UNIVERSITY OF LONDON
SESSIONAL EXAMINATION FOR THE EXTRA-MURAL CERTIFICATE/DIPLOMA IN ECONOMICS 2004
Economic Principles
Answer THREE questions, at least ONE from Section A and at least ONE from Section B.
Section A
1. “Economics is the study of the allocation of scarce resources amongst competing wants”. What does this sentence mean? What do you understand by the phrases “positive economics” and “normative economics”? Is economics a science?
2. Explain the concepts of equilibrium price and equilibrium output in a market. Use demand and supply diagrams to illustrate your answer. Again using demand and supply diagrams analyse the potential impact of the following changes on the market for package holidays in Majorca:
a) the introduction of a tourist tax of 10 euros per person per day
b) an outbreak of legionnaires disease on Majorca
c) the introduction of cheap package holdays to the Caribbean
d) the building of a new resort on Majorca with a major increase in hotel capacity
e) an economic boom in Western Europe
3. Explain what conditions are necessary for a market to be “perfectly competitive”. How does a firm operating in a perfectly competitive market set its price and output? What happens in such a market if firms are able to achieve high levels of profitability?
4. Tobacco products are addictive and therefore are price inelastic. What does this sentence mean? Why do you think therefore that historically governments have sought to tax tobacco consumption? Is taxing tobacco products likely to reduce deaths from cancer and heart disease? What alternative economic policies could a government use to deter people from smoking?
5. What do economists mean by oligopolistic markets? What are the economic arguments for and against allowing an increasing level of concentration of UK industrial output in the hands of fewer firms?
6. What do economists mean when they refer to market failure? What are the economic arguments for and against charging for entrance to museums?
PLEASE TURN OVER
Section B
7. Explain how a simple model in which prices are fixed, consumption depends on income and investment is dependent on exogenous decisions by investors could be used to explain the level of national output within an economy. Use the model to analyse the effect on an economy of
a) An increase in government spending
b) A cut in the tax rate
c) An increase in exports
d) A collapse in investment
8. Using the aggregate demand and aggregate supply model examine the effect of each of the following on real GDP and the price level:
a) An increase in government spending and cut in taxation
b) An increase in exports
c) A collapse in investment
d) An increase in wage rates
e) A fall in the price of oil
Explain what this model would predict would happen in the long run in the absence of government policy change.
9. What is the Phillip’s curve? What is the difference between the short run and long run Phillip’s curve? What determines the Non-Accelerating Rate of Inflation rate of Unemployment (NAIRU) and what could be done to lower it?
10. What is money? What determines the demand for money within an economy? Why does raising and lowering interest rates have an effect on the economy? Why do you think that control of interest rates has been given to the Monetary Policy Committee of the Bank of England?
11. What is meant by the term “balance of payments deficit”? Identify ways in which a country can attempt to reduce a deficit. Would you consider such options to be costless?
12. Explain the theories of “absolute advantage” and “comparative advantage”. What are the economic arguments put forward by proponents of free trade? In what circumstances might a country not want to promote free trade?
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