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FY13CE Economics study materials
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FY13CE Economics practice questions

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Question 1Scarcity, markets and consumer decisions

According to the Law of Diminishing Marginal Utility, what happens as a consumer in Suva consumes additional units of fresh coconuts within a given time period?

  1. The extra satisfaction derived from each additional coconut eventually decreases Correct answer.
  2. The total utility obtained from all coconuts combined begins to fall immediately from the first unit
  3. The price the consumer is willing to pay for extra coconuts rises continuously
  4. The marginal utility remains constant while average utility doubles

Explanation

The Law of Diminishing Marginal Utility states that as an individual consumes more units of a specific good in a given period, the additional satisfaction (marginal utility) gained from each successive unit decreases.

Question 2Scarcity, markets and consumer decisions

A consumer allocating income between two goods, Good A and Good B, achieves consumer equilibrium under the equimarginal principle. Good A is priced at $5.00 FJD and provides a marginal utility of 30 utils. If Good B is priced at $2.00 FJD, what must the marginal utility of Good B be at equilibrium?

  1. 12 utils Correct answer.
  2. 6 utils
  3. 15 utils
  4. 60 utils

Explanation

Under the equimarginal principle, utility is maximised when MU_A / P_A = MU_B / P_B. Here, MU_A / P_A = 30 / 5 = 6 utils per dollar. Therefore, MU_B / 2 must equal 6, which gives MU_B = 6 × 2 = 12 utils.

Question 3Scarcity, markets and consumer decisions

What does the term 'consumer surplus' represent in microeconomic market analysis?

  1. The difference between the maximum price a consumer is willing to pay and the actual price paid Correct answer.
  2. The excess quantity of goods left unsold on market stalls at the end of the trading day
  3. The total expenditure by households on durable and non-durable goods across the economy
  4. The profit earned by retail merchants after deducting all wholesale purchasing costs

Explanation

Consumer surplus is the economic measure of consumer benefit. It is calculated as the difference between the highest price a consumer is willing and able to pay for a good and the actual market price they pay.

Question 4Scarcity, markets and consumer decisions

Which two economic effects combine to explain why a normal demand curve slopes downward to the right?

  1. The substitution effect and the income effect Correct answer.
  2. The multiplier effect and the accelerator effect
  3. The law of diminishing returns and economies of scale
  4. The Fisher effect and the liquidity preference effect

Explanation

When the price of a good falls, two distinct effects cause quantity demanded to rise: the substitution effect (the good is relatively cheaper compared to alternatives) and the income effect (the lower price increases the consumer's real purchasing power).

Question 5Scarcity, markets and consumer decisions

Which of the following causes an increase in the quantity demanded of poultry (a movement along the demand curve) rather than an outward shift of the demand curve?

  1. A decrease in the market retail price of poultry Correct answer.
  2. A substantial rise in average household disposable income
  3. A health campaign highlighting the dietary benefits of eating white meat
  4. A sharp increase in the price of beef, a close substitute for poultry

Explanation

A change in the price of the good itself causes a movement along the existing demand curve (known as a change in quantity demanded). Non-price determinants such as income, consumer tastes, or prices of related goods cause the entire curve to shift.

Question 6Scarcity, markets and consumer decisions

At the Suva municipal market, the price of fresh reef fish falls from $10.00 FJD per kg to $8.00 FJD per kg. As a result, the quantity demanded increases from 500 kg to 650 kg per day. What is the price elasticity of demand (PED) for fresh reef fish over this range?

  1. -1.50 Correct answer.
  2. -0.67
  3. -1.20
  4. -2.50

Explanation

The percentage change in price is ($8.00 - $10.00) / $10.00 = -20%. The percentage change in quantity demanded is (650 - 500) / 500 = +30%. Therefore, PED = %ΔQd / %ΔP = +30% / -20% = -1.50.

Question 7Scarcity, markets and consumer decisions

A bus company operating routes in Viti Levu raises its fares by 15 percent, and finds that its total revenue rises by 8 percent. What does this reveal about the price elasticity of demand for bus travel?

  1. Demand is price inelastic Correct answer.
  2. Demand is price elastic
  3. Demand is unit elastic
  4. Demand is perfectly elastic

Explanation

Under the total revenue test, when a price increase results in an increase in total revenue, demand is price inelastic (|PED| < 1). The percentage drop in passenger numbers is smaller than the percentage increase in fare, leading to greater overall revenue.

Question 8Scarcity, markets and consumer decisions

Household incomes in Lautoka increase by 10 percent due to an expanding urban manufacturing sector. Consequently, the quantity demanded of a particular low-grade canned meat falls by 6 percent. What is the income elasticity of demand (YED) and what type of good is it?

  1. YED = -0.60; it is an inferior good Correct answer.
  2. YED = +0.60; it is a normal necessity
  3. YED = -1.67; it is a luxury good
  4. YED = +1.67; it is a superior good

Explanation

Income elasticity of demand is calculated as %ΔQd / %ΔY = -6% / +10% = -0.60. A negative YED indicates that the good is an inferior good, meaning consumers purchase less of it as their incomes rise, switching to higher-quality alternatives.

Question 9Scarcity, markets and consumer decisions

The price of butter increases by 20 percent, causing the quantity demanded of margarine to rise by 15 percent. What is the cross elasticity of demand (XED) between margarine and butter, and how are the two goods related?

  1. XED = +0.75; the goods are substitute goods Correct answer.
  2. XED = -0.75; the goods are complementary goods
  3. XED = +1.33; the goods are inferior goods
  4. XED = 0; the goods are completely independent

Explanation

Cross elasticity of demand is calculated as %ΔQd of margarine / %ΔPrice of butter = +15% / +20% = +0.75. A positive XED indicates that the two products are substitutes, meaning a price rise in one leads consumers to buy more of the other.

Question 10Scarcity, markets and consumer decisions

Why is the price elasticity of supply (PES) for agricultural crops like sugarcane typically more inelastic in the short run compared to manufactured goods?

  1. Agricultural crops require a biological gestation period and cannot be expanded instantaneously Correct answer.
  2. Sugarcane farmers operate with unlimited spare machinery and storage capacity
  3. Consumers view sugar as an essential necessity with a highly inelastic demand curve
  4. Agricultural inputs can be transferred immediately into manufacturing production

Explanation

Price elasticity of supply measures the responsiveness of quantity supplied to a price change. Sugarcane and other agricultural crops have biological growing cycles (gestation periods) lasting many months, meaning farmers cannot rapidly increase harvest volumes in response to short-run price hikes.

Question 11Scarcity, markets and consumer decisions

If the current market price of tomatoes in the municipal market is set above the market equilibrium price, what will be the resulting market condition and price pressure?

  1. An excess supply (surplus), exerting downward pressure on price toward equilibrium Correct answer.
  2. An excess demand (shortage), exerting upward pressure on price toward equilibrium
  3. A permanent state of balance where quantity supplied equals quantity demanded
  4. An immediate shift of the market demand curve outward to clear the market

Explanation

When price is above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Vendors find themselves with unsold produce at the end of the day, forcing them to lower prices to attract buyers until equilibrium is restored.

Question 12Scarcity, markets and consumer decisions

The Fijian Competition and Consumer Commission (FCCC) imposes a binding price ceiling (maximum price) on essential cooking oil below the market equilibrium price. What is the expected economic consequence in the market?

  1. A persistent market shortage where quantity demanded exceeds quantity supplied Correct answer.
  2. A persistent market surplus where quantity supplied exceeds quantity demanded
  3. An automatic expansion in supply from local oil producers to satisfy excess demand
  4. A complete elimination of informal non-price rationing and queuing

Explanation

A binding price ceiling set below the equilibrium price creates a lower price for consumers, which encourages higher quantity demanded while discouraging producers from supplying. Because price cannot rise to clear the market, a persistent shortage develops, often resulting in queuing or rationing.

Question 13Scarcity, markets and consumer decisions

If the government legislates a national minimum wage (price floor) for unskilled labour set strictly above the free market equilibrium wage, what is the theoretical outcome in a competitive labour market?

  1. A surplus of labour, representing an increase in involuntary unemployment among unskilled workers Correct answer.
  2. A shortage of labour, where employers cannot find enough workers to fill available vacancies
  3. A reduction in the number of individuals actively seeking employment in the formal sector
  4. An immediate equalisation of wages across both skilled and unskilled occupations

Explanation

A minimum wage above equilibrium increases the quantity of labour supplied (more workers want to work at the higher wage) while reducing the quantity of labour demanded by employers (higher labour costs reduce hiring). This mismatch creates a surplus of labour, which is unemployment.

Question 14Scarcity, markets and consumer decisions

In the short run, what primary factor explains why marginal product eventually begins to decline as more units of a variable factor are added?

  1. The Law of Diminishing Marginal Returns due to fixed quantities of other productive inputs Correct answer.
  2. Managerial diseconomies of scale arising from communication breakdowns in large corporate firms
  3. A continuous fall in the market price of the final product as output increases
  4. A steady deterioration in the physical skill and motivation of additional workers

Explanation

The Law of Diminishing Returns states that as successive units of a variable factor (such as labour) are added to a fixed factor (such as land or factory machinery), a point is reached where each extra unit of the variable input yields smaller additions to total output.

Question 15Scarcity, markets and consumer decisions

What is the mathematical and graphical relationship between Marginal Cost (MC) and Average Total Cost (ATC)?

  1. The MC curve intersects the ATC curve at the ATC curve's minimum point Correct answer.
  2. The MC curve lies continuously below the ATC curve at all levels of output
  3. The MC curve cuts the ATC curve at the ATC curve's maximum point
  4. The ATC curve begins to rise while the MC curve is still falling downward

Explanation

When marginal cost is below average total cost, it pulls average total cost down. When marginal cost is above average total cost, it pulls average total cost up. Therefore, the MC curve must intersect the ATC curve at its exact minimum point.

Question 16Scarcity, markets and consumer decisions

A garment manufacturing workshop in Suva has a Total Fixed Cost (TFC) of $1,200 FJD per week. When producing 60 shirts per week, its Total Variable Cost (TVC) is $1,800 FJD. What is the Average Total Cost (ATC) per shirt at this output level?

  1. $50.00 FJD Correct answer.
  2. $20.00 FJD
  3. $30.00 FJD
  4. $70.00 FJD

Explanation

Total Cost (TC) is Total Fixed Cost plus Total Variable Cost: $1,200 + $1,800 = $3,000 FJD. Average Total Cost (ATC) is TC / Quantity = $3,000 / 60 = $50.00 FJD per shirt. Alternatively, AFC ($1,200/60 = $20) + AVC ($1,800/60 = $30) = $50.00 FJD.

Question 17Scarcity, markets and consumer decisions

A commercial bakery in Nausori produces 100 loaves of bread at a Total Cost of $450.00 FJD. If expanding production to 101 loaves raises Total Cost to $454.00 FJD, what is the Marginal Cost of the 101st loaf?

  1. $4.00 FJD Correct answer.
  2. $4.50 FJD
  3. $4.54 FJD
  4. $454.00 FJD

Explanation

Marginal Cost is the addition to Total Cost resulting from producing one extra unit of output: MC = ΔTC / ΔQ = ($454.00 - $450.00) / (101 - 100) = $4.00 FJD.

Question 18Scarcity, markets and consumer decisions

When a growing commercial firm experiences falling Long-Run Average Cost (LRAC) as its scale of production expands, the firm is said to be enjoying:

  1. Economies of scale Correct answer.
  2. Diseconomies of scale
  3. The Law of Diminishing Marginal Returns
  4. Constant returns to outlay

Explanation

Economies of scale refer to cost advantages experienced by firms when their scale of operation expands in the long run, resulting in a downward-sloping Long-Run Average Cost curve.

Question 19Scarcity, markets and consumer decisions

A major hotel resort in the Yasawa Islands purchases bulk food supplies and beverages at significant wholesale discounts compared to small village homestays. What type of economy of scale does this demonstrate?

  1. Purchasing or commercial economy of scale Correct answer.
  2. Technical or indivisibility economy of scale
  3. Financial or borrowing economy of scale
  4. External or agglomeration economy of scale

Explanation

Purchasing (or commercial) economies of scale occur when large enterprises buy raw materials and inventory in bulk, enabling them to negotiate volume discounts and lower unit purchasing costs compared to smaller competitors.

Question 20Scarcity, markets and consumer decisions

Which of the following is an essential characteristic of a perfectly competitive market structure?

  1. Firms sell homogeneous (standardised) products and are price takers Correct answer.
  2. A single dominant firm controls industry output through strong patent protections
  3. Significant legal and financial barriers prevent new producers from entering
  4. Firms spend heavily on brand advertising and cosmetic product differentiation

Explanation

Perfect competition is characterized by many small buyers and sellers, homogeneous (identical) products, perfect information, and free entry and exit. Because individual firms have no market power, they must accept the market equilibrium price as given.

Question 21Scarcity, markets and consumer decisions

Why is the demand curve facing an individual firm in a perfectly competitive market a horizontal line at the market price?

  1. The firm is a price taker and can sell any quantity at the established market price Correct answer.
  2. The firm faces downward-sloping market demand and must lower price to sell more
  3. The firm has colluded with industry rivals to fix prices at the monopoly level
  4. Consumer demand for the good is completely unresponsive to changes in price

Explanation

Because a competitive firm is tiny relative to the overall market and produces a product identical to its rivals, it has no pricing power. It can sell as much as it can produce at the prevailing market price, making its individual demand curve perfectly elastic (horizontal, where P = AR = MR).

Question 22Scarcity, markets and consumer decisions

To maximise total profit (or minimise total losses), at what level of output should any firm in any market structure produce?

  1. Where Marginal Revenue equals Marginal Cost (MR = MC) Correct answer.
  2. Where Average Total Cost is at its absolute minimum point
  3. Where Total Revenue reaches its maximum achievable peak
  4. Where Price equals Average Fixed Cost (P = AFC)

Explanation

The universal profit-maximising condition for all business firms is to produce at the output where Marginal Revenue equals Marginal Cost (MR = MC), provided that MC is rising. Producing beyond this point adds more to costs than to revenue.

Question 23Scarcity, markets and consumer decisions

Under what specific cost condition must a competitive firm immediately cease production and shut down in the short run?

  1. When the market price falls below the minimum Average Variable Cost (P < AVC) Correct answer.
  2. When the market price falls below the minimum Average Total Cost (P < ATC)
  3. When the firm earns zero economic profit (normal profit)
  4. When total fixed costs exceed total variable costs

Explanation

In the short run, fixed costs must be paid regardless of whether the firm operates or shuts down. If market price is above AVC, the firm can cover all variable costs and contribute toward paying down fixed costs. If price drops below minimum AVC (P < AVC), operating adds to losses, so shutting down minimises losses to fixed costs alone.

Question 24Scarcity, markets and consumer decisions

What happens in a perfectly competitive industry in the long run when incumbent firms are earning supernormal (economic) profits?

  1. New firms enter the industry, increasing industry supply and lowering price until only normal profit is earned Correct answer.
  2. Existing firms merge to form an unregulated monopoly, permanently barring new competitors
  3. The market demand curve shifts inward to eliminate the excess profits
  4. Firms permanently reduce output to sustain high artificial scarcity prices

Explanation

Because there are zero barriers to entry in perfect competition, supernormal profits attract new firms. The entry of new firms increases total industry supply, shifting the market supply curve to the right, which drives down the market equilibrium price until firms earn only normal profits (P = ATC).

Question 25Scarcity, markets and consumer decisions

Which of the following market characteristics distinguishes a pure monopoly from other market structures?

  1. A single producer with substantial barriers to entry selling a good with no close substitutes Correct answer.
  2. A large number of small firms selling differentiated products with zero entry barriers
  3. Intense non-price competition through nationwide advertising and customer loyalty programs
  4. A perfectly horizontal demand curve where marginal revenue equals average revenue

Explanation

A pure monopoly is defined by a single firm being the sole supplier of a good or service in the market, protected by high barriers to entry, and offering a product that has no close substitutes.

Question 26Scarcity, markets and consumer decisions

Why does a single-price monopolist's Marginal Revenue (MR) curve lie below its downward-sloping Demand (Average Revenue) curve at every output level?

  1. To sell an additional unit of output, the monopolist must lower the price on all units sold Correct answer.
  2. The monopolist faces increasing marginal costs across all levels of production
  3. Total fixed costs rise continuously as additional output is produced and marketed
  4. Consumer utility increases exponentially as more units are consumed

Explanation

Because a single-price monopolist faces the downward-sloping market demand curve, selling an additional unit requires reducing the price not just for that extra unit, but for all preceding units. The revenue lost on previous units means that marginal revenue is strictly less than price (MR < P).

Question 27Scarcity, markets and consumer decisions

Why does an unregulated profit-maximising monopoly lead to allocative inefficiency compared to a perfectly competitive market?

  1. The monopolist restricts output and charges a price that exceeds marginal cost (P > MC) Correct answer.
  2. The monopolist produces where marginal cost is lower than average variable cost
  3. The monopolist operates at the lowest point on its long-run average cost curve
  4. The monopolist produces a larger output than society desires at a zero market price

Explanation

Allocative efficiency occurs when price equals marginal cost (P = MC), indicating that the value consumers place on the last unit equals the marginal cost of producing it. A profit-maximising monopolist restricts output to where MR = MC, resulting in P > MC, which creates a deadweight welfare loss for society.

Question 28Scarcity, markets and consumer decisions

Energy Fiji Limited (EFL) manages the national electricity transmission grid. Why is electricity transmission commonly regarded as a 'natural monopoly'?

  1. Enormous fixed capital infrastructure costs create continuous economies of scale over total market demand Correct answer.
  2. Electricity is a natural commodity harvested directly from rivers without human processing
  3. Private competition is legally prohibited by international environmental treaties
  4. Electricity transmission has zero variable operating costs regardless of consumption

Explanation

A natural monopoly arises when enormous initial capital costs (such as building nationwide high-voltage transmission lines and substations) create economies of scale so extensive that a single firm can supply the entire market at a lower average cost than two or more competing firms duplicating the infrastructure.

Question 29Scarcity, markets and consumer decisions

Which of the following is a necessary condition for a firm to successfully practice price discrimination?

  1. The firm must possess market power and be able to prevent the resale (arbitrage) of its product between customer groups Correct answer.
  2. The market must be perfectly competitive with thousands of identical sellers
  3. All consumer segments must have identical price elasticities of demand
  4. The government must mandate uniform retail prices across all administrative divisions

Explanation

For price discrimination to succeed, three conditions must hold: (1) the firm must have price-setting market power; (2) the firm must be able to identify distinct market segments with different price elasticities of demand; and (3) the firm must be able to prevent resale (arbitrage) between buyers who pay the lower price and those charged the higher price.

Question 30Scarcity, markets and consumer decisions

Inter-island ferry operators in Fiji charge lower passenger fares to registered school students and senior citizens than to working adults. What form of pricing practice does this exemplify?

  1. Third-degree price discrimination based on differing price elasticities of demand Correct answer.
  2. First-degree (perfect) price discrimination extracting full consumer surplus
  3. Predatory pricing designed to eliminate all regional water-taxi competitors
  4. Second-degree price discrimination based on volume and bulk discounts

Explanation

Third-degree price discrimination occurs when a seller divides consumers into distinct demographic or geographic sub-markets (such as students and working adults) that have different price elasticities of demand, and charges each segment a different price.

Question 31Scarcity, markets and consumer decisions

Which market structure best describes the restaurant and café sector in Suva, where numerous dining establishments compete by offering unique culinary styles, distinct ambiance, and specialized branding?

  1. Monopolistic competition Correct answer.
  2. Perfect competition
  3. Pure monopoly
  4. Monopsony

Explanation

Monopolistic competition features many independent firms, relatively low barriers to entry and exit, and differentiated products. Each restaurant differentiates its meals and dining atmosphere, giving it slight pricing power over its specific brand.

Question 32Scarcity, markets and consumer decisions

In the long-run equilibrium of a monopolistically competitive industry, which condition holds for each firm?

  1. Price equals Average Total Cost (P = ATC), earning normal profit with excess capacity Correct answer.
  2. Price equals Marginal Cost (P = MC), achieving full allocative efficiency
  3. The firm produces at the minimum point of its Long-Run Average Cost curve
  4. Supernormal profits are permanently preserved due to insurmountable legal barriers

Explanation

In long-run equilibrium under monopolistic competition, free entry drives economic profit to zero (normal profit), where the downward-sloping demand curve is tangent to the ATC curve (P = ATC). Because the demand curve slopes downward, tangency occurs to the left of minimum ATC, resulting in excess capacity.

Question 33Scarcity, markets and consumer decisions

Which of the following is the most critical defining feature of an oligopolistic market structure?

  1. Mutual interdependence among a small number of dominant firms Correct answer.
  2. Complete absence of non-price competition or marketing activities
  3. A single buyer controlling factor purchases across the entire nation
  4. Total freedom of entry ensuring zero long-run economic profits

Explanation

The defining hallmark of oligopoly is mutual interdependence. Because the market is dominated by a few large firms, each firm's pricing, output, and advertising decisions directly impact its rivals, and rivals' anticipated reactions must be considered.

Question 34Scarcity, markets and consumer decisions

According to the kinked demand curve theory of oligopoly, why do prices in oligopolistic markets tend to exhibit stickiness or rigidity?

  1. Rivals will match any price decrease but will not follow any price increase Correct answer.
  2. Firms face a perfectly horizontal marginal cost curve across all output ranges
  3. Consumer demand is completely price inelastic above and below the current price
  4. Government authorities legally fix prices and penalise any deviations

Explanation

The kinked demand curve model assumes an asymmetric response from competitors: if an oligopolist raises its price, rivals will not follow, making demand elastic; if it lowers price, rivals will match the cut to avoid losing market share, making demand inelastic. This creates a kink in the demand curve and a vertical discontinuity in the marginal revenue curve, stabilizing price.

Question 35Scarcity, markets and consumer decisions

Why do formal collusive cartels (such as agreements to fix high market prices) frequently suffer from inherent instability over time?

  1. Each individual cartel member has a strong incentive to secretly cheat by undercutting the agreed price to expand sales Correct answer.
  2. Cartel agreements are actively supported and enforced by international antitrust regulators
  3. Consumer demand for cartelised products becomes perfectly elastic immediately after an agreement
  4. Member firms experience a sudden surge in average fixed costs as production quotas are reduced

Explanation

Cartels are unstable because while collective profit is maximised by restricting output and holding price high, each individual member faces an incentive to cheat. At the high cartel price, an individual firm's marginal revenue exceeds its marginal cost, making it highly lucrative to secretly shade prices and sell additional volume.

Question 36Macroeconomics, finance and policy

Which of the following statements correctly identifies the three standard approaches used by national statistical offices to measure Gross Domestic Product (GDP)?

  1. The output (production) approach, the income approach, and the expenditure approach Correct answer.
  2. The taxation approach, the monetary approach, and the balance of payments approach
  3. The industrial approach, the agricultural approach, and the financial services approach
  4. The foreign reserve approach, the inflation approach, and the exchange rate approach

Explanation

Gross Domestic Product measures total economic activity using three equivalent methods: the output (production) approach (total value added by all domestic producers), the income approach (total factor incomes earned), and the expenditure approach (total spending on final domestic goods and services). In theory, all three yield identical totals.

Question 37Macroeconomics, finance and policy

In Fiji's national accounts for a given fiscal year, Private Consumption expenditure is $6,000 million FJD, Gross Private Domestic Investment is $1,500 million FJD, Government Final Consumption is $2,000 million FJD, Exports of goods and services total $2,500 million FJD, and Imports of goods and services total $3,000 million FJD. What is Fiji's Gross Domestic Product (GDP) using the expenditure approach?

  1. $9,000 million FJD Correct answer.
  2. $10,000 million FJD
  3. $9,500 million FJD
  4. $15,000 million FJD

Explanation

Using the expenditure approach, GDP = C + I + G + (X - M). Substituting the figures: GDP = $6,000M + $1,500M + $2,000M + ($2,500M - $3,000M) = $9,500M - $500M = $9,000 million FJD.

Question 38Macroeconomics, finance and policy

Why is Real GDP considered a more accurate indicator of actual economic growth than Nominal GDP?

  1. Real GDP is adjusted to remove the distorting effects of general price inflation Correct answer.
  2. Real GDP includes the monetary value of all informal and unpaid volunteer activities
  3. Real GDP measures only the output of private domestic commercial corporations
  4. Real GDP automatically accounts for environmental pollution and natural resource depletion

Explanation

Nominal GDP measures output using current market prices, meaning an increase can be driven purely by price inflation rather than an actual expansion in goods and services. Real GDP values output at constant base-year prices, isolating real physical output growth from price fluctuations.

Question 39Macroeconomics, finance and policy

In a given year, Fiji's Nominal GDP is recorded at $11,000 million FJD. If the GDP Deflator stands at 110.0 (relative to a base year index of 100.0), what is the value of Fiji's Real GDP?

  1. $10,000 million FJD Correct answer.
  2. $12,100 million FJD
  3. $9,900 million FJD
  4. $1,000 million FJD

Explanation

Real GDP is calculated using the formula: Real GDP = (Nominal GDP / GDP Deflator) × 100. Substituting the values: Real GDP = ($11,000 million / 110.0) × 100 = $100 million × 100 = $10,000 million FJD.

Question 40Macroeconomics, finance and policy

Fiji's Gross Domestic Product is $10,000 million FJD. If Fiji citizens and companies earn $200 million FJD from assets abroad, while foreign owners earn $600 million FJD from assets located inside Fiji, what is Fiji's Gross National Income (GNI)?

  1. $9,600 million FJD Correct answer.
  2. $10,400 million FJD
  3. $10,800 million FJD
  4. $9,200 million FJD

Explanation

Gross National Income (GNI) equals GDP plus Net Factor Income from Abroad (NFIA). Here, NFIA = Factor income from abroad ($200M) - Factor income paid abroad ($600M) = -$400 million FJD. Therefore, GNI = $10,000M + (-$400M) = $9,600 million FJD.

Question 41Macroeconomics, finance and policy

Which of the following highlights a major limitation of using Gross Domestic Product (GDP) per capita as a measure of the standard of living in Pacific island economies like Fiji?

  1. It excludes non-market subsistence agricultural and artisanal fishing production Correct answer.
  2. It fails to capture corporate income tax payments made to the national treasury
  3. It only counts imported luxury goods and ignores domestic manufacturing output
  4. It double counts intermediate goods used throughout the commercial supply chain

Explanation

GDP measures only market transactions. In Pacific island economies like Fiji, a substantial portion of rural livelihoods depends on subsistence farming, village food gathering, and artisanal fishing, which are not bought or sold in formal markets and are largely excluded from official GDP, understating living standards.

Question 42Macroeconomics, finance and policy

A household in Lautoka sees its weekly disposable income rise from $4,000 FJD to $4,500 FJD, and as a result its weekly personal savings increase from $400 FJD to $500 FJD. What are the household's Marginal Propensity to Save (MPS) and Marginal Propensity to Consume (MPC)?

  1. MPS = 0.20 and MPC = 0.80 Correct answer.
  2. MPS = 0.80 and MPC = 0.20
  3. MPS = 0.25 and MPC = 0.75
  4. MPS = 0.10 and MPC = 0.90

Explanation

The change in disposable income (ΔYd) is $4,500 - $4,000 = $500 FJD. The change in savings (ΔS) is $500 - $400 = $100 FJD. Therefore, MPS = ΔS / ΔYd = 100 / 500 = 0.20. Since MPC + MPS = 1, MPC = 1 - 0.20 = 0.80.

Question 43Macroeconomics, finance and policy

In a simple closed economy without government or foreign trade, the Marginal Propensity to Consume (MPC) is 0.75. What is the value of the expenditure multiplier, and what will be the total change in equilibrium national income if autonomous investment spending increases by $50 million FJD?

  1. The multiplier is 4.0 and national income increases by $200 million FJD Correct answer.
  2. The multiplier is 0.75 and national income increases by $37.5 million FJD
  3. The multiplier is 1.33 and national income increases by $66.5 million FJD
  4. The multiplier is 5.0 and national income increases by $250 million FJD

Explanation

The simple multiplier is k = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4.0. The total change in equilibrium national income is ΔY = k × ΔI = 4.0 × $50 million = $200 million FJD.

Question 44Macroeconomics, finance and policy

In an open economy with government, the Marginal Propensity to Save (MPS) is 0.15, the Marginal Propensity to Tax (MPT) is 0.15, and the Marginal Propensity to Import (MPM) is 0.20. If the government undertakes an infrastructure project spending $80 million FJD, by how much will equilibrium national income expand?

  1. $160 million FJD Correct answer.
  2. $400 million FJD
  3. $80 million FJD
  4. $240 million FJD

Explanation

The open economy multiplier is k = 1 / (MPS + MPT + MPM) = 1 / (0.15 + 0.15 + 0.20) = 1 / 0.50 = 2.0. The total expansion in national income is ΔY = k × ΔG = 2.0 × $80 million = $160 million FJD.

Question 45Macroeconomics, finance and policy

What does the 'Paradox of Thrift' demonstrate in macroeconomic theory?

  1. An autonomous collective effort by all households to save more during a recession can reduce aggregate demand, lowering total national income and leaving total savings unchanged or reduced Correct answer.
  2. Saving money in commercial banks yields negative real returns when nominal interest rates exceed the inflation rate
  3. Government budget deficits inevitably force private corporations to double their annual capital investment
  4. High savings rates in developing island economies automatically trigger a rapid currency depreciation

Explanation

The Paradox of Thrift shows that while saving is prudent for an individual, if all households simultaneously attempt to increase savings during a slump, consumption spending falls. This drop in aggregate demand contracts national income, ultimately leaving total savings no higher (and potentially lower) than before.

Question 46Macroeconomics, finance and policy

In the national budget presented by the Fiji Ministry of Finance, which of the following is categorized as capital expenditure rather than recurrent expenditure?

  1. Constructing a new climate-resilient bridge and tar-sealing rural access roads Correct answer.
  2. Paying the monthly salaries and allowances of public school teachers and nurses
  3. Purchasing medical consumables, pharmaceuticals, and stationery for public hospitals
  4. Disbursing quarterly operational interest payments on existing domestic sovereign bonds

Explanation

Capital expenditure refers to government spending on physical assets, long-term infrastructure, and development projects that provide economic benefits over multiple years (such as bridges, highways, and jetties). Recurrent expenditure covers ongoing day-to-day administrative and operational costs.

Question 47Macroeconomics, finance and policy

Which of the following pairs correctly identifies a direct tax and an indirect tax in Fiji's tax structure?

  1. Direct tax: Pay As You Earn (PAYE) personal income tax; Indirect tax: Value Added Tax (VAT) Correct answer.
  2. Direct tax: Customs import duty; Indirect tax: Corporate profits tax
  3. Direct tax: Value Added Tax (VAT); Indirect tax: Residential property tax
  4. Direct tax: Airport departure tax; Indirect tax: Capital gains tax

Explanation

Direct taxes are levied directly on the income, profits, or wealth of individuals and corporations (e.g., PAYE income tax), and their burden cannot be shifted. Indirect taxes are levied on expenditure on goods and services (e.g., VAT, excise duties), where the seller can pass the tax burden on to the consumer.

Question 48Macroeconomics, finance and policy

Why is a uniform Value Added Tax (VAT) on consumer goods classified as a regressive tax in economic incidence?

  1. Lower-income households spend a larger fraction of their total income on consumption goods than higher-income households Correct answer.
  2. The statutory percentage rate of the tax decreases as the physical price of the purchased item increases
  3. Only wealthy luxury property owners are legally required to file VAT returns with the tax revenue authority
  4. The absolute dollar amount collected per transaction is higher for low-income earners than for high-income earners

Explanation

A tax is regressive if it takes a larger percentage of income from low-income earners than from high-income earners. Because poorer households have a higher average propensity to consume (spending almost all their earnings on basic living needs), VAT payments represent a larger share of their total income.

Question 49Macroeconomics, finance and policy

If Fiji experiences a deep economic recession characterized by rising unemployment and closing businesses, which fiscal policy stance should the Ministry of Finance adopt to restore full employment?

  1. An expansionary fiscal policy by increasing public capital spending and reducing taxes Correct answer.
  2. A contractionary fiscal policy by reducing infrastructure outlays and raising consumption taxes
  3. A balanced-budget fiscal policy by cutting government borrowing to zero immediately
  4. A neutral fiscal policy by freezing all government contracts and payroll disbursements

Explanation

During a recession, an expansionary fiscal policy boosts aggregate demand. By increasing public infrastructure spending (injecting funds directly into the circular flow) and cutting taxes (raising household disposable income and corporate profits), aggregate demand shifts to the right, closing the recessionary gap.

Question 50Macroeconomics, finance and policy

When an economy faces severe demand-pull inflation caused by an overheated domestic market, how can the government use fiscal policy to stabilise prices?

  1. Implement contractionary fiscal policy by reducing government expenditure and raising direct taxes Correct answer.
  2. Implement expansionary fiscal policy by accelerating public works and subsidizing consumer credit
  3. Increase national minimum wages by 50 percent to match rising consumer retail prices
  4. Devalue the national currency to make imported food and fuel significantly more expensive

Explanation

To combat demand-pull inflation, contractionary fiscal policy dampens aggregate demand. Decreasing government spending directly reduces aggregate expenditure, while higher taxes reduce disposable income and consumer spending, cooling the overheated economy and alleviating upward pressure on prices.