Model Answers And Explanation: Paper 1: May June 2024 Paper 11
Question 1:
Which statement is a normative statement?
- A: The annual rate of inflation in Malaysia increased from 2.8% in May 2022 to 3.4%. (Positive statement, as it is factual)
- B: The annual rate of inflation was 3.4% in Malaysia, lower than the 7.7% annual rate of inflation for Thailand. (Positive statement, as it is factual)
- C: The Malaysian Central Bank raised interest rates from 2.0% to 2.25% on 6 July 2022. (Positive statement, as it is factual)
- D: The rise in interest rates in Malaysia in July 2022 is expected to only have a small impact on the rate of inflation. (Normative statement, as it involves a judgment about impact and expectations)
✅ Correct Answer: D
A normative statement expresses a value judgment or opinion rather than a fact.
Question 2:
A firm operating in country S moved its existing capital equipment to a larger factory in country T. It also installed more of the same equipment and increased the size of its workforce. What must be true?
- A: The firm is operating in the long run. (Correct, as in the long run all factors are variable.)
- B: The firm is operating in the very long run. (Incorrect, as the very long run includes technological changes.)
- C: The firm’s division of labour has increased. (Not necessarily true, as this information is not provided.)
- D: The firm’s supply curve has shifted to the left. (Incorrect, as an expansion would lead to a rightward shift.)
✅ Correct Answer: A
The long run is a period in which all factors of production are variable, including factory relocation and workforce expansion.
Question 3:
Which statement is not correct?
- A: Addictive drugs are regarded as demerit goods because users are unaware of the full damage they do. (Correct statement, as demerit goods have negative externalities.)
- B: Air is regarded as a free good because its use has no opportunity cost. (Correct statement, as air is naturally available.)
- C: National defense is regarded as a public good because one citizen ‘consuming’ it reduces the amount available to others. (Incorrect, as public goods are non-rival, meaning one person’s consumption does not reduce availability to others.)
- D: Visits to a doctor are regarded as private goods partly because they are rival. (Correct, as private goods have rivalry and excludability.)
✅ Correct Answer: C
Public goods, like national defense, are non-rival and non-excludable.
Question 4:
Which diagram shows constant opportunity costs?
- The correct answer is A, as constant opportunity costs occur when the production possibility curve (PPC) is a straight line.
✅ Correct Answer: A
A straight-line PPC means resources are perfect substitutes, leading to constant trade-offs.
Question 5:
Farmers using traditional methods lack access to finance and often employ family members on a part-time basis. If working practices in agriculture improve, how would this be shown on the PPC?
- A: A movement from R to T (Incorrect, as this does not represent efficiency improvement.)
- B: A movement from S to R (Incorrect, as this does not imply production increase.)
- C: A movement from S to T (Correct, as improved efficiency moves the economy outward on the PPC.)
- D: A movement from T to R (Incorrect, as it would indicate inefficiency.)
✅ Correct Answer: C
Efficiency gains shift production outward on the PPC.
Question 6:
In a particular year, 12,000 units of a good are sold at $1 per unit. In a later year, 14,000 units are sold at $1.20 per unit. What could account for this change, assuming consumer tastes remain constant?
- A: A decrease in the price of raw materials used by producers. (Correct, as lower production costs can lead to increased supply and higher equilibrium quantity.)
- B: An increase in the price of a substitute good. (Incorrect, as it would increase demand, not supply.)
- C: An increase in the rate of tax imposed on producers. (Incorrect, as this would shift supply left, reducing quantity.)
- D: The formation of a monopoly in the production of the good. (Incorrect, as monopolies restrict supply.)
✅ Correct Answer: A
Lower input costs increase supply, leading to higher quantity and price.
Question 7:
What is most likely to cause an increase in consumer surplus in the market for a normal good?
- A: An increase in consumer incomes. (Correct, as higher incomes increase willingness to pay.)
- B: An increase in the number of substitute goods. (Incorrect, as it affects competition.)
- C: An increase in the price of a complementary good. (Incorrect, as demand would decrease.)
- D: An increase in the price of the good. (Incorrect, as it reduces consumer surplus.)
✅ Correct Answer: A
Higher incomes lead to higher willingness to pay, increasing consumer surplus.
Question 8:
The table shows price elasticity of demand for two individuals, Lee and Yim, for restaurant meals and cinema tickets. If the price of restaurant meals rises and the price of cinema tickets falls, what can be concluded?
- A: Restaurant owners will receive more income. (Incorrect, as demand is elastic.)
- B: Lee will spend more money on both cinema tickets and restaurant meals. (Incorrect, as restaurant meal demand is elastic.)
- C: Yim will spend more money on both cinema tickets and restaurant meals. (Correct, as Yim’s demand for cinema tickets is elastic, meaning quantity demanded increases more than proportionally when price falls.)
- D: Cinema owners will receive less income. (Incorrect, as demand is elastic.)
✅ Correct Answer: C
For Yim, demand for cinema tickets is elastic, meaning spending increases.
Question 9:
What is not held constant when aggregating individual firms’ supply curves to give the short-run market supply curve?
- A: The number of firms in the industry. (Correct, as firms can enter or exit the market.)
- B: The price of the product. (Incorrect, as supply curves are drawn based on price.)
- C: The prices of factors of production. (Incorrect, as assumed constant.)
- D: The state of technology. (Incorrect, as technology is assumed constant in the short run.)
✅ Correct Answer: A
In the short run, number of firms is variable, affecting market supply.
Question 10:
Which elasticity would a shortage of skilled workers affect?
- A: Cross elasticity of demand (Incorrect, as it relates to substitutes and complements.)
- B: Income elasticity of demand (Incorrect, as it measures response to income changes.)
- C: Price elasticity of demand (Incorrect, as demand is not affected by worker shortages.)
- D: Price elasticity of supply (Correct, as a shortage of skilled workers makes supply less responsive to price changes.)
✅ Correct Answer: D
A shortage of skilled workers makes supply less elastic, as firms struggle to increase output.
Question 11:
What would cause the demand curve for public transport to shift to the right?
- A: The cost of running the individual’s car rises. (Correct, as public transport becomes a more attractive alternative.)
- B: The individual is banned from driving. (Incorrect, as it affects only one person, not market demand.)
- C: The price of public transport rises. (Incorrect, as it causes movement along the curve, not a shift.)
- D: The quality of public transport declines. (Incorrect, as demand would decrease.)
✅ Correct Answer: A
Higher car running costs increase demand for public transport.
Question 12:
Which government action would be identified as the direct provision of goods and services?
- A: Increasing road maintenance because of poor weather conditions. (Correct, as the government directly provides the service.)
- B: Making payments to low-income families with elderly dependents. (Incorrect, as it is a transfer payment, not direct provision.)
- C: Subsidizing firms to encourage output increases. (Incorrect, as it indirectly supports production.)
- D: Taxing firms due to harmful emissions. (Incorrect, as taxation is a policy tool, not direct provision.)
✅ Correct Answer: A
Direct provision involves government producing goods/services itself.
Question 13:
A specific tax is imposed on a product with perfectly inelastic supply. Who bears the burden?
- A: Consumers bear the full burden. (Correct, as producers cannot adjust supply.)
- B: Suppliers bear the full burden. (Incorrect, as consumers cannot avoid paying the tax.)
- C: Consumers bear most of the burden. (Incorrect, as it is entirely on consumers.)
- D: Suppliers bear most of the burden. (Incorrect, as supply is fixed.)
✅ Correct Answer: A
With perfectly inelastic supply, producers cannot adjust quantity, so consumers pay all the tax.
Question 14:
Which market failure does government intervention in healthcare aim to correct?
- A: Overconsumption and overproduction (Incorrect, as healthcare is underprovided in a free market.)
- B: Overconsumption and underproduction (Incorrect, as healthcare is underconsumed.)
- C: Underconsumption and underproduction (Correct, as private markets provide less than the socially optimal level.)
- D: Underconsumption and overproduction (Incorrect, as overproduction does not occur in healthcare.)
✅ Correct Answer: C
Healthcare is a merit good, meaning it is underproduced and underconsumed.
Question 15:
Which statement about the period 2008–2013 is correct?
- A: Prices increased each year. (Incorrect, as CPI decreased in 2010.)
- B: Prices increased fastest in 2011. (Correct, as the CPI increase from 2010 to 2011 was the highest.)
- C: The rate of inflation was 2% in 2010. (Incorrect, as the CPI fell.)
- D: The smallest rise in prices was in 2013. (Incorrect, as other years had smaller changes.)
✅ Correct Answer: B
Inflation is highest when CPI increase is largest.
Question 16:
What is most likely to cause the price level to rise?
- A: An increase in productivity of labor (Incorrect, as it reduces costs, lowering prices.)
- B: An increase in raw material prices (Correct, as higher costs push prices up.)
- C: An increase in income taxes (Incorrect, as it reduces demand.)
- D: An increase in producer subsidies (Incorrect, as subsidies lower costs, reducing prices.)
✅ Correct Answer: B
Higher input costs cause cost-push inflation.
Question 17:
What is most likely to increase a country’s circular flow of income?
- A: An increase in the budget deficit (Correct, as more government spending increases income flow.)
- B: An increase in imports (Incorrect, as it removes money from the domestic economy.)
- C: An increase in interest rates (Incorrect, as it reduces borrowing and spending.)
- D: An increase in the exchange rate (Incorrect, as it makes exports less competitive.)
✅ Correct Answer: A
A budget deficit injects money into the economy, increasing income flow.
Question 18:
A country’s nominal GDP increases by 5%. When will living standards most likely increase?
- A: If the government ensures no rise in unemployment (Incorrect, as inflation still matters.)
- B: If inflation is 3% (Correct, as real GDP growth is positive.)
- C: If real national income does not increase (Incorrect, as this means no real growth.)
- D: If income distribution remains unchanged (Incorrect, as GDP increase does not necessarily improve all incomes.)
✅ Correct Answer: B
Real GDP growth (Nominal GDP growth – Inflation) indicates improved living standards.
Question 19:
What information is required to draw a short-run aggregate supply curve?
- A: Negative gradient, quantity on x-axis, price level on y-axis (Incorrect, as SRAS slopes upward.)
- B: Positive gradient, real output on x-axis, price level on y-axis (Correct, as SRAS slopes upwards due to profit incentives.)
- C: Positive gradient, real output on x-axis, price on y-axis (Incorrect, as “price” should be “price level.”)
- D: Positive gradient, price level on x-axis, real output on y-axis (Incorrect, as x and y axes are reversed.)
✅ Correct Answer: B
The SRAS curve shows a positive relationship between price level and real output.
Question 20:
A government increases tax-free allowances and decreases the marginal tax rate. How does this affect AD and AS?
- A: AD decreases, AS increases (Incorrect, as AD increases.)
- B: AD decreases, AS unchanged (Incorrect, as AD does not decrease.)
- C: AD increases, AS increases (Correct, as both policies increase spending and incentives to work.)
- D: AD increases, AS unchanged (Incorrect, as lower taxes increase labor supply, shifting AS right.)
✅ Correct Answer: C
Lower tax rates boost AD, while higher incentives increase AS.
Detailed Explanations for May/June 2024 Paper 11 (9708/11) – Part 3
Question 21:
Which supply-side policy is most likely to decrease a government’s budget deficit?
- A: Cutting tax rates on company profits (Incorrect, as this reduces tax revenue in the short run.)
- B: Cutting unemployment benefits (Correct, as it directly reduces government spending, lowering the deficit.)
- C: Raising spending on education and training (Incorrect, as this increases government spending.)
- D: Raising tax-free income tax allowances (Incorrect, as it reduces tax revenue.)
✅ Correct Answer: B
Cutting unemployment benefits reduces government spending, helping decrease the budget deficit.
Question 22:
Which combination of fiscal and monetary policies would certainly be expansionary?
- A: Decrease government spending, decrease taxes, decrease money supply (Incorrect, as lower government spending is contractionary.)
- B: Decrease government spending, increase taxes, decrease money supply (Incorrect, as all policies here are contractionary.)
- C: Increase government spending, decrease taxes, increase money supply (Correct, as all three measures boost demand.)
- D: Increase government spending, increase taxes, increase money supply (Incorrect, as higher taxes reduce disposable income.)
✅ Correct Answer: C
Expansionary fiscal and monetary policy involves higher spending, lower taxes, and increased money supply.
Question 23:
The central bank raises interest rates to reduce inflation. When is this policy likely to have the biggest impact?
- A: Economy is below the PPC, and aggregate demand is highly responsive to interest rate changes. (Correct, as demand can be significantly reduced.)
- B: Economy is below the PPC, but aggregate demand is not very responsive. (Incorrect, as interest rate changes will have little impact.)
- C: Economy is on the PPC, and aggregate demand is highly responsive. (Incorrect, as the economy is already at full capacity.)
- D: Economy is on the PPC, but aggregate demand is not responsive. (Incorrect, as monetary policy would have minimal effect.)
✅ Correct Answer: A
The biggest impact occurs when there is spare capacity and high responsiveness to interest rate changes.
Question 24:
What is the most likely cause of worsening trade deficits from 2019 to 2021?
- A: Increasing domestic unemployment (Incorrect, as lower employment reduces import demand.)
- B: Increasing domestic income tax (Incorrect, as higher taxes reduce spending, including imports.)
- C: Increasing domestic inflation (Correct, as higher domestic prices make imports more attractive and exports less competitive.)
- D: Increasing import tariffs (Incorrect, as tariffs discourage imports.)
✅ Correct Answer: C
Higher domestic inflation makes exports less competitive and increases imports, worsening the trade deficit.
Question 25:
How does government-subsidized training for industrial workers affect the current account?
- A: Exports fall (Incorrect, as better training should improve productivity and exports.)
- B: Exports rise (Correct, as skilled workers improve competitiveness in global markets.)
- C: Imports fall (Incorrect, as it does not directly affect import demand.)
- D: Imports rise (Incorrect, as better local production reduces dependence on imports.)
✅ Correct Answer: B
Improved worker skills increase productivity, making exports more competitive.
Question 26:
Comparative advantage and trade:
- A: Country X should produce only steel (Incorrect, as it may also benefit from producing wheat.)
- B: Country X will not gain from international trade (Incorrect, as comparative advantage shows both can benefit.)
- C: Country Y has no comparative advantage (Incorrect, as every country has some comparative advantage.)
- D: Country Y will not gain from international trade (Incorrect, as trade allows specialization.)
✅ Correct Answer: A
Country X specializing in steel allows both countries to gain from trade.
Question 27:
Which economic change in Country Y is most likely to reduce Country X’s exchange rate?
- A: Economic growth (Incorrect, as higher income in Y could increase demand for X’s currency.)
- B: Higher inflation (Correct, as inflation makes X’s exports less competitive, reducing demand for its currency.)
- C: Increase in money supply (Incorrect, as it affects Y’s economy but not X’s currency directly.)
- D: Trade barriers (Incorrect, as trade barriers affect exports more than exchange rates.)
✅ Correct Answer: B
Higher inflation in Country Y leads to less demand for Country X’s currency, causing depreciation.
Question 28:
Which transaction is not recorded in the current account?
- A: Aid received from the government of another country (Correct, as aid is recorded in the capital account.)
- B: Exports of raw materials (Incorrect, as exports are part of the current account.)
- C: Investments by a foreign company (Incorrect, as investments are recorded in the financial account.)
- D: Dividend payments to an overseas investor (Incorrect, as income payments are recorded in the current account.)
✅ Correct Answer: A
Foreign aid is not part of the current account; it is recorded in the capital account.
Question 29:
What is the effect of a tariff on raw materials?
- A: It increases costs of production for domestic firms. (Correct, as tariffs raise input costs.)
- B: It increases consumer surplus. (Incorrect, as prices rise for domestic consumers.)
- C: It reduces government revenue. (Incorrect, as tariffs generate revenue.)
- D: It reduces import prices and increases demand. (Incorrect, as tariffs make imports more expensive.)
✅ Correct Answer: A
Tariffs on raw materials increase production costs, affecting competitiveness.
Question 30:
When will a country’s terms of trade improve?
- A: Imports rise in value less than exports (Incorrect, as it does not reflect price movements.)
- B: Imports rise in volume less than exports (Incorrect, as it does not indicate price changes.)
- C: The price of imports rises less than export prices (Correct, as this improves the ratio of export prices to import prices.)
- D: The value of external payments rises less than receipts (Incorrect, as it relates to the balance of payments, not terms of trade.)
✅ Correct Answer: C
Improved terms of trade occur when export prices rise faster than import prices.