Economics Paper 1 MCQ Practice 1.1

A natural resource was discovered in a country. The exploitation of this resource allowed the country to double its gross domestic product within ten years. Why did this not solve the basic economic problem?

• Exploiting the resource required high expenditure on capital equipment.

• Exploiting the resource caused significant environmental damage.

• Gross domestic product was unevenly distributed in the country.

• Wants still exceeded the resources available to meet those wants.

Answer explanation

Wants still exceeded the resources available to meet those wants.

The diagram shows a shift in a country's production possibility curve (PPC). What would cause the shift from X to Y?

• a fall in the unemployment rate

• a fall in consumer demand

• a rise in the rate of inflation

• a rise in the size of the labour force

Answer explanation

A fall in the unemployment rate would cause the shift from X to Y by increasing the available labor force and improving production efficiency.

A farmer decides to grow potatoes instead of wheat. What is the opportunity cost of growing the potatoes?

• the output of wheat

• the price of seed potatoes

• the profit from growing potatoes

• the time spent preparing the potato field

Answer explanation

The opportunity cost of growing potatoes is the output of wheat that could have been produced instead.

Which are both macroeconomic decisions?

• A: a school recruits more teachers and a firm sets the prices for its products

• B: a central bank reduces money supply and a government spends more on defence

• C: a government increases tax rates and a farmer decides which crops to grow

• D: a household cuts its energy use and a worker accepts an offer of overtime

Answer explanation

The correct choice is B because both reducing money supply by a central bank and government spending on defense are macroeconomic decisions that impact the overall economy.

What is the function of the price mechanism in a market economy?

• A: allocating resources and guiding choices

• B: allowing governments to provide price stability

• C: enabling markets to operate fairly

• D: preventing competitors from entering a market

Answer explanation

The function of the price mechanism in a market economy is to allocate resources and guide choices, making option A the correct choice.

The diagrams show changes in the market conditions for coffee. Which diagram shows the effect of a poor harvest of coffee beans?

• A

• B

• C

• D

Answer explanation

Diagram C shows the effect of a poor harvest of coffee beans as it depicts a decrease in the supply of coffee, leading to an increase in price.

The price elasticity of supply of good X is 0.1. The good suddenly becomes very fashionable, leading to a large increase in demand. What would be the likely outcome of this change in the short term?

• a large increase in output

• a large increase in price

• a small increase in price

• a small increase in revenue

Answer explanation

The likely outcome of the change in the short term would be a large increase in price due to the inelastic supply of good X.

What is a disadvantage to employers of switching to production using division of labour?

• average cost decreases

• flexibility of workers is lost

• repetition of tasks saves time

• training time decreases

Answer explanation

Employers may lose flexibility of workers when switching to production using division of labour, as workers become specialized in specific tasks and may not be able to easily adapt to different roles.

What is an advantage to a country of having an efficient commercial banking system?

• It controls the money supply

• It discourages spending

• It encourages tax evasion

• It enables investment

Answer explanation

An efficient commercial banking system enables investment by providing access to capital for businesses and individuals, stimulating economic growth and development.

The graph shows women's wages as a percentage of men's wages in year 1 and year 2. Which statement is shown by the graph to be true?

• A) Younger women earn more than older women.

• B) Women's wages remain about the same between the ages of 40–50.

• C) In year 2, all women were earning more than men.

• D) In year 2, women were earning a higher percentage of men's wages than in year 1.

Answer explanation

Provide a detailed explanation of the answer here.