Practice gce model questions vol1 economics 2020 Past Questions

Question 1 View Details

The economy's current real GDP is $2$ trillion dollars and the population is growing at $2\%$ per year. The government wishes to raise real per‑capita income by $5\%$ in five years, using only additional investment. The fiscal multiplier for investment is $2.5$. Assuming the population continues to grow at the same rate and that the multiplier remains constant, what constant additional amount of annual investment (in billions of dollars) must the government undertake each year to meet the target?

A. 30

Correct B. 25.5

C. 22.5

D. 20

Correct Answer: B

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Question 2 View Details

A small open economy faces a world price of $\$40$ for a tradable good. Domestic demand is $P = 120 - Q$ and domestic supply is $P = 20 + 0.5Q$. The government imposes a specific tariff of $\$10$ per unit on imports. Calculate the dead‑weight loss (in dollars) resulting from the tariff.

Correct A. 150

B. 100

C. 200

D. 125

Correct Answer: A

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Question 3 View Details

In a market for a product, the inverse demand curve is $P = 200 - 4Q$ and the total cost function is $TC = 20Q + 0.5Q^{2}$.\n(a) Determine the monopoly output, price and profit.\n(b) Compute the Lerner index $(P - MC)/P$ for the monopoly and compare it with the price that would prevail under perfect competition (where $P = MC$).

A. 0.500

Correct B. 0.667

C. 0.750

D. 0.600

Correct Answer: B

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Question 4 View Details

A country's potential real GDP is $500$ billion dollars. The actual real GDP is currently $470$ billion dollars. Okun's law states that a $1\%$ fall in real GDP relative to potential raises the unemployment rate by $0.5$ percentage points. The natural rate of unemployment is $5\%$. What is the current unemployment rate and what proportion of it is cyclical unemployment?

A. 9% (cyclical component 4%, i.e., 44.4% of total)

Correct B. 8% (cyclical component 3%, i.e., 37.5% of total)

C. 7% (cyclical component 2%, i.e., 28.6% of total)

D. 10% (cyclical component 5%, i.e., 50% of total)

Correct Answer: B

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Question 5 View Details

A transport infrastructure project requires an initial outlay of $200$ million dollars. It will generate the following net cash inflows (in millions of dollars): Year 1: 30, Year 2: 35, Year 3: 40, Year 4: 45, Year 5: 50, Years 6‑10: 55 each year. Using linear interpolation between discount rates of $12\%$ and $20\%$, estimate the internal rate of return (IRR) at which the net present value (NPV) of the project is zero. Give your answer to one decimal place.

A. 15.3

B. 13.6

Correct C. 17.8

D. 19.1

Correct Answer: C

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Question 6 View Details

The price of a good falls from £10 to £8 and the quantity demanded rises from 200 to 260 units. Assuming the demand curve is linear, calculate the price elasticity of demand at the midpoint using the midpoint formula. Give your answer to two decimal places.

A. -1.35

B. -0.80

Correct C. -1.17

D. -0.95

Correct Answer: C

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Question 7 View Details

The market for a good is described by the demand equation $ Q_D = 120 - 4P $ and the supply equation $ Q_S = -20 + 3P $, where $P$ is the price in £ and $Q$ is quantity. The government introduces a specific tax of £2 per unit on the good, payable by producers. Determine (a) the price paid by consumers after the tax, (b) the price received by producers, (c) the equilibrium quantity after the tax, and (d) the dead‑weight loss caused by the tax. Express monetary values to two decimal places.

A. £20.00, £18.00, 38.00, £2.80

B. £22.00, £20.00, 34.00, £4.00

C. £21.10, £19.10, 35.00, £3.80

Correct D. £20.86, £18.86, 36.57, £3.43

Correct Answer: D

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Question 8 View Details

A firm's total cost function (in £ thousand) for output $Q$ (in thousand units) is $ TC = 0.02Q^{3} - 0.3Q^{2} + 15Q + 200 $. The market price of the product is constant at £30 per unit. The government imposes a per‑unit environmental tax of £2. Find the output level that maximises profit after the tax and compute the maximum profit (in £ thousand). Give the output to two decimal places and profit to two decimal places.

Correct A. 20.55, 20.27

B. 19.80, 18.90

C. 20.00, 19.50

D. 21.10, 22.05

Correct Answer: A

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Question 9 View Details

A firm produces two goods, A and B, using a common fixed cost of £500,000. The marginal cost of A is $ MC_A = 2 + 0.01Q_A $ (£ per unit) and the marginal cost of B is $ MC_B = 3 + 0.02Q_B $ (£ per unit). The market price of A is £5 per unit and that of B is £7 per unit. The government offers a per‑unit subsidy of £1 on good A only. Assuming the firm can choose any non‑negative output levels for each good, determine the profit‑maximising quantities $Q_A$ and $Q_B$ and calculate the maximum total profit (in £). Show all steps and give the final profit to the nearest pound.

A. 350, 250, 650000

B. 450, 150, 720000

Correct C. 400, 200, 700000

D. 500, 300, 680000

Correct Answer: C

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Question 10 View Details

A consumer price index (CPI) is constructed using two goods. In the base year (Year 1) the price of Good X is £10 and that of Good Y is £20, with expenditure weights of 60 % and 40 % respectively. In Year 2 the prices become £12 for X and £22 for Y; in Year 3 they become £13 for X and £24 for Y. (a) Compute the Laspeyres CPI for Year 2 and Year 3 (base year = Year 1). (b) Calculate the average annual inflation rate over the two‑year period from Year 1 to Year 3 using the geometric mean. (c) If a nominal interest rate of 8 % per annum is offered in Year 3, estimate the real interest rate using the Fisher approximation (real ≈ nominal - inflation). Give percentages to two decimal places.

A. CPI Year2 = 120, CPI Year3 = 128, average inflation = 12.00%, real interest = -0.40%

B. CPI Year2 = 115, CPI Year3 = 124, average inflation = 11.50%, real interest = -0.30%

C. CPI Year2 = 118, CPI Year3 = 130, average inflation = 13.00%, real interest = -0.20%

Correct D. CPI Year2 = 116, CPI Year3 = 126, average inflation = 12.25%, real interest = -0.62%

Correct Answer: D

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Question 11 View Details

A farmer can produce either 40 tonnes of wheat or 20 tonnes of corn using all his resources. If he decides to produce 10 tonnes of wheat, how many tonnes of corn must he give up?

A. 10 tonnes of corn

B. 15 tonnes of corn

C. 2.5 tonnes of corn

Correct D. 5 tonnes of corn

Correct Answer: D

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Question 12 View Details

The Consumer Price Index (CPI) was 120 last year and is 132 this year. What is the annual inflation rate expressed as a percentage?

A. 15%

Correct B. 10%

C. 8%

D. 12%

Correct Answer: B

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Question 13 View Details

Country Z had a population of 5,000,000 at the start of 2020. For the first two years (2020‑2021) the natural increase rate was 2 % per year and net migration was +30,000 people each year. For the next three years (2022‑2024) the natural increase rate fell to 1.5 % per year and net migration became -20,000 people each year. Assuming these rates apply each year, what is the projected population at the end of 2024?

Correct A. 5,442,083

B. 5,425,000

C. 5,398,210

D. 5,467,500

Correct Answer: A

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Question 14 View Details

A government infrastructure project requires an initial outlay of £200 million today. It is expected to generate real benefits of £80 million at the end of year 1, £90 million at the end of year 2 and £100 million at the end of year 3. The nominal discount rate is 8 % per annum and the expected inflation rate is 3 % per annum. Using the real discount rate, calculate the net present value (NPV) of the project and state whether it should be undertaken.

A. NPV ≈ £52.1 million (positive, so the project should be undertaken)

B. NPV ≈ -£5.3 million (negative, so the project should not be undertaken)

Correct C. NPV ≈ £44.9 million (positive, so the project should be undertaken)

D. NPV ≈ £38.2 million (positive, so the project should be undertaken)

Correct Answer: C

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Question 15 View Details

The market demand for a product is given by $ Q = 120 - 4P $, where $Q$ is quantity demanded and $P$ is price (in dollars). At the current price of £10, calculate the price elasticity of demand using the point‑elasticity formula. Then, if the price is increased to £12, predict whether total revenue will increase or decrease, and compute the new total revenue.

A. Elasticity = -1.2 (elastic); total revenue rises to £864

B. Elasticity = -0.8 (inelastic); total revenue falls to £720

Correct C. Elasticity = -0.5 (inelastic); total revenue rises to £864

D. Elasticity = -0.5 (inelastic); total revenue falls to £720

Correct Answer: C

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Question 16 View Details

A firm in monopolistic competition has total cost $TC = 0.5Q^{2}+20Q+100$ and faces the demand curve $P = 120-0.5Q$. Determine the profit the firm earns at the profit‑maximising output.

A. 3000

B. 2600

C. 2000

Correct D. 2400

Correct Answer: D

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Question 17 View Details

Country X initially exports wheat at £2 per kg and imports oil at £4 per litre. After a tariff on oil is removed, the world price of oil falls to £3 per litre while the wheat price rises to £2.20 per kg. Calculate the percentage change in the terms of trade (export price index divided by import price index).

A. 61.0%

Correct B. 46.7%

C. 38.5%

D. 52.3%

Correct Answer: B

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Question 18 View Details

A small open economy has domestic demand $Q_D = 200-2P$ and domestic supply $Q_S = 20+P$. The world price of the good is £10. The government imposes an import quota that limits imports to 40 units and sells import licences at auction, capturing the quota rent.\n(a) Find the domestic price after the quota is imposed.\n(b) Calculate the total quota rent captured by the government.\n(c) Determine the changes in consumer surplus, producer surplus and government revenue.\n(d) What is the net welfare change for the economy?

A. £2200 (approx) welfare loss

B. £1800 (approx) welfare loss

Correct C. £2017 (approx) welfare loss

D. £2500 (approx) welfare loss

Correct Answer: C

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Question 19 View Details

Using the income approach, calculate the Gross Domestic Product (GDP) at market prices for an economy with the following annual (in billions) data: wages £300, rent £50, interest £40, profits £110, indirect taxes £70, subsidies £20, depreciation £60, and net factor income from abroad £‑15.

Correct A. 610

B. 630

C. 580

D. 650

Correct Answer: A

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Question 20 View Details

A firm faces the demand curve $P = 200 - 4Q$ and has total cost $TC = 5Q^{2} + 20Q + 100$.\n(i) Find the output level that maximises profit.\n(ii) Calculate the maximum profit.\n(iii) Should the firm produce in the short run? Justify by comparing price with average variable cost.

A. Output = 8 units; Maximum profit = 640; Produce (price > AVC)

B. Output = 12 units; Maximum profit = 720; Produce (price > AVC)

Correct C. Output = 10 units; Maximum profit = 800; Produce (price > AVC)

D. Output = 10 units; Maximum profit = 700; Shut down (price < AVC)

Correct Answer: C

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Question 21 View Details

Given the demand equation $Q_d = 120 - 2P$ and the supply equation $Q_s = 20 + 3P$, where $P$ is the price per unit and $Q$ is quantity, determine the equilibrium price and equilibrium quantity.

A. Equilibrium price = £20, equilibrium quantity = 85 units

Correct B. Equilibrium price = £20, equilibrium quantity = 80 units

C. Equilibrium price = £25, equilibrium quantity = 70 units

D. Equilibrium price = £15, equilibrium quantity = 90 units

Correct Answer: B

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Question 22 View Details

A market has demand $Q_d = 500 - 5P_c$ and supply $Q_s = 100 + 5P_s$, where $P_c$ is the price paid by consumers and $P_s$ is the price received by producers. The government imposes a specific tax of £2 per unit on producers. Calculate (a) the price paid by consumers, (b) the price received by producers, (c) total tax revenue, and (d) the dead‑weight loss resulting from the tax.

A. Consumer price £41, producer price £39, tax revenue £600, dead‑weight loss £0

B. Consumer price £40, producer price £38, tax revenue £570, dead‑weight loss £10

Correct C. Consumer price £41, producer price £39, tax revenue £590, dead‑weight loss £5

D. Consumer price £42, producer price £40, tax revenue £620, dead‑weight loss £8

Correct Answer: C

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Question 23 View Details

Using the data below, compute (a) GDP at market prices, (b) GDP at factor cost, (c) Gross National Income (GNI), and (d) Net National Product (NNP). - Consumption $C = £500$ bn - Investment $I = £150$ bn - Government spending $G = £300$ bn - Exports $X = £200$ bn - Imports $M = £250$ bn - Indirect taxes $T = £80$ bn - Subsidies $S = £20$ bn - Depreciation $D = £70$ bn - Factor income earned by residents from abroad $F_{in} = £30$ bn - Factor income paid to non‑residents $F_{out} = £45$ bn

A. GDP (market) £950 bn, GDP (factor) £890 bn, GNI £845 bn, NNP £775 bn

B. GDP (market) £880 bn, GDP (factor) £820 bn, GNI £805 bn, NNP £735 bn

C. GDP (market) £900 bn, GDP (factor) £860 bn, GNI £830 bn, NNP £760 bn

Correct D. GDP (market) £900 bn, GDP (factor) £840 bn, GNI £825 bn, NNP £755 bn

Correct Answer: D

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Question 24 View Details

In an economy the public holds currency equal to 30 % of bank deposits (currency‑deposit ratio $c = 0.3$) and banks keep reserves equal to 10 % of deposits (reserve‑deposit ratio $r = 0.1$). The central bank purchases government securities worth £50 bn, paying by increasing bank reserves. Assuming the ratios $c$ and $r$ remain unchanged, calculate the resulting change in the money supply.

A. £150 bn increase

Correct B. £162.5 bn increase

C. £162.5 bn decrease

D. £175 bn increase

Correct Answer: B

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Question 25 View Details

A farmer's total cost function for wheat production is $TC = 0.5Q^{2} + 20Q + 100$ (costs in £ million, $Q$ in tonnes). The market price of wheat is £30 per tonne. The government offers a per‑unit subsidy $s$ that the farmer can claim only if output exceeds 40 tonnes. Determine the minimum subsidy per tonne that will induce the farmer to produce at least 50 tonnes, and compute the farmer's profit at that output level.

A. Minimum subsidy £35 per tonne; profit £1,050 million

Correct B. Minimum subsidy £40 per tonne; profit £1,150 million

C. Minimum subsidy £30 per tonne; profit £900 million

D. Minimum subsidy £45 per tonne; profit £1,250 million

Correct Answer: B

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