Economics – Advanced Level Paper 1 50 Multiple Choice Questions Paper 1 is multiple choice. 1 mark each. Time: 1 hour. --- A firm is a price taker when it operates in A. Monopoly B. Oligopoly C. Perfect competition D. Monopolistic competition If PED = -0.8, demand is A. Elastic B. Inelastic C. Unit elastic D. Perfectly elastic The law of diminishing marginal returns operates in the A. Long run only B. Short run only C. Both short and long run D. Neither A firm will shut down in the short run when A. P < ATC B. P < AVC C. MR = MC D. TR = TC Average fixed cost A. Increases with output B. Decreases with output C. Is constant D. Equals marginal cost A Giffen good has a A. Positive income effect larger than substitution effect B. Negative income effect larger than substitution effect C. Zero income effect D. Positive cross elasticity Price discrimination is most feasible under A. Perfect competition B. Monopolistic competition C. Monopoly D. Oligopoly Consumer surplus is represented by the area A. Above supply curve below price B. Below demand curve above price C. Above demand curve below price D. Between MC and AC Internal economies of scale arise from A. External factors B. Division of labour within the firm C. Diminishing returns D. Diseconomies of scale If XED = +2.0, goods are A. Complements B. Substitutes C. Inferior D. Normal A specific tax on a good with inelastic demand will A. Reduce quantity greatly B. Generate more revenue with small welfare loss C. Be paid mostly by producers D. Eliminate deadweight loss Monopolist maximises profit where A. P = MC B. MR = MC C. AR = MC D. TR = TC Street lighting is an example of a A. Private good B. Public good C. Merit good D. Demerit good A movement along the supply curve results from A. Change in technology B. Change in input prices C. Change in price of the good D. Change in number of firms Contestable markets have A. High sunk costs B. Low barriers to entry and exit C. Collusion D. Product differentiation Opportunity cost is the A. Money cost of production B. Value of next best alternative forgone C. Fixed cost D. Sunk cost A price ceiling set below equilibrium causes A. Surplus B. Shortage C. Equilibrium D. No effect Interdependence of firms is a feature of A. Perfect competition B. Monopoly C. Oligopoly D. Monopolistic competition If YED = -1.2, the good is A. Normal luxury B. Normal necessity C. Inferior D. Unit elastic Marginal revenue is negative when demand is A. Elastic B. Inelastic C. Unit elastic D. Perfectly elastic Section B: Macroeconomics GDP at factor cost = GDP at market prices A. Plus indirect taxes minus subsidies B. Minus indirect taxes plus subsidies C. Plus depreciation D. Minus depreciation Demand-pull inflation is caused by A. Rising costs of production B. Excess aggregate demand C. Wage-push D. Supply shock If MPC = 0.75, the multiplier is A. 1.33 B. 4 C. 0.75 D. 3 A rise in interest rates will likely A. Increase investment B. Decrease investment C. Increase consumption D. Depreciate the currency Imports are a A. Injection B. Leakage C. Neutral item D. Transfer payment Stagflation is A. High inflation and low unemployment B. Low inflation and high growth C. High inflation and high unemployment D. Deflation and growth Expansionary fiscal policy involves A. Higher tax, lower spending B. Lower tax, higher spending C. Selling bonds D. Raising interest rates The Phillips curve shows trade-off between A. Inflation and GDP B. Inflation and unemployment C. Interest rate and investment D. Wage and productivity Currency appreciation will likely A. Increase exports B. Reduce imports C. Reduce exports D. Increase inflation Automatic stabilizers include A. Discretionary spending B. Progressive income tax C. Interest rate changes D. Quantitative easing M1 money supply includes A. Time deposits B. Cash and demand deposits C. Bonds D. Shares A leftward shift of SRAS causes A. Price fall, output rise B. Price rise, output fall C. Price and output rise D. Price and output fall A current account deficit can be corrected by A. Capital inflow only B. Currency depreciation C. Increase in imports D. Increase in interest rates Real GDP adjusts nominal GDP for A. Inflation B. Unemployment C. Population D. Exchange rate A budget surplus occurs when A. G > T B. G = T C. G < T D. M > X Crowding out is linked to A. Loose monetary policy B. Expansionary fiscal policy C. Supply-side policy D. Exchange rate policy Supply-side policies aim to shift A. AD right B. SRAS left C. LRAS right D. LRAS left If $1 moves from ₵6 to ₵8, the cedi has A. Appreciated B. Depreciated C. Revalued D. Devalued The Laffer curve shows relationship between A. Inflation and unemployment B. Tax rate and tax revenue C. Wage and productivity D. Price and quantity Quantitative easing increases money supply by A. Selling bonds B. Buying bonds C. Raising interest rates D. Cutting spending Section C: International & Development* Comparative advantage is based on A. Absolute cost differences B. Opportunity cost differences C. Exchange rates D. Tariffs Protectionism is used to A. Increase consumer choice B. Protect infant industries C. Reduce employment D. Lower prices Terms of trade improve when A. Export prices fall faster than import prices B. Import prices rise faster than export prices C. Export prices rise relative to import prices D. Exchange rate falls A key problem of LDCs is A. High capital mobility B. Over-reliance on primary exports C. Low population growth D. High savings rate FDI differs from portfolio investment by involving A. Short-term capital B. Management control C. Speculation D. No risk WTO’s main role is to A. Provide loans B. Reduce trade barriers C. Control exchange rates D. Distribute aid A common feature of LDCs is A. High per capita income B. High dependency ratio C. Low birth rate D. Advanced technology Devaluation is used to correct A. Budget deficit B. Balance of payments deficit C. Inflation D. Unemployment HDI measures development using A. GDP only B. GDP, life expectancy, education C. Inflation and unemployment D. Trade balance A customs union differs from a free trade area by having A. No internal tariffs B. Common external tariff C. Free movement of labour D. Single currency

Here are the solutions for the multiple-choice questions:

1. C. Perfect competition. In perfect competition, firms are too small to influence market price.
2. B. Inelastic. When the absolute value of Price Elasticity of Demand (PED) is less than 1, demand is inelastic.
3. B. Short run only. The law of diminishing marginal returns applies when at least one factor of production is fixed, which is the definition of the short run.
4. B. P < AVC. A firm will shut down in the short run if the price falls below its average variable cost, as it cannot even cover its variable costs of production.
5. B. Decreases with output. Average fixed cost (AFC) is total fixed cost divided by output. As output increases, AFC decreases.
6. B. Negative income effect larger than substitution effect. For a Giffen good, the negative income effect outweighs the positive substitution effect, leading to an upward-sloping demand curve.
7. C. Monopoly. Price discrimination requires market power, which is highest in a monopoly.
8. B. Below demand curve above price. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, represented by the area under the demand curve and above the market price.
9. B. Division of labour within the firm. Internal economies of scale arise from factors within the firm as it increases its scale of production.
10. B. Substitutes. A positive cross-elasticity of demand (XED) indicates that two goods are substitutes.
11. B. Generate more revenue with small welfare loss. With inelastic demand, consumers are not very responsive to price changes, so a specific tax will lead to a smaller reduction in quantity and thus more tax revenue with a relatively smaller deadweight loss.
12. B. MR = MC. A monopolist maximizes profit where marginal revenue equals marginal cost.
13. B. Public good. Street lighting is non-rivalrous and non-excludable.
14. C. Change in price of the good. A movement along the supply curve is caused by a change in the price of the good itself.
15. B. Low barriers to entry and exit. Contestable markets are characterized by the threat of entry and exit, which keeps incumbent firms' prices close to competitive levels.
16. B. Value of next best alternative forgone. Opportunity cost is the cost of choosing one alternative over another.
17. B. Shortage. A price ceiling set below the equilibrium price creates excess demand, leading to a shortage.
18. C. Oligopoly. Interdependence of firms, where the actions of one firm significantly affect others, is a key characteristic of an oligopoly.
19. C. Inferior. A negative income elasticity of demand (YED) indicates an inferior good.
20. B. Inelastic. Marginal revenue is negative when demand is inelastic, meaning that a price decrease leads to a proportionally smaller increase in quantity demanded, causing total revenue to fall.
21. B. Minus indirect taxes plus subsidies. GDP at factor cost removes the effect of indirect taxes and adds back subsidies from GDP at market prices.
22. B. Excess aggregate demand. Demand-pull inflation occurs when aggregate demand grows faster than aggregate supply.
23. B. 4. The multiplier is calculated as $\frac{1}{1 - \text{MPC}}$. $$\frac{1}{1 - 0.75} = \frac{1}{0.25} = 4$$
24. B. Decrease investment. Higher interest rates increase the cost of borrowing, making investment less attractive.
25. B. Leakage. Imports represent money flowing out of the circular flow of income.
26. C. High inflation and high unemployment. Stagflation is a period characterized by simultaneous high inflation and high unemployment.
27. B. Lower tax, higher spending. Expansionary fiscal policy aims to stimulate the economy by increasing government spending or decreasing taxes.
28. B. Inflation and unemployment. The Phillips curve illustrates the inverse relationship between the rate of inflation and the rate of unemployment.
29. C. Reduce exports. Currency appreciation makes a country's exports more expensive for foreign buyers, thus reducing exports.
30. B. Progressive income tax. Automatic stabilizers are government policies that automatically adjust to stabilize the economy, such as progressive income tax and unemployment benefits.
31. B. Cash and demand deposits. M1 is the narrowest measure of money supply, including physical currency and checking account balances.
32. B. Price rise, output fall. A leftward shift of the Short-Run Aggregate Supply (SRAS) curve indicates a decrease in supply, leading to higher prices and lower output.
33. B. Currency depreciation. Currency depreciation makes exports cheaper and imports more expensive, which can help to reduce a current account deficit.
34. A. Inflation. Real GDP adjusts nominal GDP for changes in the price level (inflation) to reflect actual output changes.
35. C. G < T. A budget surplus occurs when government revenue (T) is greater than government spending (G).
36. B. Expansionary fiscal policy. Crowding out refers to the reduction in private investment that can result from increased government borrowing to finance expansionary fiscal policy.
37. C. LRAS right. Supply-side policies aim to increase the productive capacity of the economy, shifting the Long-Run Aggregate Supply (LRAS) curve to the right.
38. B. Depreciated. If $1 moves from ₵6 to ₵8, it means more cedis are needed to buy one dollar, so the cedi has depreciated against the dollar.
39. B. Tax rate and tax revenue. The Laffer curve illustrates the theoretical relationship between tax rates and the amount of tax revenue collected by governments.
40. B. Buying bonds. Quantitative easing is a monetary policy where a central bank buys government bonds or other financial assets to inject money into the economy and lower interest rates.
41. B. Opportunity cost differences. Comparative advantage is based on a country's ability to produce a good at a lower opportunity cost than another country.
42. B. Protect infant industries. Protectionism, such as tariffs or quotas, is often used to shield nascent domestic industries from foreign competition.
43. C. Export prices rise relative to import prices. Terms of trade improve when a country's export prices increase relative to its import prices, meaning it can buy more imports for a given amount of exports.
44. B. Over-reliance on primary exports. Many Less Developed Countries (LDCs) face challenges due to their economies being heavily dependent on the export of raw materials, which are subject to volatile prices.
45. B. Management control. Foreign Direct Investment (FDI) involves acquiring a lasting management interest in an enterprise in a foreign country, unlike portfolio investment which is purely financial.
46. B. Reduce trade barriers. The World Trade Organization (WTO) is an international organization that deals with the rules of trade between nations, primarily aiming to reduce barriers to international trade.
47. B. High dependency ratio. LDCs often have a high dependency ratio, meaning a large proportion of the population is non-working (children and elderly) compared to the working-age population.
48. B. Balance of payments deficit. Devaluation of a currency makes exports cheaper and imports more expensive, which can help to correct a balance of payments deficit.
49. B. GDP, life expectancy, education. The Human Development Index (HDI) is a composite statistic of life expectancy, education (mean and expected years of schooling), and per capita income (GNI per capita).
50. B. Common external tariff. A customs union is a free trade area with a common external tariff, meaning all member countries apply the same tariffs to imports from non-member countries.