Past Exams

Question 1

Own Price Elasticity

Answer 1

(Change in Q demanded) / (Change in Price) = -x

Question 2

Price Elasticity of Demand (PED)

Answer 2

(Q1-Q0)/Q0 / (P1-P0)/P0 = -x

Question 3

Purchasing Power Parity (PPP)

Answer 3

Cost of Good in Currency 1 / Cost of Good in Currency 2

Question 4

Nominal Exchange Rate ($/Pound)

Answer 4

Cost of Good X in $ / Cost of Good X in Pound

Question 5

Real Exchange Rate

Answer 5

Cost of Good X in $ / Cost of Good Y in $

Question 6

Characteristics of Public Good

Answer 6

Non-excludable and non-rivalry in consumption

Question 7

Closed economy multiplier

Answer 7

1 / 1-c
where c: marginal propensity to consume
1-c: marginal propensity to save

Question 8

Consumer behavioural assumption

Answer 8

Rational -> will try to obtain the best they can from consumption decisions
-> pick consumption bundle that maximises individual’s satisfaction

Question 9

Completeness Assumption

Answer 9

Consumer always ranks alternative bundles of goods according to satisfaction/utility it provides -> one bundle is better than, worse than or same

Question 10

Transitivity Assumption

Answer 10

Ranking of possible bundles is internally consistent
If bundle a > bundle b > bundle c -> bundle a > bundle c

Question 11

Non-satiation assumption

Answer 11

If bundle b offers more films but as many meals as bundle c -> bundle b is preferred

Question 12

Indifference Curve

Answer 12

Shows all combinations of good x and good y that yield individual same level of utility

Question 13

Giffen good effect

Answer 13

Income Effect > Substituion Effect

Question 14

Perfect competition long-run profit maximising output and price

Answer 14

P = minimum AC

Question 15

Price taker assumptions for PC

Answer 15

1. Large volume of buyers and sellers
2. Perfect information for both buyers and sellers
3. Homogeneous product
   Set P = MR

Question 16

0 profit in LR for PC assumption

Answer 16

Free entry and exit for all firms where P(x) minimum average cost

Question 17

PC output level

Answer 17

P = MC
Bc that’s also where MR = MC (profit maximisation condition)

Question 18

P = MC

Answer 18

= MR
P = MC is allcoative efficiency condition
1. level of output is at demand = supply
2. total welfare of economy (CS and PS) are maximised

Question 19

Cause of short-run AC movement along MC

Answer 19

1. Fixed cost
2. Tax/Subsidy
3. Wages or cost of capital

Question 20

Nash equilibrium

Answer 20

Strategy that gives highest payoff as a response to other player’s strategy

If both players have dominant strategy, confirm have nash equilibrium

Question 21

Dominant Strategy

Answer 21

Strategy that gives higher payoff relative to other strategies REGARDLESS of what others are playing

If both players have dominant strategy, then equilibrium is where both players play their own dominant strategy

Question 22

Real GDP Growth

Answer 22

Quantity of base year and current year at base price
= (current year GDP / base year GDP) - 1.00

Question 23

Labour Force Participation

Answer 23

Employed + Unemployed / Relevant Population

Question 24

Cause of inflation

Answer 24

1. Decrease in SR AS (bc of wage raise)
2. Increasing in AD (bc of increased consumer spending)

Question 25

Marginal Rate of Substitution

Answer 25

MUx / MUy
Quantity of good Y consumer must sacrifice for an additional unit of good X without affecting total utility

Question 26

Cournot Equilibrium

Answer 26

(1) P = C + Q
P = C + (q1 - q2)
P = C - q1 - q2
(2) find q1 and q2 by
finding TR using q1 or q2
finding MR
MR = MC
= reaction function of firm
(3) Substitute q1 into q2 or vice versa for firm’s quantity
(4) Industry Q = q1 + q2
(5) Industry P = C + Q

Question 27

IS curve

Answer 27

Shows equilibrium in goods market

Question 28

MP curve

Answer 28

Denotes equilibrium in money market

Question 29

Open economy with government

Answer 29

Y = C + I + G + X - Z

Question 30

C

Answer 30

A0 + c(Y-T)
where A0 > 0
and 0 < c < 1

Question 31

I

Answer 31

I0 - b x r
where b > 0 (measures interest sensitivty of investment function)

Question 32

Fischer Equation

Answer 32

i (nominal interest) = r (real interest) + pi (inflation rate)
r = i - pi (from Taylor’s rule)

Question 33

Z

Answer 33

Z0 - zY

Question 34

Closed economy with government

Answer 34

Y = C + I + G
Y = C0 + cY+ I0 - br + G
Y(1-c) = (C0 + I0 + G) - br
Y = 1/1-c [C0+I0+G] - b/1-c

Question 35

Causes of IS shifting

Answer 35

1. Autonomous consumption
2. Autonomous investment
3. Government spending

Question 36

IS Slope

Answer 36

(1 - c)/b

Question 37

Monetary Policy

Answer 37

Target inflation rate (i)
MP curve shows central bank’s desired interest rate (i) at each level of income (Y)