ratio. However, the bank may choose to set a higher ratio. In either case the reserve ratio is:
reserves
.
deposits
35
With a 5% reserve ratio and deposits of £20,000 the common sense answer is that the bank
can lend 95% of the deposit, i.e. £19,000.
See BVFD Section 18.3 for a story which is closer to reality. Suppose a bank receives a
deposit of £20,000 in cash. Banks can expand their balance sheets, simultaneously creating
loans, which are assets, and deposits in the borrowers account, which are liabilities. The
assets are than cash + loans. The liabilities are deposits. The bank is constrained by its
reserve ratio and:
cash
reserve ratio =
deposits
which, as assets = cash + loans = liabilities = deposits, we have:
cash
reserve ratio = .
cash + loans
Therefore, with a cash deposit of £20,000 and a reserve ratio of 5% the banks can create
loans of £380,000 so the money supply is now £380,000 + £20,000 = £400,000.
(d) The cash reserves are there so that the bank can meet withdrawals which are unpredictable.
The risk of not being able to meet withdrawal requirements is that there will be a run on
the bank. The bank may judge that this requires a higher reserve ratio than that required
by the central bank.
(e) The lender of last resort lends money to private sector banks in difficulties allowing the
private sector bank to pay its debts to its depositors.
The Bank of England can act as lender of last resort because it can create an unlimited
quantity of money by conducting open market operations. The Bank of England can literally
print money by producing physical banknotes. It can get the money into circulation by using
them to purchase bonds on the open market. More realistically, the Bank of England creates
electronic money and lends the money to private sector banks. In exchange the private
sector bank lends a long-term bond to the central bank, with a commitment to buy the
bond back. This is a repo. In effect the central bank is lending money to the private bank.
(f) Quantitative easing is the purchase by a central bank of government bonds and ‘safe’ private
sector bonds. The objective was to push up the price of bonds and hence reduce the
long-run interest rate, thereby encouraging investment and consumption. This was done in
the context of the financial crisis at which point the official interest rate was very low (close
to the zero lower bound) so there was no further scope for stimulating the economy in the
standard monetary policy way by cutting the interest rate. The UK government was
reluctant to use fiscal policy to stimulate the economy. It embarked on a policy of austerity.
The US government in contrast undertook both quantitative easing and a boost to
government expenditure.
Saying whether the policy was successful requires thinking about what would have happened
if central banks had not undertaken quantitative easing. The Bank of England calculated
that the long-term interest rate was 1% lower than it would have been otherwise. However,
given the pessimism of households and firms it is unclear how effective this was in increasing
consumption and investment above the level which they would have been in the absence of
quantitative easing.
36

This Paper Is Not To Be Removed From The Examination Hall

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

This Paper Is Not To Be Removed From The Examination Hall

Uploaded by

Copyright:

Available Formats

This paper is not to be removed from the Examination Hall

UNIVERSITY OF LONDON EC1002 ZA

BSc degrees and Diplomas for Graduates in Economics, Management, Finance

Wednesday, 2 May 2018: 14:30 to 17:30

This paper consists of THREE sections:

Section C (30 marks): Candidates must answer ONE of TWO questions on

PLEASE TURN OVER

Choose one answer for each question: no explanation is needed.

1. Matthew needs to decide whether to go to work today or call in sick. If he goes

(a) Go to work as his opportunity cost of working is £30.

(a) The equilibrium price is equal to marginal cost.

6. Which of the following statements about the rate of inflation is correct?

8. In the simple model of national income determination investment, government

(a) Tax rates must change for automatic stabilisers to work.

9. Which of the following statements about banking crises is correct?

(a) An expected high rate of inflation is associated with high levels of

11. [30 marks]

12. [30 marks]

13. [30 marks]

(e) In June 2016 a referendum in the UK resulted in a decision that the UK

UNIVERSITY OF LONDON EC1002 ZB

BSc degrees and Diplomas for Graduates in Economics, Management, Finance

Wednesday, 2 May 2018: 14:30 to 17:30

This paper consists of THREE sections:

Section C (30 marks): Candidates must answer ONE of TWO questions on

PLEASE TURN OVER

© University of London 2018 Page 1 of 9 D0

© University of London 2018 Page 2 of 9 D0

Choose one answer for each question: no explanation is needed.

1. Bubble tea is a popular drink in Singapore. Which of the following statements

2. Amil needs to decide whether to go to work today or call in sick. If he goes to

(a) Go to work as his opportunity cost of working is £60.

3. Which of the following statements is implied by the assumption that consumers

(a) If the consumer prefers bundle A to bundle B and bundle B to bundle C,

© University of London 2018 Page 3 of 9 D0

6. Which of the following statements about banking crises is correct?

© University of London 2018 Page 4 of 9 D0

(a) An unexpected high rate of inflation is associated with high levels of

10. In the simple model of national income determination investment, government

© University of London 2018 Page 5 of 9 D0

11. [30 marks]

(e) Under what conditions is it difficult for firms to sustain a cartel?

© University of London 2018 Page 6 of 9 D0

© University of London 2018 Page 7 of 9 D0

13. [30 marks]

(a) Is this a change in fiscal policy? Is this a change in monetary policy?

© University of London 2018 Page 8 of 9 D0

© University of London 2018 Page 9 of 9 D0

Examiners’ commentaries 2018

Information about the subject guide and the Essential reading

Format of the examination

This paper consists of three sections:

Key steps to improvement

Make the most of what you know in the examination room.

Examination revision strategy

Examiners’ commentaries 2018

Information about the subject guide and the Essential reading

Comments on specific questions – Zone A

This paper consists of THREE sections:

Answer all questions from this section.

Choose one answer for each question: no explanation is needed.

Matthew needs to decide whether to go to work today or call in sick. If he goes to

(a) Go to work as his opportunity cost of working is £30.