Economics Class Questions and Answers: Key Concepts, Formulas and Solved Problems
GROUP A
Very Short Questions – 1 Mark
1. What is the effect on real wages when the price level increases?
When the price level increases, real wages decrease if money wages remain unchanged.
2. Write any two difficulties of the barter system.
- Double coincidence of wants.
- Lack of a common measure of value.
3. Mention two methods of collecting data.
- Primary method.
- Secondary method.
4. What is the addition of expenditure incurred on fixed factors used in the short-run production process?
It is called Total
Macroeconomic Factors Affecting Aggregate Demand
(a) 4% Fall in UK Household Consumption Expenditure
A fall in household consumption means that C decreases, which is a component of aggregate demand:
AD = C + I + G + (X − M)
Therefore, aggregate demand decreases and the AD curve shifts left from AD₁ to AD₂. The new equilibrium has:
- Lower real GDP: Y₂ < Y₁
- Lower price level: P₂ < P₁
This is because lower consumption reduces firms’ sales and therefore reduces the level of output demanded in the economy.
(b) Fall in UK Bank Base Interest
Read MoreMacroeconomics Concepts: National Income and Fiscal Policy
1. Define National Income
National Income refers to the total factor income earned by the normal residents of a country from the production of goods and services during a financial year. It includes wages, rent, interest, and profits earned by the factors of production.
Formula: National Income = NNP at Factor Cost
2. Difference Between GDP and GNP
GDP (Gross Domestic Product) is the money value of all final goods and services produced within the domestic territory of a country during a given period.
Read MoreAnalyzing Inflation and Deflation in Global Economies
1(a) Japan: Sales Tax and Inflation
a) Which one of the following is most likely to explain the data? (1 mark)
Answer: C
C. In April 2014, Japan raised its sales tax from 5% to 8%.
The graph shows inflation rising sharply during 2014 before falling again. A higher sales tax directly increases consumer prices, causing a temporary increase in CPI inflation.
1(b) Defining Deflation in Japan
(b) With reference to Figure 6, explain the term deflation. (4 marks)
Deflation is a sustained fall in the general price
Read MoreTrade Theory and Political Coalitions: Rogowski’s Matrix
The Stolper-Samuelson Theorem and Trade Dynamics
According to the Stolper-Samuelson theorem, when a country moves from autarky to free trade, the owners of the country’s abundant factor of production gain, while the owners of the scarce factor lose. This occurs because trade allows countries to specialize in producing the goods for which they have a comparative advantage.
Heckscher-Ohlin Model and Income Distribution
As production expands in export industries, the demand for the abundant factor increases,
Read MoreStolper-Samuelson Theorem and Rogowski’s Political Coalitions
1. The Stolper-Samuelson Theorem Explained
The statement is grounded directly in the Stolper-Samuelson Theorem, an extension of the Heckscher-Ohlin model of international trade. The theorem demonstrates that a transition from autarky to free trade increases the real returns to a country’s abundant factor of production while decreasing the real returns to its scarce factor.
This outcome occurs due to shifts in production patterns driven by comparative advantage. When a country opens to international
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