I85PREP
⌘ K
European Baccalaureate Economics study materials
European Baccalaureate Economics study resources

European Baccalaureate Economics practice questions

One question at a time. Build your European Baccalaureate Economics understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In the European Baccalaureate written examinations, which component is compulsory for every candidate regardless of their chosen options?

  1. Two further written subjects chosen freely
  2. The L1 language paper only
  3. The advanced mathematics paper for all candidates
  4. L1, L2 and Mathematics Correct answer.

Explanation

The European Baccalaureate written session always comprises the first language, the second language and mathematics as compulsory written papers, to which candidates add two further written subjects drawn from their option choices. The compulsory core guarantees a common linguistic and quantitative baseline across all students.

Question 2Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate is preparing the economics written paper. Which description best matches the role of the written examination within the European Baccalaureate assessment system?

  1. It is optional for candidates taking economics as an option
  2. It is used only for university admission and does not affect the Baccalaureate grade
  3. It replaces the preliminary mark entirely for that subject
  4. It is one component weighted alongside the preliminary mark in the final subject grade Correct answer.

Explanation

In the European Baccalaureate the final subject mark combines the preliminary mark awarded during the year with the written examination mark, each carrying a defined weight. The written paper therefore complements rather than replaces continuous assessment.

Question 3Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In an economics written paper, a candidate is asked to 'discuss' a policy proposal. Which approach best matches the command word at Baccalaureate level?

  1. Present arguments for and against and reach a reasoned judgement Correct answer.
  2. Define the policy in one sentence and stop
  3. List every statistical indicator available on the topic
  4. Describe only the historical origins of the policy

Explanation

The command word 'discuss' signals that the candidate must weigh competing arguments, use economic reasoning and evidence, and arrive at a supported conclusion. Marks are allocated for balanced analysis and judgement, not for a single definition or a data dump.

Question 4Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A question in the written paper provides a demand schedule and asks candidates to calculate the price elasticity of demand between two points. Which formula should be applied?

  1. Percentage change in price divided by percentage change in quantity demanded
  2. Total revenue divided by quantity demanded
  3. Percentage change in quantity demanded divided by percentage change in price Correct answer.
  4. Change in price divided by change in quantity demanded

Explanation

Price elasticity of demand measures the responsiveness of quantity demanded to a price change and is computed as the percentage change in quantity demanded divided by the percentage change in price. Using percentage changes makes the measure independent of the units in which price and quantity are expressed.

Question 5Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

During the written economics examination, a candidate wishes to use a calculator for a multiplier calculation. Which statement reflects the standard examination convention?

  1. Only graphing calculators with stored programmes are permitted
  2. Calculators may be shared between candidates during the paper
  3. Non-programmable calculators are permitted where the subject rules allow Correct answer.
  4. Calculators are prohibited in all written papers

Explanation

Examination regulations generally allow non-programmable calculators in papers where numerical work is required, subject to the rules communicated for that subject. Devices capable of storing text or communicating are excluded to preserve fairness.

Question 6Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written paper asks candidates to explain why a government might impose a maximum price below the equilibrium price. Which outcome should the answer identify?

  1. An automatic shift of the supply curve to the right
  2. A surplus because supply exceeds demand at that price
  3. A shortage because quantity demanded exceeds quantity supplied Correct answer.
  4. No effect because price controls do not alter market outcomes

Explanation

A binding maximum price set below equilibrium makes the good cheaper, so quantity demanded rises while quantity supplied falls, producing excess demand or a shortage. The resulting gap often encourages queues, rationing or black markets.

Question 7Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In the economics written examination, candidates must interpret a circular flow diagram. Which statement correctly describes the role of households in the simple circular flow model?

  1. Households purchase factors of production from firms
  2. Households set the level of taxation in the economy
  3. Households supply goods and services to firms in product markets
  4. Households supply factors of production and receive factor incomes Correct answer.

Explanation

In the simple circular flow, households own the factors of production, supply them to firms and receive wages, rent, interest and profit in return, which they then spend on goods and services. Firms organise production and sell output in product markets.

Question 8Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate must identify the effect of a depreciation of the domestic currency on the current account, assuming the Marshall-Lerner condition holds. Which conclusion is correct?

  1. The current account is unaffected because trade volumes are fixed
  2. Imports become cheaper domestically and the trade balance improves
  3. Exports become cheaper abroad and the trade balance improves Correct answer.
  4. Exports become more expensive abroad and the current account worsens

Explanation

Depreciation lowers the foreign-currency price of exports and raises the domestic-currency price of imports, so export volumes rise and import volumes fall. When the Marshall-Lerner condition is satisfied, these volume effects outweigh the terms-of-trade loss and the trade balance improves.

Question 9Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written paper on market structures, candidates compare perfect competition with monopoly. Which feature distinguishes the monopolist's long-run position?

  1. Output is produced at the minimum point of average total cost
  2. Price equals marginal cost, as in perfect competition
  3. The firm can sustain positive economic profit behind barriers to entry Correct answer.
  4. The firm faces a horizontal demand curve

Explanation

Barriers to entry allow a monopolist to keep price above marginal cost and earn positive economic profit in the long run, whereas free entry drives competitive profit to normal levels. The monopolist produces where marginal revenue equals marginal cost and prices above that level.

Question 10Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question supplies the following data: consumption 600, investment 150, government spending 200, exports 120 and imports 170. Using the expenditure approach, what is gross domestic product?

  1. 1,070
  2. 1,240
  3. 800
  4. 900 Correct answer.

Explanation

The expenditure approach sums consumption, investment, government spending and net exports, where net exports equal exports minus imports, giving minus 50. Adding 600, 150 and 200 and then subtracting 50 yields GDP of 900.

Question 11Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate must explain the concept of opportunity cost in a written answer. Which example illustrates the concept correctly?

  1. The accounting depreciation of capital equipment over time
  2. The value of the next best alternative forgone when a choice is made Correct answer.
  3. The total cost of all alternatives available to a decision maker
  4. The money paid for a good, regardless of alternatives forgone

Explanation

Opportunity cost is the value of the next best alternative sacrificed when resources are allocated to one use rather than another. It is a forward-looking concept about forgone alternatives, distinct from the money actually spent.

Question 12Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written answer on fiscal policy, a candidate must distinguish an automatic stabiliser from discretionary policy. Which item is an automatic stabiliser?

  1. A new subsidy scheme legislated to support a specific industry
  2. Progressive income tax receipts that fall when incomes fall Correct answer.
  3. A deliberate cut in the central bank policy rate
  4. A one-off increase in public investment announced in the budget

Explanation

Automatic stabilisers operate without new government decisions: progressive taxes and unemployment benefits dampen fluctuations because receipts fall and transfers rise during a downturn. Discretionary measures require an explicit policy change.

Question 13Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written paper asks candidates to evaluate the use of cost-benefit analysis for a proposed infrastructure project. Which limitation should be identified?

  1. It applies only to private firms and never to governments
  2. Valuing non-market outcomes such as pollution or travel time is uncertain Correct answer.
  3. It cannot incorporate any monetary values
  4. It ignores future costs and benefits entirely

Explanation

Cost-benefit analysis requires shadow prices for goods without market prices, such as environmental damage or time savings, and these valuations are inherently uncertain and sensitive to assumptions. The discount rate chosen also strongly affects the result.

Question 14Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate writing on the money multiplier is given a reserve ratio of 0.1. Assuming banks hold no excess reserves and the public holds no cash, what is the simple deposit multiplier?

  1. 10 Correct answer.
  2. 1.1
  3. 9
  4. 0.1

Explanation

The simple deposit multiplier equals one divided by the reserve ratio, so with a reserve ratio of 0.1 the multiplier is 10. Each unit of new reserves can therefore support ten units of deposits under the stated assumptions.

Question 15Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written essay on inequality, a candidate uses the Gini coefficient. Which interpretation is correct?

  1. Values above 0.5 are impossible in practice
  2. A value of 1 indicates perfect equality and 0 indicates maximum inequality
  3. A value of 0 indicates perfect equality and 1 indicates maximum inequality Correct answer.
  4. The coefficient measures absolute poverty rather than distribution

Explanation

The Gini coefficient ranges from 0, where income is distributed perfectly equally, to 1, where one unit receives all income. It summarises the Lorenz curve as the area between the curve and the line of equality.

Question 16Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question asks candidates to explain the difference between a movement along the aggregate demand curve and a shift of the curve. Which event causes a shift to the right?

  1. A movement from a higher to a lower price level
  2. An increase in consumer confidence raising autonomous consumption Correct answer.
  3. A rise in the general price level
  4. A fall in the general price level

Explanation

Changes in the price level cause movements along the aggregate demand curve, whereas changes in any component of demand at a given price level shift the curve. Higher consumer confidence raises autonomous consumption and shifts aggregate demand to the right.

Question 17Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate must assess a policy of raising the minimum wage above the market-clearing level. Using competitive labour market analysis, which prediction follows?

  1. Quantity of labour supplied exceeds quantity demanded, creating unemployment Correct answer.
  2. Employment rises because workers become more productive
  3. Wages fall to restore equilibrium immediately
  4. The labour supply curve shifts leftward automatically

Explanation

A binding minimum wage above equilibrium raises the wage, so more workers offer labour while firms demand less, producing excess supply of labour. In the simple competitive model this surplus appears as unemployment among affected workers.

Question 18Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written paper on international trade, candidates evaluate a tariff imposed on imports. Which effect is correctly described?

  1. Government collects tariff revenue while consumer surplus falls Correct answer.
  2. Producer surplus falls because domestic firms lose protection
  3. World prices rise to the domestic tariff-inclusive level for all trade
  4. Consumer surplus rises because domestic prices fall

Explanation

A tariff raises the domestic price of imports, transferring surplus from consumers to domestic producers and generating government revenue, while consumer surplus falls. The net welfare effect is typically negative because of deadweight losses.

Question 19Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question presents a payoff matrix and asks candidates to identify a Nash equilibrium. Which statement correctly defines the concept?

  1. A combination that is always Pareto efficient
  2. A combination where each player's strategy is best given the other player's strategy Correct answer.
  3. A combination chosen by a central authority to coordinate players
  4. A combination that maximises the sum of payoffs for both players

Explanation

A Nash equilibrium is a strategy profile in which no player can improve their payoff by unilaterally changing strategy, given what the others do. It need not be socially optimal, and in the prisoner's dilemma it is Pareto inefficient.

Question 20Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate must evaluate the claim that a central bank can always eliminate a recession by expanding the money supply. Which analytical objection is most relevant at Baccalaureate level?

  1. Central banks are legally barred from changing interest rates
  2. Expansionary monetary policy always raises inflation immediately to infinity
  3. Monetary policy has no effect on aggregate demand under any conditions
  4. A liquidity trap may weaken transmission, and time lags may delay effects Correct answer.

Explanation

Monetary expansion works through interest rates, credit and expectations, and these channels can fail when rates approach the zero lower bound in a liquidity trap. Recognition and implementation lags also mean effects may arrive after the recession has evolved.

Question 21Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written answer on the Phillips curve, a candidate must explain the shift from the short-run to the long-run relationship. Which explanation is correct?

  1. There is no distinction between short-run and long-run versions
  2. Expectations adjust, so the long-run curve is vertical at the natural rate of unemployment Correct answer.
  3. The long-run curve is upward sloping because higher inflation lowers unemployment permanently
  4. The long-run Phillips curve is downward sloping at every inflation rate

Explanation

Once workers and firms adjust inflation expectations, the short-run trade-off disappears and unemployment returns to its natural rate whatever the inflation rate. The long-run Phillips curve is therefore drawn vertical at the natural rate.

Question 22Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question gives a production possibility frontier that is concave to the origin. Which interpretation should the candidate give?

  1. Opportunity cost is constant along the frontier
  2. Resources are perfectly substitutable between the two goods
  3. Increasing opportunity cost arises because resources are not equally suited to both goods Correct answer.
  4. The economy can produce beyond the frontier through specialisation

Explanation

A bowed-out frontier reflects rising opportunity cost: as more of one good is produced, resources less suited to it must be transferred, so each additional unit costs more of the other good. A straight-line frontier would indicate constant opportunity cost.

Question 23Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate is asked to evaluate the use of GDP per capita as a measure of living standards. Which criticism is most defensible?

  1. It measures the stock of wealth rather than annual output
  2. It omits non-market activity, income distribution and environmental costs Correct answer.
  3. It counts only government spending and ignores private consumption
  4. It is calculated only for developing economies

Explanation

GDP per capita is an average output measure that excludes unpaid household work and informal activity, says nothing about how income is distributed, and ignores environmental degradation and depletion of natural capital. These omissions limit its use as a welfare indicator.

Question 24Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written paper on market failure, candidates analyse a negative externality of production. Which policy combination is most consistent with correcting the inefficiency?

  1. A Pigouvian tax equal to the marginal external cost, or tradable permits capping emissions Correct answer.
  2. Public provision of the good at zero price to all consumers
  3. A subsidy to producers to increase output toward the private optimum
  4. Price controls set below the competitive equilibrium

Explanation

With a negative externality of production, marginal social cost exceeds marginal private cost, so output is above the social optimum. A Pigouvian tax equal to marginal external cost or a cap-and-trade permit scheme internalises the cost and moves output toward the efficient level.

Question 25Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question asks candidates to compare the multiplier effect under a fixed and a floating exchange rate. Which statement is analytically sound?

  1. The multiplier is typically smaller under a floating rate because appreciation crowds out net exports Correct answer.
  2. Exchange rate regimes have no bearing on the size of the multiplier
  3. The multiplier is always larger under a floating exchange rate
  4. The multiplier is always zero under a fixed exchange rate

Explanation

Under a floating rate, an expansionary fiscal impulse tends to raise interest rates and attract capital, appreciating the currency and reducing net exports, which offsets part of the initial demand increase. Under a fixed rate the currency cannot appreciate in the same way, so the multiplier is typically larger.

Question 26Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A European Baccalaureate economics candidate is asked to define the 'economic problem'. Which statement captures the core of the definition used in the written paper?

  1. The difficulty of measuring national income across countries
  2. The tendency of inflation to erode purchasing power over time
  3. Scarcity of resources relative to unlimited wants forces choices with opportunity costs Correct answer.
  4. The problem of how firms maximise profit in competitive markets

Explanation

The economic problem concerns unlimited wants facing scarce resources, which forces choices and creates opportunity cost. Profit maximisation, inflation and measurement issues are separate topics in the syllabus, not the definition of the economic problem itself.

Question 27Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written examination question on elasticity, a candidate is told that a 10% rise in price reduces quantity demanded by 25%. How should the price elasticity of demand be described?

  1. Inelastic, with a coefficient of 0.4 in absolute value
  2. Perfectly inelastic, because demand still exists at the higher price
  3. Elastic, with a coefficient of 2.5 in absolute value Correct answer.
  4. Unit elastic, because price and quantity change together

Explanation

Price elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in price, so 25/10 gives 2.5. Any value above 1 in absolute terms is elastic, meaning quantity responds proportionately more than price.

Question 28Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate writing on the circular flow must explain the role of the financial sector. Which statement is accurate for the written answer?

  1. It channels saving by households into investment by firms, expanding the flow of spending Correct answer.
  2. It determines the level of government taxation and public spending
  3. It sets the price of exports and imports through the exchange rate
  4. It fixes the wage rate in the labour market through collective bargaining

Explanation

In the extended circular flow, banks and financial markets collect savings and lend them to firms for investment, which adds to total spending. Exchange rates, fiscal decisions and wage bargaining are functions of other agents in the model.

Question 29Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question asks a candidate to distinguish a public good from a private good. Which pair of characteristics correctly identifies a pure public good?

  1. Rivalry in consumption and non-excludability
  2. Non-rivalry in consumption and excludability
  3. Non-rivalry in consumption and non-excludability Correct answer.
  4. Rivalry in consumption and excludability

Explanation

A pure public good is both non-rival, so one person's use does not reduce another's, and non-excludable, so non-payers cannot be prevented from consuming it. These two features together produce the free-rider problem and justify public provision.

Question 30Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written answer on unemployment, a candidate must classify a worker who loses a job in a declining steel industry and lacks the skills demanded by growing service industries. Which type of unemployment is this?

  1. Seasonal unemployment
  2. Structural unemployment Correct answer.
  3. Frictional unemployment
  4. Cyclical unemployment

Explanation

Structural unemployment arises when the skills or location of workers no longer match the pattern of demand across industries. The decline of steel and the rise of services is a classic mismatch of this kind.

Question 31Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate is asked to state the main function of a central bank in a written paper. Which function belongs to a central bank rather than to commercial banks?

  1. Acting as lender of last resort to the banking system Correct answer.
  2. Accepting deposits from households and lending to firms
  3. Issuing credit cards to retail customers
  4. Providing overdraft facilities to small businesses

Explanation

Central banks provide liquidity support to solvent banks in distress, which is the lender-of-last-resort function. Retail deposit-taking, overdrafts and credit cards are commercial banking activities.

Question 32Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written paper on national income, a candidate must distinguish nominal from real GDP. Which statement is correct?

  1. Nominal GDP measures only goods, while real GDP includes services
  2. Real GDP is adjusted for price changes, while nominal GDP is valued at current prices Correct answer.
  3. Real GDP always exceeds nominal GDP in a growing economy
  4. Nominal GDP is adjusted for inflation, while real GDP uses base-year prices

Explanation

Nominal GDP values output at the prices prevailing in the year of measurement, so it mixes quantity and price changes. Real GDP holds prices constant at a base year, isolating changes in the volume of output.

Question 33Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate writing on the balance of payments must place a payment for imported machinery. In which account does it belong?

  1. The current account, as a visible import of goods Correct answer.
  2. The financial account, as a portfolio investment outflow
  3. The current account, as an income flow from abroad
  4. The capital account, as a transfer of capital

Explanation

Imported machinery is a physical good, so it is recorded as a visible trade import within the goods component of the current account. The financial and capital accounts record asset transactions and capital transfers, not merchandise trade.

Question 34Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written answer on supply, a candidate must identify a factor that shifts the supply curve for a good to the right. Which change does so?

  1. A fall in household incomes when the good is normal
  2. A rise in the market price of the good
  3. A fall in the cost of a key raw material Correct answer.
  4. A rise in the price of a complementary good

Explanation

Lower input costs raise profitability at every price, so producers are willing to supply more and the supply curve shifts right. A change in the good's own price produces movement along the curve, and income or complementary-price changes affect demand.

Question 35Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question asks a candidate to explain the concept of consumer surplus. Which statement is the correct interpretation?

  1. The total amount consumers spend on a good at the market price
  2. The difference between what consumers are willing to pay and what they actually pay Correct answer.
  3. The difference between total revenue and total cost for producers
  4. The extra revenue a firm earns when it raises its price

Explanation

Consumer surplus measures the benefit buyers receive because they pay less than their maximum willingness to pay. Graphically it is the area below the demand curve and above the price line.

Question 36Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written paper on market failure, a candidate must explain why a positive externality of consumption leads to under-consumption. Which reasoning is correct?

  1. The good is produced by a monopoly, which restricts output to raise price
  2. The good is non-excludable, so firms cannot charge a price for it
  3. Social benefit exceeds private benefit, so the free market consumes less than the socially optimal quantity Correct answer.
  4. Private benefit exceeds social benefit, so consumers buy too much of the good

Explanation

With a positive externality, marginal social benefit is above marginal private benefit, so the demand curve understates true benefit and the market equilibrium lies below the social optimum. A subsidy can close the gap by shifting private demand outward.

Question 37Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate is given data for a country: nominal GDP rises by 6% while the GDP deflator rises by 4%. What is the approximate growth rate of real GDP in the written answer?

  1. About 10%
  2. About 2% Correct answer.
  3. About 1.5%
  4. About 24%

Explanation

Real growth is approximately nominal growth minus inflation, so 6% minus 4% gives about 2%. This approximation is accurate enough for the small percentage changes typically used in written examination data questions.

Question 38Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written answer on monetary policy transmission, a candidate must explain how a rise in the central bank's policy rate is expected to affect aggregate demand. Which chain of reasoning is correct?

  1. Higher interest rates lower saving returns, so households spend more and demand rises
  2. Higher interest rates raise borrowing costs and saving returns, reducing consumption and investment Correct answer.
  3. Higher interest rates raise the exchange rate, which increases net exports and aggregate demand
  4. Higher interest rates reduce government debt interest, so public spending increases

Explanation

A higher policy rate is passed through to loan and deposit rates, making credit more expensive and saving more attractive. Both effects reduce consumption and investment, so aggregate demand falls.

Question 39Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question asks a candidate to explain the difference between a progressive and a regressive tax. Which example correctly illustrates a progressive tax?

  1. A tax on cigarettes that is a fixed amount per packet
  2. A poll tax of the same amount for every adult
  3. A value added tax charged at a single rate on most goods
  4. An income tax whose average rate rises as income rises Correct answer.

Explanation

A progressive tax takes a larger proportion of income from higher earners, so its average rate rises with income. Proportional and regressive taxes either take the same share or a larger share from lower incomes.

Question 40Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate writing on the European Union must explain the single market. Which description matches the written syllabus treatment?

  1. The free movement of goods, services, capital and persons among member states Correct answer.
  2. A monetary union in which all members use the euro
  3. A free trade area that removes tariffs only on agricultural products
  4. A customs union that harmonises external tariffs but restricts labour mobility

Explanation

The single market extends beyond tariff removal to the four freedoms of goods, services, capital and persons. Monetary union involves the euro but is a separate stage that not all members have joined.

Question 41Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written answer on economies of scale, a candidate must distinguish internal from external economies. Which example is an external economy of scale?

  1. Cost savings from a single firm expanding its factory and spreading fixed costs
  2. Cost savings from bulk purchasing by one large firm
  3. Cost savings from a firm adopting a new production technique
  4. Cost savings from the growth of an industry cluster that shares a skilled labour pool Correct answer.

Explanation

External economies arise from the expansion of the whole industry, for example a shared pool of specialised labour or improved infrastructure. Internal economies come from the growth of the individual firm itself.

Question 42Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate must explain the accelerator effect in a written answer on investment. Which statement correctly describes it?

  1. Investment rises when the growth rate of output rises, because firms need more capital Correct answer.
  2. Investment rises when interest rates fall, because borrowing becomes cheaper
  3. Investment rises when the exchange rate depreciates, because exports become cheaper
  4. Investment rises when government spending falls, because taxes are lower

Explanation

The accelerator links the level of investment to the rate of change of output: faster growth requires more capital stock, so investment increases. Interest rates, exchange rates and fiscal policy affect investment through other channels.

Question 43Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written paper on competition policy, a candidate must identify a practice that a competition authority would typically treat as an abuse of dominance. Which practice fits?

  1. A firm investing in research and development that reduces its costs
  2. A firm entering a new market with an innovative product
  3. A dominant firm pricing below cost to eliminate rivals and then raising prices Correct answer.
  4. A firm lowering its price in response to a rival's efficiency gains

Explanation

Predatory pricing by a dominant firm aims to remove competitors and then exploit market power, which is a classic abuse of dominance. Competitive price cuts, innovation and market entry are normal rivalry that competition policy protects.

Question 44Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question asks a candidate to evaluate a policy of quantitative easing. Which transmission channel is correctly described?

  1. Central bank sales of government bonds reduce bank reserves and raise long-term yields
  2. Central bank purchases of bonds directly reduce the budget deficit
  3. Central bank purchases of government bonds raise bond prices and lower long-term yields Correct answer.
  4. Central bank purchases of bonds increase the government's tax revenue

Explanation

When a central bank buys bonds, their price rises and the yield falls, lowering long-term borrowing costs for firms and households. This portfolio rebalancing channel is central to how quantitative easing is expected to stimulate demand.

Question 45Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate writing on the Laffer curve must explain its central claim. Which statement is correct?

  1. Tax revenue is zero at both a zero rate and a 100% rate, so some intermediate rate maximises revenue Correct answer.
  2. Tax revenue depends only on the size of the population
  3. Tax revenue is maximised at the highest possible tax rate
  4. Tax revenue always rises when the tax rate rises, because the base is unaffected

Explanation

The Laffer curve shows revenue as zero when the rate is zero and also zero at 100% because no one works, so revenue must peak at some intermediate rate. Beyond that point higher rates shrink the tax base enough to reduce revenue.

Question 46Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written answer on development economics, a candidate must explain the human development index. Which combination of components does the HDI use?

  1. Life expectancy, education and gross national income per capita Correct answer.
  2. Gini coefficient, poverty rate and literacy
  3. Inflation, unemployment and the budget deficit
  4. Export volume, tariff level and foreign direct investment

Explanation

The HDI combines health measured by life expectancy, education measured by schooling years, and income measured by GNI per capita. It is a broader measure of development than income alone.

Question 47Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate must analyse why a price ceiling set below equilibrium creates deadweight loss. Which explanation is correct for the written answer?

  1. Producers supply more than consumers demand, creating a surplus
  2. Quantity traded falls below the equilibrium, so mutually beneficial transactions are lost Correct answer.
  3. Quantity traded rises above the equilibrium, so resources are overused
  4. The ceiling raises the price above equilibrium, reducing consumer surplus

Explanation

A binding ceiling holds the price below equilibrium, so suppliers offer less than the equilibrium quantity and some beneficial trades do not occur. The lost surplus is the deadweight loss, and shortages and queuing usually appear alongside it.

Question 48Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A written question asks a candidate to assess a policy of imposing a tariff on imports. Which statement correctly identifies a welfare effect in a partial equilibrium analysis?

  1. Both consumer and producer surplus rise because domestic output expands
  2. Consumer surplus rises and producer surplus falls, with a net welfare gain
  3. Consumer surplus falls and producer surplus rises, with the government gaining tariff revenue and a net deadweight loss Correct answer.
  4. The tariff has no effect on surplus because the price is unchanged

Explanation

A tariff raises the domestic price, reducing consumer surplus and increasing producer surplus, while the government collects revenue on the reduced import volume. The losses exceed the gains because of consumption and production distortions, giving a net deadweight loss.

Question 49Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

In a written paper on game theory, a candidate is given a one-shot prisoners' dilemma. Which outcome is predicted by the Nash equilibrium when both players have a dominant strategy to defect?

  1. One defects while the other cooperates, giving the defector the highest payoff
  2. Players randomise between cooperating and defecting in equal proportions
  3. Both defect, producing a Pareto-inferior outcome compared with mutual cooperation Correct answer.
  4. Both cooperate, because cooperation maximises joint payoff

Explanation

When defection is dominant for both players, the only Nash equilibrium is mutual defection, even though mutual cooperation would make both better off. This gap between individual and joint rationality defines the prisoners' dilemma.

Question 50Written examinations (L1, L2, Mathematics compulsory; plus two further written subjects)

A candidate must evaluate the claim that a central bank with an inflation target can always eliminate a demand-deficient recession. Which criticism is most defensible?

  1. Inflation targeting prevents the central bank from using open market operations
  2. Interest rates cannot fall below the effective lower bound, so conventional policy may be exhausted Correct answer.
  3. Monetary policy affects output only through the exchange rate
  4. Central banks cannot influence bank reserves in a modern economy

Explanation

When the policy rate approaches its effective lower bound, further cuts are constrained, so conventional easing may be insufficient in a deep recession. Unconventional tools can help but are not guaranteed to restore full employment quickly.