EC1002 Commentary 2022

Examiners’ commentaries 2022

EC1002 Introduction to economics
Important note
This commentary reflects the examination and assessment arrangements for this course in the
academic year 2021–22. 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 (2021).
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. 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.
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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).
What the examiners are looking for
In answers to the long questions (Sections B and C) 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. Reaching the right answer, but failing to justify the process that led to
those answers, leads to receiving only partial credit. Some candidates found it difficult to approach
questions in this way, and it was obvious that they had not fully understood the material. Some
candidates tried to include all the knowledge they had on a given topic. Sometimes this resulted in a
lack of focus and suggested to the examiners that the candidate had some relevant knowledge but
did not know how to pick the best arguments to answer the question. A minority of candidates had
problems because they were not familiar with the material. This commentary should help candidates
understand what worked in their revision strategy and went well in the examination, and where
instead they can still improve.
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.
Practise 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
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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.
3

Important note

references
section.
Comments on specific questions – Zone A
Candidates should answer Sections A, B and C.
Section A of this examination consists of 10 multiple choice questions. You should attempt to
answer ALL the questions. Each question has four possible answers (A–D). There is only one
correct answer to each of the questions. The maximum mark for this section is 40.
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
Question 1
Maria is a marketer. In a day’s work Maria used to be able to bake 5 cakes or

create 3 advertising campaigns. She recently received a new computer as a birthday
gift from her parents. The new computer allows her to create 5 advertising
campaigns in a day, but does not alter her baking abilities. Which of these effects
does having a new computer NOT cause?
(a) Maria’s Production Possibility Frontier (PPF) shifts up.

(b) Maria has become relatively more productive in producing advertising
campaigns.
(c) Maria’s opportunity cost of baking cakes has increased.
(d) Maria’s opportunity cost of producing campaigns has decreased.
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Reading for this question
See BVFD Chapter 1.
Approaching the question
(a) is not correct.
The computer only allows her to create more advertising campaigns and bake the same amount
of cakes, so Maria’s production possibility frontier (PPF) now has a different intercept on the
axis representing the amount of advertising campaigns she can produce (from 3 to 5). As the
other intercept remains constant, this is not a shift in the PPF.
Question 2
A firm pays each worker (i.e. each unit of labour L) a wage w = 4 and pays for each
computer (i.e. each unit of capital K) a cost of r = 2. The firm has a production
function Y = min[2K, 2L] and needs to produce Y = 12. Which of the following is
correct?
(a) The firm employs 12 workers and buys 12 computers.

(b) The firm buys 12 computers and hires 6 workers.
(c) The firm buys 6 computers and hires 12 workers.
(d) The firm buys 6 computers and hires 6 workers.
See BVFD Chapter 7.
(d) is the correct answer.
Given the firm’s production function the firm will optimally set 2K = 2L → K = L. The firm
needs to produce Y = 12 so it will to buy computers and hire workers such that 2K = 2L = 12,
or K = L = 6.
Question 3
Assume that the average price and quantity of strawberries for the years 2018–2021
are the ones reported in the table below. When was the own price elasticity of
demand for strawberries highest?
Year Average Strawberry Price (in £ Strawberries sold (in

per kg) thousands of kilograms)
2018 2.4 1215
2019 3.7 1100
2020 3.4 1190
2021 3.6 1164
(a) The own price elasticity is highest between 2019 and 2018.
(b) The own price elasticity is highest between 2020 and 2019.
(c) The own price elasticity is highest between 2021 and 2020.
(d) The own price elasticity is constant across the years considered.
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See BVFD Chapter 4.
(b) is the correct answer.
The own price elasticity measures the change in quantity demanded given a change in price.
Between 2020 and 2019 the price of strawberries went down by 0.3 or about 8%, and the
quantity of strawberries increased only by 90 or about 8%. In all the other years the elasticity of
demand was far lower in absolute terms.
Question 4
People who choose to drive electric cars instead of relying on fossil fuels reduce the
level of emissions in the atmosphere, regardless of their country of origin. From this
information we can infer that:
(a) Electric cars are a public good.

(b) Electric cars are non-excludable.
(c) Electric cars are non-rival.
(d) Electric cars generate an externality.
See BVFD Chapter 13.
In driving electric cars individuals reduce their emissions. While this does not make electric cars
a public good (they are both excludable and rival in consumption), it makes their drivers
generate a positive externality on society.
Question 5
A per unit tax of £X (where X > 0) is introduced in a market. Which of the

following is correct?
(a) Consumers of the good will pay a price that is £X higher than before the tax
was introduced.
(b) Producers of the good will receive a price that is £X lower than before the tax
was introduced.
(c) The market outcome might be more efficient after the introduction of the tax.
(d) The tax revenue is equal to the total amount of money lost by consumers and
producers as the tax is introduced.
See BVFD Chapters 13 and 14.
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(c) is the correct answer.
We have no information on the elasticities of demand and supply so we cannot say anything
about the price paid by consumers or perceived by the sellers. Typically, a tax generates a
deadweight loss, creating inefficiency in the market. However, if the tax is imposed on a good
whose consumption generates a deadweight loss, the market outcome may become more efficient
after the introduction of a tax.
Question 6
Unemployment in the Caribbean islands has recently increased. Which of the

following observations is consistent with a rise in unemployment?
(a) Some workers have moved to the Caribbean islands.

(b) The labour force participation rate has increased.
(c) The number of unemployed workers has not changed.
(d) All of the above observations.
If more people enter the labour force – either because they move to the Caribbean Islands or
because more residents start looking for work – unemployment can increase if they cannot find a
job, by making the number of unemployed people rise. Conversely, if more people exit the labour
force and the number of unemployed people remains the same, the unemployment rate becomes
higher. Hence, all the facts in (a)–(c) are consistent with a rise in the unemployment rate.
Question 7
The island of Grootland is a small country with only two sectors: wood and
furniture. This year, the total revenue of the wood sector is £3 billion, where £2
billion comes from sales to the furniture sector and the rest from sales to consumer.
All the output of the furniture sector is bought by consumers at £5 billion. What is
the GDP of Grootland?
(a) Using the expenditure approach it is £6 billion.

(b) Using the income approach it is £7 billion.
(c) Using the production approach it is £8 billion.
(d) There is not enough information to compute the GDP in the island of
Grootland.
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(a) is the correct answer.
The approach used to derive the GDP is irrelevant, as the three approaches will lead to the same
number. Here we need to consider the wood sold to consumers (3bn − 2bn = 1bn), as we know
that £2 billion is sold to the furniture sector and hence counts as an intermediate product, and
the output sold by the furniture sector, giving us a GDP of 1bn + 5bn = 6bn.
Question 8
In February 2022 the €/$ (euro/dollar) exchange rate was 0.88€/$. In France, a
country that uses Euros as currency, the average price of a cinema ticket was 7€,
while in the United States, a country that uses dollars as currency, the average price
of a cinema ticket was $9.5. From this information we can infer that:
(a) The exchange rate is too low. The dollar should appreciate to ensure that
purchasing power parity holds.
(b) The exchange rate is too low. The euro should appreciate to ensure that
(c) The exchange rate is too high. The dollar should appreciate to ensure that
(d) None of the above.
Cinema tickets cannot be used to calculate purchasing power parity, as they are a local service
and not easily imported/exported.
Question 9
The closed economy of Sokovia has a GDP of 150 billion dollars and a marginal
propensity to save of 0.2. In the closed economy of Madripoor the GDP is 160
billion dollars and the marginal propensity to save is 0.25. We can infer that:
(a) The multiplier in Sokovia is 4.

(b) The multiplier in Madripoor is 6.
(c) It takes Sokovia an injection of 10 billion dollars to reach a GDP of 200 billion
dollars.
(d) It takes Madripoor an injection of 12 billion dollars to reach a GDP of 200
billion dollars.
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We can calculate the multiplier in Sokovia as 1/(1 − c), where c is the marginal propensity to
consume. We know that the marginal propensity to save in Sokovia ia 0.2, so the marginal
propensity to consume is 0.8 and the multiplier is 1/0.2 = 5. Injecting 10 billion in Sokovia means
having a GDP that grows by 50 billion, making the country reach a GDP of 200 billion dollars.
Question 10
Following political tensions, Germany’s marginal propensity to import from Russia is

likely to decrease and its IS curve is likely to shift down. The government attempts
to avoid an economic downturn. Using fiscal policy can help with everything except:
(a) Restoring the previous level of output.
(b) Restoring the previous level of interest rate.
(c) Reaching a new and higher level of output.
(d) Restoring the slope of the IS curve.
The government can cause a shift in the IS curve by either lowering taxes or increasing
government spending. However, it cannot restore the slope of the IS curve, which has changed
now that the marginal propensity to import is lower.
Section B: Microeconomics
Candidates should answer ONE of the following long questions. It is essential that you explain your
answers.
Question 11
Swati has an income of £9 to spend on smoothies (good X) and lattes (good Y )

from either a smoothie bar or a café. Her preferences are described by
U (X, Y ) = 3X + 2Y , for which M UX = 3 and M UY = 2. Prices are PX = PY = £3.
(a) Sketch some of Swati’s indifference curves in a diagram and explain what their
shape tells us about Swati’s preferences over smoothies and lattes.
(5 marks)
(b) Add Swati’s budget line to your diagram. Find Swati’s optimal consumption of
smoothies and lattes, explaining your reasoning.
(10 marks)
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(c) The marginal cost to the café of providing a latte is £0.50. It wishes to attract
more customers like Swati and considers two policies:
Policy A: lowering the price of lattes to £1.50, or
Policy B: spending £2.50 on an advertising campaign that would change

Swati’s utility function to U (X, Y ) = 2X + 3Y , for which M UX = 2 and
M UY = 3.
Assume that prices remain at the previous level, i.e. PX = PY = £3. Analyse
the effects of these two policies. Which policy generates more profit for the café?
(15 marks)
See BVFD Chapter 5.
(a) An indifference curve shows all the combinations of smoothies and lattes that allow Swati to
reach the same utility. The sketch should contain linear indifference curves with slope −3/2.
Swati views the two goods as perfect substitutes and can trade-off 3 units of good X for 2
units of Y .
Many candidates were able to draw Swati’s preferences and correctly identified the goods as
perfect substitutes. However, many diagrams had no details (for example, labels on the
axes, slope etc.) and some just drew Cobb–Douglas preferences.
(b) The budget line 3X + 3Y = 9, or Y = 3 − X. It has a slope of −1 and intercepts:
M M
= = 3.
PX PY
These should be labelled on the diagram.
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The two goods are equally priced, but smoothies contribute more to utility than lattes, so
Swati will spend all her income on smoothies. Candidates could alternatively reason using
the diagram comparing the MRS with relative price. Hence Swati consumes 3 smoothies and
no lattes.
Again, many candidates were able to identify the optimal bundle and draw the correct
diagram. Some mistakenly drew the budget line so that it was entirely below the
indifference curve sharing its intercept on the Y -axis – this would not be a utility
maximising bundle as a higher indifference curve can be reached with the same income –
and some failed to include details in their diagram. A minority of candidates attempted to
find the optimal bundle by setting the marginal rate of substitution equal to the price ratio,
claiming that the optimal bundle would be at a tangency. These candidates were often
unable to reach a conclusion, as the MRS here is a constant.
(c) We need to carefully see the impact of both policies.

Policy A:
A fall in the price of lattes to £1.50 pivots the budget line out from the X-intercept. The
change in the relative price of lattes induces Swati to switch to consuming only lattes. With
a budget of £9 she can afford 6 lattes. The café receives a revenue of £9, from which we
deduct the cost of producing the lattes £0.5 × 6 = £3. The profit of the café rises by £6.
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Policy B:
The advertising campaign would alter Swati’s preferences as reflected by the new utility
function. Her indifference curves change but her budget line does not. Now she perceives 1.5
smoothies as a perfect substitute to 1 latte. With both equally priced, Swati will change her
consumption decision and spend all her income on lattes, moving to the other corner of her
budget constraint. This can be reasoned with a diagram or verbally.
The café will receive £9 from Swati (who now buys 3 lattes), from which £2.50 must be
deducted for the campaign and £1.50 for the cost of producing the lattes. The profit of the
café rises by £5.
Policy A is thus more effective than Policy B.
This is the part where candidates struggled the most. In this part those who performed well
were careful in analysing each policy and focused on the implications of a price change and
preference change. They either focused on drawing new diagrams with precise details or on
the optimal bundles that would follow from each policy. Candidates who attempted to draw
both policies on a diagram, or to answer the question without a diagram and without any
reason to support their claims often made mistakes and were awarded only partial marks.
Many candidates lost some marks in not accounting for the cost of policy B, calculating only
the café’s revenues instead of their profits.
Question 12
GasGen is a natural gas company. The marginal cost of producing natural gas is 2
and there is a fixed cost of 4, so GasGen’s total cost of producing Q units of gas is
4 + 2Q. Demand for natural gas by consumers is given by Q = 8 − p, where p is the
price.
(a) Is it possible for this natural gas industry to be perfectly competitive? Explain
why or why not.
(5 marks)
(b) Suppose GasGen is a profit-maximising monopolist. Find GasGen’s price,

quantity and profit generated. Sketch the monopoly outcome of this market in a
diagram.
(10 marks)
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(c) Now suppose the natural gas market is duopolistic, where GasGen and its
competitor PowerG engage in Cournot competition. Both firms have the same
marginal and fixed costs. Find production levels and price in the Cournot
equilibrium and show that the firms exactly break even.
(10 marks)
(d) Starting from the Cournot duopoly in (c), the government takes steps to
dismantle entry barriers into the natural gas market. Would you expect natural
gas companies to enter this market?
(5 marks)
(a) No, since the firm has increasing returns to scale technology. There is a constant marginal
cost of 2 but also a fixed cost of production 4. Hence ATC = 4Q + 2, which is declining for
all output levels. Perfect competition assumes price-taking behaviour. For any price
p > ATC the firm would find it profitable to expand indefinitely and so would grow to be
very large and thus cannot be a price-taker.
Many candidates here received only partial credit as instead of arguing that the average cost
is decreasing in the quantity produced, they structured their answer on the product supplied
and argued that natural gas is often a monopoly. While this is empirically true, it is not a
valid argument from an economic theory standpoint.
(b) Candidates could set marginal cost (2) equal to marginal revenue (8 − 2Q) and solve.
Alternatively, candidates can set up monopoly profit, substitute in for price from the
demand equation and then maximise.
Monopoly profits are:
ΠM = pQ − 2Q − 4 = (6 − Q)Q − 4.
FOC:
6 − 2Q = 0.
SOC:
−2 < 0
hence we confirm it is a maximum.
Hence: QM = 3 (monopoly quantity), pM = 5 (monopoly price), ΠM = 5 (monopoly

profits). The majority of candidates were able to find the correct quantity and price set by
the monopolist, but some forgot to deduct the fixed cost when computing the profits.
This is a standard monopoly diagram with horizontal MC curve at 2. Downward-sloping

demand and MR with twice the slope.
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Many candidates drew the correct diagram, but a considerable number who attempted this
question did not include details/labels and/or included an upward-sloping and convex
marginal cost.
(c) In a Cournot–Nash equilibrium each firm chooses quantity to maximise its profits, taking
the other firm’s quantity as given. Let Q = q1 + q2 . The profit of firm 1 can be expressed as:
Π1 = (6 − q1 − q2 )q1 − 4.
Maximising firm 1’s profit taking the quantity of firm 2 as given yields firm 1’s reaction
function:
q2
q1 = 3 − .
2
Similarly, for firm 2:
q1
q2 = 3 − .
2
Solving simultaneously gives the Cournot quantities, price and profit:
q1C = q2C = 2, QC = 4, pC = 4 and ΠC = 0.
The majority of candidates could derive the correct quantity and prices, but many failed to
deduct the fixed cost when computing the profits and obtained positive profits for both
firms. A minority of candidates solved this as if the firms had formed a cartel and claimed
that the quantity produced by each firm would be half the monopoly quantity. This is not
what happens in Cournot competition and led many to lose marks.
(d) The two firms just break even under Cournot competition! It would be impossible to
accommodate more firms in the market as they would make a loss. The high fixed costs in
this market mean the market can only accommodate a small number of firms. (Note, even
candidates who struggled to find the Cournot equilibrium could refer to the wording in (c)
that firms break even to answer part (d).) This question was largely fine for the candidates
who computed profits correctly in part (c), but proved very hard for those who computed
profits without deducting the fixed costs. Arguments varied in quality, but those who
claimed that typically an increase in competition benefits consumers were awarded partial
marks, despite barriers to entry not being the key issue in this market.
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Section C: Macroeconomics
Candidates should answer ONE of the two following long questions. It is essential that you explain
your answers.
Question 13
Disruption to the supply of natural gas has caused a surge in energy prices in
Utopia. Although Utopia has an inflation target of 2% the current rate of inflation
is 5%. The Central Bank of Utopia forecasts a period of above-target inflation of
around two years.
(a) What type of shock has affected Utopia and how has it fueled inflation?
(5 marks)
(b) Explain why the Central Bank of Utopia faces a trade-off between inflation and
output stability in the face of this shock. How is this trade-off reflected by the
shape of Utopia’s Aggregate Demand (AD) curve?
(10 marks)
(c) Analyse the effect of the shock in Utopia in the short and long run using the
AS–AD framework.
(8 marks)
(d) What type of monetary policy should the Central bank of utopia conduct to
accommodate the shock?
(7 marks)
(a) This is a temporary supply shock. It impacts the cost of energy and thus the production
costs of firms giving rise to cost-push inflation. So higher energy prices impact inflation
directly but also indirectly through price rises of other goods. Inflationary expectations are
also likely to rise, affecting wage- and price-setting, altering the trade-off between inflation
and output. Many candidates here correctly identified the shock as a temporary supply
shock but failed to mention the repercussions of this shock in the market. A minority of
candidates considered this to be a permanent supply shock, but often failed to explain why.
These candidates received only partial credit.
(b) In the face of a temporary supply shock (SAS shifts up) it is not possible to maintain the
inflation target and keep output stable. If the Central Bank prioritises inflation stability,
then output will fall below potential output in the short-run. This would be reflected by a
shallow AD curve, or at the extreme horizontal at the inflation target. In contrast, if the
priority is to keep output stable, the Central Bank must accept inflation. This would be
reflected by a steep AD curve, or at the extreme vertical at potential output. The
downward-sloping AD curve describes a particular compromise in the way interest rates are
set. Many candidates stated the Central Bank faces a trade-off between stabilising inflation
or output, but failed to explain how this would be reflected in the AS–AD framework. Some
candidates only mentioned the Central Bank’s ability to lower inflation and received partial
credit.
(c) This is a standard AS–AD diagram of a temporary supply shock. Here the SAS shifts up in
the short-run; inflation rises and output falls in the short-run. This is a movement along the
downward-sloping AD curve. In the long-run, the SAS gradually restores and the economy
goes back to where it has started. Candidates were expected to draw the SRAS and the
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LRAS curves to make clear the difference between temporary and permanent supply shocks
to get full marks. Candidates who were able to draw the diagram correctly and
accompanied it with some explanation received top marks in this question. Candidates who
did not comment on their diagram, or failed to detail the diagram (for example, by not
including labels for the axes or not including the LRAS) received only some of the marks.
(d) The Central Bank of Utopia will have raised interest rates but not to the point of bringing
inflation back to its target. The Central Bank is not adhering to the inflation target as
inflation is expected to be above target for two years. The central bank is accepting a period
of above-target inflation, in order to prevent a large fall in output. Stronger answers
discussed that the Central Bank of Utopia might be following flexible inflation
targeting/Taylor rule/nominal GDP targeting. Weaker answers only mentioned that the
Central Bank can always alter interest rates but did not comment on the likely adjustments
in this case.
Question 14
In Narnia,
√ production per worker (y) depends on capital per worker (k) such that
y = A k, where A > 0. Every year 20% of the capital stock depreciates, while
workers in Narnia save 10% of their income. The population is stable in Narnia,
neither growing nor shrinking.
(a) Explain what is meant by the ‘steady state’ and find capital per worker and
output per worker in Narnia’s steady state, as a function of parameter A.
(10 marks)
(b) Let A = 10. If capital per worker is currently at 25, should we expect to see
economic growth in Narnia?
(5 marks)
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(c) Starting from a position where capital per worker is 25, technological change
causes A to rise from 10 to 20. Explain how this affects Narnia’s steady state
and illustrate the change in a diagram. Will there be economic growth in
Narnia?
(10 marks)
(d) How does your analysis in (c) help us understand the drivers of long run
economic growth?
(5 marks)
(a) In the steady state capital per worker is constant (∆k = 0), so output per worker is
constant. This means investment of new capital must exactly replace depreciated capital
also accounting for population growth. So:
i = sy = (δ + n)k.
√
Output per worker: y = A k.
√
Savings per worker (= investment per worker) = sy = 0.1A k.
Depreciation of capital per worker: (δ + n)k = (0.20 + 0)k = 0.2k.
In the steady state therefore: √
0.2k = 0.1A k
so:
A2
k∗ =
4
and output per worker is:
A
y∗ =
2
in the steady state.
Most candidates who opted for this question were able to define the steady state correctly
and found the correct levels of capital per worker and output per worked. A minority of
candidates were unable to set investment equal to depreciation and left this question almost
empty.
(b) If A = 10, then capital per worker is k ∗ = 25 and output per worker is y ∗ = 50 so we are in
the steady state. Narnia already has capital per worker of 25 so is in the steady state.
Hence there is no economic growth.
Again a majority of candidates who opted for this question correctly argued that if we are
at the steady state there is no more growth. Some pointed out that the growth is just
enough to offset the depreciation, which is correct. A small minority argued that the
economy would keep growing.
(c) If A = 20, then steady state capital per worker rises to k ∗ = 100 and output per worker rises
to y ∗ = 200 in the steady state. Narnia is no longer at the steady state with capital per
worker at 25. A rise in A boosts incomes and thus savings, causing it to exceed depreciation
of capital per worker and driving economic growth. As Narnia converges to the new steady
state, economic growth will slow and in the new steady state output per worker will again be
constant. This is a standard steady state diagram. Shock in A shifts up the savings function
giving rise to a new steady state. Marks were deducted for inaccuracies or poor labelling.
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(d) In the Solow model long-run growth is zero. A one-off change in technological growth shifts
the steady state giving rise to economic growth until the new steady state is reached, at
which growth is zero again. In order for there to be long-run growth there would need to be
ongoing technological progress. No equations were required to explain this. Here some
candidates lost marks in saying that technology is the only factor that can promote
continuous growth in the Solow model. This is not entirely inaccurate, but for growth to
continue we need more and more technological advancement. A one-off change in technology
still raises the steady state, but cannot promote long-term growth.
18

Important note

references
section.
Comments on specific questions – Zone B
Candidates should answer Sections A, B and C.
Section A of this examination consists of 10 multiple choice questions. You should attempt to
answer ALL the questions. Each question has four possible answers (A–D). There is only one
correct answer to each of the questions. The maximum mark for this section is 40.
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
Question 1
Stan is a comic book artist. In a year’s work Stan could write 50 comic books or
help producing 2 movies (the number of movies is much lower, as he would need to
travel and wait for the sets to be built before giving his input). The recent
pandemic inspired him to write more episodes for his comic books and allowed him
to give feedback on movies from the comfort of his home. As a result, in a year’s
work he is now able to write 55 comic books and help producing 7 movies. Which of
the following effects has the pandemic NOT caused?
(a) Stan’s Production Possibility Frontier (PPF) shifts up.

(b) Stan has become relatively more productive in helping to produce movies.
(c) Stan’s opportunity cost of writing comic books has increased.
(d) Stan’s opportunity cost of helping to produce movies has decreased.
19
See BVFD Chapter 1.
(c) is not correct.
Stan is more productive in all areas of work now, but his increase in productivity has increased
the opportunity cost of writing a comic book. The opportunity cost of writing a comic book used
to be 2/50 = 1/25 = 0.04 and is now 7/55 ≈ 0.13.
Question 2
A firm pays each worker (i.e. each unit of labour L) a wage w = 4 and pays for each
computer (i.e. each unit of capital K) a cost of r = 3. The firm has a production
function Y = K + 2L and needs to produce Y = 12. Which of the following is
correct?
(a) The firm employs 12 workers and buys no computers.

(b) The firm buys 12 computers and hires no workers.
(c) The firm employs 6 workers and buys no computers.
(d) The firm buys 6 computers and hires no workers.
See BVFD Chapter 7.
Here capital and workers are substitutes as inputs of production and the firm is willing to pay
twice as much for workers, as they are twice as productive as computers. Because the wage is
lower than twice the cost of capital, the firm will only hire workers to produce its output. To
produce an output of 12 the firm will need to employ L = Y /2 = 12/2 = 6 workers.
Question 3
In 2020 the average price of a laptop was $600 and 218 million laptops were sold. In
2021 the average price of a laptop was $750 and 302 million laptops were sold.
Assume that incomes have not changed between 2020 and 2021. What can we learn
from this data?
(a) The demand for laptops is downward sloping.

(b) The demand for laptops is upward sloping.
(c) Laptops are a normal good.
(d) The own price elasticity for laptops is zero.
See BVFD Chapter 4.
20
(b) is the correct answer.
This data suggests that as the price of a laptop increases, holding income constant, the quantity
of laptops demanded also increases, suggesting an upward-sloping demand curve.
Question 4
Manufacturing processes relying on fossil fuels cause large emissions of sulphur

dioxide (SO2). These damaging emissions accumulate in the atmosphere, regardless
of their country of origin. From this information we can infer that:
(a) The efficient amount of emissions will be produced as each firm burning fossil
fuels is a profit maximising firm.
(b) There will be less emissions than socially optimal, as profit-maximising firms
will take into account the damages they impose on society.
(c) There will be more emissions than socially optimal, as firms have no incentives
to take into account the damages they impose on society.
(d) To gua-rantee that the level of emissions is the socially optimal we need firms to
compete à la Cournot.
Manufacturing processes cause emissions of sulphur dioxide, but firms will not individually take
this into account when deciding their production. Hence, firms will cause a negative externality
that they will not consider in deciding their production, leading to emissions that are higher than
optimal.
Question 5
A per unit subsidy of £X (where X > 0) is introduced in a market. Hence:
(a) Consumers of the good will pay a price that is £X lower than before the tax
was introduced.
(b) Producers of the good will receive a price that is £X higher than before the tax
was introduced.
(c) The market outcome might be more efficient after the introduction of the
subsidy.
(d) The subsidy cost is equal to the total amount of money gained by consumers
and producers as the subsidy is introduced.
21
We do not know anything about the elasticities of demand and supply and so cannot comment
on the impact of the price paid by consumers or perceived by sellers. However, if the subsidy is
introduced in a market for a good whose consumption creates a positive externality, it can make
the market outcome more efficient.
Question 6
In Thailand unemployment recently decreased. Which of the following observations

is consistent with a drop in unemployment?
(a) Some workers have moved out of Thailand.

(b) The labour force participation rate has gone down.
(c) The number of unemployed workers has not changed.
(d) All of the above observations.
If more people leave the labour force – either because they moved out of Thailand or because
more residents are stop looking for work – unemployment can decrease. Conversely, if more
people enter the labour force and the number of unemployed people remains the same, the
unemployment rate becomes lower. Hence, all the facts in (a)–(c) are consistent with a lower
unemployment rate.
Question 7
Jarviland is a small country with only two sectors: microchips and computers. This
year, the total revenue of the microchips sector is £3 billion, where £2 billion comes
from sales to the computer sector and the rest from sales to consumers. All the
output of the computer sector is bought by consumers at a total of £5 billion. What
is the GDP of Jarviland?
(a) Using the expenditure approach it is £6 billion.

(b) Using the income approach it is £7 billion.
(c) Using the production approach it is £8 billion.
(d) There is not enough information to compute the GDP in the island of Jarviland.
(a) is the correct answer.
22
Regardless of the approach we use to compute the GDP of Jarviland, we need to consider the
3bn − 2bn = 1bn in direct sales of microchips and the 5 billion output of the computer sector,
bringing the GDP of Jarviland to 6 billion dollars.
Question 8
In February 2022 the €/$ (euro/dollar) exchange rate was 0.88€/$. In France, a
country that uses Euros as currency, the average price of the game Monopoly was
€22, while in the United States, a country that uses dollars as currency, the average
price of the game Monopoly was $25. From this information we can infer that:
(a) The exchange rate is too low. The dollar should appreciate to ensure that
(b) The exchange rate is too low. The euro should appreciate to ensure that
(c) The exchange rate is approximately correct. Purchasing power parity holds.
(d) The exchange rate is too high. The euro should appreciate to ensure that
We can check how much a Monopoly game should cost through the exchange rate we are given.
In France, the board game costs 22€, so we should expect Monopoly to cost 22 × 1/0.88 = 25
USD. This is indeed what we observe, so the exchange rate is approximately correct and
Question 9
The closed economies of Sokovia and Madripoor want to increase their GDP, so that
it reaches 200 billion dollars. In Sokovia the GDP this year is 150 billion dollars and
the marginal propensity to save is 0.2. In Madripoor the GDP this year is 160
billion dollars and the marginal propensity to save is 0.25. We can infer that:
(a) It takes a larger injection of money for Sokovia to reach a GDP of 200 billion
dollars than it takes for Madripoor.
(b) It takes a larger injection of money for Madripoor to reach a GDP of 200 billion
dollars than it takes for Sokovia.
(c) It takes the same injection of money for Sokovia and Madripoor to reach a GDP
of 200 billion dollars.
(d) Neither country can reach a GDP of 200 billion dollars.
23
We can look at the multipliers for Sokovia and Madripoor. In Sokovia the multiplier is
1/(1 − c) = 1/0.2 = 5. To make Sokovia reach a GDP of 200 billion dollars we need an injection
of (200 − 150)/5 = 10bn. In Madripoor the multiplier is 1/(1 − c) = 1/0.25 = 4 so to reach a
GDP of 200 billion dollars the injection needed is (200 − 160)/4 = 10bn. Intuitively, Madripoor is
closer to the target GDP but has a lower multiplier than Sokovia, so the injection of money
needed for it to reach its target GDP is higher.
Question 10
Following political tensions, Germany’s marginal propensity to import from Russia

is likely to decrease and its IS curve is likely to shift down. The government
attempts to avoid an economic downturn. Using monetary policy can help with
everything except:
(a) Restoring the previous level of output.
(b) Restoring the previous level of interest rate.
(c) Reaching a new and higher level of output.
(d) Restoring the slope of the IS curve.
The central bank can lower interest rates to restore the previous level of output or the previous
level of interest rates. It can also lower rates more to increase the level of output above the
previous one. However, it cannot restore the slope of the IS curve, which has changed now that
the marginal propensity to import is lower.
Section B: Microeconomics
Candidates should answer ONE of the following long questions. It is essential that you explain your
answers.
Question 11
Sam views a packet of cheese (good X) and a bottle of wine (good Y ) as perfect
complements. Each month Sam sets aside £80 to spend on cheese and wine. The
prices of the two goods are PX = PY = £10.
(a) Sketch some of Sam’s indifference curves in a diagram and explain their shape.
(5 marks)
(b) Add Sam’s budget line to your diagram. Find the amount of cheese and wine
Sam chooses to consume and add the optimal bundle to your diagram.
(10 marks)
24
(c) Sam is consuming at his optimal bundle when he receives an unexpected gift of
two bottles of wine. Will Sam benefit from receiving this gift? Explain your
answer.
(5 marks)
(d) Sam is consuming as in (b) when the price of cheese falls (the price of a bottle
of wine is unchanged). Illustrate in a diagram how the fall in the price of cheese
changes Sam’s optimal bundle and decompose the effect of the price fall into a
substitution and an income effect, explaining your reasoning.
(10 marks)
See BVFD Chapter 5.
(a) An indifference curve shows all the combinations of wine and cheese that allow Sam to reach
the same utility. The sketch should contain L-shaped indifference curves with the corners
along the line Y = X. From any bundle where Y = X, adding more of one good does not
add to utility; only increasing both adds to utility. If Y > X (or X > Y ) then adding more
of good Y (or good X) does not add to utility but adding more of X (or good Y ) does.
Many candidates were able to draw these preferences correctly, but not everyone detailed
the graph and some drew Cobb–Douglas preferences.
(b) The budget line 10X + 10Y = 80, or Y = 8 − X. It has a slope of −1 and intercepts:
M M
= = 8.
PX PX
25
These should be labelled on the diagram. Perfect complements implies utility is maximised
where Y = X. Solving gives Y = X = 4. So 4 packets of cheese and 4 bottles of wine a
month. This bundle should be added to the diagram for full marks.
Again, many candidates were able to correctly add the budget constraint to the diagram
and find the optimal bundle for Sam. However, some argued that the solution is at a
tangency where the MRS is equal to the price ratio, which is not the case here (the kink is
non-differentiable so the MRS is formally undefined there) and the right way to argue that
the solution will be at the kink is to explain that spending more on either cheese than wine
(or the opposite) would not lead to an increase in utility.
(c) From Sam’s optimal bundle, adding two bottles of wine without adding more cheese does
not add to utility. In the diagram, it would mean a move vertically up the same indifference
curve (we would be on the vertical part of the L-shaped indifference curve). The fact that
the gift is unexpected matters (had it been anticipated Sam would have reallocated income
to cheese to ensure Y = X incorporating the gift).
Many candidates here argued that the gift does not increase Sam’s utility and either showed
the new bundle on their diagram or explained that this does not allow him to consume the
right ratio of cheese and wine. Some explained that Sam could sell some of the wine he
receives as a gift to increase his overall utility. This is not the case here because the gift is
unexpected – it happens after Sam has purchased his optimal bundle. However, candidates
who argued either that utility cannot increase (but failed to explain that this is because the
gift is unexpected) or that Sam could reoptimise received partial credit.
(d) The fall in the price of cheese makes Sam relatively richer. Given his preference, there is no
substitution effect here, only an income effect. There is no substitution because he will still
want to consume cheese and wine at the same ratio. However, the fact that cheese is now
cheaper allows him to buy both more cheese and more wine, making him better off.
26
This was undoubtedly the hardest part of the question, and many candidates only provided
a short explanation or drew income and substitution effects as if the preferences were
Cobb–Douglas. It was clear that some candidates understood the material much better than
others, as they were able to correctly explain the effects and draw the correct pictures.
Weaker candidates mentioned that Sam will now consume more cheese due to the
substitution effect (failing to recognise that with perfect complements there is no
substitution effect) and drew the substitution effect on the new and higher indifference
curve, rather than the original one.
Question 12
BigPharma is a profit-maximising pharmaceutical company. It invests heavily in

R&D to find new effective pharmaceutical drugs, which BigPharma goes on to
patent. BigPharma can expect to be a monopoly supplier of patented new drugs for
the duration of the patent.
BigPharma’s latest patented drug is ViraBloc an anti-viral drug that helps treat
coronavirus patients. The marginal cost of production is 1. Demand for the new
drug is Q = 13 − P .
(a) Find the price that BigPharma will set for ViraBloc, the quantity produced and
the profit generated. Sketch the monopoly outcome of this market in a diagram.
(10 marks)
(b) A new coronavirus variant Theta appears. ViraBloc is found to be very effective
in preventing serious illness against Theta. As a result, demand for ViraBloc
becomes less price elastic. In particular, the price elasticity of demand becomes
−13/12. Explain how this affects the price of ViraBloc.
(10 marks)
(c) During the pandemic some have argued that new vaccines and treatments for
coronavirus should not be patented, in order to maximise global distribution,
especially to developing countries. Discuss the welfare effects of such a proposal.
(10 marks)
27
See BVFD Chapter 8.
(a) Candidates typically set marginal cost (3) equal to marginal revenue (13 − 2Q) and solved
for the market outcome. Alternatively, candidates could set up monopoly profit, substitute
in for price from the demand equation and then maximise.
Monopoly profits are:
ΠM = pQ − Q = (12 − Q)Q.
FOC:
12 − 2Q = 0.
SOC:
−2 < 0
hence we confirm it is a maximum.
Hence: QM = 6 (monopoly quantity), pM = 7 (monopoly price), ΠM = 36 (monopoly
profits). The majority of candidates were able to find the correct quantity and price set by
the monopolist. This is a standard monopoly diagram with horizontal MC curve at 1. The
demand is downward-sloping and MR is downward-sloping with the same intercept and with
twice the slope. Marks were deducted for inaccuracies or incomplete labelling.
Many candidates drew the correct diagram, but a considerable amount of candidates who
attempted this question did not include details/labels and/or included an upward-sloping
and convex marginal cost.
(b) The relationship linking marginal revenue, price and marginal cost is:

1
MR = P 1 − = MC .
|ε|
Substituting for marginal cost and the new price elasticity gives a price of £13.

1 12 1
P 1− =1 ⇒ P 1− = P = 1 ⇒ P = 13.
| − 13/12| 13 13
28
Many were not be able to analyse this formally. The examiners rewarded generously an
accurate intuitive discussion based on how the elasticity is likely to affect the demand if the
monopolist decided to increase prices, especially if accompanied by a diagram showing the
likely consequences. A minority of candidates derived the optimal price as a function of the
elasticity of demand, correctly computed the new price and received full marks.
(c) Here candidates could discuss that removing patents is likely to increase production, lower
the price, expand access to such treatments and vaccines, benefitting consumers in the short
run, while reducing BigPharma’s profits, through the reduction of monopoly power. On the
other hand, the pharmaceutical industry relies on R&D that is very costly and risky, often
not leading to effective new pharmaceutical products. Without profits to be reinvested in
R&D, there is likely to be less innovation and fewer new pharmaceutical drugs going
forward, which might harm consumers in the future. There is an extra issue on whether
firms would be willing to develop vaccines and invest in R&D if they could not reap the
benefits granted by patents.
Candidates discussed this both in the context of Covid vaccines and in general. They could
also discuss public procurement. Many candidates performed well in this question, with
some really good answers highlighting the trade-offs between expanding access and not
incentivising innovation. Some lost some marks in providing arguments that were not based
on economic theory – for example, discussing the safety of Covid vaccines.
Section C: Macroeconomics
Candidates should answer ONE of the two following long questions. It is essential that you explain
your answers.
Question 13
Disruption to the supply of natural gas to Atlantis has caused a surge in energy
prices. While Atlantis has had a period of inflation around 2% for several years, the
current rate of inflation is 6%.
(a) What type of shock has affected Atlantis and how has it fueled inflation?
(5 marks)
(b) Explain what is meant by the natural rate of unemployment and explain why
the long-run Phillips curve is vertical at that rate. Why is inflation constant in
the long-run equilibrium?
(10 marks)
(c) Analyse the effect of the shock on Atlantis using short- and long-run Phillips
curves. Explain how the Central Bank’s willingness to accommodate the shock
affects inflation and unemployment in Atlantis.
(10 marks)
(d) Explain why the credibility of monetary policy is important.
(5 marks)
(a) This is a temporary supply shock. It impacts the cost of energy and thus the production
costs of firms giving rise to cost-push inflation. So higher energy prices impact inflation
directly but also indirectly through price rises of other goods. Inflationary expectations are
29
also likely to rise, affecting wage- and price-setting, altering the trade-off between inflation
and output.
Many candidates here correctly identified the shock as a temporary supply shock, but failed
to mention the repercussions of this shock in the market and how they are likely to affect
expectations. A minority considered this to be a permanent supply shock, but often failed
to explain why. These candidates received only partial credit.
(b) The natural rate of unemployment is the rate that prevails when employment is at its
long-run level (potential output). Equilibrium unemployment is not zero because job
separations and job hiring rates continuously occur, giving rise to people moving between
jobs etc. In the long run equilibrium unemployment is unrelated to inflation because it is
assumed nominal wages and prices are flexible and change together. Equilibrium
unemployment in the long run depends only on the real wage, which is unaffected. Inflation
is constant in the long-run equilibrium because people correctly anticipate inflation (π = π e )
and adjust nominal wages to real wages at the level required for the long-run equilibrium
(Y = Ȳ and U = U ∗ ).
Candidates seemed to struggle on this question and often answered only a portion of it.
Most were able to define the natural rate of unemployment and explain why this is unlikely
to be zero. However, some did not explain the determinants of long-run unemployment
and/or why inflation is stable in the long run. Most were able to draw the long-run
equilibrium but seem not to have understood the role of adjustments and expectations in
determining it.
(c) The rise in energy prices is an adverse temporary supply shock which shifts up the short-run
Phillips curve without affecting the LRPC. Monetary policy can fully accommodate the
shock, for example, by raising the target inflation rate in line with the shift, so that inflation
rises but unemployment remains at the long-run level. If instead interest rates were to rise,
then it would prevent inflation from rising as high as in the full-accommodation case. The
fall in aggregate demand induced by the interest rate rise would raise unemployment. This
would be reflected by a move along the higher short-run Phillips curve, giving rise to
stagflation. That is, both high inflation and high unemployment.
Many candidates struggled here and either discussed only the full accommodation or the
stagflation case. Some seemed to struggle to see the impact of this shock in a Phillips curve
30
framework, and instead reasoned in the AS–AD framework. While the same shock can
indeed be analysed within the AS–AD model, this is not what the question asked and these
candidates received only partial credit.
(d) Here candidates were expected to discuss the importance of inflationary expectations. If
people expect high inflation (i.e. do not feel that the Central Bank will meet the inflation
target), then that feeds into wages and prices etc. A Central Bank that is more credible is
more likely to be believed and influence inflation expectations, which turn out to be true if
there is perfect credibility. Many candidates correctly identified the role of expectations and
how the Central Bank’s credibility affects them. A minority argued that Central Banks’
credibility makes international trade easier or stabilises the exchange rate, which is not the
point in this question.
Question 14
In Wonderland
√ production per worker (y) depends on capital per worker (k) such
that y = 10 k. Every year 15% of the capital stock depreciates, while workers in
Wonderland save 10% of their income. Every year the population grows at a rate of
5%.
(a) Explain what is meant by the ‘steady state’ and find capital per worker and
output per worker in the steady state of Wonderland.
(10 marks)
(b) Illustrate the steady state of Wonderland using a diagram.
(5 marks)
(c) The country of Neverland is identical to Wonderland in terms of output per
worker, the savings rate, the depreciation rate and population growth. They
differ in one respect: Wonderland has capital per worker of 10, whereas
Neverland has capital per worker of 20. Which country experiences a higher
growth rate of output per worker and how will their growth rates evolve over
time?
(10 mark)
(d) How might Wonderland and Neverland achieve economic growth in the
long-run?
(5 marks)
(a) In the steady state capital per worker is constant (∆k = 0), so output per worker is
constant. This means investment of new capital must exactly replace depreciated capital
also accounting for population growth. So:
i = sy = (δ + n)k.
√
Output per worker: y = 10 k.
√ √
Savings per worker (= investment per worker) = sy = 0.1(10 k) = k.
Depreciation of capital per worker:
(δ + n)k = (0.15 + 0.05)k = 0.2k.
31
√
In the steady state therefore: 0.2k = k, so k ∗ = 25 in the steady state. Hence output per
worker is y ∗ = 50 in the steady state.
Most candidates were able to define the steady state correctly and found the correct
equilibrium levels of capital per worker and output per worker. A minority of candidates
were unable to set investment equal to depreciation and left this question almost empty.
(b) Standard steady state diagram. The diagram should indicate k ∗ = 25 and y ∗ = 50.
Most candidates were able to replicate the standard version of this diagram, but it was often
left without details.
(c) As Wonderland and Neverland are identical in terms of output per worker, the savings rate,
the depreciation rate and population growth, they have the same steady state. Wonderland
and Neverland both have less capital per worker than in the steady state. Hence investment
exceeds depreciation of capital per worker, causing capital per worker and thus output per
worker to grow. As Wonderland is further away from the steady state than Neverland, the
gap between investment and depreciation of capital per worker is larger, giving rise to a
higher growth rate than in Neverland. Wonderland has less capital per worker and is thus
poorer – output per worker is lower than in Neverland. The Solow model predicts poor
countries will grow faster than rich countries. Over time the two countries will converge in
terms of capital per worker and output per worker until in the steady state there will be no
growth of output per worker.
Many candidates here computed the steady state for both countries and concluded that they
were the same. While this is unnecessary – what matters are the saving rate, depreciation
rate and population growth – this was not penalised by the examiners. Candidates who
argued that both countries will keep growing were awarded only partial credit. A minority
argued that having a lower initial capital implies having a lower steady state level of capital
and output. This is not what the model predicts and shows that some just memorised
equations and diagrams instead of understanding them.
(d) In the Solow model long-run growth is zero. Technological progress is the key to long-run
growth (can discuss Romer and endogenous growth). No equations required.
The examiners rewarded the quality of the explanation. Most candidates mentioned
technological growth, but failed to explain that a one-off change in technology raises the
steady state but cannot promote long-term growth.
32

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Examiners’ commentaries 2022

Examiners’ commentaries 2022

Information about the subject guide and the Essential reading

Format of the examination

This paper consists of three sections:

What the examiners are looking for

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

Examination revision strategy

Examiners’ commentaries 2022

Information about the subject guide and the Essential reading

Comments on specific questions – Zone A

Candidates should answer Sections A, B and C.

Maria is a marketer. In a day’s work Maria used to be able to bake 5 cakes or

(a) Maria’s Production Possibility Frontier (PPF) shifts up.

Reading for this question

See BVFD Chapter 1.

Approaching the question

(a) is not correct.

(a) The firm employs 12 workers and buys 12 computers.

Reading for this question

See BVFD Chapter 7.

Approaching the question

(d) is the correct answer.

Year Average Strawberry Price (in £ Strawberries sold (in

Reading for this question

See BVFD Chapter 4.

Approaching the question

(b) is the correct answer.

(a) Electric cars are a public good.

Reading for this question

See BVFD Chapter 13.

Approaching the question

(d) is the correct answer.

A per unit tax of £X (where X > 0) is introduced in a market. Which of the

Reading for this question

See BVFD Chapters 13 and 14.

Approaching the question

(c) is the correct answer.

Unemployment in the Caribbean islands has recently increased. Which of the

(a) Some workers have moved to the Caribbean islands.

Reading for this question

See BVFD Chapter 23.

Approaching the question

(d) is the correct answer.

(a) Using the expenditure approach it is £6 billion.

Reading for this question

See BVFD Chapter 15.

Approaching the question

(a) is the correct answer.

Reading for this question

See BVFD Chapter 24.

Approaching the question

(d) is the correct answer.

(a) The multiplier in Sokovia is 4.

Reading for this question

See BVFD Chapter 15.

Approaching the question

(c) is the correct answer.

Following political tensions, Germany’s marginal propensity to import from Russia is

(a) Restoring the previous level of output.

(b) Restoring the previous level of interest rate.

(c) Reaching a new and higher level of output.

(d) Restoring the slope of the IS curve.