Economics A-level mcqs

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Noble
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#1
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#1
I need help with the following mcqs:

1) What would result in a reduction in the volume of bank deposits?
A--an increase in the public's desire to hold cash
B--an increase in the government expenditure financed by the borrowing from the central bank
C--a reduction in the production of their deposits that the banks hold in cash
D--an open market purchase of securities by the central bank
Ans: A

2) Which of the following is likely to intensify a recession following an initial fall in aggregate demand?
A--Unemployment benefits increase as the level of activity falls
B--the yield from income tax falls as incomes fall
C--firms maintain a constant ratio of stocks to sales
D--interest rates fall as the demand for money falls
Ans: C

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

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

5) What will cause interest rates to rise?
A--an unexpected increase in the prices of bonds
B--an increase in the nominal money supply
C--an increase in the volume of output
D--a reduction in the price level
Ans: C
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Noble
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#2
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Anyone?
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Noble
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Tateco
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#4
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Sorry :/ What level of economics are you doing, I'm doing AS macro at the moment so this is a little bit beyond me I think... Hopefully one or two of the guys doing a degree will come in here and help you...
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Noble
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#5
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(Original post by tateco)
Sorry :/ What level of economics are you doing, I'm doing AS macro at the moment so this is a little bit beyond me I think... Hopefully one or two of the guys doing a degree will come in here and help you...
I'm doing A2
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Crucible
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#6
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Agree with all.

What board you on though? Completely different questions from my A-Level.
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Noble
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#7
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(Original post by Crucible)
Agree with all.

What board you on though? Completely different questions from my A-Level.
I'm doing CIE. What about u?
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suraj.poudel
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#8
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#8
ok imma try help u on these ones these are surely CIE ones..may be repeated these sessions, since a lot usually is...

1) What would result in a reduction in the volume of bank deposits?
ANS- in option B, th e govt borrows money from the central bank. now remember that central bank is not in the Money Supply chain, so it effectively prints money for the govt. now the govt injects this into economy->multiplier effect on income->more bank deposits. in C, if the [proportion?] banks have a reduction in the CRR means that they have to hold lesser money in cash->meaning they can loan that out too and then the credit multiplier effect and more savings in the bank. in D->an open market purchase of securities by "Central Bank" means the bank again "prints or introduces" new money for paying ie its not in money supply and then more bank deposits. A is kinda obvious, it means ppl remove money from banks.

2) Which of the following is likely to intensify a recession following an initial fall in aggregate demand?
Ans: A,B,D are automatic stabilizers they work as part of fiscal and monetary policy to save economy from recession. More unemployment benefits means the unemployed consume more and AD increases,B is obvious[means govt has debt],from D since saving is less lucrative than consuming AD increases. As for why the ans is C, its because of the operation of 'unplanned increase and decrease in stock' what it means is that if firms maintain sales:stock ratio, then as AD falls sales fall and they have more stock. so to balance the ratio they reduce production->lay off workers->more unemployment->if all firms do this then mass unemployment and hence likely recession.


3) In an economy, the marginal propensity to consume of the unemployed is higher than that of taxpayers. The government increases both expenditure on unemployment benefits and taxation by $10 million. What will be the impact on aggregate demand?
Ans: Here we already know from propensity that the unemployed consume much, and so the increased $10m will cause multiple increase in AD due to multiplier. However, taxes are special->not only are they a withdrawal from the circular flow they also have "Disincentive Effects" on the economy [maybe more ppl leave work,take more benefits and consume off it??] and so the multiple increase in AD is followed by withdrawals from the econ. HOWEVER, the taxpayers have a lesser propensity anyway and so they never made up a large part of aggregate consumption, and the effect of leakages must hence be lower than the injections [plus the tax is reinjected into economy]. this must mean we can eliminate A. C&D both suggest that only one part of withdrawal and injection works, so eliminate them too. B supports the theory i gave above that injection effects>withdrawal effects.

4) A closed economy is initially in equilibrium with a national income of $100 million, and a capital stock of $25 million. Aggregate demand increases by $10 million.
According to the accelerator principle, by how much will net investment increase?
Ans:Accelerator theory says
Investment(I) = a [ Yt - Y(t-1)] where a=capitalutput ratio,Y=natnl income,t=year
the capital output ratio tells us how much capital the economy requires to produce a given volume of outputs. so in this case:
a = CAPITAL stock[machinery?] / GDP
or, a = 25m/100m = 0.25
AND so I = 0.25 x10m = $2.5m

5) What will cause interest rates to rise?
A--an unexpected increase in the prices of bonds
B--an increase in the nominal money supply
C--an increase in the volume of output
D--a reduction in the price level
Ans: C
Price of bonds and intrest rates are inversely related, so if Pbonds UP then IR must DOWN so cut A. If money supply increases,IR must DOWN so cut B.D means price level, and so also IR goes down so cut D. As for why C,if volume of outputs increase means prices must increase-> on a keynesian cross diagram Xaxis has output and Yaxis price, so if x increases so must y as u move along the AD curve.
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Noble
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#9
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#9
thanks mate...really appreciate ur help .... I didn't expect someone to answer them after so long
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suraj.poudel
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#10
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well my first post...even tho my account is old.replied as soon as i saw this..giving them this session? glad 2 help
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Noble
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#11
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#11
yeah exam in two days..

oh..

(Original post by suraj.poudel)
D means price level, and so also IR goes down so cut D. As for why C,if volume of outputs increase means prices must increase-> on a keynesian cross diagram Xaxis has output and Yaxis price, so if x increases so must y as u move along the AD curve.
can u explain again it please?

(Original post by suraj.poudel)
on a keynesian cross diagram Xaxis has output and Yaxis price,
also, are u talking about AD/AS diagram. I thought keynesian cross diagram has income on Xaxis and aggregate expenditure on Yaxis. Oh, by the way, is the income on Xaxis nominal or real income?
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suraj.poudel
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#12
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#12
to ur answer:If price level goes down, then ALL average prices go down,including the price of money which is Intrest Rate[IR], so eliminate D.P.Bond in market is inversely proportional to the rate of intrest,so if price of bond goes up then IR must go Down so eliminate A.Increases in the MSupply means IR goes down so eliminate that too.

As for the diagram i made u a customized one to try help u understand.u know that a demand curve gives [email protected] lvl of output rite? well the AD curve gives just that, only that the price there is calculated in the CPI and changes in those prices give u inflation, meaning they are the net avg prices in the economy and:

http://i478.photobucket.com/albums/rr147/uys/s.jpg

and on X axis i think its value of OUTPUT which is Real GDP. hope this helps. ciao around man
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MagicNMedicine
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#13
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(Original post by Noble)
oh..



can u explain again it please?
For this stuff about how interest rates are affected by the money supply, and prices, there's an easy diagram which gives you the answer which you might not have seen on A level, its the money-supply/money-demand diagram.

Draw a diagram which has nominal interest rate (i) on the vertical axis and 'real money balances' (M/P) on the horizontal axis. The reason its called real money balances is because it means the actual value of money (in terms of prices) not just the nominal amount which is meaningless unless we know the price level.

Money supply is just a vertical line which hits the horizontal axis at some value of (M/P), that tells you how much 'real money' there is in the economy at that point. If the central bank increases money supply you shift the vertical line to the right, if it decreases, you shift it to the left.

Money demand is a downward sloping curve. This is basically because when i is high, you hold more of your wealth in assets that bear interest (like bonds, stocks, shares etc) so you don't hold as much of your wealth as money. When i is low, you don't get as much of a return for tying your wealth up in interest-bearing assets, so you may as well hold more money which is convenient because you can use it for transactions. So when i is high money demand is low, when i is low money demand is high, thats the thinking behind money demand being downward sloping. When output in the economy increases people need more money for transactions, so the money demand curve shifts up. When output in the economy falls, people don't need as much money as they aren't carrying out as many transactions so the money demand curve shifts down.

Where they intersect is the interest rate.

So back to the question:
5) What will cause interest rates to rise?
A--an unexpected increase in the prices of bonds
B--an increase in the nominal money supply
C--an increase in the volume of output
D--a reduction in the price level


A - the price of bonds is inversely related to the yield (interest rate) so when bond prices rise interest rates FALL.

B - use the diagram above for this....if you increase nominal money supply then you are increasing M, so (M/P) goes up. This means you shift the money supply curve to the right. The equilibrium interest rate on your diagram will have fallen. So interest rates FALL.

C - use the diagram again....if you increase volume of output then you are shifting money demand up (money supply is unchanged). This means the equilibrium interest rate on your diagram will be higher. Interest rates RISE.

D - use the diagram again....if you reduce P then (M/P) gets bigger, so this is the equivalent of increasing M like in part B above, its just reducing the denominator rather than increasing the numerator. So again you shift the money supply to the right, the equilibrium interest rate on the diagram will have fallen. Interest rates FALL.
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burningfire12
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#14
Report 8 years ago
#14
I need help please.
Please reply to me ASAP, my exam's in 3 days.
13. The table shows the costs of two milk producers.
costs per litre
firm X $9
firm Y $7
The price received by producers is $10 per litre. Both firms have been given quotas allowing
them to produce 200 litres per day. Firm X sells its quota to firm Y.
Assuming constant costs of production and zero costs of entry and exit, what price did firm Y pay
(per day) to buy X’s quota?
A $200
B $600
C $700
D between $200 and $600

I don't understand why the answer's D.
Can someone please explain it to me?

And also this one:

18 In an economy, the volume of output rises by 3% in a year, while the quantity of money rises by
5%.
If the velocity of circulation of money remains the same, what will be the approximate increases in
the money value of national income and the price level?
increase in money
value of national income increase in price level
A 5% 2%
B 5% 3%
C 8% 2%
D 8% 3%

The answer here is A. I do not understand why.
Please help. Please....
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nileiyen
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#15
Report 2 years ago
#15
hi mate can you help me
In an economy, the marginal propensity to consume of the unemployed is higher than that of taxpayers.
The government increases expenditure on unemployment benefits by $10 million. What will the government need to do if it wishes to keep aggregate demand unchanged?
A raise taxation by less than $10 million
B raise taxation by more than $10 million
C raise taxation by $10 million
D leave taxes unchanged
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VREOES
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#16
Report 1 year ago
#16
For number one profit made by firm x =200(10-9) = 200profit made by firm y =200(10-7) =600if firm x sells its quota to firm y then he must ATLEAST receive $200 if firm y accepts the quota then must make a PROFIT of equal of less than 600HENCE FOR BOTH PARTIES TO BENEFITFirm x should receive a price of greater or equal to $200 inorder to sell the quota while for firm y he would be willing to accept the quota till a profit is being madehence answer becomes D
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