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NCEA Level 3 Economics study materials
NCEA Level 3 Economics study resources

NCEA Level 3 Economics practice questions

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Question 1Economic concepts and models

In the circular flow model, which of the following best describes the role of households in the factor market?

  1. They create money through the banking system.
  2. They supply factors of production and receive income in return. Correct answer.
  3. They purchase goods and services from firms.
  4. They set the level of taxation and government spending.

Explanation

In the circular flow model, households own the factors of production (land, labour, capital, entrepreneurship) and sell them to firms in the factor market, receiving wages, rent, interest and profit as income. Firms then use these inputs to produce output sold in the product market.

Question 2Economic concepts and models

A movement along a country's production possibility frontier from one point to another represents:

  1. an outward shift caused by technological improvement
  2. an increase in the quantity of resources available
  3. a reallocation of resources between two goods with full employment maintained Correct answer.
  4. a reduction in the productive capacity of the economy

Explanation

Points on the frontier represent combinations produced with all resources fully and efficiently employed. Moving along the curve reallocates resources between the two goods, so producing more of one good means sacrificing some of the other, reflecting opportunity cost.

Question 3Economic concepts and models

The law of demand states that, all else held constant, as the price of a good rises:

  1. the quantity demanded falls Correct answer.
  2. the quantity demanded rises
  3. supply becomes perfectly inelastic
  4. demand shifts to the right

Explanation

The law of demand describes an inverse relationship between price and quantity demanded when other determinants of demand are unchanged. A higher price reduces the quantity demanded, shown as an upward movement along the demand curve.

Question 4Economic concepts and models

A market is in equilibrium when:

  1. the price is set by government regulation
  2. quantity demanded exceeds quantity supplied
  3. there is a surplus of the good at the ruling price
  4. quantity demanded equals quantity supplied at the ruling price Correct answer.

Explanation

Equilibrium occurs where the demand and supply curves intersect, so the quantity buyers wish to purchase equals the quantity sellers wish to sell. At this price there is no tendency for the price to change.

Question 5Economic concepts and models

Which of the following would cause the supply curve for a normal good to shift to the left?

  1. A fall in the price of a substitute in production
  2. An increase in consumer incomes
  3. A decrease in the price of the good itself
  4. An increase in the cost of a key raw material Correct answer.

Explanation

Higher input costs reduce the profitability of production at any given price, so producers supply less and the supply curve shifts left. Changes in input costs are non-price determinants that shift the whole supply curve.

Question 6Economic concepts and models

If a 10% increase in the price of a good leads to a 25% decrease in quantity demanded, demand over this range is:

  1. inelastic, because the percentage change in quantity is smaller than the price change
  2. perfectly inelastic, because quantity still changes
  3. unit elastic, because price and quantity changes offset each other
  4. elastic, because the percentage change in quantity exceeds the percentage change in price Correct answer.

Explanation

Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Here 25% divided by 10% gives an elasticity of 2.5, which is greater than one, so demand is elastic.

Question 7Economic concepts and models

Which best describes a positive statement in economics?

  1. A statement about the future that cannot be examined
  2. A statement that all economists agree is correct
  3. A statement that expresses a value judgement about what ought to happen
  4. A statement that can be tested against evidence and is either true or false Correct answer.

Explanation

Positive statements are objective claims about how the economy works and can be tested with data. Normative statements, by contrast, involve value judgements about what should be done.

Question 8Economic concepts and models

The opportunity cost of a decision is best defined as:

  1. the money actually paid for the chosen option
  2. the total value of all alternatives available
  3. the value of the next best alternative forgone Correct answer.
  4. the benefit gained from the chosen option

Explanation

Because resources are scarce, choosing one option means giving up the best alternative use of those resources. Opportunity cost measures the value of that next best alternative forgone, not the money spent.

Question 9Economic concepts and models

A government imposes a binding price ceiling below the equilibrium price. The likely result is:

  1. a surplus, because quantity supplied exceeds quantity demanded
  2. no change, because the ceiling is above equilibrium
  3. a shortage, because quantity demanded exceeds quantity supplied Correct answer.
  4. an increase in supply as producers respond to higher prices

Explanation

A price ceiling set below equilibrium prevents the price from rising to clear the market. At the lower price, quantity demanded exceeds quantity supplied, creating a shortage that may lead to rationing or black markets.

Question 10Economic concepts and models

A negative externality of production, such as pollution, causes the free market to:

  1. produce less than the socially optimal quantity at too high a price
  2. produce more than the socially optimal quantity because private costs are below social costs Correct answer.
  3. produce at the socially optimal quantity but at a higher price
  4. achieve the socially optimal quantity because firms internalise all costs

Explanation

When production imposes external costs on third parties, marginal social cost exceeds marginal private cost. Firms base output on private costs, so the market overproduces relative to the social optimum, creating a deadweight loss.

Question 11Economic concepts and models

A good is both non-excludable and non-rival. This good is best classified as:

  1. a private good
  2. a common resource
  3. a public good Correct answer.
  4. a club good

Explanation

Non-excludability means people cannot be prevented from consuming the good, and non-rivalry means one person's consumption does not reduce availability to others. Goods with both characteristics are public goods, which markets tend to underprovide because of free-riding.

Question 12Economic concepts and models

An increase in the minimum wage above the market-clearing wage for low-skilled labour is most likely to cause:

  1. a shortage of low-skilled labour, with quantity demanded exceeding quantity supplied
  2. no effect on employment because wages are always flexible
  3. a surplus of low-skilled labour, with quantity supplied exceeding quantity demanded Correct answer.
  4. an increase in the quantity of low-skilled labour demanded

Explanation

A minimum wage above equilibrium acts as a price floor in the labour market. At the higher wage, more workers are willing to supply labour than firms wish to hire, producing a surplus of labour, often measured as unemployment.

Question 13Economic concepts and models

Which of the following is a leakage from the circular flow of income?

  1. Savings held by households in financial institutions Correct answer.
  2. Investment spending by firms
  3. Government spending on infrastructure
  4. Export receipts earned by domestic firms

Explanation

Leakages are flows that remove income from the domestic circular flow before it is spent on domestic output. Savings, taxation and imports are leakages, while investment, government spending and exports are injections.

Question 14Economic concepts and models

The income elasticity of demand for a good is negative. This indicates that the good is:

  1. a luxury good
  2. a normal good
  3. an inferior good Correct answer.
  4. a good with perfectly elastic demand

Explanation

Income elasticity of demand measures the responsiveness of demand to a change in income. A negative value means demand falls as income rises, which is the defining characteristic of an inferior good.

Question 15Economic concepts and models

When the price of good X falls and, as a result, the demand curve for good Y shifts to the left, goods X and Y are:

  1. inferior goods
  2. unrelated goods
  3. substitutes Correct answer.
  4. complements

Explanation

A fall in the price of X increases the quantity of X demanded. Demand for Y falls because consumers switch toward the now cheaper X, which is the pattern for substitute goods, whose cross-price elasticity is positive.

Question 16Economic concepts and models

A firm operating in perfect competition is a price taker. This means the firm:

  1. faces a downward-sloping demand curve for its product
  2. sets a price above marginal cost to maximise profit
  3. sells its output at the market price determined by industry demand and supply Correct answer.
  4. can influence the market price by changing its output

Explanation

In perfect competition, many small firms sell a homogeneous product, so no single firm can affect the market price. Each firm faces a horizontal demand curve at the market price and maximises profit where marginal cost equals that price.

Question 17Economic concepts and models

A monopoly is able to earn supernormal profits in the long run primarily because:

  1. its marginal cost is always lower than that of competitive firms
  2. the government guarantees it a subsidy in every period
  3. barriers to entry prevent competing firms from entering the market Correct answer.
  4. consumers are irrational in their purchasing decisions

Explanation

Supernormal profits normally attract new entrants, which erodes profits in competitive markets. A monopoly is protected by barriers to entry such as patents, economies of scale or control of a key resource, allowing profits to persist.

Question 18Economic concepts and models

Which of the following best explains why the aggregate supply curve may slope upward in the short run?

  1. Consumers demand more output when the general price level falls
  2. Firms can increase output only by paying higher wages and input prices as more is produced Correct answer.
  3. Government spending automatically rises with the price level
  4. The economy is always at full employment in the short run

Explanation

In the short run some costs, such as wages, are sticky. As firms expand output, they must attract additional resources at higher cost, so a higher price level is needed to make extra production profitable, giving an upward-sloping aggregate supply curve.

Question 19Economic concepts and models

In the AD/AS model, an increase in aggregate demand when the economy is already at full employment is most likely to cause:

  1. an increase in real output with no change in the price level
  2. a fall in the price level with no change in real output
  3. a fall in both the price level and real output
  4. an increase in the price level with little or no increase in real output Correct answer.

Explanation

At full employment the short-run aggregate supply curve becomes steep because resources are fully used. Additional demand mainly bids up prices rather than expanding output, producing inflationary pressure.

Question 20Economic concepts and models

A country has an absolute advantage in producing both wheat and cloth compared with its trading partner. According to comparative advantage theory, the country should:

  1. specialise in the good for which it has the lower opportunity cost and trade for the other Correct answer.
  2. produce neither good and import both
  3. produce both goods domestically and avoid trade entirely
  4. specialise in the good in which it has the greatest absolute advantage

Explanation

Comparative advantage is based on opportunity cost, not absolute advantage. Even if a country is more efficient at producing both goods, it gains from specialising where its opportunity cost is relatively lower and trading for the other good.

Question 21Economic concepts and models

A small open economy imposes a tariff on imported goods. Which combination of effects is most consistent with standard trade theory?

  1. Consumer surplus falls, domestic producer surplus rises, and government collects tariff revenue Correct answer.
  2. Consumer surplus falls, domestic producer surplus falls, and deadweight loss disappears
  3. Consumer surplus rises, producer surplus falls, and government revenue rises
  4. Consumer surplus rises, domestic producer surplus rises, and imports increase

Explanation

A tariff raises the domestic price of imports, reducing consumer surplus as consumers pay more and buy less. Domestic producers benefit from higher prices, gaining producer surplus, while the government collects revenue on imported units. The tariff also creates deadweight loss from reduced consumption and inefficient domestic production.

Question 22Economic concepts and models

An economy experiences a negative supply shock, such as a sharp rise in oil prices. In the AD/AS model, this is most likely to produce:

  1. a fall in the price level and a fall in real output
  2. a rise in the price level and a rise in real output
  3. no change in the price level but a rise in real output
  4. a rise in the price level together with a fall in real output Correct answer.

Explanation

A negative supply shock raises firms' costs and shifts short-run aggregate supply left. The new equilibrium has a higher price level and lower real output, a combination often described as stagflation.

Question 23Economic concepts and models

A firm's marginal revenue is less than price at its current output level. This situation is most consistent with:

  1. perfect competition, where price equals marginal revenue
  2. a firm facing a downward-sloping demand curve, such as a monopoly Correct answer.
  3. a firm producing at the minimum of its average cost curve
  4. a firm that is a price taker in a competitive market

Explanation

For a firm facing a downward-sloping demand curve, selling an extra unit requires lowering the price on all units, so marginal revenue is below price. This contrasts with perfect competition, where the firm is a price taker and marginal revenue equals price.

Question 24Economic concepts and models

A government introduces a subsidy for producers of a good with a positive externality of consumption. The intended effect is to:

  1. shift the supply curve right, lowering price and increasing quantity toward the socially optimal level Correct answer.
  2. shift the demand curve left to reduce consumption of the good
  3. create a deadweight loss by reducing output below the market level
  4. raise the price so that consumers internalise the external benefit

Explanation

A production subsidy lowers firms' costs, shifting supply right and reducing the market price. The lower price encourages additional consumption, moving output closer to the socially optimal level where marginal social benefit equals marginal social cost, internalising the external benefit.

Question 25Economic concepts and models

The consumer price index rises from 120 to 126 over a year. The annual inflation rate is:

  1. 0.05%
  2. 5.0% Correct answer.
  3. 4.8%
  4. 6.0%

Explanation

The inflation rate is the percentage change in the CPI, calculated as (126 - 120) / 120 × 100. This equals 6 / 120 × 100, which is 5.0%.

Question 26Economic concepts and models

A production possibility curve is drawn as a straight line rather than bowed outward. This shape implies that:

  1. resources are specialised and cannot be transferred between uses
  2. opportunity cost is constant as production switches between the two goods Correct answer.
  3. the economy is producing at an inefficient point inside the curve
  4. opportunity cost rises as more of either good is produced

Explanation

A straight-line production possibility curve has a constant slope, and the slope measures the opportunity cost of one good in terms of the other. Constant slope therefore means each additional unit of one good always costs the same amount of the other good, regardless of how much is already being produced.

Question 27Economic concepts and models

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

  1. the price of coffee Correct answer.
  2. the number of coffee drinkers
  3. consumer incomes
  4. the price of tea

Explanation

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

Question 28Economic concepts and models

At a price of $8, a supplier is willing to sell 200 units; at $10, the supplier is willing to sell 260 units. Using the midpoint method, the price elasticity of supply over this range is approximately:

  1. 0.50
  2. 1.20 Correct answer.
  3. 0.83
  4. 2.40

Explanation

The midpoint method divides the percentage change in quantity by the percentage change in price, using average values. Quantity changes by 60 on an average of 230 (about 26.1%) and price changes by $2 on an average of $9 (about 22.2%), giving an elasticity of roughly 1.20, which is elastic supply.

Question 29Economic concepts and models

A firm faces a downward-sloping demand curve and maximises profit where marginal revenue equals marginal cost. At that output, price exceeds marginal cost. This outcome indicates that:

  1. the firm should expand output until price equals marginal cost to maximise profit
  2. the firm is a price taker and earns only normal profit
  3. the firm has some market power and restricts output below the competitive level Correct answer.
  4. allocative efficiency is achieved because marginal cost equals average revenue

Explanation

A downward-sloping demand curve means the firm must lower price to sell more, so marginal revenue lies below price. Profit maximisation sets marginal revenue equal to marginal cost, which leaves price above marginal cost and output below the level where price equals marginal cost, the classic sign of market power and allocative inefficiency.

Question 30Economic concepts and models

The government raises the excise tax on a good whose demand is highly inelastic and whose supply is highly elastic. Compared with a good with elastic demand, the burden of this tax falls:

  1. equally on consumers and producers, because the tax is legally imposed on sellers
  2. mostly on consumers, because they cannot easily reduce quantity purchased Correct answer.
  3. entirely on producers, because they are legally required to pay the tax
  4. mostly on producers, because supply is more responsive than demand

Explanation

Tax incidence depends on the relative elasticities of demand and supply, not on who legally pays. When demand is highly inelastic and supply is highly elastic, consumers bear most of the burden because they cannot easily switch away, while producers can adjust quantity readily.

Question 31Economic concepts and models

In a market with a negative externality of consumption, the marginal social benefit curve lies below the marginal private benefit curve. A free market will therefore:

  1. produce exactly the socially optimal quantity because consumers value the good
  2. underproduce the good relative to the socially optimal quantity
  3. produce nothing because the externality is not priced
  4. overproduce the good relative to the socially optimal quantity Correct answer.

Explanation

With a negative externality of consumption, private decision-makers ignore the external cost, so marginal private benefit exceeds marginal social benefit. Equilibrium output where marginal private benefit equals marginal cost therefore exceeds the socially optimal output where marginal social benefit equals marginal cost.

Question 32Economic concepts and models

A price floor set above the equilibrium wage in a labour market is likely to result in:

  1. no change in employment, because wages do not affect labour demand
  2. a surplus of labour, since quantity supplied exceeds quantity demanded Correct answer.
  3. a shift of the labour demand curve to the right
  4. a shortage of labour, since quantity demanded exceeds quantity supplied

Explanation

A binding price floor holds the wage above equilibrium, so more workers offer themselves for work while firms demand fewer workers. The gap between quantity supplied and quantity demanded is a labour surplus, usually associated with unemployment.

Question 33Economic concepts and models

Which item is treated as an injection into the circular flow of income?

  1. Household saving placed in a bank deposit account
  2. Spending on imported consumer electronics
  3. Government spending on new infrastructure Correct answer.
  4. Income tax paid by wage earners

Explanation

Injections add to the circular flow from outside the household-firm spending loop and include government spending, investment and exports. Government spending on infrastructure adds demand to the flow, whereas saving, taxation and imports are leakages.

Question 34Economic concepts and models

A consumer's marginal utility from a good falls as more units are consumed, while the price stays constant. The consumer should:

  1. keep buying while marginal utility per dollar exceeds that of alternatives Correct answer.
  2. reduce purchases because price exceeds marginal utility
  3. buy more only if total utility is still rising
  4. stop buying immediately, because marginal utility is falling

Explanation

Rational choice compares marginal utility per dollar spent across goods. As long as the marginal utility per dollar from this good exceeds the marginal utility per dollar from alternatives, buying more raises total utility, and the consumer stops when the ratios are equalised.

Question 35Economic concepts and models

A firm's total fixed cost is $500, total variable cost at 100 units is $1,500, and output rises to 110 units with total variable cost of $1,700. The marginal cost of the additional 10 units is:

  1. $22 per unit
  2. $20 per unit Correct answer.
  3. $200 per unit
  4. $15 per unit

Explanation

Marginal cost is the change in total cost divided by the change in output. Variable cost rises by $200 as output rises by 10 units, and fixed cost does not change, so marginal cost is $200 divided by 10, which equals $20 per unit.

Question 36Economic concepts and models

In perfect competition, a firm earns normal profit in long-run equilibrium because:

  1. each firm produces a differentiated product that limits entry
  2. free entry and exit drive price down to minimum average total cost Correct answer.
  3. firms collude to set a common price equal to average cost
  4. the government regulates price at the level of average total cost

Explanation

Supernormal profit attracts new entrants, which increases market supply and pushes price down until each firm earns only normal profit. If firms make losses, exit raises price, so long-run equilibrium settles where price equals minimum average total cost.

Question 37Economic concepts and models

A monopolistically competitive firm in long-run equilibrium is best described as:

  1. producing at minimum average total cost, achieving productive efficiency
  2. earning supernormal profit because entry is blocked
  3. producing at a point where price exceeds marginal cost and average cost is tangent to demand Correct answer.
  4. charging a price equal to marginal cost, achieving allocative efficiency

Explanation

With free entry, supernormal profit is competed away until the firm's demand curve is tangent to its average total cost curve, leaving only normal profit. Because demand slopes downward, this tangency occurs above minimum average cost, so price exceeds marginal cost and the firm has excess capacity.

Question 38Economic concepts and models

A natural monopoly, such as a water network, arises mainly because:

  1. average total cost continues to fall over the relevant range of market demand Correct answer.
  2. the firm holds a patent that legally excludes rivals
  3. consumer demand is highly elastic at all output levels
  4. the product is homogeneous and entry is completely free

Explanation

A natural monopoly exists where economies of scale are so large that one firm can supply the whole market at lower average cost than two or more firms. Declining average total cost across the relevant range of demand makes competition wasteful and tends to produce a single supplier.

Question 39Economic concepts and models

In the AD/AS model, a rise in labour productivity combined with a fall in nominal wage growth is most likely to:

  1. shift aggregate demand left, lowering both the price level and output
  2. shift short-run aggregate supply left, raising the price level and lowering output
  3. shift short-run aggregate supply right, lowering the price level and raising output Correct answer.
  4. shift aggregate demand right, raising both the price level and output

Explanation

Higher productivity and slower wage growth both reduce unit costs of production, which shifts short-run aggregate supply to the right. A rightward supply shift raises equilibrium output and puts downward pressure on the price level.

Question 40Economic concepts and models

An economy is operating below full employment. The central bank lowers the official cash rate. In the AD/AS model, the most likely short-run effect is:

  1. aggregate demand falls, reducing real output and the price level
  2. aggregate supply rises, increasing real output and lowering the price level
  3. aggregate supply falls, reducing real output and raising the price level
  4. aggregate demand rises, increasing real output and the price level Correct answer.

Explanation

A lower cash rate reduces borrowing costs and encourages consumption and investment, shifting aggregate demand to the right. With spare capacity available, the economy responds mainly through higher real output, with some upward pressure on prices.

Question 41Economic concepts and models

The economy is at full employment when a sharp rise in import prices occurs. The most likely combination of outcomes is:

  1. cost-push inflation together with a fall in real output Correct answer.
  2. no change in the price level together with a rise in real output
  3. demand-pull inflation together with a rise in real output
  4. deflation together with a rise in real output

Explanation

Higher import prices raise production costs, which shifts short-run aggregate supply to the left. The new equilibrium has a higher price level and lower real output, a combination known as stagflation or cost-push inflation.

Question 42Economic concepts and models

A country can produce either 40 units of cheese or 20 units of wine with its resources, while its trading partner can produce either 30 units of cheese or 30 units of wine. The first country's opportunity cost of one unit of wine is:

  1. 0.5 units of cheese
  2. 2 units of cheese Correct answer.
  3. 1.5 units of cheese
  4. 1 unit of cheese

Explanation

Giving up 40 cheese to gain 20 wine means each unit of wine costs 40 divided by 20, which is 2 units of cheese. The partner's opportunity cost of wine is 1 unit of cheese, so the partner has a comparative advantage in wine.

Question 43Economic concepts and models

A country's current account records a large deficit. Which transaction is recorded as a credit in the current account?

  1. Domestic firms importing machinery from abroad
  2. Overseas tourists spending money in the domestic economy Correct answer.
  3. Domestic residents sending remittances to relatives overseas
  4. Domestic residents paying dividends to foreign shareholders

Explanation

The current account records exports of goods and services as credits and imports as debits, along with income and transfers. Spending by overseas tourists is an export of services and therefore a credit, while the other items are debits.

Question 44Economic concepts and models

A depreciation of the domestic currency is most likely to improve the current account balance when:

  1. domestic inflation is higher than that of trading partners
  2. the sum of the price elasticities of demand for exports and imports is less than one
  3. the sum of the price elasticities of demand for exports and imports exceeds one Correct answer.
  4. the country has a large stock of foreign-currency debt

Explanation

The Marshall-Lerner condition states that a depreciation improves the current account only if the sum of the price elasticities of export and import demand exceeds one. If demand is inelastic, the volumes traded change little and the higher import bill can worsen the balance.

Question 45Economic concepts and models

The unemployment rate is calculated as:

  1. the number of unemployed divided by the number of employed people
  2. the number of unemployed divided by the total population, expressed as a percentage
  3. the number of people not in work divided by the working-age population
  4. the number of unemployed divided by the labour force, expressed as a percentage Correct answer.

Explanation

The labour force consists of employed plus unemployed people who are actively seeking work. The unemployment rate expresses the unemployed as a percentage of that labour force, excluding people outside it such as full-time students and retirees.

Question 46Economic concepts and models

A worker loses a job in a declining manufacturing industry and lacks the skills required by growing service industries. This is best classified as:

  1. seasonal unemployment
  2. frictional unemployment
  3. structural unemployment Correct answer.
  4. cyclical unemployment

Explanation

Structural unemployment arises from a mismatch between the skills or location of workers and the available jobs, often caused by long-term changes in the structure of the economy. The worker's skills no longer match demand, which is the defining feature.

Question 47Economic concepts and models

The consumer price index rises from 150 to 162 over a year. The annual inflation rate is:

  1. 7.4%
  2. 10.8%
  3. 8% Correct answer.
  4. 12%

Explanation

The inflation rate is the percentage change in the index: the change of 12 divided by the starting index of 150, multiplied by 100. This gives 8% for the year.

Question 48Economic concepts and models

A government increases spending on a new motorway, financed by borrowing. In the AD/AS model, the main short-run effect is:

  1. aggregate demand shifts right, raising output and the price level Correct answer.
  2. aggregate demand shifts left, lowering output and the price level
  3. aggregate supply shifts right, raising output and lowering the price level
  4. aggregate supply shifts left, lowering output and raising the price level

Explanation

Government spending is a component of aggregate demand, so increased spending shifts aggregate demand to the right. In the short run this raises real output and puts upward pressure on the price level, with the size of each effect depending on spare capacity.

Question 49Economic concepts and models

An economy experiences demand-pull inflation. Which policy response is most consistent with reducing this inflation?

  1. Increasing government spending on infrastructure
  2. Raising the official cash rate to reduce aggregate demand Correct answer.
  3. Cutting income tax rates to raise disposable income
  4. Lowering the exchange rate to boost exports

Explanation

Demand-pull inflation results from aggregate demand growing faster than the economy's capacity, so contractionary policy is appropriate. A higher official cash rate raises borrowing costs, reduces consumption and investment, and eases demand pressure on prices.

Question 50Economic concepts and models

In a progressive income tax system, the marginal tax rate is higher than the average tax rate. This implies that:

  1. the tax takes a larger proportion of income as income rises Correct answer.
  2. the tax takes a smaller proportion of income as income rises
  3. the tax is levied at a single rate on all income above a threshold
  4. every taxpayer pays the same proportion of income in tax

Explanation

A progressive tax has a marginal rate above the average rate, so as income rises the average rate is pulled upward by the higher rate applied to additional income. The share of income paid in tax therefore increases with income.