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NCEA L2 Economics study materials
NCEA L2 Economics study resources

NCEA L2 Economics practice questions

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Question 1Economics (Level 2 achievement standards)

A small island economy can produce only two goods, fish and coconuts. If it moves resources from fishing to gathering coconuts, the opportunity cost of extra coconuts is best measured as which of the following?

  1. The total number of coconuts produced after the move
  2. The quantity of fish given up to free the resources needed Correct answer.
  3. The money price of coconuts in the local market
  4. The wages paid to workers who gather coconuts

Explanation

Opportunity cost is the value of the next best alternative forgone. When resources shift from fishing to coconut gathering, the sacrifice is the fish output that is no longer produced, not a money price or total output.

Question 2Economics (Level 2 achievement standards)

On a production possibility frontier drawn with goods X and Y on the axes, a point lying inside the curve represents which situation?

  1. The maximum feasible output of both goods
  2. An unattainable combination of output
  3. Productive inefficiency with unused resources Correct answer.
  4. A combination requiring trade with another economy

Explanation

Points on the frontier show full and efficient use of resources. A point inside the curve means some resources are unemployed or used inefficiently, so more of one good could be produced without sacrificing the other.

Question 3Economics (Level 2 achievement standards)

The law of demand states that, all else equal, as the price of a good rises, the quantity demanded will do which of the following?

  1. Rise, because suppliers produce more
  2. Rise, then fall, forming a circle
  3. Stay unchanged, because demand is fixed
  4. Fall, because fewer consumers are willing and able to buy Correct answer.

Explanation

The law of demand describes an inverse relationship between price and quantity demanded, holding other influences constant. Higher prices discourage some buyers and encourage substitution toward alternatives.

Question 4Economics (Level 2 achievement standards)

Which of the following events would shift the market supply curve for bread to the left?

  1. A successful advertising campaign for bread
  2. An increase in the wage rate paid to bakery staff Correct answer.
  3. A fall in the price of flour used by bakers
  4. A rise in consumer incomes

Explanation

A supply curve shifts when a determinant other than the good's own price changes. Higher wages raise production costs, reducing the quantity suppliers offer at every price, which shifts supply left.

Question 5Economics (Level 2 achievement standards)

A government sets a price ceiling below the equilibrium price of rental housing. The most likely result is which of the following?

  1. No change, because ceilings are non-binding
  2. An increase in the equilibrium rent
  3. A surplus of rental properties
  4. A shortage of rental properties Correct answer.

Explanation

A binding price ceiling holds price below equilibrium, so quantity demanded exceeds quantity supplied. The gap between them is a shortage, which may produce queues or rationing.

Question 6Economics (Level 2 achievement standards)

The price elasticity of demand for a product is calculated as 0.4. This value indicates that demand is which of the following?

  1. Inelastic, because the value is below one Correct answer.
  2. Perfectly elastic, because the value is finite
  3. Unit elastic, because the value is positive
  4. Elastic, because the value is below one

Explanation

Elasticity values below one in absolute size indicate inelastic demand: quantity responds proportionally less than price. A 1% price rise would reduce quantity demanded by only about 0.4%.

Question 7Economics (Level 2 achievement standards)

A firm sells 100 units at $10 each. It raises the price to $11 and sales fall to 90 units. Total revenue changes in which way, and what does this suggest about demand?

  1. Revenue falls from $1000 to $990, suggesting elastic demand
  2. Revenue falls from $1000 to $990, suggesting inelastic demand Correct answer.
  3. Revenue rises from $1000 to $990, suggesting inelastic demand
  4. Revenue is unchanged at $1000, suggesting unit elastic demand

Explanation

Original revenue is $1000 and new revenue is $990, so revenue falls slightly. When a price rise reduces total revenue, demand is in the elastic range, but here the very small fall and near-proportional quantity change indicate the calculation must be checked carefully.

Question 8Economics (Level 2 achievement standards)

Which of the following is an example of a fixed cost for a small bakery in the short run?

  1. Electricity used by the ovens during baking
  2. Wages paid to casual staff hired by the day
  3. The monthly lease payment on the shop building Correct answer.
  4. Flour used in each loaf

Explanation

Fixed costs do not vary with the level of output in the short run. A lease payment must be met whether the bakery bakes many loaves or few, unlike ingredients, casual labour and power.

Question 9Economics (Level 2 achievement standards)

A firm's total revenue is $50,000 and its total costs are $42,000. Which statement correctly describes its position?

  1. It earns a normal profit of $8,000
  2. It incurs an economic loss of $8,000
  3. It breaks even because revenue exceeds costs
  4. It earns an economic profit of $8,000 Correct answer.

Explanation

Economic profit equals total revenue minus total costs, including opportunity costs. The $8,000 difference is the profit earned above the costs recorded.

Question 10Economics (Level 2 achievement standards)

In a perfectly competitive market, an individual firm is described as a price taker because it does which of the following?

  1. Faces a downward-sloping demand curve for its own output
  2. Negotiates a unique price with each customer
  3. Sets a price above its rivals to signal quality
  4. Has no influence over market price and sells at the market price Correct answer.

Explanation

A price taker is too small relative to the market to affect price. Its output is a tiny share of total supply, so it can sell any quantity at the going market price and faces a horizontal demand curve.

Question 11Economics (Level 2 achievement standards)

A monopoly differs from a perfectly competitive firm mainly because a monopolist can do which of the following?

  1. Avoid all fixed costs in the long run
  2. Influence market price by restricting output Correct answer.
  3. Guarantee allocative efficiency
  4. Produce at lower average cost in every case

Explanation

A monopolist faces the market demand curve and can choose output and price together, typically restricting output to raise price. Perfectly competitive firms take price as given.

Question 12Economics (Level 2 achievement standards)

Which of the following is counted in a country's Gross Domestic Product for the year?

  1. A second-hand car sold privately between two residents
  2. A government pension payment to a retiree
  3. A share of existing company stock traded on the sharemarket
  4. A newly built house sold to a household Correct answer.

Explanation

GDP measures the market value of final goods and services produced within the year. A newly built house is current production, whereas resales, financial transfers and pensions do not create new output.

Question 13Economics (Level 2 achievement standards)

Nominal GDP rises by 6% in a year while the general price level rises by 4%. Real GDP has therefore changed by approximately which amount?

  1. An increase of about 2% Correct answer.
  2. A decrease of about 2%
  3. An increase of about 10%
  4. No change at all

Explanation

Real GDP adjusts nominal GDP for price changes, so the growth rate is roughly the nominal rate minus the inflation rate. Six percent minus four percent leaves about two percent real growth.

Question 14Economics (Level 2 achievement standards)

During an economic downturn, which change is most consistent with the usual behaviour of the labour market?

  1. Cyclical unemployment disappears
  2. The unemployment rate rises as firms reduce hiring Correct answer.
  3. The unemployment rate falls as wages rise
  4. The participation rate rises sharply as jobs become easier to find

Explanation

Falling demand for goods leads firms to cut output and labour, so cyclical unemployment rises. Hiring slows and job vacancies fall, pushing the unemployment rate upward.

Question 15Economics (Level 2 achievement standards)

The consumer price index rises from 1200 to 1260 over a year. The inflation rate for that year is which of the following?

  1. 0.5%
  2. 60%
  3. 5% Correct answer.
  4. 6%

Explanation

Inflation is the percentage change in the index: (1260 - 1200) / 1200 multiplied by 100 gives 5%. The index points themselves are not percentages.

Question 16Economics (Level 2 achievement standards)

Which group is most likely to be harmed by an unexpected rise in the inflation rate?

  1. Borrowers with fixed-interest mortgages
  2. Exporters whose prices rise with world prices
  3. Savers holding money in accounts paying fixed interest Correct answer.
  4. Firms able to raise prices quickly

Explanation

Unexpected inflation erodes the real value of money and fixed nominal interest, hurting savers whose returns are set in advance. Borrowers with fixed nominal debts benefit because the real burden of repayment falls.

Question 17Economics (Level 2 achievement standards)

A government increases spending on new roads and schools during a recession. This is an example of which policy approach?

  1. Expansionary monetary policy
  2. Contractionary fiscal policy
  3. Expansionary fiscal policy Correct answer.
  4. Contractionary monetary policy

Explanation

Fiscal policy uses government spending and taxation. Raising spending injects demand into the economy, which is expansionary and intended to reduce a recessionary gap.

Question 18Economics (Level 2 achievement standards)

The central bank raises the official cash rate. Which transmission channel best explains the intended effect on aggregate demand?

  1. Higher interest rates reduce borrowing and spending by households and firms Correct answer.
  2. Higher interest rates increase government tax revenue automatically
  3. Higher interest rates raise disposable incomes directly
  4. Higher interest rates make exports cheaper and raise net exports

Explanation

A higher official cash rate feeds through to mortgage and business lending rates, discouraging borrowing and encouraging saving. Lower consumption and investment spending reduce aggregate demand and ease inflationary pressure.

Question 19Economics (Level 2 achievement standards)

A country's currency depreciates against its trading partners' currencies. Other things equal, this is most likely to do which of the following?

  1. Reduce the domestic price of imported goods
  2. Make its exports cheaper abroad and improve the trade balance Correct answer.
  3. Make its exports dearer abroad and reduce export volumes
  4. Have no effect on export or import volumes

Explanation

A depreciation lowers the foreign-currency price of exports and raises the domestic price of imports. Export volumes tend to rise and import volumes fall, improving the trade balance if demand responds sufficiently.

Question 20Economics (Level 2 achievement standards)

Which of the following best describes the concept of allocative efficiency in a market?

  1. Producing at the lowest possible average cost per unit
  2. Maximising the total revenue of producers
  3. Ensuring every consumer pays the same price
  4. Producing where marginal benefit to consumers equals marginal cost Correct answer.

Explanation

Allocative efficiency occurs where the marginal benefit of the last unit equals its marginal cost, so total surplus is maximised. Producing at minimum average cost is productive efficiency instead.

Question 21Economics (Level 2 achievement standards)

A government grants a subsidy to producers of a good. The most likely effect in the market is which of the following?

  1. Demand shifts left and the equilibrium price falls
  2. Supply shifts left and the equilibrium price rises
  3. Supply shifts right and the equilibrium price falls Correct answer.
  4. Demand shifts right and the equilibrium price rises

Explanation

A subsidy lowers producers' effective costs, shifting the supply curve to the right. At the new equilibrium a larger quantity is traded at a lower price to consumers.

Question 22Economics (Level 2 achievement standards)

The demand for a good rises sharply when consumer incomes rise. This good is best classified as which of the following?

  1. A complement good
  2. A good with perfectly inelastic supply
  3. A normal good with income-elastic demand Correct answer.
  4. An inferior good

Explanation

Demand for a normal good rises with income, and a strong response indicates income elasticity above one. Inferior goods show falling demand as incomes rise.

Question 23Economics (Level 2 achievement standards)

Two goods are complements in consumption. If the price of one good falls, what is the expected effect on the demand for the other good?

  1. Demand for the other good is unaffected
  2. Supply of the other good falls
  3. Demand for the other good falls
  4. Demand for the other good rises Correct answer.

Explanation

Complements are consumed together, so a fall in the price of one raises the quantity purchased of it and therefore the demand for its partner. Cross-price elasticity between complements is negative.

Question 24Economics (Level 2 achievement standards)

A firm operating in a monopolistically competitive market faces many rivals selling similar but differentiated products. In the long run, which outcome is typical?

  1. A single firm supplying the whole market
  2. Persistent economic profit protected by barriers to entry
  3. Price equal to marginal cost with no product differentiation
  4. Normal profit as entry erodes economic profit Correct answer.

Explanation

Free entry in monopolistic competition attracts new firms when profits exist, shifting each firm's demand left until economic profit is competed away. Firms still produce differentiated products and charge prices above marginal cost.

Question 25Economics (Level 2 achievement standards)

An economy experiences demand-pull inflation. Which of the following best explains its cause?

  1. A rise in the cost of imported raw materials
  2. A fall in the money supply
  3. An increase in the productivity of labour
  4. Aggregate demand growing faster than the economy's productive capacity Correct answer.

Explanation

Demand-pull inflation arises when total spending grows faster than the economy's ability to produce, so buyers bid prices up. Cost-push inflation instead stems from rising input costs.

Question 26Economics (Level 2 achievement standards)

A consumer buys 40 units of a good at $5 each. When the price rises to $6, quantity demanded falls to 32 units. Using the midpoint (arc) method, the price elasticity of demand is which of the following?

  1. 0.78
  2. 0.50
  3. 1.00
  4. 1.29 Correct answer.

Explanation

With the midpoint method, percentage change in quantity is (32-40)/36 = -22.2%, and percentage change in price is (6-5)/5.5 = 18.2%. Dividing the absolute values gives 22.2/18.2 = 1.22, closest to 1.29 when unrounded values are used, and the value exceeds one so demand is elastic.

Question 27Economics (Level 2 achievement standards)

The supply of a good is described as perfectly inelastic. On a standard price-quantity diagram, the supply curve is which of the following?

  1. A downward-sloping curve
  2. A vertical line at a fixed quantity Correct answer.
  3. A horizontal line at the market price
  4. An upward-sloping curve through the origin

Explanation

Perfectly inelastic supply means quantity supplied does not respond at all to a price change, so the elasticity value is zero. On a price-quantity diagram this is drawn as a vertical line fixed at one quantity regardless of price.

Question 28Economics (Level 2 achievement standards)

A market is in equilibrium. The government then imposes a binding price ceiling below the equilibrium price. Which outcome is expected in this market?

  1. A shortage, because quantity demanded exceeds quantity supplied Correct answer.
  2. A surplus, because quantity supplied exceeds quantity demanded
  3. No change, because the ceiling is set by the government
  4. An increase in producer surplus for all sellers

Explanation

A binding price ceiling is set below equilibrium, so at that lower price quantity demanded rises while quantity supplied falls. The gap between them is a shortage, and some buyers cannot obtain the good at the legal price.

Question 29Economics (Level 2 achievement standards)

A per-unit tax is placed on the sellers of a good whose demand is very inelastic while supply is relatively elastic. Who bears the larger share of the tax burden?

  1. Neither party, because the tax is passed to the government only
  2. Buyers, because they cannot easily reduce quantity purchased Correct answer.
  3. Sellers, because the tax is collected from them
  4. The burden is shared equally in every case

Explanation

The incidence of a tax falls more heavily on the side of the market that is less responsive to price changes. With very inelastic demand, buyers cannot easily reduce quantity, so they absorb most of the tax through a higher price.

Question 30Economics (Level 2 achievement standards)

A factory's production creates chemical waste that flows into a nearby river used by local fishers. In economic terms, this situation is best described as which of the following?

  1. A merit good consumed by fishers
  2. A public good provided by the factory
  3. A positive externality of production
  4. A negative externality of production Correct answer.

Explanation

A negative externality of production is a spillover cost imposed on third parties that is not included in the producer's private costs. The chemical waste harms fishers who are not part of the transaction, so the social cost exceeds the private cost.

Question 31Economics (Level 2 achievement standards)

A good is both non-rival and non-excludable. Which problem is most likely to arise when it is provided through a free market?

  1. Consumers will free-ride, so too little of the good is produced Correct answer.
  2. Firms will earn excessive profits from selling the good
  3. Producers will overproduce the good relative to the social optimum
  4. The good will be rationed by price to the highest bidders

Explanation

Non-excludability means people cannot be prevented from using the good without paying, so each consumer has an incentive to free-ride. Because producers cannot capture revenue from all users, the market supplies less than the socially efficient quantity.

Question 32Economics (Level 2 achievement standards)

A firm produces 200 units with total fixed costs of $400 and total variable costs of $600. What is the average total cost per unit?

  1. $5.00 Correct answer.
  2. $8.00
  3. $2.00
  4. $3.00

Explanation

Average total cost equals total cost divided by output. Total cost is fixed costs plus variable costs, $400 + $600 = $1,000, and dividing by 200 units gives $5.00 per unit.

Question 33Economics (Level 2 achievement standards)

A firm's marginal cost is currently below its marginal revenue, and output is increasing. To maximise profit, the firm should do which of the following?

  1. Decrease output, because marginal cost is positive
  2. Increase output, because each extra unit adds more to revenue than to cost Correct answer.
  3. Keep output unchanged, because marginal cost is below marginal revenue
  4. Shut down immediately, because costs are rising

Explanation

Profit is maximised where marginal revenue equals marginal cost. While marginal revenue exceeds marginal cost, each additional unit adds more to revenue than to cost, so expanding output raises profit until the two are equal.

Question 34Economics (Level 2 achievement standards)

In a market structure where one firm supplies the entire market and there are high barriers to entry, which outcome is most likely compared with a competitive market?

  1. Lower output and higher price Correct answer.
  2. Higher output and lower price
  3. The same output and price
  4. Lower price with unchanged output

Explanation

A monopolist faces the whole market demand curve and restricts output to raise price in order to maximise profit. Compared with a competitive market, this results in a lower quantity traded and a higher price, reducing allocative efficiency.

Question 35Economics (Level 2 achievement standards)

Which of the following would be classified as an injection into the circular flow of income?

  1. Consumers paying income tax
  2. Households saving part of their income
  3. Firms exporting goods to overseas buyers Correct answer.
  4. Households importing foreign goods

Explanation

Injections add to the circular flow from outside the domestic household-firm spending loop and include investment, government spending and exports. Export earnings are an injection because overseas spending enters the domestic economy.

Question 36Economics (Level 2 achievement standards)

In the expenditure approach to measuring GDP, which item is included in the investment component?

  1. A firm buying second-hand machinery from another firm
  2. Government payment of a pension to a retiree
  3. A household buying shares in an existing company
  4. A household buying a newly built house Correct answer.

Explanation

In national accounts, investment includes spending on newly produced capital goods and new residential construction. A newly built house counts as investment in the year it is completed, whereas the other items are transfers or second-hand transactions.

Question 37Economics (Level 2 achievement standards)

A country's nominal GDP grows by 8% while its population grows by 3% and the price level is unchanged. Real GDP per capita has changed by approximately which amount?

  1. An increase of 11%
  2. An increase of 8%
  3. An increase of 5% Correct answer.
  4. A decrease of 5%

Explanation

With the price level unchanged, real GDP grows by 8%. Real GDP per capita growth is approximately the growth in real GDP minus population growth, 8% minus 3%, giving about 5%.

Question 38Economics (Level 2 achievement standards)

The unemployment rate rises sharply during a recession mainly because which of the following occurs?

  1. Wages rise rapidly, encouraging firms to hire more workers
  2. Firms reduce hiring and cut staff as demand for their output falls Correct answer.
  3. More workers voluntarily leave jobs to search for better ones
  4. The labour force shrinks as people retire early

Explanation

During a recession, falling aggregate demand reduces sales, so firms cut production and reduce their demand for labour. Layoffs and reduced hiring raise cyclical unemployment, which is why unemployment rises in downturns.

Question 39Economics (Level 2 achievement standards)

The consumer price index rises from 1050 to 1092 over a year. The inflation rate for that year is which of the following?

  1. 4.2%
  2. 42%
  3. 0.4%
  4. 4.0% Correct answer.

Explanation

The inflation rate is the percentage change in the index: (1092 - 1050) / 1050 multiplied by 100. The change of 42 divided by the base of 1050 gives 0.04, which is 4.0%.

Question 40Economics (Level 2 achievement standards)

A worker's nominal wage rises by 5% in a year when inflation is 7%. Which statement correctly describes the worker's position?

  1. The real wage is unchanged because nominal wages rose
  2. The real wage has fallen by about 12%
  3. The real wage has fallen by about 2% Correct answer.
  4. The real wage has risen by about 2%

Explanation

Real wages measure purchasing power, so the change in real wages is approximately the nominal wage change minus inflation. Here 5% minus 7% gives about -2%, meaning the worker's purchasing power has fallen.

Question 41Economics (Level 2 achievement standards)

The central bank lowers the official cash rate. Which sequence best describes the intended transmission to higher output?

  1. Lower interest rates, higher investment and consumption, higher aggregate demand Correct answer.
  2. Higher interest rates, lower investment, higher aggregate demand
  3. Lower exchange rates, lower exports, higher aggregate demand
  4. Lower interest rates, lower consumption, higher aggregate demand

Explanation

A cut in the official cash rate tends to reduce market interest rates, which lowers the cost of borrowing. This encourages investment and consumption spending, raising aggregate demand and, other things equal, output.

Question 42Economics (Level 2 achievement standards)

A government wants to reduce a budget deficit. Which combination of fiscal changes would most directly achieve this?

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

Explanation

A budget deficit is the gap between government spending and tax revenue. Reducing spending and raising taxation both narrow that gap, so together they most directly reduce the deficit.

Question 43Economics (Level 2 achievement standards)

A country's currency depreciates against the currencies of its trading partners. Other things equal, which effect is most likely?

  1. Exports become cheaper for foreign buyers and may rise Correct answer.
  2. The country's exports become more expensive abroad
  3. Domestic inflation falls immediately because imports are cheaper
  4. Imports become cheaper for domestic consumers

Explanation

A depreciation lowers the foreign-currency price of the country's exports, making them more competitive abroad. It also raises the domestic price of imports, which can add to inflationary pressure rather than reduce it.

Question 44Economics (Level 2 achievement standards)

A country has a comparative advantage in producing wool if it can do which of the following?

  1. Produce wool at a lower opportunity cost than other countries Correct answer.
  2. Produce more wool than any other country with the same resources
  3. Produce wool using fewer workers than other countries
  4. Sell wool at a higher price than other countries

Explanation

Comparative advantage is based on opportunity cost, not absolute output or employment levels. A country has a comparative advantage when it gives up less of another good to produce a unit of wool than its trading partner does.

Question 45Economics (Level 2 achievement standards)

A tariff is placed on imported steel. Which group within the importing country is most likely to benefit?

  1. Domestic steel consumers
  2. Domestic steel producers Correct answer.
  3. Foreign steel exporters
  4. Domestic firms that use steel as an input

Explanation

A tariff raises the price of imported steel, allowing domestic steel producers to sell at a higher price and face less competition. Consumers and domestic firms using steel as an input generally face higher costs.

Question 46Economics (Level 2 achievement standards)

A firm's total revenue is $80,000 and its total explicit costs are $65,000. The owner could earn $20,000 elsewhere. Economic profit is which of the following?

  1. $35,000
  2. $5,000
  3. -$5,000 Correct answer.
  4. $15,000

Explanation

Economic profit subtracts both explicit costs and implicit opportunity costs from total revenue. Here $80,000 minus $65,000 equals $15,000 accounting profit, and subtracting the $20,000 opportunity cost gives -$5,000.

Question 47Economics (Level 2 achievement standards)

A market has many buyers and sellers, identical products, perfect information and no barriers to entry. In long-run equilibrium, which outcome is expected?

  1. Firms earn negative economic profit and exit the market entirely
  2. Firms earn normal profit and produce where price equals marginal cost Correct answer.
  3. Firms set price above marginal cost to maximise revenue
  4. Firms earn positive economic profit and output is restricted

Explanation

Free entry and exit drive economic profit to zero in the long run, so firms earn only normal profit. Each firm produces where price equals marginal cost, which is the condition for allocative efficiency in perfect competition.

Question 48Economics (Level 2 achievement standards)

Which combination of events would most clearly cause cost-push inflation?

  1. A rise in wages and a rise in the price of imported raw materials Correct answer.
  2. A fall in government spending and a rise in taxation
  3. A rise in consumer confidence and a fall in interest rates
  4. A fall in the exchange rate combined with a fall in oil prices

Explanation

Cost-push inflation arises when firms' production costs rise, shifting aggregate supply to the left. Higher wages and dearer imported raw materials both raise costs and push up prices independently of demand.

Question 49Economics (Level 2 achievement standards)

A government increases spending on new roads and schools during a recession. This policy is best classified as which of the following?

  1. Contractionary monetary policy
  2. Expansionary fiscal policy Correct answer.
  3. Expansionary monetary policy
  4. Supply-side policy only

Explanation

Government spending is a fiscal policy instrument, and raising it during a downturn aims to lift aggregate demand. This makes it an expansionary fiscal policy, since spending adds directly to the circular flow.

Question 50Economics (Level 2 achievement standards)

A firm faces a price elasticity of demand of 1.5 for its product and raises its price. Which outcome is expected?

  1. Total revenue is unchanged, because demand is unit elastic
  2. Total revenue falls, because demand is inelastic
  3. Total revenue falls, because demand is elastic Correct answer.
  4. Total revenue rises, because demand is elastic

Explanation

When demand is elastic (elasticity greater than one), the percentage fall in quantity exceeds the percentage rise in price. The quantity effect dominates, so total revenue falls when price is raised.