BSc degrees and Diplomas for Graduates in Economics, Management, Finance
and the Social Sciences, the Diplomas in Economics and Social Sciences
Introduction to Economics
Wednesday, 2 May 2018: 14:30 to 17:30
This paper consists of THREE sections:
Section A (40 marks): TEN multiple choice questions, each worth FOUR marks. Candidates
must answer all questions. No explanation is needed.
Section B (30 marks): Candidates must answer ONE of TWO questions on microeconomics.
It is essential that candidates explain their answers.
Section C (30 marks): Candidates must answer ONE of TWO questions on
macroeconomics. It is essential that candidates explain their answers.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
PLEASE TURN OVER
This paper is not to be removed from the Examination Hall
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SECTION A: Multiple choice questions
Please mark the correct answer in the special multiple choice answer sheet
provided using an HB pencil.
Candidates should write their candidate number in the boxes and then mark up their
appropriate letter and numbers in the grid.
The date, candidate first name(s) and surnames should be written in the appropriate
space.
Candidates should use an eraser to remove any unwanted marks as fully as possible.
If an eraser is unavailable, please put a cross (X) through the incorrect mark.
The sheets should not be folded or creased in any way as this will make them
unreadable.
Candidates should not write anywhere else on the sheet other than to mark their
answers as shown on the sheet; any writing or marks in an inappropriate place could
make the sheet unreadable.
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Answer all questions from this section.
Choose one answer for each question: no explanation is needed.
Note that some questions ask you to choose which statement IS correct and other
questions ask you to choose which statement IS NOT correct.
1. Matthew needs to decide whether to go to work today or call in sick. If he goes
to work, he will get his daily wage of £73. It costs £20 to get to work. If he calls in
sick, he will stay at home and invite his friends over to watch a movie, which he
values at £80. The cost of renting a movie and getting snacks is £30. What is the
best thing for Matthew to do given this information?
(a) Go to work as his opportunity cost of working is £30.
(b) Call in sick as his opportunity cost of staying at home is £53.
(c) Go to work as his opportunity cost of working is £50.
(d) Call in sick as his opportunity cost of staying at home is £73.
2. Two firms, A and B, produce the same product and compete by setting prices.
They are the only firms that produce the product. Both firms have a marginal
and average cost of £2. If both firms set the same price, they share the market
equally. If they charge different prices, the firm charging the lower price takes the
entire market. Which one of the following statements is not correct?
(a) The equilibrium price is equal to marginal cost.
(b) In equilibrium both firms set the same price.
(c) In equilibrium the two firms share the market equally.
(d) Because the number of firms in the industry is small firms make profits in
equilibrium.
3. The price of cake has increased. Which of the following statements about the
effects on the demand for oranges is correct?
(a) Demand for oranges increases if cake and oranges are complements.
(b) Demand for oranges decreases if cake and oranges are substitutes.
(c) If you know the income elasticity of demand for oranges, you can predict
whether demand for oranges increases or decreases when the price of cake
increases.
(d) Some health conscious consumers eat oranges regularly but never eat
cake. The increase in the price of cake has no effect on their demand for
oranges.
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4. A tax of £2 per kilo on a good is introduced. Which of the following statements is
correct?
(a) The price paid per kilo of the good always increases by £2 when the tax is
introduced.
(b) The price received by producers for each kilo of the good always falls by £2
when the tax is introduced.
(c) In some circumstances introducing the tax makes the economy more efficient.
(d) The tax revenue is always equal to the amount lost by consumers and
producers when the tax is introduced.
5. Figure 1 shows graphs of total cost and total revenue as a function of quantity
Q. What value of Q maximises profits?
Figure 1: question 5
(a) 1
(b) 2
(c) 3
(d) 4
6. Which of the following statements about the rate of inflation is correct?
(a) The numerical value of the consumer price index is the rate of inflation.
(b) The increase in the numerical value of the consumer price index is the rate of
inflation.
(c) The percentage change in the numerical value of the consumer price index is
the rate of inflation.
(d) If the rate of inflation is positive then the price of every type of good has
increased.
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7. Which of the following statements about the balance of payments is not correct?
(a) The current account measures the difference between payments for goods
manufactured in the UK and exported, and payment for goods
manufactured outside the UK and imported by the UK. It does not include
services.
(b) The capital account is the international flow of transfer payments relating to
capital items.
(c) The financial account records international purchases and sales of financial
assets.
(d) The UK has a floating exchange rate. If all transactions between the UK and
the rest of the world are correctly measured, then the UK balance of payments
is
current account + capital account + financial account = 0.
8. In the simple model of national income determination investment, government
expenditure, and tax revenue, are all taken to be exogenous. A more sophisticated
model recognises that there are automatic stabilisers. Which of the following
statements about the model with automatic stabilisers is correct?
(a) Tax rates must change for automatic stabilisers to work.
(b) In the model with automatic stabilisers tax revenue automatically falls when
national income increases.
(c) In the model with automatic stabilisers government expenditure automatically
increases when national income increases.
(d) The multiplier is lower in the model with automatic stabilisers than it
is in the model without automatic stabilisers.
9. Which of the following statements about banking crises is correct?
(a) In a solvency crisis depositors are anxious about whether a bank will be able
to repay the money they have deposited in the bank. Many depositors try to
withdraw money at the same time. The assets of the bank are greater than its
liabilities.
(b) In a liquidity crisis depositors are anxious about whether a bank will be able
to repay the money they have deposited in the bank. Many depositors try to
withdraw money at the same time. The assets of the bank are greater than its
liabilities.
(c) Central banks can resolve a solvency crisis by lending to the bank in difficulties.
(d) It is easy for central bankers to tell whether a bank has a liquidity crisis or a
solvency crisis.
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10. Which of the following statements about the Phillips curve model with
expectations is correct?
(a) An expected high rate of inflation is associated with high levels of
output and employment.
(b) An unexpected high rate of inflation is associated with high levels of
output and employment.
(c) In the long run governments can increase real output and employment by
using monetary policy to increase the rate of inflation.
(d) In the long run there is nothing governments can do to increase real
output and employment.
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Section B: Microeconomics
Answer one of the two following long questions. It is essential that you explain
your answers.
11. [30 marks]
Figure 2: question 11
(a) Figure 2 shows the short run marginal cost (SMC), short run average total
cost (SATC) and short run average variable cost (SAVC) curves for a firm.
Explain why the cost curves have the following properties:
• SAVC is decreasing if SMC < SAVC and increasing if SMC > SAVC.
• SATC is greater than SAVC for all values of q.
• SATC is decreasing if SMC < SATC and increasing if SMC > SATC.
[6 marks]
(b) Assume that the firm operates in a perfectly competitive industry and in the
short run the firm has to cover its fixed costs even if it produces zero. What is
the relationship between the curves shown in figure 2 and the supply curve of
the firm? What is the lowest price at which the firm will produce?
[6 marks]
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(c) Now assume that the firm operates in a perfectly competitive industry and in
the short run the firm does not have to cover its fixed costs if it produces zero.
What is the relationship between the curves shown in figure 2 and the supply
curve of the firm? What is the lowest price at which the firm will produce?
[6 marks]
(d) Explain the distinction between long and short run costs. Is it possible for the
long run average cost to be larger than the short run average total cost?
[6 marks]
(e) What are economies and diseconomies of scale? For what levels of output
does the firm with cost curves shown in figure 2 exhibit economies and
diseconomies of scale? What causes economies of scale? What causes
diseconomies of scale?
[6 marks]
12. [30 marks]
(a) Use a supply and demand diagram to show the equilibrium in the labour
market. What is the effect of an increase in demand for the output of the
industry?
[6 marks]
(b) Under what circumstances is a firm a price taker in its labour market? What is
the effect of introducing a minimum wage in a perfectly competitive market?
[6 marks]
(c) Under what circumstances is the firm a monopsonist in its labour market,
that is the only employer of a particular type of worker? What is the effect of
introducing a minimum wage in a labour market in which firms are
monopsonists?
[6 marks]
(d) Consider labour supply in a market in which workers are paid by the hour and
can choose how many hours to work for. Use an indifference curve diagram
to discuss whether an increase in the hourly wage increases labour supply.
[12 marks]
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Section C: Macroeconomics
Answer one of the two following long questions. It is essential that you explain
your answers.
13. [30 marks]
(a) After the financial crisis in 2007-2009 many central banks reduced the interest
rate. Is this a change in fiscal policy? Is this a change in monetary policy?
[4 marks]
(b) What is the difference between a closed economy model and an open
economy model?
[4 marks]
(c) Explain the derivation of the IS curve in a closed economy model. Use the
IS-LM model to analyse the effect of a fall in investment, due to a lack of
confidence, on national income if there is no change in fiscal policy and no
change in the interest rate.
[10 marks]
(d) Continue to assume a closed economy. Assume now that the central bank
sets the interest rate, setting a higher interest rate when output is higher.
Discuss, using your IS-LM diagram, how monetary and fiscal policy can be
used to reduce the impact of the fall in investment on national income.
[6 marks]
(e) In June 2016 a referendum in the UK resulted in a decision that the UK
should leave the European Union. Following the referendum there was
concern that firms would reduce their investment in the UK. Monetary policy
in the UK is determined by the Bank of England, which sets the interest rate.
The interest rate was cut from 0.5% to 0.25% in August 2016. How does the
fact that the UK is an open economy with a floating exchange rate change your
analysis of the effects of monetary policy?
[6 marks]
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14. [30 marks]
(a) Why do households hold money? What type of bank deposits are included in
the money supply?
[7 marks]
(b) Contactless cards make it possible to make a payment by holding the card
near a reader, with no requirement to enter a PIN number or provide a
signature. They allow customers to make a transaction more quickly and
conveniently than using cash. However there is a limit on the size of the
transaction and some shops will not accept cards for very small transactions.
Are contactless cards a perfect substitute for cash? What effect is the
introduction of contactless cards likely to have on holdings of cash and bank
deposits? What are the risks of contactless cards? Which sectors of the
economy prefer working with cash rather than electronic payments involving
banks?
[7 marks]
(c) What is a reserve requirement for a bank? What determines the reserve ratio
of a bank? If a bank has a reserve ratio of 3%, starts with zero cash, and
then receives a cash deposit of £3,000 how much can it lend? What is the
effect of the lending on the money supply in the economy?
[7 marks]
(d) What is quantitative easing? Why did the Bank of England adopt a policy of
quantitative easing after the financial crisis of 2007-2009? Was the policy
successful?
[9 marks]
END OF PAPER

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