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New Zealand Scholarship Economics study materials
New Zealand Scholarship Economics study resources

New Zealand Scholarship Economics practice questions

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Question 1Economics (single Scholarship subject; no content domains or weights published in the source)

A small open economy fixes its exchange rate and also allows unrestricted cross-border capital flows. According to the Mundell-Fleming framework, which policy tool becomes ineffective at influencing domestic output?

  1. Independent monetary policy Correct answer.
  2. Automatic stabilisers
  3. Structural supply-side reform
  4. Fiscal policy

Explanation

With a fixed exchange rate and perfect capital mobility, any attempt to set a domestic interest rate different from the world rate triggers capital flows that force the central bank to defend the peg, so the money supply becomes endogenous. Monetary policy therefore cannot be used independently to stabilise output. Fiscal policy, by contrast, retains traction because it shifts the exchange-rate-compatible equilibrium.

Question 2Economics (single Scholarship subject; no content domains or weights published in the source)

A firm's total cost rises from $500 to $560 when output increases from 40 to 50 units. What is the marginal cost of the additional output?

  1. $60.00 per unit
  2. $1.50 per unit
  3. $11.20 per unit
  4. $6.00 per unit Correct answer.

Explanation

Marginal cost is the change in total cost divided by the change in output, so ($560 − $500) ÷ (50 − 40) = $60 ÷ 10 = $6.00 per unit. Average cost figures use total cost divided by total output and are a different concept.

Question 3Economics (single Scholarship subject; no content domains or weights published in the source)

An economy is producing on its production possibility frontier and reallocates resources to produce more capital goods and fewer consumer goods. What is the most likely long-run consequence?

  1. Current consumption rises immediately
  2. The frontier shifts outward more rapidly in future periods Correct answer.
  3. The opportunity cost of capital goods falls to zero
  4. The economy moves inside its frontier

Explanation

Producing more capital goods sacrifices present consumption but adds to the future capital stock, shifting the production possibility frontier outward faster over time. This trade-off between present and future consumption is the core of the growth-versus-current-consumption choice.

Question 4Economics (single Scholarship subject; no content domains or weights published in the source)

A good is non-rival and non-excludable. Which outcome does standard public-goods theory predict in a competitive market with no government intervention?

  1. Efficient provision through the price mechanism
  2. Complete absence of any demand for the good
  3. Underprovision relative to the socially efficient quantity Correct answer.
  4. Overprovision because firms capture all benefits

Explanation

Non-excludability creates a free-rider problem, so private firms cannot charge for the good and non-rivalry means additional users impose no extra cost. Markets therefore supply less than the socially efficient quantity, justifying public provision or subsidy.

Question 5Economics (single Scholarship subject; no content domains or weights published in the source)

A government imposes a binding price ceiling below the equilibrium price in a competitive market. Which set of effects is most consistent with standard analysis?

  1. A surplus, increased quantity supplied, and wasted resources
  2. A shortage, reduced quantity supplied, and possible non-price rationing Correct answer.
  3. A shift of both demand and supply curves
  4. No effect because ceilings only bind above equilibrium

Explanation

A binding ceiling holds price below equilibrium, so quantity demanded exceeds quantity supplied, creating a shortage. Because price can no longer clear the market, allocation may occur through queues, quotas, or other non-price mechanisms.

Question 6Economics (single Scholarship subject; no content domains or weights published in the source)

A monopolist faces a downward-sloping demand curve. At its profit-maximising output, which condition holds?

  1. Average total cost is minimised and price equals average cost
  2. Marginal revenue equals marginal cost and price exceeds marginal revenue Correct answer.
  3. Price equals marginal cost and marginal revenue is zero
  4. Marginal revenue exceeds price and marginal cost is falling

Explanation

Profit maximisation requires marginal revenue to equal marginal cost. Because the monopolist must lower price to sell more, marginal revenue lies below price, so price exceeds marginal revenue at the optimum.

Question 7Economics (single Scholarship subject; no content domains or weights published in the source)

Real GDP per capita rises by 2% in one year while the population grows by 3%. Assuming real GDP is measured correctly, what happens to real GDP per capita?

  1. It is unchanged
  2. It rises by approximately 1%
  3. It rises by approximately 5%
  4. It falls by approximately 1% Correct answer.

Explanation

Real GDP per capita growth is approximately the growth of real GDP minus population growth, so 2% − 3% = −1%. Living standards measured this way therefore decline slightly despite absolute output rising.

Question 8Economics (single Scholarship subject; no content domains or weights published in the source)

A country's consumer price index rises from 120 to 126 over a year. What is the inflation rate?

  1. 126%
  2. 5% Correct answer.
  3. 6%
  4. 4.8%

Explanation

Inflation is the percentage change in the index: (126 − 120) ÷ 120 × 100 = 5%. Using the earlier period as the base is essential for a correct percentage change.

Question 9Economics (single Scholarship subject; no content domains or weights published in the source)

The Reserve Bank raises the official cash rate. Which transmission channel most directly explains a subsequent fall in investment spending?

  1. Higher borrowing costs raise the user cost of capital Correct answer.
  2. A fall in the labour force participation rate
  3. Higher government spending crowds out private firms
  4. A lower exchange rate raises import prices

Explanation

A higher policy rate raises the cost of borrowed funds, increasing the user cost of capital and reducing the profitability of investment projects at the margin. This is the interest-rate transmission channel of monetary policy.

Question 10Economics (single Scholarship subject; no content domains or weights published in the source)

In a simple Keynesian model with no government or trade, the marginal propensity to consume is 0.75. What is the value of the expenditure multiplier?

  1. 1.33
  2. 0.75
  3. 0.25
  4. 4 Correct answer.

Explanation

The multiplier equals 1 ÷ (1 − marginal propensity to consume), so 1 ÷ 0.25 = 4. Each initial dollar of autonomous spending generates four dollars of eventual income.

Question 11Economics (single Scholarship subject; no content domains or weights published in the source)

A tariff is imposed on imported steel. Which effect is a standard welfare loss identified in partial-equilibrium analysis?

  1. Domestic producer surplus falls
  2. Consumers lose more surplus than producers and government gain combined Correct answer.
  3. The domestic price falls toward the world price
  4. Government tariff revenue always exceeds the consumer loss

Explanation

A tariff raises the domestic price, transferring surplus from consumers to producers and government while creating deadweight losses from reduced consumption and inefficient domestic production. The net effect is a welfare loss because consumer losses exceed the sum of producer and revenue gains.

Question 12Economics (single Scholarship subject; no content domains or weights published in the source)

A country has a comparative advantage in a good when it can produce that good at which cost relative to its trading partner?

  1. A higher opportunity cost
  2. A lower absolute money cost
  3. A higher absolute labour productivity
  4. A lower opportunity cost Correct answer.

Explanation

Comparative advantage is defined by opportunity cost, not absolute cost: a country gains from specialising where it sacrifices less of other output per unit produced. Absolute cost differences are neither necessary nor sufficient for gains from trade.

Question 13Economics (single Scholarship subject; no content domains or weights published in the source)

An externality arises in production. Which policy instrument is most directly designed to internalise a negative production externality?

  1. A price ceiling on the good
  2. A Pigouvian tax equal to the marginal external cost at the efficient output Correct answer.
  3. A subsidy to consumers of the good
  4. A minimum wage increase

Explanation

A Pigouvian tax set equal to marginal external cost at the efficient output aligns private marginal cost with social marginal cost, so the firm internalises the damage it imposes. The result is the socially efficient quantity.

Question 14Economics (single Scholarship subject; no content domains or weights published in the source)

Which situation best illustrates adverse selection rather than moral hazard?

  1. Healthy people drop health insurance because premiums reflect average risk Correct answer.
  2. A firm pollutes more after buying pollution permits
  3. A worker shirks because monitoring is imperfect
  4. An insured driver becomes less careful about parking

Explanation

Adverse selection concerns hidden information before a contract: high-risk and low-risk types differ in ways the insurer cannot observe, so low-risk individuals may exit when premiums reflect average risk. Moral hazard concerns hidden actions after the contract is signed.

Question 15Economics (single Scholarship subject; no content domains or weights published in the source)

In an oligopoly with two firms producing a homogeneous good and competing on quantity, what does the Cournot equilibrium predict?

  1. Each firm takes price as given and cannot influence it
  2. Each firm chooses output taking the other's output as given, with price above marginal cost Correct answer.
  3. Firms collude to achieve the monopoly outcome
  4. Firms set price equal to marginal cost as in perfect competition

Explanation

In Cournot competition each firm maximises profit conditional on the rival's output, generating best-response functions whose intersection gives equilibrium quantities. Total output exceeds the monopoly level but price remains above marginal cost, so there is allocative inefficiency.

Question 16Economics (single Scholarship subject; no content domains or weights published in the source)

A Lorenz curve lies further from the line of perfect equality than before. What does this indicate?

  1. Greater inequality, with a higher Gini coefficient Correct answer.
  2. No change in inequality but higher average income
  3. A fall in the poverty line
  4. Lower inequality, with a lower Gini coefficient

Explanation

The Lorenz curve plots cumulative income shares against cumulative population shares, and a larger gap from the diagonal means more unequal distribution. The Gini coefficient is derived from the area between the curve and the diagonal, so it rises when the curve moves further away.

Question 17Economics (single Scholarship subject; no content domains or weights published in the source)

A central bank with a credible inflation target faces a temporary supply shock that raises costs. What does a standard flexible inflation-targeting response involve?

  1. Tightening policy enough to hold inflation at target immediately at any output cost
  2. Allowing inflation to rise temporarily while avoiding a large output contraction Correct answer.
  3. Ignoring inflation and targeting the exchange rate
  4. Abandoning the target permanently

Explanation

Flexible inflation targeting balances deviations of inflation and output from their targets, so a temporary supply shock is typically accommodated somewhat, with policy tightening gradually as second-round effects are contained. Attempting to hold inflation exactly at target immediately would require a large output sacrifice.

Question 18Economics (single Scholarship subject; no content domains or weights published in the source)

Which statement best describes the difference between a movement along the aggregate demand curve and a shift of the curve?

  1. Both changes always shift the curve
  2. Movements along the curve are caused only by supply shocks
  3. A change in the price level shifts the curve, while a change in government spending moves along it
  4. A change in the general price level moves the quantity of output demanded along the curve, while a change in autonomous spending shifts the curve Correct answer.

Explanation

The aggregate demand curve relates the price level to the quantity of output demanded, so a price-level change produces a movement along it through wealth, interest-rate, and trade effects. Changes in autonomous components such as government spending or investment shift the whole curve.

Question 19Economics (single Scholarship subject; no content domains or weights published in the source)

A firm in perfect competition faces a market price below its minimum average variable cost. What is the standard short-run shutdown rule?

  1. Raise the price above marginal cost
  2. Shut down because revenue does not cover variable costs Correct answer.
  3. Continue producing because fixed costs are sunk
  4. Produce where price equals average total cost

Explanation

If price is below minimum average variable cost, the firm loses less by shutting down and paying only fixed costs than by producing and covering neither variable nor fixed costs. Fixed costs are sunk and do not affect the shutdown decision.

Question 20Economics (single Scholarship subject; no content domains or weights published in the source)

Which change would shift an economy's short-run aggregate supply curve to the left?

  1. An increase in consumer confidence
  2. A fall in the general price level
  3. A rise in the price of a key imported input Correct answer.
  4. A fall in the official cash rate

Explanation

Higher input prices raise unit production costs at every price level, reducing the quantity firms are willing to supply and shifting short-run aggregate supply left. The other options act on aggregate demand or represent movements along the supply curve.

Question 21Economics (single Scholarship subject; no content domains or weights published in the source)

A government runs a large structural budget deficit during an economic boom. Which interpretation is most consistent with standard fiscal analysis?

  1. The structural balance is unaffected by discretionary tax changes
  2. The structural position suggests the stance is expansionary beyond what the cycle requires Correct answer.
  3. The deficit must be entirely cyclical and requires no policy response
  4. The deficit automatically disappears as the boom continues

Explanation

The structural or cyclically adjusted balance removes the effect of the economic cycle, so a large structural deficit during a boom indicates a discretionary expansionary stance rather than cyclical weakness. This may overheat an already strong economy.

Question 22Economics (single Scholarship subject; no content domains or weights published in the source)

A depreciation of the domestic currency occurs. According to the Marshall-Lerner condition, when does the trade balance improve?

  1. When both elasticities are less than one
  2. When the sum of the elasticities equals zero
  3. When the sum of the absolute price elasticities of export and import demand exceeds one Correct answer.
  4. When domestic inflation is zero

Explanation

A depreciation raises import prices and lowers export prices in foreign currency. The trade balance improves only if the combined price responsiveness of exports and imports is elastic enough, specifically when the sum of the absolute elasticities exceeds one.

Question 23Economics (single Scholarship subject; no content domains or weights published in the source)

Which item is excluded from a country's labour force measure?

  1. A part-time worker seeking more hours
  2. An unemployed person actively applying for jobs
  3. A full-time student who is not working and not actively seeking work Correct answer.
  4. A self-employed contractor working twenty hours a week

Explanation

The labour force comprises employed and unemployed people, where the unemployed must be actively seeking and available for work. A student neither working nor actively job-seeking is classified as outside the labour force.

Question 24Economics (single Scholarship subject; no content domains or weights published in the source)

A natural monopoly has declining long-run average cost over the relevant range of demand. Why is marginal-cost pricing likely to require a subsidy?

  1. Marginal cost exceeds average cost, so the firm earns excess profit
  2. Fixed costs are zero in natural monopoly
  3. Marginal cost lies below average cost, so pricing at marginal cost produces a loss Correct answer.
  4. Demand is perfectly inelastic, so revenue is zero

Explanation

With declining average cost, marginal cost is below average cost, so a regulator setting price equal to marginal cost forces the firm to sell below average cost and incur a loss that must be covered by subsidy or an alternative pricing rule.

Question 25Economics (single Scholarship subject; no content domains or weights published in the source)

A consumer's budget line rotates outward along the horizontal axis after the price of the horizontally measured good falls, with income and the other price unchanged. What does this represent?

  1. A change in preferences toward the cheaper good
  2. An increase in the maximum affordable quantity of that good, lowering its opportunity cost in terms of the other good Correct answer.
  3. A fall in the consumer's real income
  4. A parallel shift caused by higher income

Explanation

A price fall pivots the budget line outward on the axis of the cheaper good, increasing the maximum quantity affordable while leaving the intercept on the other axis unchanged. The slope, which measures relative price, becomes flatter, so the good is cheaper in terms of the other good.

Question 26Economics (single Scholarship subject; no content domains or weights published in the source)

A small open economy fixes its exchange rate and also allows unrestricted cross-border capital flows. According to the Mundell-Fleming framework, which policy becomes ineffective for influencing domestic output?

  1. Structural labour-market reform
  2. Tariff changes on imported inputs
  3. Independent monetary policy Correct answer.
  4. Discretionary fiscal policy

Explanation

Under a fixed exchange rate with perfect capital mobility, the central bank must defend the peg, so any attempt to set interest rates independently is reversed by capital flows and reserve operations. Monetary policy therefore loses traction on output, whereas fiscal policy retains potency because it moves the exchange-rate-consistent interest rate.

Question 27Economics (single Scholarship subject; no content domains or weights published in the source)

A firm's production function exhibits constant returns to scale and it operates in a perfectly competitive market. In long-run equilibrium with free entry, what happens to the number of firms if market demand rises permanently?

  1. Existing firms expand output while price rises permanently above minimum average cost
  2. Firms earn positive economic profit and entry expands the number of firms until price returns to minimum average cost Correct answer.
  3. The number of firms stays fixed and each firm earns sustained supernormal profit
  4. Price falls below minimum average cost and firms exit until demand recovers

Explanation

Free entry drives long-run economic profit to zero, so price settles at the minimum of long-run average cost regardless of demand. A permanent demand increase attracts entrants, expanding industry output at an unchanged long-run price.

Question 28Economics (single Scholarship subject; no content domains or weights published in the source)

A government introduces a means-tested benefit that is withdrawn at 40 cents for every dollar of earnings above a threshold. Which behavioural effect does this withdrawal rate most directly create?

  1. A rise in the reservation wage to zero
  2. A lump-sum transfer that leaves marginal incentives unchanged
  3. An increase in the marginal product of labour
  4. An effective marginal tax rate on additional earnings that can reduce work incentives Correct answer.

Explanation

Tapering a benefit as earnings rise is equivalent to an extra tax on the marginal dollar earned, so the effective marginal tax rate rises and the incentive to increase hours may fall. The income effect and substitution effect can pull in different directions, but the marginal distortion is the key mechanism.

Question 29Economics (single Scholarship subject; no content domains or weights published in the source)

In a duopoly where firms compete by setting prices for a homogeneous good with identical constant marginal costs, what is the Nash equilibrium outcome?

  1. Output equals the monopoly level and profit is shared equally
  2. Price equals marginal cost and both firms earn zero economic profit Correct answer.
  3. Price equals average fixed cost and firms break even on overheads
  4. Price exceeds marginal cost and each firm earns positive profit

Explanation

With homogeneous products and price competition, any price above marginal cost can be undercut to capture the whole market, so the only Nash equilibrium is price equal to marginal cost. This is the Bertrand result, which contrasts with the Cournot quantity outcome.

Question 30Economics (single Scholarship subject; no content domains or weights published in the source)

A government sells permits under a cap-and-trade scheme for a pollutant. Which feature distinguishes this instrument from a carbon tax when abatement costs differ across firms?

  1. Firms face no cost for emitting because permits are freely allocated
  2. Abatement cost differences become irrelevant to which firms reduce emissions
  3. The regulator fixes the emissions price and lets the quantity emerge from the market
  4. The regulator fixes the quantity of emissions and lets the permit price emerge from trading Correct answer.

Explanation

A cap-and-trade scheme sets the emissions quantity and allows the price to be discovered through trading, whereas a tax fixes the price and leaves quantity uncertain. Trading also ensures abatement occurs where it is cheapest, equalising marginal abatement costs across firms.

Question 31Economics (single Scholarship subject; no content domains or weights published in the source)

A worker's wage rises from $20 to $22 per hour and, in response, she chooses to work fewer hours. Which interpretation of her preferences is consistent with this observation?

  1. The income effect of the wage rise outweighs the substitution effect over this range Correct answer.
  2. The substitution effect outweighs the income effect over this range
  3. Her labour supply curve must be perfectly inelastic
  4. Her marginal utility of leisure must be zero

Explanation

A higher wage makes leisure more expensive, encouraging more work through the substitution effect, but raises real income, encouraging more leisure through the income effect. Reduced hours means the income effect dominates, producing a backward-bending segment of the labour supply curve.

Question 32Economics (single Scholarship subject; no content domains or weights published in the source)

A country's current account records a large deficit while its capital and financial account shows a corresponding surplus. Which statement best describes the accounting relationship?

  1. The current account deficit indicates the country has received no foreign investment
  2. The balance of payments accounts sum to zero, so a current account deficit is matched by net capital inflows Correct answer.
  3. The two accounts are independent and need not offset each other
  4. A capital account surplus means the country's net foreign asset position must be improving

Explanation

Balance of payments accounting uses double entry, so the current account and the capital plus financial accounts must sum to zero apart from statistical discrepancy. A current account deficit therefore corresponds to net inflows of capital, which is equivalent to the country borrowing from abroad or selling assets.

Question 33Economics (single Scholarship subject; no content domains or weights published in the source)

An economy's output gap is negative and inflation is below target. Which policy mix is most consistent with a standard inflation-targeting central bank's reaction function?

  1. Raise the policy rate to defend the exchange rate
  2. Keep the policy rate unchanged regardless of the output gap
  3. Raise the policy rate to restrain demand and lower inflation further
  4. Lower the policy rate to stimulate demand and return inflation toward target Correct answer.

Explanation

A negative output gap with below-target inflation signals deficient demand, so a Taylor-type rule prescribes a lower policy rate. Loosening monetary conditions supports activity and helps inflation return to target over the horizon.

Question 34Economics (single Scholarship subject; no content domains or weights published in the source)

In the Solow growth model without technological progress, what happens to output per worker in the long run as capital per worker increases?

  1. It equals the saving rate multiplied by capital per worker forever
  2. It converges to a steady-state level where investment equals depreciation Correct answer.
  3. It grows without bound as capital accumulates
  4. It falls steadily as diminishing returns set in

Explanation

Diminishing returns to capital mean that investment per worker eventually equals the depreciation requirement, so capital per worker and output per worker settle at a steady state. Sustained growth in output per worker then requires technological progress.

Question 35Economics (single Scholarship subject; no content domains or weights published in the source)

A consumer's indifference curves are convex to the origin and she chooses a bundle where the budget line is tangent to an indifference curve. Which condition characterises her optimum?

  1. The marginal utilities of both goods are equal
  2. The marginal rate of substitution equals total income
  3. The marginal rate of substitution exceeds the price ratio
  4. The marginal rate of substitution equals the ratio of the two prices Correct answer.

Explanation

At an interior optimum with convex preferences, the slope of the indifference curve equals the slope of the budget line, so the marginal rate of substitution equals the price ratio. This ensures the consumer cannot raise utility by reallocating spending between the goods.

Question 36Economics (single Scholarship subject; no content domains or weights published in the source)

A firm's marginal cost curve intersects its average total cost curve. At that point, what is true of average total cost?

  1. Average total cost is at its minimum Correct answer.
  2. Average total cost is at its maximum
  3. Average total cost equals fixed cost
  4. Average total cost is rising steeply

Explanation

Marginal cost pulls average cost in the direction it lies, so when marginal cost equals average total cost the average is stationary. Because average cost is U-shaped, that stationary point is the minimum.

Question 37Economics (single Scholarship subject; no content domains or weights published in the source)

A government wants to correct a positive externality from education. Which instrument is most directly targeted at the externality rather than at general equity objectives?

  1. A per-student subsidy tied to enrolment Correct answer.
  2. A lump-sum benefit paid to all households
  3. A progressive income tax
  4. A higher goods and services tax

Explanation

A targeted subsidy raises the private return toward the social return, encouraging the activity that generates the spillover. Broad taxes and transfers alter income distribution but do not specifically align private and social marginal benefits.

Question 38Economics (single Scholarship subject; no content domains or weights published in the source)

An economy experiences a sharp rise in the price of imported oil. In the short run, with sticky nominal wages, what is the most likely combination of effects?

  1. Higher inflation and higher output
  2. Lower inflation and higher output
  3. Higher inflation and lower output Correct answer.
  4. Lower inflation and lower output

Explanation

An adverse supply shock shifts short-run aggregate supply left, raising the price level and reducing real output when wages are sticky. This combination is the standard stagflationary response to an input-price shock.

Question 39Economics (single Scholarship subject; no content domains or weights published in the source)

A firm price-discriminates between two markets with different demand elasticities. To maximise profit, how should it set prices?

  1. A higher price in the market with more elastic demand
  2. The same price in both markets
  3. A lower price in the market with less elastic demand
  4. A higher price in the market with less elastic demand Correct answer.

Explanation

The optimal markup over marginal cost is inversely related to demand elasticity, so the less elastic market bears the higher price. Charging a uniform price would leave profit on the table where willingness to pay differs.

Question 40Economics (single Scholarship subject; no content domains or weights published in the source)

A country's Gini coefficient rises from 0.30 to 0.38. Which statement is the most accurate interpretation?

  1. Average income has fallen
  2. The poverty line has been redefined
  3. Absolute poverty has necessarily risen
  4. Income inequality has increased according to this measure Correct answer.

Explanation

The Gini coefficient is a summary measure of relative inequality, so a higher value indicates a more unequal distribution. It says nothing directly about average income, absolute poverty, or the definition of a poverty line.

Question 41Economics (single Scholarship subject; no content domains or weights published in the source)

A central bank announces a future path of low policy rates. Which channel of monetary transmission does this primarily exploit?

  1. The exchange rate channel operating through import prices
  2. Forward guidance affecting expectations of future short rates and long-term yields Correct answer.
  3. The wealth channel operating through share prices
  4. The bank lending channel operating through reserve requirements

Explanation

Forward guidance works by shaping expectations of the future policy path, which feeds into longer-term interest rates and current spending decisions. It is distinct from channels that operate through exchange rates, credit supply, or asset wealth.

Question 42Economics (single Scholarship subject; no content domains or weights published in the source)

A firm is a natural monopoly in a market where demand intersects marginal cost below average cost. Why does unregulated average-cost pricing require a subsidy or accept inefficiency?

  1. Average-cost pricing forces marginal cost above average cost
  2. Average-cost pricing sets price above marginal cost, so output is below the allocatively efficient level Correct answer.
  3. Average-cost pricing sets price below marginal cost, causing the firm to overproduce
  4. Average-cost pricing eliminates the firm's fixed costs

Explanation

With declining average cost, marginal cost lies below average cost, so pricing at average cost leaves price above marginal cost and output short of the efficient level. Marginal-cost pricing would be allocatively efficient but would generate losses requiring a subsidy.

Question 43Economics (single Scholarship subject; no content domains or weights published in the source)

A union negotiates a wage above the market-clearing level in a competitive labour market. Which outcome is predicted by the standard model?

  1. Employment falls and some workers are rationed out of jobs Correct answer.
  2. The marginal product of labour rises automatically
  3. The labour demand curve shifts outward
  4. Employment rises because higher wages attract more workers

Explanation

A wage above equilibrium moves the economy up along the labour demand curve, so firms hire fewer workers and excess supply of labour emerges. The higher wage benefits those employed but creates queuing or rationing among those who cannot find work.

Question 44Economics (single Scholarship subject; no content domains or weights published in the source)

A government finances a temporary increase in spending by issuing debt, and households anticipate future tax rises. Under Ricardian equivalence, what is the predicted effect on aggregate demand?

  1. Little or no effect, because households increase saving in anticipation of future taxes Correct answer.
  2. A fall in demand, because debt issuance crowds out all private spending
  3. An increase in demand equal to the spending increase
  4. A large expansion, because households treat the debt as net wealth

Explanation

Ricardian equivalence holds that debt-financed spending merely postpones taxation, so forward-looking households save more now and the demand effect is muted. The result depends strongly on assumptions such as perfect foresight and non-distortionary taxes.

Question 45Economics (single Scholarship subject; no content domains or weights published in the source)

A small country opens to trade and its domestic price of a good falls to the world price. Which effect on domestic producer surplus and consumer surplus follows in the standard partial-equilibrium model?

  1. Both consumer and producer surplus fall
  2. Both consumer and producer surplus rise
  3. Consumer surplus rises and producer surplus falls Correct answer.
  4. Consumer surplus falls and producer surplus rises

Explanation

A lower domestic price transfers surplus from producers to consumers, so consumer surplus rises and producer surplus falls. The net welfare effect depends on whether the price change reflects efficient trade or a distortion.

Question 46Economics (single Scholarship subject; no content domains or weights published in the source)

An economy is at full employment and the government increases spending financed by borrowing. In the loanable funds market, what is the standard crowding-out mechanism?

  1. Higher spending reduces the marginal propensity to consume
  2. Higher demand for funds raises interest rates and reduces private investment Correct answer.
  3. Borrowing reduces the money supply and lowers prices
  4. Higher spending lowers interest rates and stimulates investment

Explanation

Government borrowing adds to the demand for loanable funds, pushing interest rates up and displacing some private investment. The extent of crowding out depends on how sensitive investment is to interest rates and on the economy's spare capacity.

Question 47Economics (single Scholarship subject; no content domains or weights published in the source)

A firm faces a downward-sloping demand curve and its marginal revenue is below price. Why does marginal revenue fall below price for a monopolist?

  1. Consumers have identical reservation prices
  2. Selling an extra unit requires lowering the price on all units sold Correct answer.
  3. The monopolist faces increasing marginal cost
  4. The firm cannot influence the market price

Explanation

To sell more, a price-setting firm must lower the price on every unit, so the revenue gained on the extra unit is reduced by the revenue lost on inframarginal units. This makes marginal revenue less than price for any downward-sloping demand curve.

Question 48Economics (single Scholarship subject; no content domains or weights published in the source)

Which development indicator adjusts gross national income per capita for health and education and expresses it relative to a benchmark?

  1. The Gini coefficient
  2. The Human Development Index Correct answer.
  3. The terms of trade
  4. The consumer price index

Explanation

The Human Development Index combines income, life expectancy, and schooling into a single composite measure scaled between 0 and 1. The other measures capture prices, distribution, or trade prices rather than multidimensional development.

Question 49Economics (single Scholarship subject; no content domains or weights published in the source)

A central bank's balance sheet expands through large-scale asset purchases. Which transmission channel is most directly engaged when these purchases lower yields on longer-dated bonds?

  1. The expectations channel about future inflation only
  2. The exchange rate channel
  3. The bank lending channel
  4. The portfolio balance channel Correct answer.

Explanation

Asset purchases alter the relative supply of long-dated securities, prompting investors to rebalance toward other assets and lowering term premia. This portfolio rebalancing is distinct from signalling expectations or altering bank reserves directly.

Question 50Economics (single Scholarship subject; no content domains or weights published in the source)

A firm's short-run production function shows diminishing marginal returns to labour. What does this imply for its short-run marginal cost curve?

  1. Marginal cost is constant as output expands
  2. Marginal cost rises as output expands Correct answer.
  3. Marginal cost falls as output expands
  4. Marginal cost is unrelated to labour productivity

Explanation

When each extra worker adds less output, the extra labour needed for an additional unit of output rises, so marginal cost increases with output. This links diminishing returns in production to the upward-sloping marginal cost curve.