CIE AS Level Economics 9708-Questions
and Answers Graded A+
Choice - ANSWER-The need to make decision about the possible alternative uses of scarce
resources due to scarcity
Issue of Market Transition - ANSWER-- Inflation
- Industrial unrest
- Fall in output
- Unemployment
- Balance of payments' deficit
- Reduction in welfare services
Production Possibility Curve - ANSWER-a curve measuring the maximum combination of outputs
that can be obtained from a given number of inputs in an economy in a period of time
Factor Mobility - ANSWER-the ease by which factors of production can be moved around
Economic Growth - ANSWER-Is an expansion in the productive capacity in an economy
Money - ANSWER-Anything which is universally acceptable as a means of payment for goods and
services
Functions of Money - ANSWER-- Medium of exchange
- Measure of value
- Standard for deferred payment
- Store of value
Characteristic of Money - ANSWER-- Acceptability
- Divisibility
- Portability
- Durability
- Scarcity
- Uniformity
Liquidity - ANSWER-Refers to the extent and ease of converting a non-cash asset into cash
Near Money - ANSWER-non-cash assets that can be quickly turned into cash
Rivalry and Excludability - ANSWER-Rivalry: refers to extent to which consumption limits availability
Excludability: refers to extent to which free-riders can be prohibited from consumption
Free-rider Problem - ANSWER-The problem of someone who consume a product without an
incentive to pay for it
Merit / Demerit Goods - ANSWER-Is a product which has positive/negative externalities, but would
be under/over consumed and produced in a market economy as a result of information failure
,Information Failure (Imperfect Information) - ANSWER-Is a situation in which producers and
consumers lack information needed to make rational decisions, causing inefficiency
Paternalism - ANSWER-Is a situation where society knows beast and has some right to make a
value judgement
Price Elasticity of Demand (PED) - ANSWER-% change in quantity demanded / % change in price
Price Elasticity of Supply (PES) - ANSWER-% change in quantity supplied / % change in price
Income Elasticity of Demand (YED) - ANSWER-% change in quantity demanded / % change in
income
Cross Elasticity of Demand (XED) - ANSWER-% change in quantity demanded of product X / %
change in price of product Y
Functions of the price mechanism - ANSWER-Rationing: Scarce resources are divided among their
competing uses according to what is demanded
Signaling: The price of a product reflects the market conditions and signals if producers should
increase or decrease production
Incentive: Prices act as an incentive for both consumers and producers, low prices encourage
consumers to purchase more and suppliers will leave the market due to low profit margins forcing
the price back up, whilst high prices encourage producers to enter the market or produce more,
increasing supply and pushing the price back down.
Buffer Stock - ANSWER-An amount of commodity held to limit price fluctuation
Ad valorem Tax - ANSWER-Tax on consumption, is paid as percentage of value of product
Specific Tax - ANSWER-Tax paid in fixed amount
Average Rate of Tax - ANSWER-The average percentage of total income that is paid in taxes
Marginal Rate - ANSWER-The proportional of additional income that is taken in income tax
Transfer Payment - ANSWER-A payment made or income received in which no goods or services
are being paid for, such as a benefit payment or subsidy.
Means-tested and Universal Benefit - ANSWER-Means-tested: is paid to units whose income is
below a level
Universal benefit: is paid to units without income reference
Poverty-trap - ANSWER-Is a situation in which an individuals has work-disincentive, as additional
income will be taken away as taxes and lost benefits
Nationalization - Advantage and Disadvantage of Nationalization - ANSWER-Takeover of property or
resources by the government
Advantage:
- Economies of scale
,- Avoids wasteful duplication
- CBA (Cost-benefit Analysis) is involved
- Private monopoly prevented
Disadvantage:
- Inefficient
- Non competitive
- Political mileage
- SOE (State-owned Enterprise) monopoly
Privatization - Advantage and Disadvantage of Privatization - ANSWER-The transfer of a business,
industry, or service from public (government own) to private ownership and control
Advantage:
- Economic efficiency
- Enterprise encourage
- Lower price
- Government revenue
- Growth by investment
Disadvantage:
- Private monopoly
- Wasteful duplication
- Unemployment
- Non regular funds
- Regulations needed
Government Failure - ANSWER-Occurs when the government intervention economic performance
rather than increasing, thus failing to correct market failure, due to:
- Imperfect information
- Policy conflicts
- Political mileage
- Corruption
Aggregate Demand - ANSWER-Is the total spending on an economy's goods and services, at a
given price level in a given time period. It consists of:
- Consumption (C)
- Investment (I)
- Government Expenditure (G)
- Net Exports (X-M)
AD= C + I +G + (X-M)
Inflation and Deflation - ANSWER-Is a sustainable increase/fall in general price levels in an
economy over a given time period, causing fall/rise in purchasing power of a currency
Menu Costs and Shoe-leather Costs - ANSWER-Menu Costs: are incurred by firms having to
change prices
Shoe-leather Costs: are incurred by firms moving money for high-interest
Cost-push Inflation - ANSWER-Is caused by increase in costs of production decreasing aggregate
supply, e.g.
, - Wages rising more than productivity
- Raw materials costs rising (especially imported ones)
- Increase in indirect/corporate taxes
- Rise in profit margins
Demand-pull Inflation - ANSWER-Is caused by increase in aggregate demand unmatched by
equivalent rise in aggregate supply, e.g.
- Consumer boom
- Money supply growing faster than output (monetarist)
- Growing budget deficit
- Increase in net exports
Balance of Payment - ANSWER-Is a record of a country's economic transactions with the rest of the
world over a year. It consists of:
Current Account:
- Visible trade in goods
- Invisible trade in services
- Income, e.g. profits, interest
- Current transfer (no exchange involved)
Financial Account
- Direct investment
- Portfolio investment
- Reserve assets
- Other investment
Capital Account
- Capital transfer
- Nonfinancial assets
Factors Determining Exchange Rate - ANSWER-
Closed economy - ANSWER-economy that does not trade with other economics, under autarky. Two
sector: without government. Three sector: with government
Open economy - ANSWER-an economy that is involved trade with other economies. Four sector:
with government
Circular Flow of income - ANSWER-a simple model of the process by which income flows around
the economy. Demonstrates the principle where the income flow from firms to households is equal to
the expenditure flow from households to firms
Injections - ANSWER-additions to the circular flow of income, where money flows into circular flow in
the form of investment, government spending and exports. (Increase spending)
Withdrawals - ANSWER-leakages from the circular flow of income, money flows out of the circular
flow in the form of savings taxation and imports (reduce spending)
Net withdrawal - ANSWER-withdraw-injection, decrease in size of circular flow/national income
Net injection - ANSWER-increase in the size of circular flow
and Answers Graded A+
Choice - ANSWER-The need to make decision about the possible alternative uses of scarce
resources due to scarcity
Issue of Market Transition - ANSWER-- Inflation
- Industrial unrest
- Fall in output
- Unemployment
- Balance of payments' deficit
- Reduction in welfare services
Production Possibility Curve - ANSWER-a curve measuring the maximum combination of outputs
that can be obtained from a given number of inputs in an economy in a period of time
Factor Mobility - ANSWER-the ease by which factors of production can be moved around
Economic Growth - ANSWER-Is an expansion in the productive capacity in an economy
Money - ANSWER-Anything which is universally acceptable as a means of payment for goods and
services
Functions of Money - ANSWER-- Medium of exchange
- Measure of value
- Standard for deferred payment
- Store of value
Characteristic of Money - ANSWER-- Acceptability
- Divisibility
- Portability
- Durability
- Scarcity
- Uniformity
Liquidity - ANSWER-Refers to the extent and ease of converting a non-cash asset into cash
Near Money - ANSWER-non-cash assets that can be quickly turned into cash
Rivalry and Excludability - ANSWER-Rivalry: refers to extent to which consumption limits availability
Excludability: refers to extent to which free-riders can be prohibited from consumption
Free-rider Problem - ANSWER-The problem of someone who consume a product without an
incentive to pay for it
Merit / Demerit Goods - ANSWER-Is a product which has positive/negative externalities, but would
be under/over consumed and produced in a market economy as a result of information failure
,Information Failure (Imperfect Information) - ANSWER-Is a situation in which producers and
consumers lack information needed to make rational decisions, causing inefficiency
Paternalism - ANSWER-Is a situation where society knows beast and has some right to make a
value judgement
Price Elasticity of Demand (PED) - ANSWER-% change in quantity demanded / % change in price
Price Elasticity of Supply (PES) - ANSWER-% change in quantity supplied / % change in price
Income Elasticity of Demand (YED) - ANSWER-% change in quantity demanded / % change in
income
Cross Elasticity of Demand (XED) - ANSWER-% change in quantity demanded of product X / %
change in price of product Y
Functions of the price mechanism - ANSWER-Rationing: Scarce resources are divided among their
competing uses according to what is demanded
Signaling: The price of a product reflects the market conditions and signals if producers should
increase or decrease production
Incentive: Prices act as an incentive for both consumers and producers, low prices encourage
consumers to purchase more and suppliers will leave the market due to low profit margins forcing
the price back up, whilst high prices encourage producers to enter the market or produce more,
increasing supply and pushing the price back down.
Buffer Stock - ANSWER-An amount of commodity held to limit price fluctuation
Ad valorem Tax - ANSWER-Tax on consumption, is paid as percentage of value of product
Specific Tax - ANSWER-Tax paid in fixed amount
Average Rate of Tax - ANSWER-The average percentage of total income that is paid in taxes
Marginal Rate - ANSWER-The proportional of additional income that is taken in income tax
Transfer Payment - ANSWER-A payment made or income received in which no goods or services
are being paid for, such as a benefit payment or subsidy.
Means-tested and Universal Benefit - ANSWER-Means-tested: is paid to units whose income is
below a level
Universal benefit: is paid to units without income reference
Poverty-trap - ANSWER-Is a situation in which an individuals has work-disincentive, as additional
income will be taken away as taxes and lost benefits
Nationalization - Advantage and Disadvantage of Nationalization - ANSWER-Takeover of property or
resources by the government
Advantage:
- Economies of scale
,- Avoids wasteful duplication
- CBA (Cost-benefit Analysis) is involved
- Private monopoly prevented
Disadvantage:
- Inefficient
- Non competitive
- Political mileage
- SOE (State-owned Enterprise) monopoly
Privatization - Advantage and Disadvantage of Privatization - ANSWER-The transfer of a business,
industry, or service from public (government own) to private ownership and control
Advantage:
- Economic efficiency
- Enterprise encourage
- Lower price
- Government revenue
- Growth by investment
Disadvantage:
- Private monopoly
- Wasteful duplication
- Unemployment
- Non regular funds
- Regulations needed
Government Failure - ANSWER-Occurs when the government intervention economic performance
rather than increasing, thus failing to correct market failure, due to:
- Imperfect information
- Policy conflicts
- Political mileage
- Corruption
Aggregate Demand - ANSWER-Is the total spending on an economy's goods and services, at a
given price level in a given time period. It consists of:
- Consumption (C)
- Investment (I)
- Government Expenditure (G)
- Net Exports (X-M)
AD= C + I +G + (X-M)
Inflation and Deflation - ANSWER-Is a sustainable increase/fall in general price levels in an
economy over a given time period, causing fall/rise in purchasing power of a currency
Menu Costs and Shoe-leather Costs - ANSWER-Menu Costs: are incurred by firms having to
change prices
Shoe-leather Costs: are incurred by firms moving money for high-interest
Cost-push Inflation - ANSWER-Is caused by increase in costs of production decreasing aggregate
supply, e.g.
, - Wages rising more than productivity
- Raw materials costs rising (especially imported ones)
- Increase in indirect/corporate taxes
- Rise in profit margins
Demand-pull Inflation - ANSWER-Is caused by increase in aggregate demand unmatched by
equivalent rise in aggregate supply, e.g.
- Consumer boom
- Money supply growing faster than output (monetarist)
- Growing budget deficit
- Increase in net exports
Balance of Payment - ANSWER-Is a record of a country's economic transactions with the rest of the
world over a year. It consists of:
Current Account:
- Visible trade in goods
- Invisible trade in services
- Income, e.g. profits, interest
- Current transfer (no exchange involved)
Financial Account
- Direct investment
- Portfolio investment
- Reserve assets
- Other investment
Capital Account
- Capital transfer
- Nonfinancial assets
Factors Determining Exchange Rate - ANSWER-
Closed economy - ANSWER-economy that does not trade with other economics, under autarky. Two
sector: without government. Three sector: with government
Open economy - ANSWER-an economy that is involved trade with other economies. Four sector:
with government
Circular Flow of income - ANSWER-a simple model of the process by which income flows around
the economy. Demonstrates the principle where the income flow from firms to households is equal to
the expenditure flow from households to firms
Injections - ANSWER-additions to the circular flow of income, where money flows into circular flow in
the form of investment, government spending and exports. (Increase spending)
Withdrawals - ANSWER-leakages from the circular flow of income, money flows out of the circular
flow in the form of savings taxation and imports (reduce spending)
Net withdrawal - ANSWER-withdraw-injection, decrease in size of circular flow/national income
Net injection - ANSWER-increase in the size of circular flow
