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WACE Economics ATAR study materials
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WACE Economics ATAR practice questions

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Question 1Economics knowledge and understanding

Which of the following best defines opportunity cost?

  1. The total cost of producing one additional unit
  2. The money paid for a good or service
  3. The value of the next best alternative forgone when a choice is made Correct answer.
  4. The difference between revenue and total cost

Explanation

Opportunity cost measures what must be given up when resources are allocated to one use rather than the best alternative use. It is a value concept, not necessarily a monetary payment, so it applies even when no money changes hands.

Question 2Economics knowledge and understanding

A farmer can use a field to grow either wheat or barley. If wheat earns $40,000 and barley would earn $30,000, what is the opportunity cost of growing wheat?

  1. $10,000
  2. $40,000
  3. $70,000
  4. $30,000 Correct answer.

Explanation

Opportunity cost is the value of the next best alternative forgone, which here is the $30,000 from barley. The $40,000 earned from wheat is the return actually received, not the cost of the choice.

Question 3Economics knowledge and understanding

On a production possibility frontier, a point lying inside the curve represents:

  1. An unattainable combination of output
  2. An efficient use of all resources
  3. A combination using resources inefficiently Correct answer.
  4. A point where opportunity cost is zero

Explanation

Points inside the frontier show that the economy could produce more of at least one good without sacrificing the other, indicating unemployed or underemployed resources. Points on the curve are efficient and points beyond it are unattainable.

Question 4Economics knowledge and understanding

A movement along a demand curve for coffee is most likely caused by a change in:

  1. Consumer preferences for coffee
  2. The price of coffee Correct answer.
  3. The price of tea
  4. Consumer incomes

Explanation

A change in the good's own price changes quantity demanded and is shown as a movement along the existing demand curve. The other listed factors shift the entire demand curve to a new position.

Question 5Economics knowledge and understanding

If the price of a good rises and total consumer spending on it also rises, demand for the good is:

  1. Unit elastic
  2. Perfectly elastic
  3. Relatively inelastic Correct answer.
  4. Relatively elastic

Explanation

When price rises and total revenue rises, the percentage fall in quantity is smaller than the percentage rise in price, which is the definition of inelastic demand. Elastic demand would cause total spending to fall when price rises.

Question 6Economics knowledge and understanding

Which factor would most likely increase the supply of a product?

  1. An improvement in production technology Correct answer.
  2. An increase in consumer incomes
  3. A rise in the price of a key input
  4. A new tax on each unit sold

Explanation

Better technology lowers unit costs of production, so producers are willing to supply more at each price and the supply curve shifts right. Higher input prices and per-unit taxes raise costs and reduce supply.

Question 7Economics knowledge and understanding

At the market equilibrium price for a normal good:

  1. Quantity demanded equals quantity supplied Correct answer.
  2. There is no tendency for price to change at any other price
  3. Quantity supplied exceeds quantity demanded
  4. Quantity demanded exceeds quantity supplied

Explanation

Equilibrium occurs where the quantity buyers wish to purchase equals the quantity sellers wish to sell, so there is no shortage or surplus. At this price there is no pressure for price to rise or fall.

Question 8Economics knowledge and understanding

A price floor set above the equilibrium price will most likely result in:

  1. A surplus of the good Correct answer.
  2. A shortage of the good
  3. An increase in quantity demanded
  4. The market clearing at the floor price

Explanation

A binding price floor holds the price above equilibrium, so quantity supplied exceeds quantity demanded and a surplus develops. Sellers cannot sell all they wish at that legally enforced price.

Question 9Economics knowledge and understanding

Which of the following is an example of a public good?

  1. A national defence system Correct answer.
  2. A restaurant meal
  3. A mobile phone service
  4. A privately owned toll road

Explanation

National defence is non-rival and non-excludable, so one person's protection does not reduce another's and providers cannot easily exclude non-payers. These features make it a classic public good.

Question 10Economics knowledge and understanding

A negative externality occurs when:

  1. Consumers pay more than the equilibrium price
  2. A third party bears a cost not reflected in the market price Correct answer.
  3. A firm's private costs exceed its social costs
  4. The government subsidises production

Explanation

Negative externalities are spillover costs imposed on people outside a transaction, so the market price fails to reflect the full social cost. This causes the market to overproduce relative to the socially optimal level.

Question 11Economics knowledge and understanding

Gross Domestic Product measures:

  1. The total stock of wealth held by a country's households
  2. The total income earned by a country's residents wherever they are located
  3. The value of all goods and services exchanged, including second-hand sales
  4. The total value of final goods and services produced within a country in a period Correct answer.

Explanation

GDP is the market value of final output produced within a nation's borders over a given period. Counting only final goods avoids double counting intermediate products.

Question 12Economics knowledge and understanding

If nominal GDP rises by 6 per cent and the price level rises by 4 per cent, real GDP has approximately:

  1. Risen by 6 per cent
  2. Risen by 2 per cent Correct answer.
  3. Fallen by 2 per cent
  4. Risen by 10 per cent

Explanation

Real GDP adjusts nominal GDP for price changes, so subtracting the inflation rate from nominal growth gives an approximate real growth rate. Six per cent minus four per cent leaves about two per cent.

Question 13Economics knowledge and understanding

A country's labour force consists of:

  1. All employed persons plus unemployed persons actively seeking work Correct answer.
  2. All employed persons only
  3. All people aged 15 and over
  4. All persons of working age who are not in full-time education

Explanation

The labour force includes those who are employed plus those who are unemployed and actively looking for work. People not seeking work, such as full-time students or retirees, are outside the labour force.

Question 14Economics knowledge and understanding

Using the labour force data, if the unemployment rate is 5 per cent and the labour force is 10 million, the number of unemployed people is:

  1. 5,000,000
  2. 500,000 Correct answer.
  3. 950,000
  4. 50,000

Explanation

The unemployment rate equals unemployed persons divided by the labour force, so unemployed equals 5 per cent of 10 million. That gives 500,000 people.

Question 15Economics knowledge and understanding

Demand-pull inflation is best described as inflation caused by:

  1. An appreciation of the exchange rate
  2. Excessive growth in aggregate demand relative to output Correct answer.
  3. A fall in the money supply
  4. Rising costs of production such as wages

Explanation

Demand-pull inflation arises when aggregate demand grows faster than the economy's capacity to produce, pulling prices upward. Cost-push inflation, by contrast, stems from rising input costs.

Question 16Economics knowledge and understanding

Which group is most likely to benefit from an unexpected increase in the inflation rate?

  1. Borrowers with fixed-rate mortgages Correct answer.
  2. Retirees living on fixed pensions
  3. Banks holding long-term fixed-interest loans
  4. Savers holding cash deposits

Explanation

Inflation reduces the real value of money, so people who owe fixed nominal amounts repay in money worth less than expected. Borrowers therefore gain at the expense of lenders when inflation is higher than anticipated.

Question 17Economics knowledge and understanding

An increase in the official cash rate by a central bank is intended mainly to:

  1. Depreciate the exchange rate to boost exports
  2. Reduce inflationary pressure by raising borrowing costs Correct answer.
  3. Increase aggregate demand and reduce unemployment
  4. Increase government spending on infrastructure

Explanation

Raising the cash rate increases the cost of borrowing and the return on saving, which dampens consumption and investment. Lower aggregate demand then reduces inflationary pressure.

Question 18Economics knowledge and understanding

Contractionary fiscal policy would typically involve:

  1. Lowering the cash rate
  2. Raising taxation and cutting government spending Correct answer.
  3. Reducing the reserve requirement ratio
  4. Cutting taxation and raising government spending

Explanation

Fiscal policy uses the government budget, so contraction means withdrawing demand through higher taxes or lower spending. The other listed actions are monetary policy tools.

Question 19Economics knowledge and understanding

A depreciation of a country's currency is most likely to:

  1. Increase the price of imports in foreign currency
  2. Reduce the volume of exports
  3. Make its exports cheaper for foreign buyers Correct answer.
  4. Make its exports more expensive for foreign buyers

Explanation

A depreciation lowers the foreign-currency price of exports, improving their competitiveness abroad. It also raises the domestic price of imports, which can worsen the terms of trade.

Question 20Economics knowledge and understanding

Which of the following is recorded as a credit in the current account of the balance of payments?

  1. Transfers sent overseas by residents
  2. Income paid to foreign investors
  3. Imports of goods
  4. Exports of services Correct answer.

Explanation

In the balance of payments, credits record inflows such as export earnings, while debits record outflows such as imports and income paid abroad. Service exports therefore appear as a current account credit.

Question 21Economics knowledge and understanding

A country's terms of trade improve when:

  1. Its export prices rise relative to its import prices Correct answer.
  2. Its import prices rise relative to its export prices
  3. Its volume of exports falls
  4. Its currency depreciates sharply

Explanation

The terms of trade measure export prices relative to import prices, so a rise in export prices or a fall in import prices improves them. Improved terms of trade mean a given volume of exports buys more imports.

Question 22Economics knowledge and understanding

The main purpose of a progressive income tax system is to:

  1. Take a larger proportion of income from higher-income earners Correct answer.
  2. Take a larger proportion of income from lower-income earners
  3. Raise revenue only from company profits
  4. Apply the same rate of tax to all income earners

Explanation

Progressive taxation applies higher marginal rates as income rises, so average tax rates increase with income. This structure is often used to redistribute income and reduce inequality.

Question 23Economics knowledge and understanding

A monopoly is likely to charge a higher price than a perfectly competitive market mainly because:

  1. It has no market power over price
  2. It faces a horizontal demand curve
  3. It restricts output to raise price above marginal cost Correct answer.
  4. Its costs are always higher than those of competitive firms

Explanation

A monopolist faces the downward-sloping market demand curve and can raise price by restricting output. Profit maximisation occurs where marginal revenue equals marginal cost, which typically yields a price above marginal cost.

Question 24Economics knowledge and understanding

Which of the following best describes a positive statement in economics?

  1. The government should reduce income inequality
  2. Unemployment is too high and must be lowered
  3. An increase in the minimum wage may raise unemployment among low-skilled workers Correct answer.
  4. Everyone deserves a living wage

Explanation

Positive statements are factual claims that can be tested against evidence, such as the predicted effect of a minimum wage on employment. Normative statements express value judgements about what ought to be.

Question 25Economics knowledge and understanding

A firm's fixed costs are $2,000 and its variable cost per unit is $10. If it produces 200 units, its average total cost is:

  1. $20 Correct answer.
  2. $30
  3. $2,000
  4. $10

Explanation

Total cost equals fixed costs plus variable costs, which is $2,000 plus $2,000, giving $4,000. Dividing by 200 units yields an average total cost of $20 per unit.

Question 26Economics knowledge and understanding

Which statement best describes the economic problem of scarcity?

  1. Firms sometimes produce more output than consumers are willing to buy.
  2. Governments must collect taxes in order to fund public services.
  3. Wants are unlimited while the resources available to satisfy them are limited. Correct answer.
  4. Some households earn lower incomes than other households in the same economy.

Explanation

Scarcity is the fundamental condition in which unlimited human wants exceed the limited resources available to produce goods and services. Because resources are finite, choices must be made about what to produce, how to produce and for whom.

Question 27Economics knowledge and understanding

A farmer can use a field to grow either wheat or barley. The income given up by choosing to grow wheat is best described as:

  1. The tax payable on the wheat income.
  2. The total income earned from selling the wheat crop.
  3. The barley income that could have been earned from the same field. Correct answer.
  4. The money spent on wheat seed and fertiliser.

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. Since the field can grow barley instead, the forgone barley income represents the true cost of choosing wheat.

Question 28Economics knowledge and understanding

The production possibility frontier for an economy is drawn as a curve that is concave to the origin. This shape indicates that:

  1. Increasing opportunity cost arises as resources are reallocated between goods. Correct answer.
  2. The economy can produce unlimited quantities of both goods.
  3. All resources are equally suited to producing either good.
  4. The economy is operating inefficiently at every point on the curve.

Explanation

A concave frontier reflects the law of increasing opportunity cost: as production shifts toward one good, resources less suited to it must be used, so ever more of the other good is sacrificed. Constant opportunity cost would instead produce a straight-line frontier.

Question 29Economics knowledge and understanding

When the price of a good falls and, as a result, consumers can afford to buy more of it because their purchasing power has risen, this is known as:

  1. A movement along the supply curve.
  2. The income effect. Correct answer.
  3. The substitution effect.
  4. A shift in demand.

Explanation

The income effect occurs when a price change alters consumers' real purchasing power, changing the quantity demanded. The substitution effect, by contrast, concerns consumers switching toward the relatively cheaper good.

Question 30Economics knowledge and understanding

A product has a price elasticity of demand of 0.4. If the firm raises its price by 10 per cent, total revenue will most likely:

  1. Rise, because demand is price inelastic. Correct answer.
  2. Fall, because quantity demanded rises.
  3. Remain unchanged, because elasticity is below one.
  4. Fall, because demand is price inelastic.

Explanation

When demand is price inelastic (elasticity less than one), the percentage fall in quantity is smaller than the percentage rise in price, so total revenue increases. A 10 per cent price rise with elasticity of 0.4 reduces quantity by only about 4 per cent.

Question 31Economics knowledge and understanding

Which factor would shift the demand curve for coffee to the right?

  1. An improvement in coffee harvesting technology.
  2. A fall in the price of coffee.
  3. A rise in the price of tea, a substitute for coffee. Correct answer.
  4. A fall in the incomes of consumers, if coffee is a normal good.

Explanation

A rise in the price of a substitute makes coffee relatively more attractive, increasing demand at every price and shifting the demand curve rightward. Price changes for coffee itself cause movements along the curve rather than shifts.

Question 32Economics knowledge and understanding

A government imposes a per-unit tax on a good whose demand is highly inelastic and whose supply is highly elastic. The burden of the tax will fall mainly on:

  1. Producers, because supply is elastic.
  2. Consumers, because demand is inelastic. Correct answer.
  3. Both parties equally, regardless of elasticity.
  4. The government, because it collects the tax.

Explanation

The incidence of a tax falls more heavily on the side of the market that is less responsive to price changes. With highly inelastic demand and elastic supply, producers can pass most of the tax forward to consumers as a higher price.

Question 33Economics knowledge and understanding

The price of a good is currently below the equilibrium price. In a free market, the most likely result is:

  1. A surplus, putting upward pressure on price.
  2. A shortage, putting upward pressure on price. Correct answer.
  3. An immediate shift of the supply curve to the left.
  4. A surplus, putting downward pressure on price.

Explanation

At a price below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage. Competition among buyers for the limited supply pushes the price upward toward equilibrium.

Question 34Economics knowledge and understanding

Which characteristic is typical of an oligopolistic market structure?

  1. A few large firms dominate and their decisions are interdependent. Correct answer.
  2. Firms produce differentiated products with no strategic interaction.
  3. Many small firms sell an identical product with no barriers to entry.
  4. A single firm supplies the entire market.

Explanation

Oligopoly is characterised by a small number of large firms whose pricing and output decisions depend on the expected reactions of rivals. This mutual interdependence distinguishes oligopoly from other market structures.

Question 35Economics knowledge and understanding

A firm in perfect competition maximises profit in the short run by producing where:

  1. Average total cost is at its minimum.
  2. Price equals average fixed cost.
  3. Marginal revenue equals marginal cost. Correct answer.
  4. Total revenue is at its maximum.

Explanation

Profit is maximised where marginal revenue equals marginal cost, because producing beyond that point adds more to cost than to revenue. In perfect competition, price equals marginal revenue, so the firm produces where price equals marginal cost.

Question 36Economics knowledge and understanding

Which item is excluded from the calculation of a country's GDP?

  1. A newly built house bought by a household.
  2. New machinery purchased by a factory.
  3. A second-hand car sold by one household to another. Correct answer.
  4. Fees paid to a dentist for treatment.

Explanation

GDP measures the value of goods and services produced within a period, so resale of an existing asset is excluded to avoid double counting. Only newly produced output, such as machinery, new housing and services, is counted.

Question 37Economics knowledge and understanding

Which situation would be classified as cyclical unemployment?

  1. A school leaver spends several weeks searching for a first job.
  2. A builder is idle during the winter months.
  3. A worker loses a job during a recession as aggregate demand falls. Correct answer.
  4. A textile worker is replaced by automated machinery.

Explanation

Cyclical unemployment results from a general deficiency of aggregate demand during a downturn, so jobs disappear across many industries. It falls when the economy recovers and rises during recessions.

Question 38Economics knowledge and understanding

A country's consumer price index rises from 120 to 126 over one year. The annual inflation rate is:

  1. 5.0 per cent. Correct answer.
  2. 6.0 per cent.
  3. 4.8 per cent.
  4. 21.0 per cent.

Explanation

The inflation rate is the percentage change in the index between periods: (126 - 120) / 120 multiplied by 100, which equals 5 per cent. The change of 6 index points must be expressed relative to the base period figure.

Question 39Economics knowledge and understanding

Cost-push inflation is most likely to be caused by:

  1. A rise in consumer confidence about future income.
  2. A fall in the exchange rate that raises import prices. Correct answer.
  3. A rise in household disposable income.
  4. An increase in government spending on infrastructure.

Explanation

Cost-push inflation arises from increases in the costs of production, which shift aggregate supply to the left. A depreciation that raises the price of imported inputs increases business costs and pushes up prices.

Question 40Economics knowledge and understanding

The central bank lowers the cash rate. The most likely sequence of effects is:

  1. Government tax revenue falls and the budget deficit widens.
  2. Market interest rates fall, investment rises and aggregate demand increases. Correct answer.
  3. The exchange rate appreciates and net exports increase.
  4. Market interest rates rise, investment falls and unemployment rises.

Explanation

A lower cash rate is transmitted to lower market interest rates, which reduce the cost of borrowing and encourage investment and consumption. Higher aggregate demand then supports output and employment.

Question 41Economics knowledge and understanding

A government wants to reduce an inflationary gap using fiscal policy. Which combination is most appropriate?

  1. Reduce taxation and increase transfer payments.
  2. Reduce government spending and increase taxation. Correct answer.
  3. Increase government spending and increase transfer payments.
  4. Increase government spending and reduce taxation.

Explanation

Contractionary fiscal policy reduces aggregate demand, and this is achieved by lowering government spending or raising taxation to reduce disposable income. Either action reduces the size of the inflationary gap.

Question 42Economics knowledge and understanding

Which of the following is a supply-side policy measure?

  1. Increasing welfare payments to raise household income.
  2. Cutting company tax to encourage business investment. Correct answer.
  3. Raising the cash rate to reduce consumer spending.
  4. Reducing income tax to increase consumption expenditure.

Explanation

Supply-side policies aim to increase the productive capacity of the economy, for example by improving incentives to invest, work or innovate. Cutting company tax affects investment and productive capacity rather than simply adding to demand.

Question 43Economics knowledge and understanding

A country's currency depreciates against its trading partners' currencies. In the short term, this is most likely to:

  1. Make its exports more expensive for foreign buyers.
  2. Have no effect on the volume of trade in either direction.
  3. Make its imports cheaper for domestic consumers.
  4. Improve the competitiveness of its exports and worsen its import competitiveness. Correct answer.

Explanation

A depreciation lowers the foreign-currency price of exports, making them more competitive abroad, while raising the domestic-currency price of imports. This tends to improve the trade balance, subject to the J-curve effect.

Question 44Economics knowledge and understanding

A debit entry in the current account of the balance of payments records:

  1. A payment of foreign currency abroad for imports. Correct answer.
  2. An inflow of foreign capital for investment.
  3. A receipt of foreign currency from the sale of exports.
  4. An increase in the nation's official reserve assets.

Explanation

In the balance of payments, debit entries record outflows of value, such as payments for imports of goods and services or income sent abroad. Credit entries record inflows such as export earnings.

Question 45Economics knowledge and understanding

A country's export price index is 110 and its import price index is 100. Which statement is correct?

  1. The terms of trade are 10, indicating a small improvement.
  2. The terms of trade are 110, indicating that exports have become less competitive.
  3. The terms of trade are 90, indicating a deterioration in the terms of trade.
  4. The terms of trade are 110, indicating that a given volume of exports buys more imports than in the base year. Correct answer.

Explanation

The terms of trade are calculated as the export price index divided by the import price index, multiplied by 100, giving 110. A value above 100 means export prices have risen relative to import prices, so a unit of exports purchases more imports.

Question 46Economics knowledge and understanding

A firm's fixed costs are $3,000 and its variable cost per unit is $15. If it produces 300 units, its average total cost is:

  1. $10.00
  2. $25.00 Correct answer.
  3. $40.00
  4. $15.00

Explanation

Total cost equals fixed costs plus variable costs, which is $3,000 plus $15 multiplied by 300, giving $7,500. Dividing total cost by 300 units yields an average total cost of $25.

Question 47Economics knowledge and understanding

Two economies can both produce cloth and wine. Economy A can produce cloth at a lower opportunity cost than Economy B. It follows that:

  1. Economy A should import all of its cloth.
  2. Economy A has a comparative advantage in cloth. Correct answer.
  3. Economy B should specialise in both goods.
  4. Economy A has an absolute advantage in cloth.

Explanation

Comparative advantage is determined by lower opportunity cost, not by absolute productivity levels. Specialising according to comparative advantage and trading raises total output and benefits both economies.

Question 48Economics knowledge and understanding

Which statement is an example of a normative economic statement?

  1. An increase in the price of petrol reduces the quantity demanded.
  2. The unemployment rate rose to 5.2 per cent last quarter.
  3. A fall in interest rates typically increases borrowing.
  4. The government ought to raise the minimum wage to reduce poverty. Correct answer.

Explanation

Normative statements express value judgements about what should be and cannot be tested purely with data. Positive statements describe what is and can be assessed against evidence.

Question 49Economics knowledge and understanding

A government removes a tariff on imported steel. Which outcome is most consistent with economic theory?

  1. Domestic steel prices rise and domestic producers expand output.
  2. Domestic steel production rises because imports become cheaper.
  3. Domestic consumers pay lower prices while domestic steel producers face more competition. Correct answer.
  4. Government tariff revenue increases substantially.

Explanation

Removing a tariff lowers the price of imported steel, benefiting consumers and firms that use steel as an input. Domestic producers lose protection and must compete with cheaper imports, so their output tends to fall.

Question 50Economics knowledge and understanding

A government increases its spending on infrastructure by $2 billion and the marginal propensity to consume is 0.8. Assuming no other leakages, the maximum total increase in national income is:

  1. $4.0 billion
  2. $2.5 billion
  3. $16.0 billion
  4. $10.0 billion Correct answer.

Explanation

The simple multiplier equals 1 divided by (1 minus the marginal propensity to consume), which is 1 divided by 0.2, or 5. Multiplying the initial spending of $2 billion by 5 gives a maximum increase of $10 billion.