Download FOE December 2015 – Examination Paper – Final

Fundamentals of Economics
25 November 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
Marks
Question 1
a)
Explain what is regarded as the fundamental problem of economics; support your
answer with two examples.
b) Explain in economic terms why there is “no such thing as a free lunch”.
c)
Identify the main four factors of production.
4
2
4
Total 10 Marks
Question 2
a)
In economic theory what is the difference between the short run and the long
run?
2
b) In the example of a firm wishing to increase output in the economic short run, by
adding a variable input, such as labour, to a fixed amount of capital, explain what
is meant by diminishing marginal returns to labour setting in.
2
c)
In terms of long run average costs distinguish between economies of scale and
diseconomies of scale.
2
d) Define the following terms:
i)
Price elasticity of demand.
2
ii)
Income elasticity of demand.
2
Total 10 Marks
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Marks
Question 3
a)
List three factors that would define the market structure known as perfect
competition.
3
b) Describe the demand curve faced by a firm in the short run in perfect
competition.
1
c)
1
Describe and distinguish between the following abstract terms:
i)
Normal profit
ii)
Abnormal profit
1
d) In imperfect competition of an oligopoly explain why the demand curve is
described as being kinked.
4
Total 10 Marks
Question 4
a)
Define the term money.
2
b) Outline three functions of money.
c)
3
In a barter system, what does the term double coincidence of wants mean?
d) What is credit creation? Using an example explain the risk of credit creation.
1
4
Total 10 Marks
Question 5
a)
Define the following terms:
i)
Microeconomics
2
ii)
Macroeconomics
2
b) In the context of equilibrium national income explain what is meant by the term
paradox of thrift.
c)
Explain the term monetary transmission mechanism.
2
2
d) Explain the term crowding out by (a) a government raising taxes and (b) a
government funding certain activities.
2
Total 10 Marks
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Section B
Answer any TWO (2) questions from this section
Marks
Question 6
a)
The law of demand states that the price of a product will inversely influence the
demand for that product, other things remaining equal.
i)
Identify four variables which influence the household’s demand for a product.
4
ii)
Explain what is meant by the income effect and the substitution effect when
a price falls.
6
iii) Explain what is meant by an inferior good and give an example of such a
good.
3
b) Define each of the following, giving an example for each:
c)
i)
A substitute good
3
ii)
A complement good.
3
In looking at market demand, explain the difference between a movement along
a demand curve compared to a shift of the demand curve.
6
Total 25 Marks
Question 7
a)
Explain the concepts of :
i)
Moral hazard, and outline two ways that travel insurers could try to reduce it.
4
ii)
Adverse selection.
3
iii) Asymmetric information.
3
b) Outline two strategies insurance companies might adopt in addressing the issue
of adverse selection in health related insurance.
c)
Describe the principal-agent problem and explain why it is a problem.
d) Describe three ways of coping with the principal-agent problem.
6
3
6
Total 25 Marks
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Marks
Question 8
a)
Consider a closed economy with no government sector where national income is
£16,000, and households save 20% of their income. Illustrate this economy
using a circular flow diagram which includes the value of investment (“I”) by firms.
4
b) A world recession provides a shock to this economy. National income is
unchanged at £16,000 but household consumption falls by 25%. Assuming
Say’s Law:
c)
i)
What impact will the fall in consumption have on the level of investment by
firms?
3
ii)
Describe the economic mechanism that could bring about this investment
response.
2
Now consider the addition of a government sector to the circular flow model for
this closed economy. From a demand-side perspective, as advocated by
Keynes:
i) Explain how a fall in consumption might reduce national income
4
ii)
2
Give two examples of fiscal policy measures that might be used to
counteract this fall by stimulating growth in national income.
iii) Explain how a rise in the government deficit could affect investors holding
government bonds (gilts).
4
d) Now assume an open economy buying imports and selling exports. Identify three
advantages or disadvantages of this economy maintaining a fixed exchange rate.
6
Total 25 Marks
Question 9
a)
Using a Phillips curve diagram, explain why and how policy makers use the
output gap (the gap between equilibrium and actual output) to target inflation.
b) Briefly describe five types of unemployment.
c)
Briefly describe five types of inflation
15
5
5
Total 25 Marks
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Marks
Question 10
a)
Describe the main features and use of the income statement.
5
b) Describe the main features and use of the balance sheet (statement of financial
position).
c)
Describe the main features and use of the cash flow statement.
5
5
d) Describe the following types of cost, giving an example for each:
e)
i)
Fixed
2
ii)
Variable
2
iii) Sunk
2
Identify four characteristics of good financial information.
4
Total 25 Marks
End of paper
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Fundamentals of Economics
© NCC Education Limited 2015