FA1 Exam

Question 1

What are the four key economic questions every society must answer?

Answer 1

What to produce? How much to produce? How to produce? How to distribute production?

Question 2

What is opportunity cost?

Answer 2

The value of the second best alternative that is forgone when making a decision.

Question 3

Who are the main economic participants and what matters to them?

Answer 3

Individuals (income, jobs), Businesses (profits, costs), Governments (economic stability, growth).

Question 4

What are the four factors of production?

Answer 4

Land, Labour, Capital, Entrepreneurship.

Question 5

How are the factors of production linked to income?

Answer 5

Land → Rent, Labour → Wages, Capital → Interest, Entrepreneurial Ability → Profit.

Question 6

What does a production possibility curve (PPC) illustrate?

Answer 6

Scarcity, Choice, Opportunity Cost, Trade-offs, Underutilisation of resources, Efficiency, Productivity, Unemployment, Economic Growth, Full Employment.

Question 7

What are the 4 key assumptions of a PPC?

Answer 7

Only two goods are produced, All available resources are used, Technology is fixed, Goods are produced efficiently.

Question 8

What is the difference between efficiency and equity in economics?

Answer 8

Efficiency is the optimal use of resources; equity is the fair distribution of resources.

Question 9

What are the three main types of economies?

Answer 9

Market economy, Mixed-market economy, Planned/Command economy.

Question 10

What are the main features of a market economy?

Answer 10

Private ownership, Consumer sovereignty, Freedom of enterprise (market determines prices, products, services), Competition.

Question 11

How does a mixed economy address the issues of market economies?

Answer 11

Government intervention, Resource allocation, Income distribution, Economic stability.

Question 12

What are the five sectors in the circular flow of income model?

Answer 12

Households, Firms, Financial Sector, Government Sector, Overseas Sector.

Question 13

What is the equation for economic equilibrium?

Answer 13

S + T + M = I + G + X (Savings + Taxes + Imports = Investment + Government Spending + Exports).

Question 14

What happens when injections exceed leakages?

Answer 14

Economic expansion.

Question 15

What happens when leakages exceed injections?

Answer 15

Economic contraction.

Question 16

What are the four phases of the business cycle?

Answer 16

Expansion, Peak, Contraction, Trough.

Question 17

What happens to economic indicators during expansion?

Answer 17

Economic growth, Rising incomes, Higher consumption, Lower unemployment.

Question 18

What happens during a peak?

Answer 18

Inflation risk increases, Resource shortages, High economic activity.

Question 19

What happens during contraction?

Answer 19

Declining GDP, Lower investment, Rising unemployment.

Question 20

What happens in a trough?

Answer 20

High unemployment, Low business output, Decreased consumption.

Question 21

What is the formula for Aggregate Demand (AD)?

Answer 21

AD = C + I + G + (X - M), where C = Consumption, I = Investment, G = Government Spending, X = Exports, M = Imports.

Question 22

What factors affect aggregate demand?

Answer 22

Consumption spending, Investment spending, Government spending, Net export spending.

Question 23

What factors affect aggregate supply?

Answer 23

Technology, Innovation, Immigration, Entrepreneurship. - think “factors of production”

Question 24

How do changes in aggregate supply affect the PPC?

Answer 24

Increases in supply shift the PPC outward, indicating economic growth.

Question 25

How does the government use fiscal policy in a trough?

Answer 25

Increases spending, Lowers taxes to boost aggregate demand.

Question 26

How does the government use fiscal policy in a peak?

Answer 26

Reduces spending, Raises taxes to slow down excessive demand.

Question 27

How does the Reserve Bank (RBA) use monetary policy in a trough?

Answer 27

Loosening monetary policy - Lowers interest rates to encourage borrowing and investment.

Question 28

How does the RBA use monetary policy in a peak?

Answer 28

Increases interest rates to reduce borrowing and slow demand.

Question 29

What is the latin phrase for "all things being equal"? Why is it used?

Answer 29

Ceteris Paribus - used in economics to isolate the effect of one variable while assuming other factors remain constant.

Question 30

How is a market economy run?

Answer 30

Resources are allocated based on supply and demand, with minimal government intervention. Businesses and consumers make decisions based on price signals.

Question 31

How is a planned/command economy run?

Answer 31

The government controls resource allocation, production, and distribution, setting prices and output levels

Question 32

What are the main features of a market economy?

Answer 32

Private ownership, Consumer sovereignty, Freedom of enterprise, Competition.

Question 33

How does a mixed economy address market economy issues?

Answer 33

Government intervention, Resource allocation, Income distribution, Economic stability.

Question 34

How is a planned/command economy run?

Answer 34

The government makes all economic decisions, including what to produce, how much to produce, and how to distribute goods and services. There is no competition, and industries are state-owned. Prices and wages are set by the government rather than market forces, often leading to inefficiencies and shortages.

Question 35

How does the Australian economy compare to those of other countries, and how do they handle economic issues?

Answer 35

Australia has a mixed-market economy, balancing free-market principles with government intervention to manage inflation, unemployment, and economic stability. Countries with more market-based economies, like the US, rely heavily on private enterprise, while countries with stronger government involvement, like Sweden, use higher taxation to fund welfare programs. In command economies like China, the government plays a dominant role in resource allocation and economic planning, often prioritising long-term growth over short-term market fluctuations.

Question 36

What structure must you use for the analysis section?

Answer 36

1. Economic Issue, correlated with event 2. Specific Trends / Relationships / Coincidences / Contradictions 3. Explain real-world significance 4. Link to economic theory, "ceteris paribus" Repeat

Question 37

What structure must you use for the evaluation section?

Answer 37

1. Establish economic criterion 2. Summarise government intervention 3. Evaluate based on: perspectives 4. ST/LT 5. Costs/Benefits 6. Conclusion - summarise and justify 7. Limitations of concl.