BT7,3

Company makes a variety of different products, including windows. Which TWO of the following would cause a decrease in the level of supply of Company’s windows?

• A new automated assembly system for L’s products that reduces L’s window manufacturing overheads

• Staff negotiations, leading to window production staff adopting a shift-work approach which makes better use of L’s production facilities

• Staff negotiations, leading to a slight rise in the hourly rate paid to window production workers

• An decrease in the level of VAT charged by the government on windows

Answer explanation

A rise in the hourly rate for window production workers increases production costs, leading to a decrease in supply. The other options either reduce costs or improve efficiency, which would not decrease supply.

Anel and Roman's family business manufactures a single product. Which of the following would indicate that the product will have a low price elasticity of demand?

• Clients don’t see the product as being a necessity

• Clients typically purchase the product out of habit

• Customers allocate a significant portion of their incomes to purchasing the product

• Customers have several alternative products available to choose from

Answer explanation

Clients typically purchasing the product out of habit suggests they are less sensitive to price changes, indicating low price elasticity of demand. In contrast, necessity, income allocation, and alternatives would suggest higher elasticity.

Emma is preparing a short-term budget for a cost incurred by her company. She is predicting that the company will experience significant increases in output during the period. How would Emma expect to see the average cost per unit change within the short-term?

• The cost per unit would be expected to fall for the entire period due to the increased output

• The cost per unit would be expected to initially fall, then start to rise again due to diseconomies of scale

• The cost per unit would be unlikely to change in the short-term

• The cost per unit is expected to decrease at first, but then increase again due to the law of diminishing returns

Answer explanation

The cost per unit is expected to decrease initially due to increased output, benefiting from economies of scale. However, as production continues to rise, the law of diminishing returns will cause costs to increase again.

Which of the following is an example of cyclical unemployment?

• The entry of school leavers into the labour pool each year

• Lay-offs among agricultural labourers in winter

• Automation of ticketing services in tourism

• Recession in the construction industry

Answer explanation

Cyclical unemployment occurs due to economic downturns. A recession in the construction industry leads to reduced demand for labor, resulting in layoffs, which is a clear example of cyclical unemployment.

Country Y has an increasingly high rate of unemployment. Which of the following statements is/are correct regarding the effect of this on consumers and businesses?

i) Businesses may offer lower wages to staff

ii) | Government spending on social security will fall

iii) | Businesses will find it easier to locate new employees

iv) Businesses may find that demand for their goods and services falls

• (i), (ii) and (iii) only

• (i), (iii) and (iv) only

• (i) and (iii) only

• All four are correct

Answer explanation

With high unemployment, businesses may lower wages (i), find it easier to hire (iii), and face reduced demand for goods/services (iv). However, government spending on social security is likely to increase, making (ii) incorrect.

Increases in unemployment, reduced demand, falling household incomes and low business confidence and investment are associated most strongly with which of the following?

• High interest rates

• Increase in the money supply

• A budget deficit

• Recession

Answer explanation

Increases in unemployment, reduced demand, and low business confidence are key indicators of a recession. These factors lead to decreased economic activity, making 'recession' the strongest association among the options.

The balance of payment surplus will result in:

• lower rate of economic growth

• inflation

• unemployment

• budget deficit

Answer explanation

A balance of payment surplus indicates that a country is exporting more than it imports, leading to increased demand for its currency. This can cause inflation as more money chases the same amount of goods.

The drowbacks of economic growth include which one of the following:

• growth rates may exceed inflation rates

• the gap between rich and poor may narrow

• growth may exceed population growth

• growth may be in ‘demerit’ goods

Answer explanation

The correct choice, 'growth may be in ‘demerit’ goods', highlights a drawback of economic growth, as it can lead to increased production and consumption of harmful goods, negatively impacting society despite overall growth.

Demand side policies are best described as:

• a belief that government should manipulate its spending so as to manage aggregate demand

• ensuring that demand is contained so that inflation is controlled

• managing down excessive growth by reducing government borrowing

• keeping employment levels substantially below full levels

Answer explanation

Demand side policies focus on government spending to influence aggregate demand, making the first choice correct. The other options misinterpret the primary goal of these policies.

For example: Kazakhstan is suffering from a recession. A government minister has recently suggested that the country’s government should ‘focus more on reducing the power of trade unions and the number of state-owned monopolies and less on worrying about running a budget surplus.’ Which economics theory is the government minister suggesting that Kazakhstan should adopt?

• Classical

• Monetarist

• Keynesian

• Demand side

Answer explanation

The minister's suggestion to reduce trade union power and state monopolies aligns with Monetarist theory, which emphasizes controlling money supply and reducing government intervention in the economy to stimulate growth.