Practice gce model questions vol1 economics 2017 Past Questions

Question 1 View Details

A consumer's weekly income rises from $£200$ to $£260$. During the same period, the quantity demanded of a particular good increases from $40$ units to $55$ units. Calculate the income elasticity of demand for the good and state whether it is a normal or inferior good.

A. Income elasticity = -1.25; the good is a normal good.

Correct B. Income elasticity = 1.25; the good is a normal good.

C. Income elasticity = 1.25; the good is an inferior good.

D. Income elasticity = 0.75; the good is a normal good.

Correct Answer: B

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Question 2 View Details

The monetary base is $£500$ million. The public holds cash equal to 10 % of total money holdings. Commercial banks keep required reserves of 5 % of deposits and hold excess reserves of 2 % of deposits. (a) Assuming these ratios remain constant, calculate the total money supply. (b) If the central bank raises the required reserve ratio to 8 % and reduces excess reserves to 1 % while the cash‑holding proportion stays at 10 %, what is the new money supply? (c) By what percentage does the money supply change as a result of the policy shift?

Correct A. Initial money supply ≈ £3.07 billion; new money supply ≈ £2.76 billion; the supply falls by about 10 %.

B. Initial money supply ≈ £3.20 billion; new money supply ≈ £2.90 billion; the supply falls by about 9 %.

C. Initial money supply ≈ £2.95 billion; new money supply ≈ £2.70 billion; the supply falls by about 8 %.

D. Initial money supply ≈ £3.07 billion; new money supply ≈ £3.20 billion; the supply rises by about 4 %.

Correct Answer: A

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Question 3 View Details

In year 1 a CPI basket contains two goods: Good A (weight 40 %) priced at $£5$ and Good B (weight 60 %) priced at $£10$. In year 2 the prices rise to $£6$ for A and $£12$ for B, and a new Good C (price $£8$) is introduced with a weight of 10 %; the weights of A and B are reduced proportionally to keep the total at 100 %. (a) Using a Laspeyres index (base‑year weights), compute the inflation rate from year 1 to year 2. (b) If the nominal interest rate is 8 %, determine the real interest rate using the Fisher equation.

Correct A. Inflation = 20 %; real interest rate = -10 %.

B. Inflation = 18 %; real interest rate = -9 %

C. Inflation = 15 %; real interest rate = -13 %

D. Inflation = 25 %; real interest rate = -5 %

Correct Answer: A

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Question 4 View Details

The following data (in billions of dollars) are given for an economy: Compensation of employees = 500, Gross operating surplus = 200, Gross mixed income = 150, Indirect taxes = 120, Subsidies = 30, Depreciation (consumption of fixed capital) = 80, Net factor income from abroad = 25. Compute (a) Gross Domestic Product at market prices, (b) Net Domestic Product, (c) Gross National Product, and (d) Net National Income.

A. GDP = £950 bn; NDP = £870 bn; GNP = £895 bn; NNI = £815 bn

B. GDP = £930 bn; NDP = £850 bn; GNP = £875 bn; NNI = £795 bn

C. GDP = £960 bn; NDP = £880 bn; GNP = £905 bn; NNI = £825 bn

Correct D. GDP = £940 bn; NDP = £860 bn; GNP = £885 bn; NNI = £805 bn.

Correct Answer: D

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Question 5 View Details

A firm's total cost function is $TC = 0.5Q^{3} - 3Q^{2} + 20Q + 100$ (where $Q$ is output). The market price is constant at £30 per unit. (a) Determine the output level that maximises profit. (b) Calculate the maximum profit (or minimum loss). (c) Given that fixed costs are £100, should the firm continue producing in the short run? Explain.

A. Profit‑maximising output ≈ 5.3 units; maximum profit ≈ -£10 (loss); the firm should keep producing in the short run because price (£30) exceeds AVC.

Correct B. Profit‑maximising output ≈ 5.3 units; maximum profit ≈ -£37 (loss); the firm should keep producing in the short run because price (£30) exceeds AVC.

C. Profit‑maximising output ≈ 6.7 units; maximum profit ≈ -£55 (loss); the firm should shut down in the short run because price (£30) is below AVC.

D. Profit‑maximising output ≈ 4.1 units; maximum profit ≈ -£20 (loss); the firm should keep producing in the short run because price (£30) exceeds AVC.

Correct Answer: B

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Question 6 View Details

A firm's total cost function is $TC = F + aQ + bQ^{2}$, where $F$ is fixed cost and $a, b > 0$. At an output of $Q = 100$ units the average total cost equals the marginal cost, both being £20. When output is increased to $Q = 200$ units, the marginal cost exceeds the average total cost by £5. Determine the fixed cost $F$.

A. 1200/3

B. 1000/4

Correct C. 1000/3

D. 500/3

Correct Answer: C

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Question 7 View Details

The reserve ratio of the banking system is 0.10 and the currency‑to‑deposit ratio is 0.20. The central bank wishes to raise the money supply by £500 million using open‑market operations. Assuming the money multiplier is $\frac{1+c}{r+c}$, calculate the net amount of government securities the bank must purchase.

A. 75

B. 150

Correct C. 125

D. 100

Correct Answer: C

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Question 8 View Details

A country's population follows the logistic model $P(t)=\frac{K}{1+A e^{-rt}}$ where $t$ is years after 2000. In 2000 the population was 50 million and in 2010 it was 70 million. If the intrinsic growth rate $r$ is 0.04 per year, find the carrying capacity $K$ (in millions, rounded to the nearest million).

A. 350

B. 400

C. 425

Correct D. 375

Correct Answer: D

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Question 9 View Details

A new railway line requires an upfront capital cost of £800 million. Operating costs are £20 million per year. Each passenger pays £5 per trip. In the first year 30 million passengers are expected, and passenger numbers grow at 3 % per year. Using a discount rate of 5 % per year, after how many whole years will the project's net present value become positive?

A. 5

B. 6

Correct C. 7

D. 9

Correct Answer: C

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Question 10 View Details

The market for a good is described by the demand equation $Q_d = 100 - 3P$ and the supply equation $Q_s = 20 + 2P$, where $P$ is the price and $Q$ the quantity. The government imposes a specific tax of £2 per unit on the good. Compute the dead‑weight loss (in £) caused by the tax.

A. 1.6

B. 4.0

C. 3.2

Correct D. 2.4

Correct Answer: D

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Question 11 View Details

The market for smartphones is described by the linear demand equation $ Q_d = 500 - 5P $ and the linear supply equation $ Q_s = 100 + 3P $, where $P$ is the price in dollars and $Q$ is quantity in thousands of units. Determine the equilibrium price and the equilibrium quantity.

A. Equilibrium price = 45 dollars, equilibrium quantity = 275 (thousand units)

B. Equilibrium price = 40 dollars, equilibrium quantity = 300 (thousand units)

Correct C. Equilibrium price = 50 dollars, equilibrium quantity = 250 (thousand units)

D. Equilibrium price = 55 dollars, equilibrium quantity = 225 (thousand units)

Correct Answer: C

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Question 12 View Details

In Year A the actual unemployment rate in Econland is 9 %. The frictional unemployment rate is 2 % and the structural unemployment rate is 3 %. In Year B the actual unemployment rate falls to 6 % while the frictional and structural rates remain unchanged. Calculate (i) the natural rate of unemployment, (ii) the cyclical unemployment in each year, and (iii) the percentage change in cyclical unemployment from Year A to Year B.

A. Natural rate = 5 %; cyclical unemployment Year A = 4 %; Year B = 2 %; cyclical unemployment fell by 50 %

Correct B. Natural rate = 5 %; cyclical unemployment Year A = 4 %; Year B = 1 %; cyclical unemployment fell by 75 %

C. Natural rate = 5 %; cyclical unemployment Year A = 5 %; Year B = 1 %; cyclical unemployment fell by 80 %

D. Natural rate = 5 %; cyclical unemployment Year A = 3 %; Year B = 1 %; cyclical unemployment fell by 66 %

Correct Answer: B

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Question 13 View Details

Country Z had a population of 20 million in 2010. From 2010 to 2020 the annual natural increase (births minus deaths) was 1.5 % and net migration was -0.2 % of the population each year. From 2020 onward a new policy reduces net migration to -0.05 % and raises the natural increase to 1.8 % per year. Assuming the rates apply continuously each year, calculate (i) the population at the end of 2025, and (ii) the average annual growth rate over the whole period 2010‑2025.

Correct A. Population 2025 ≈ 24.8 million; average annual growth rate ≈ 1.45 %

B. Population 2025 ≈ 25.2 million; average annual growth rate ≈ 1.60 %

C. Population 2025 ≈ 23.5 million; average annual growth rate ≈ 1.30 %

D. Population 2025 ≈ 24.0 million; average annual growth rate ≈ 1.20 %

Correct Answer: A

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Question 14 View Details

A borrower takes a loan with a nominal interest rate of 8 % per annum. The borrower expects inflation to be 5 % over the next year, but the actual inflation that occurs is 6 %. Using the Fisher equation, find (i) the expected real interest rate, (ii) the actual real interest rate, (iii) the percentage change between the expected and actual real rates, and (iv) state whether the borrower gains or loses because of the difference.

A. Expected real ≈ 2.50 %; actual real ≈ 1.50 %; real rate fell about 40 %; borrower gains

B. Expected real ≈ 3.00 %; actual real ≈ 2.00 %; real rate fell about 33 %; borrower loses

C. Expected real ≈ 2.86 %; actual real ≈ 2.20 %; real rate fell about 23 %; borrower loses

Correct D. Expected real ≈ 2.86 %; actual real ≈ 1.89 %; real rate fell about 34 %; borrower gains

Correct Answer: D

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Question 15 View Details

Country X imports good A and exports good B. Before any tariff, the world price of good A is £10 per unit and the world price of good B is £40 per unit, so the terms of trade (export price ÷ import price) are 4. The country imports 1 000 units of A and exports 250 units of B each year. The government then imposes a 20 % tariff on imports of good A, raising the domestic price of A by exactly 20 % while the export price of B remains unchanged. Calculate (i) the new terms of trade, (ii) the percentage change in the terms of trade, (iii) the annual tariff revenue, and (iv) briefly discuss the likely impact on national welfare.

A. New terms of trade ≈ 2.50; terms of trade fell by ≈ 37.5 %; tariff revenue = £1 500 per year; overall welfare falls (dead‑weight loss exceeds revenue)

Correct B. New terms of trade ≈ 3.33; terms of trade fell by ≈ 16.7 %; tariff revenue = £2 000 per year; overall welfare falls (dead‑weight loss exceeds revenue)

C. New terms of trade ≈ 4.00; terms of trade fell by ≈ 0 %; tariff revenue = £0 000 per year; overall welfare rises (no dead‑weight loss)

D. New terms of trade ≈ 3.33; terms of trade fell by ≈ 10 %; tariff revenue = £2 500 per year; overall welfare falls (dead‑weight loss exceeds revenue)

Correct Answer: B

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Question 16 View Details

A firm's total product (TP) from labour L (in units) is given by $ TP = 200L - 4L^{2} + 0.2L^{3} $.\n\n(a) Find the quantity of labour at which average product (AP) is maximised.\n(b) What is the marginal product (MP) at that labour input?\n(c) At labour inputs $L = 5$ and $L = 15$, state whether the firm is experiencing increasing, diminishing or constant returns to labour, justifying your answer.

Correct A. Labour at max AP = 10; MP at that point = 180; At L = 5 diminishing returns; At L = 15 increasing returns

B. Labour at max AP = 8; MP at that point = 160; At L = 5 increasing returns; At L = 15 diminishing returns

C. Labour at max AP = 10; MP at that point = 150; At L = 5 increasing returns; At L = 15 constant returns

D. Labour at max AP = 12; MP at that point = 200; At L = 5 constant returns; At L = 15 diminishing returns

Correct Answer: A

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Question 17 View Details

The price of a good rises from $\£20$ to $\£25$ and quantity demanded falls from 200 units to 160 units. Using the midpoint (arc) method, calculate the price elasticity of demand and state whether demand is elastic, inelastic or unit‑elastic.

A. -0.5 (inelastic)

B. -0.8 (inelastic)

C. -1.2 (elastic)

Correct D. -1 (unit‑elastic)

Correct Answer: D

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Question 18 View Details

A developing country wants to raise its real GNI per capita from $\$2{,}000$ to $\$2{,}500$ within five years. The economy's output response to investment is given by the multiplier relationship $\Delta Y = k\,\Delta I$ with $k = 3$. The current total investment is $\$150$ billion and the population (constant) is 50 million. The government plans to increase investment by the same amount each year. Assuming no depreciation and that the multiplier effect applies each year to the cumulative increase in investment, determine the constant annual increase in investment (in billions of dollars) required to meet the GNI per‑capita target after five years. Also state whether this required annual increase exceeds 5 % of the initial investment.

A. Approximately \$1.20\) billion per year; it does not exceed 5 % of the initial investment

B. Approximately \$1.67\) billion per year; it exceeds 5 % of the initial investment

Correct C. Approximately \$1.67\) billion per year; it does not exceed 5 % of the initial investment

D. Approximately \$2.10\) billion per year; it exceeds 5 % of the initial investment

Correct Answer: C

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Question 19 View Details

The government imposes a specific tax of $\$2$ per unit on a good. The market demand is $Q_d = 100 - 5P$ and the supply (price received by producers) is $Q_s = 20 + 3P$, where $P$ is the price received by producers. Determine:\n(a) the price paid by consumers,\n(b) the price received by producers,\n(c) the total tax revenue, and\n(d) the dead‑weight loss caused by the tax.

A. Consumer price = \$10.75; Producer price = \$8.75; Tax revenue = \$92.5; Dead‑weight loss = \$5.00

Correct B. Consumer price = \$10.75; Producer price = \$8.75; Tax revenue = \$92.5; Dead‑weight loss = \$3.75

C. Consumer price = \$10.00; Producer price = \$8.00; Tax revenue = \$80; Dead‑weight loss = \$2.50

D. Consumer price = \$11.00; Producer price = \$9.00; Tax revenue = \$100; Dead‑weight loss = \$5.00

Correct Answer: B

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Question 20 View Details

The market for wheat is initially in equilibrium at price $\£2$ per kg and quantity 5,000 kg. The demand curve is $Q_d = 8{,}000 - 2{,}000P$ and the supply curve is $Q_s = 1{,}000P$. The government introduces a price ceiling of $\£1.5$ per kg. Calculate the resulting shortage (in kg) and briefly explain the likely market outcome.

A. Shortage = 3,500 kg; the market will experience a surplus leading to downward pressure on price.

B. Shortage = 4,500 kg; the market will experience a shortage leading to rationing or black‑market activity.

C. Shortage = 2,000 kg; the market will experience a shortage leading to rationing or black‑market activity.

Correct D. Shortage = 3,500 kg; the market will experience a shortage leading to rationing or black‑market activity.

Correct Answer: D

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Question 21 View Details

A firm in a monopolistically competitive market faces the demand curve $P = 120 - 2Q$ and has total cost function $TC = 20Q + 0.5Q^{2}$. (a) Determine the profit‑maximising output and the corresponding price. (b) Calculate the firm's profit at this output. (c) Based on the relationship between price and average variable cost, state whether the firm should produce or shut down in the short run.

A. Q=20 units, P=£70, profit=£-200, shut down

B. Q=25 units, P=£70, profit=£500, produce

C. Q=15 units, P=£90, profit=£-250, produce

Correct D. Q=20 units, P=£80, profit=£1,000, produce

Correct Answer: D

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Question 22 View Details

When the price of a product rises from £30 to £36, quantity demanded falls from 500 units to 400 units. (a) Calculate the price elasticity of demand between these two points using the midpoint formula. (b) Indicate whether total revenue increases, decreases or remains unchanged as price rises. (c) Advise the firm on how to change price to increase total revenue.

A. Elasticity ≈ -0.85; total revenue falls; firm should lower price

B. Elasticity ≈ -2.00; total revenue falls; firm should keep price unchanged

C. Elasticity ≈ -1.22; total revenue rises; firm should raise price

Correct D. Elasticity ≈ -1.22; total revenue falls; firm should lower price

Correct Answer: D

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Question 23 View Details

The government imposes a specific tax of £2 per unit on a good. The market demand is $Q_D = 500 - 5P$ and the supply (before tax) is $Q_S = 3P$. (a) Find the price paid by consumers and the price received by producers after the tax is introduced. (b) Compute the total tax revenue. (c) Determine the dead‑weight loss caused by the tax.

A. Consumers pay £64.50, producers receive £62.50, tax revenue £375.00, dead‑weight loss £2.50

B. Consumers pay £62.00, producers receive £60.00, tax revenue £360.00, dead‑weight loss £5.00

C. Consumers pay £65.00, producers receive £63.00, tax revenue £390.00, dead‑weight loss £4.00

Correct D. Consumers pay £63.25, producers receive £61.25, tax revenue £367.50, dead‑weight loss £3.75

Correct Answer: D

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Question 24 View Details

In a closed economy, autonomous consumption is £200, marginal propensity to consume (MPC) is 0.75, investment is £150, government spending is £100, taxes are £80 and net exports are £30. (a) Calculate the equilibrium level of aggregate income using the Keynesian multiplier. (b) If government spending rises by £20, what is the new equilibrium income? (c) What is the total change in income resulting from this fiscal expansion?

Correct A. Initial income £1,600; after increase £1,680; total change £80

B. Initial income £1,600; after increase £1,700; total change £100

C. Initial income £1,550; after increase £1,630; total change £80

D. Initial income £1,500; after increase £1,580; total change £80

Correct Answer: A

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Question 25 View Details

A student can allocate her study time between Economics and Mathematics. Spending 1 hour on Economics means she gives up 2 hours of Mathematics. What is the opportunity cost of studying Economics for 3 hours, expressed in hours of Mathematics?

A. 9

B. 3

Correct C. 6

D. 4

Correct Answer: C

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