SAQ Answers For Interview Flashcards
(11 cards)
What is asymmetric information and adverse selection as a market failure?
When one party in a transaction has more information than the other, it leads to asymmetric information.
Adverse selection is a type of this, where the party with less information ends up with a worse outcome (e.g. insurance markets attracting high-risk individuals).
This leads to market failure as resources are misallocated or markets break down.
What factors affect the demand for labour?
• Wage rate (inverse relationship)
• Demand for the final good/service
• Productivity of labour
• Substitutability with capital
• Employment costs (e.g. taxes, pensions)
Firms hire more when labour is productive and affordable.
How does technological change affect the demand for labour?
Positive effect: tech can create new jobs (e.g. digital sector), increase productivity, raise demand for high-skilled labour.
• Negative effect: automation may reduce demand for low-skilled roles.
Net impact depends on whether tech is labour-complementing or labour-replacing.
What are automatic stabilisers and how do they affect the business cycle?
These are fiscal tools that work without active government intervention, such as:
• Tax revenues falling in recessions (boosting demand)
• Benefits spending rising during downturns
They smooth the cycle, cushioning booms and recessions automatically.
What is the cross-price elasticity of demand (XED) for tea and coffee?
XED measures the responsiveness of demand for one good to a price change in another.
Tea and coffee are substitutes, so their XED is positive — if coffee becomes more expensive, tea demand rises.
Why use fiscal policy to reduce short-term inflation?
Fiscal policy can reduce aggregate demand by:
• Cutting government spending
• Raising taxes
This helps cool the economy and bring demand-pull inflation down, especially when monetary policy tools are limited or slow to take effect.
What are the risks of using only monetary policy to control inflation?
Blunt instrument: affects the whole economy, may cause slowdown.
• Uneven effects: hurts borrowers more than savers.
• Time lags: takes months to impact inflation.
• Ignoring fiscal tools limits flexibility.
• May not address cost-push inflation effectively.
What is the opportunity cost of owning a car for a year?
Opportunity cost = value of next best alternative forgone.
Owning a car includes:
• Purchase or leasing cost
• Fuel, insurance, tax
• Value of alternative transport or saving/investing that money
Car Opp Cost Follow-up: Does servicing the car affect opportunity cost?
Servicing the car does not directly change the opportunity cost, because opportunity cost is about the next best alternative foregone. The cost of servicing is part of the total cost of owning the car, but the opportunity cost depends on what you’re giving up to own it — for example, the ability to use that money on public transport or investing it elsewhere. However, if servicing improves the car’s resale value or lifespan, it might reduce the economic cost overall, but the opportunity cost remains tied to what alternative is sacrificed.
Why is the foreign exchange market considered perfectly competitive?
Many buyers and sellers
• Homogeneous product (currencies are identical)
• Full access to price information
• Low barriers to entry/exit
• No single actor can influence price
This makes it close to the textbook model of perfect competition.
What are tariffs and why are they used?
Used to:
• Protect domestic industries
• Raise government revenue
• Correct trade imbalances
• Can also be used as a political or retaliatory tool
But they can raise prices for consumers and provoke retaliation.
