Unit 1: Introduction to Economic Principles · 2520U10-1
WJEC AS Unit 1, June 2016
All 7 written questions and 15 multiple choice questions from WJEC AS Unit 1 (June 2016), Introduction to Economic Principles. Each question shows its marks and topic, with an examiner insight on 3, and opens the question paper and mark scheme at the right page.
Section A
Q1
The economy below produces only two goods, X and Y. The opportunity cost of increasing the production of X from 3 to 4 units is: Good Y 0 Good X
Show the answer
The answer is E. Open the question paper to read the options.
Q2
In the circular flow of income model, GDP would be most likely to increase if there was:
- Aa fall in savings
- Ba fall in exports
- Ca fall in government spending
- Da fall in investment
- Ea rise in imports
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The answer is A.
TopicAggregate demandInternational trade and exchange ratesNational income and the circular flow
Q3
High rates of personal income tax are thought to have a disincentive effect on work. This refers to the likelihood that the high tax rates will:
- Aencourage illegal tax evasion by individuals
- Bdiscourage consumer spending
- Clead to a reduction in the supply of labour
- Dlead to a reduction in emigration
- Edecrease the demand for labour
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The answer is C.
TopicThe labour marketDemand, supply and elasticityThe economic problem and resource allocation
Q4
The diagram shows a demand and supply curve for a product. D P S Q If the Government were to impose a specific unit tax on the product then the burden of tax would fall:
- Aequally between suppliers and consumers
- Bmainly on consumers
- Cmainly on suppliers
- Dentirely on consumers
- Eentirely on suppliers
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The answer is B.
Q5
The excess demand created by a maximum price imposed below the free market equilibrium will be greatest if:
- Ademand is price inelastic and supply is perfectly price inelastic
- Bdemand and supply are price elastic
- Cdemand and supply are price inelastic
- Ddemand is price elastic and supply is price inelastic
- Edemand is price inelastic and supply is price elastic
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The answer is B.
TopicDemand, supply and elasticityGovernment intervention in markets
Q6
The diagram below shows the movement of the UK exchange rate against the US dollar (from P to P1). Price of £s in $s D S D1 P P1 S D D1 Quantity of £ 0 Q1 Q One reason for this could be that:
- Athe Bank of England has increased interest rates
- Bthere is a significant drop in UK export sales
- Cinflation rates soar in the US
- Dthe UK experiences a housing market boom
- Ebusiness confidence falls in the US
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The answer is B.
TopicMacroeconomic objectives and policyInternational trade and exchange ratesMeasuring economic performance
Q7
Calculate the number of people who have lost their jobs as a direct result of the National Minimum Wage (NMW) being increased from £7.50 to £9. Slab Wage £9 NMW £7.50 Dlab 100 160 210 Labour D 60 E 50
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The answer is D. Open the question paper to read the options.
TopicThe labour market
Q8
Nationwide House Price index. Index (Q1) Quarter 1993=100 Q1 2014 355.3 Q2 2014 372.1 Q3 2014 376.7 Q4 2014 377.0 Q1 2015 376.2 Q2 2015 387.5 It can be concluded from the table above that:
- Ahouse prices rose throughout the period shown
- Bhouse prices rose by approximately 3% in the 2nd quarter of 2015
- Cthe supply of houses must have fallen over the period given
- Dhouse prices rose by 32.2% on average between Q1 2014 and Q2 2015
- Ehouse prices were on average 387.5% higher in Q2 2015 than they were in Q1 1993
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The answer is B.
TopicMeasuring economic performanceDemand, supply and elasticity
Q9
Product X is price elastic in demand and is an inferior good. It also has a close substitute in the form of product Z. Possible elasticities in this case might be: Cross elasticity of Price elasticity of Income elasticity of demand between demand for X demand for X X and Z
- A–0.7 –0.6 –1.1
- B–0.7 +0.6 +1.1
- C–1.4 –0.6 –1.1
- D–1.4 –0.6 +1.1
- E–1.4 +0.6 –1.1
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The answer is D.
Q10
The following diagram shows the market for a merit good. Which area represents the welfare loss which would occur if it was supplied in a free market economy? PRICE H S = MPC = MSC I K N L P MSB J D = MPB Quantity M R
- AKLN
- BLNP
- CIJL
- DHJN
- ELMRP
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The answer is A.
TopicMarket failureThe economic problem and resource allocation
Q11
A sudden large rise in consumer spending in an economy would be most likely to cause: Economic Inflation Trade balance Budget (Fiscal) growth balance
- ARise Fall Worsen Worsen
- BFall Fall Improve Improve
- CRise Rise Worsen Improve
- DRise Rise Improve Worsen
- ERise Rise Worsen Worsen
Show the answer
The answer is C.
TopicInternational trade and exchange ratesMeasuring economic performanceMacroeconomic objectives and policy
Q12
A decrease in the price of a particular good, with all other variables staying constant, causes:
- Aa shift to a different demand curve with a higher quantity demanded
- Ba shift to a different demand curve with a lower quantity demanded
- Ca movement along a given demand curve to a lower quantity demanded
- Da movement along a given demand curve to a higher quantity demanded
- Eno movement along a given demand curve
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The answer is D.
Q13
Which of the following will be most likely to result from an increase in labour productivity in an economy:
- Aa decrease in output and an increase in inflation
- Ban increase in output and a decrease in inflation
- Can increase in exports and an increase in inflation
- Da decrease in exports and an increase in inflation
- Ea decrease in output and a decrease in inflation
Show the answer
The answer is B.
TopicMeasuring economic performanceInternational trade and exchange ratesThe labour market
Q14
Consumption within an economy will be most likely to rise if:
- Aasset prices rise
- Bincome taxes rise
- Cconsumers do not expect pay rises next year
- Dgovernment spending on benefits is cut
- Einterest rates rise
Show the answer
The answer is A.
TopicMacroeconomic objectives and policyAggregate demandGovernment intervention in markets
Q15
The market for potatoes is initially in equilibrium. At the same time as floods hit potato growers, new research is published into the health problems associated with eating crisps and chips. Which of the following is the most likely outcome? Supply Demand Price
- AShifts left Shifts left Impossible to tell
- BShifts left Shifts right Rises
- CShifts right Shifts left Falls
- DShifts left Shifts left Falls
- EShifts right Shifts right Impossible to tell
Show the answer
The answer is A.
Section B
Q16
Illustrate your answer using a production possibility diagram.
Mark splitKnowledge 2Application 2
Q17
Explain, with the use of a diagram, what the effect of imposing an indirect tax would be on the price, quantity sold and tax revenue gained from the sales of luxury yachts.
TopicGovernment intervention in marketsMacroeconomic objectives and policy
Q18
To what extent could the payday lending market be considered to demonstrate market failure before the FCA intervened?
Mark splitKnowledge 1Application 2Analysis 3Evaluation 2
TopicThe financial sectorMarket failure
Examiner insight
- What to cover
- Pick one or two types of market failure that the payday lending stem points to (asymmetric information about the true cost of borrowing, monopoly or market power over vulnerable borrowers, negative externalities on families and the state) and for each one show why it causes a misallocation of resources.
- Evaluation
- Judge how far it really is market failure: borrowers may be making an informed choice, the market serves people banks will not lend to, and regulation itself can fail. Reach a supported view on the extent.
- Watch out
- The most common loss of marks was listing the problems given in the stem without naming the market failure and explaining why it is one. A significant number also wrote no evaluation at all.
- How it went in the exam
- Examiners said this question was designed to test application to an unfamiliar context. Any strand of market failure was accepted, but full marks needed the link back to a misallocation of resources.
Q19(a)
Using the figures above, calculate: (i) New Jersey's GDP per person in 2014; (ii) the percentage of New Jersey's GDP that came from tourism.
Q19(b)
Using a diagram, and with reference to the data, explain why holiday accommodation prices have increased between 2014 and 2015.
Mark splitKnowledge 2Application 2
TopicMeasuring economic performanceMacroeconomic objectives and policyGovernment intervention in markets
Q19(c)
Discuss the likely effects of increasing the rate of VAT in New Jersey on the level of employment in the state.
Mark splitApplication 2Analysis 4Evaluation 2
TopicGovernment intervention in markets
Examiner insight
- What to cover
- Treat a VAT rise as a cost and price effect. Higher prices cut real incomes and spending, firms face lower sales and higher costs, so derived demand for labour in New Jersey falls. Keep every step tied to employment in the state.
- Diagram
- AD and AS: the VAT rise shifts SRAS upward (left), giving a higher price level and lower real output, with the contraction in AD shown as a movement along AD, not a shift.
- Evaluation
- Weigh the size of the rise, how elastic demand is, cross-border shopping into neighbouring states, and what the revenue is spent on. Employment may be little affected if the rise is small or the revenue is recycled.
- Watch out
- Two errors cost marks: drifting onto other macro objectives instead of employment, and shifting AD left rather than shifting AS upward.
- How it went in the exam
- Examiners called this a demanding question that discriminated in three ways: staying on employment, getting the AD or AS shift right, and applying the analysis to New Jersey.
Q20
With reference to the data, and using relevant economic theory, evaluate the view expressed by John Redwood.
Mark splitApplication 2Analysis 2Evaluation 4
TopicGovernment intervention in markets
Examiner insight
- What to cover
- Use the data table in both directions, comparing tax rates by income level and across countries, then apply theory: Laffer curve effects on revenue and incentives, and the progressivity of the system.
- Diagram
- Laffer curve, with the revenue maximising rate marked and the UK rate placed either side of it.
- Evaluation
- Test how far the evidence supports Redwood. Consider whether the tax rate is really past the peak, the size of the incentive and avoidance effects, and the equity objectives that a higher rate serves.
- Watch out
- Full marks were not available without using the data table. Answers that gave pure theory with no reference to the figures were capped.
- How it went in the exam
- Examiners described this as the most open question on the paper, with several valid routes. Laffer curve analysis was by far the most popular.
Question text is quoted from the question papers, © WJEC CBAC Ltd, for students’ private study. Open the official papers and mark schemes from the links on each question. Examiner insights are written with AI assistance and moderated by Finn.