Section A
(1 mark per question)
1. What is the most likely effect of an increase in income?
a. It shifts the budget constraint inward
b. An increase in the consumer’s utility
c. The consumer is going to consume more of all goods
d. It shifts indifference curves outwards
2. What is least likely to occur in a competitive market in the long run?
a. Firms have zero economic profit
b. Firms have positive economic profit
c. Firms operate at efficient scale
d. Market supply curve is a horizontal line
3. What of the following events is most likely to increase the number of Deliveroo Riders in Newcastle (other things equal)?
a. An increase in population in Newcastle
b. People become more used to eating in restaurants
c. Uber Eats increase its workers’ wages
d. Traffic becomes congested
4. Which of the following events is most likely to increase the demand for airline tickets from Newcastle to London (other things equal)?
a. A price drop in train tickets from Newcastle to London
b. Flooding affecting the operation of trains
c. A price increases in airline tickets from Newcastle to London
d. An increasing concern over CO2 emissions from aviation
5. Which of the following is least likely for a monopoly
a. Its marginal revenue curve is higher its demand curve
b. Its marginal revenue curve is the same as its demand curve
c. Its marginal revenue is lower than its demand curve
d. It operates at a level that marginal revenue is positive
6. Suppose a consumer is willing to pay up to 500 pounds for a trip and she takes an offer of 400 pounds from a travel agency. What is the consumer surplus for the transaction?
a. 100 pounds
b. Minus 100 pounds
c. Zero pounds
d. Not enough information to calculate
7. Suppose a price ceiling (binding) is imposed in a market currently in equilibrium? What would NOT happen
a. An increase in consumer surplus
b. A reduction in producer surplus
c. An increase in both consumer surplus and producer surplus
d. An increase in consumer surplus and a reduction in producer surplus
8. What is the profit maximization condition in all market structures?
a. Price equals to Marginal Cost
b. Price equals to Average Total Cost
c. Marginal Revenue equals to Marginal Cost
d. Marginal Revenue equals to Average Total Cost
9. Which of the following statements is NOT the reason that firms do not cooperate in a duopoly? a. Cartels are usually illegal
b. The uncooperative outcome is a Nash Equilibrium
c. Firms have an incentive to deviate from the cooperative outcome
d. It is less profitable when firms cooperate
10. Which of the following policy is most likely to increase the consumption of a good
a. A tax
b. A price floor
c. A price ceiling
d. A subsidy
11. A car costs $30,000 in the United States. The exchange rate is $1 = £0.50. The same car costs £12,000 in the United Kingdom. What is the purchasing power parity of the pound?
a. $5
b. $2.5
c. $1.25
d. $0.80
12. According to the interest rate effect, an increase in the price level causes people to _____ their money holdings, which _____ interest rates and _____ investment spending.
a. decrease; decreases; increases
b. increase; decreases; increases
c. decrease; increases; increases
d. increase; increases; decreases
13. Suppose that in 2020 money supply in the UK was £700 billion, nominal GDP was £15 trillion and real GDP is £10 trillion. According to the classical theory of inflation the price level was _____ and the velocity of money was _____.
a. 0.7; 9.5
b. 1.5; 21.4
c. 1.5; 14.3
d. 1.5; 32.1
14. Given the predictions of the Solow model, assuming a closed economy, what is the opportunity cost of investing in capital?
a. The diminishing marginal product of factor inputs
b. The increase in the saving rate
c. A higher cost of labour input
d. It is the loss of consumption that results from redirecting resources towards investment
15.Assume a hypothetical economy where consumers buy only potatoes, meat and fish. If we choose 2019 as the base year, the inflation rate for 2020 is:
a. 65%
b. 100%
c. 825%
d. 165%
16. If the interest rate is 8% households and firms will want to borrow:
a. £3 billion
b. £2 billion
c. £4 billion
d. £1 billion
17.Assume that an economy produces only Coke and pizzas. Knowing that 2018 is the base year, GDP deflator for 2020 is:
a. 140
b. 110
c. £3,750
d. £5,250
18. Frictional unemployment:
a. Occurs only during expansions
b. Is due to time workers spend in job search
c. Is the difference between cyclical unemployment and the natural rate of unemployment
d. Is evitable
19. Expansionary monetary policy _____ the money supply, _____ interest rates, and _____ consumption and investment spending.
a. increases; increases; increases
b. decreases; decreases; decreases
c. increases; decreases; increases
d. decreases; increases; decreases
20. Assume an economy with the nominal interest rate equal 2.0% and the inflation rate equal to 0.5%. If the tax rate is 10%, the before-tax real interest rate and aftertax real interest rate are:
a. 1.5% and 0.8%
b. 2.0% and 1.3%
c. 1.5% and 1.3%
d. 1.8% and 2%
Section B
Microeconomics Choose Two questions to answer. Up to 20 marks available per question.
21. Consider a consumer choosing bundles of two goods. Good A is priced at 2 pound per item. Good B is priced in the following way. The first five items of good B cost 2 pounds each. However, any subsequent items of B are 1 pound each. Draw the budget line.
a. [5 marks] Suppose that the consumer’s income is 20 pounds and the consumer has chosen the bundle of 2 units of good A and 11 units of good B. Draw the budget line and indicate the chosen bundle.
b. [15 marks] Following part a, now suppose the consumer’s incomes has been increased from 20 pounds to 40 pounds. In the same diagram as in a, draw the new budget line and indicate the likely positions of the new chosen bundle. Discuss the implications of the relative positions of the two bundles on the properties of the two goods. (Hint: you need to consider the possibility that a good can be an inferior good.)
22. A country decides to ban advertising of tobacco in any form. Discuss the effect of this public policy.
23. Consider the following production game in a duopoly.
a. [10 marks] Explain what the Nash equilibrium is.
b. [10 marks] Explain how the firms would make decisions if they will play the same game repeatedly for many times.
24. Suppose a company is about to launch a new hair dryer. It is the only seller of this product. The expected demand schedule and the company’s marginal cost is as follows.
a. [5 marks] Draw the demand curve, marginal cost curve and marginal revenue curve. Then indicate what the socially optimal output quantity would be in the diagram.
b. [5 marks] Explain what price the company should charge to maximize its profit.
c. [10 marks] Suppose the government imposes a specific tax of 2 thousand dollars to the profit maximizing seller. In the same diagram as in a, indicate the effect of this tax.
Section C
Macroeconomics Choose two questions to answer. Up to 20 marks available per question.
25. Assume an imaginary country called Averna that trades freely with other economies in the world. The government of Averna experiences an increase in tax revenues that induces a budget surplus. According to the macroeconomic model of the open economy, what are the effects in the market for loanable funds, in the capital market and in the market for foreign currency exchange? Use a diagrammatic analysis to provide your answer.
26. In response to the Covid19 crisis, many governments around the world have decided to use expansionary fiscal policy. What are the effects of such policy? In particular, describe the concepts of “multiplier effect” and “crowding-out effect” of fiscal policy on aggregate demand. In your answer use the diagrammatic analysis and provide a real example of expansionary fiscal policy.
27. Assume an imaginary country called Narnia. Firms in this country heavily rely natural gas as a raw material to produce the final output. Assume a sudden fall in the price of natural gas. This shock is an event that directly affects firms’ costs of production and thus the price that they charge. Describe the effects of this shock on the aggregate supply curve and on the Phillips curve of the economy of Narnia. Use a diagrammatic analysis to provide your answer.
28. Assume an imaginary country called Avalon. The government of Avalon decides to reduce its expenditure in order to improve the public finances of the country. According to the predictions of the IS-LM model, what should the central bank of Avalon do in order to keep the nominal interest rate constant? What monetary tool can the central bank of Avalon use to achieve its target? Use a diagrammatic analysis to provide your answer.
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