Fundamentals of Economics 3 June 2015 Examination Paper Section A Section B Answer ALL questions from this section. Answer any TWO (2) questions from this section. Clearly cross out surplus answers. Failure to do this will result in only the first TWO (2) answers being marked. Time: 2.5 hours The maximum mark for this paper is 100. Any reference material brought into the examination room must be handed to the invigilator before the start of the examination.
Section A Answer ALL questions from this section Question 1 a) Briefly explain what is meant by an economic model or theory. 2 b) i) State the simple rule for identifying a profit maximising level of output. 2 ii) Explain what is meant by the term equilibrium price. 2 c) When economists consider the effect that a change in price may have upon demand, they tend to assume that other factors that might also affect demand remain constant and can therefore be ignored. According to simple economic theory, what are the other main factors that can have a direct effect on the demand for a product? Question 2 Total 10 a) Draw and label a monopolistically competitive firm in its short run equilibrium position. b) Explain how and why this position differs from the long run equilibrium position of a monopolistically competitive firm. 5 5 Total 10 Question 3 a) Define the following terms: i) fiscal policy 2 ii) government budget deficit 2 iii) the stock of government debt 3 b) The circular flow of income model generates three flows that can be used as measures of overall economic activity in an economy. Identify these THREE (3) flows of activity. 3 Total 10 marks Page 2 of 6
Question a) What is meant by the term liquid asset? 1 b) In what ways can a Central Bank contribute to the stability of the banking system? c) Explain what is meant by open market operations by a Central Bank. 5 Total 10 marks Question 5 a) Define inelastic demand. 2 b) What is the economic problem? c) Explain briefly the difference between a free market economy model and a command economy model. Total 10 Page 3 of 6
Section B Answer any TWO (2) questions from this section Question 6 a) Economists analyse costs and other economic issues in the short run and the long run. Define the terms short run and long run. 3 b) Define the following terms: i) economies of scale 2 ii) diseconomies of scale 2 iii) minimum efficient scale 2 c) With reference to the three terms defined in part (b), explain why economists believe that a firm s long run average cost curve is often U-shaped. d) Using an appropriate diagram, explain the relationship that will always exist between a short run marginal cost curve and an average cost curve. 10 6 Total 25 Question 7 a) Using appropriate symbols, identify the elements of aggregate demand in a four-sector Keynesian model of the economy. b) In simple terms, explain the Keynesian view of the relationship between aggregate demand and inflation. 8 c) Defining the key terms involved, state the quantity theory of money. 5 d) i) How would monetarist economists interpret the quantity theory of money equation? 3 ii) How might other economists, particularly Keynesian economists, interpret the equation differently? 5 Total 25 Page of 6
Question 8 a) i) Draw and label a diagram of the circular flow of income in a simple two-sector model of the economy. 6 ii) In the context of the above question, what are leakages and injections and how do each impact the level of economic activity? 6 b) To a considerable extent it is the case that monetary policy has become more important in recent decades as the significance given to fiscal policy has declined. Explain the main problems and difficulties associated with relying on fiscal policy to manage an economy. c) Define the terms macro-economics and micro-economics, highlighting the differences between them. 9 Total 25 Question 9 a) The market structure models of perfect competition and monopoly are often considered to represent two ends of a spectrum or continuum of market structures. i) Outline the assumptions that underpin the model of perfect competition. ii) Define the term monopoly. 1 b) Explain how the long run equilibrium profitability of a perfectly competitive firm and a monopoly firm differ and explain the main reason for this difference. c) Draw a fully labelled diagram of a monopoly firm in its long run equilibrium position and comment on how it reflects any of the points you made in your answer to part (b). d) Discuss the advantages and disadvantages of a monopoly structure compared to a perfectly competitive structure from the point of view of society as a whole. 8 8 Total 25 Page 5 of 6
Question 10 a) Explain the terms price ceiling and price floor. 3 b) Draw a fully labelled diagram, including a key showing key terms, for the imposition of a price ceiling below the equilibrium price in the market. c) With reference to your diagram from part (b), discuss how far the ceiling price established there is likely to help the poor. 10 12 Total 25 End of paper Page 6 of 6