A-Level H2 Economics 4 — Questions and Answers
Question 1: What is the AD-AS model used for?
- Analysing individual firm behaviour
- Analysing macroeconomic equilibrium and the effects of policies on national income, price level, and employment (Correct answer)
- Measuring poverty levels
- Analysing international trade patterns
Correct answer: Analysing macroeconomic equilibrium and the effects of policies on national income, price level, and employment
The AD-AS (Aggregate Demand-Aggregate Supply) model analyses macroeconomic equilibrium, showing how changes in AD or AS affect national income (real GDP), price level, and employment.
Question 2: What is the 'crowding out' effect?
- When foreign investment replaces domestic investment
- When increased government borrowing raises interest rates, reducing private sector investment (Correct answer)
- When exports crowd out domestic consumption
- When taxation reduces disposable income
Correct answer: When increased government borrowing raises interest rates, reducing private sector investment
Crowding out occurs when government borrowing increases demand for funds in financial markets, raising interest rates, which then reduces private sector investment and consumption.
Question 3: What distinguishes monopolistic competition from perfect competition?
- No firms in monopolistic competition
- Monopolistic competition involves product differentiation and some price-setting power; perfect competition has homogeneous products (Correct answer)
- Perfect competition has fewer firms
- Monopolistic competition has fewer buyers
Correct answer: Monopolistic competition involves product differentiation and some price-setting power; perfect competition has homogeneous products
Monopolistic competition involves many firms with differentiated products, giving each firm some market power and a downward-sloping demand curve. Perfect competition has homogeneous products and firms are price-takers.
Question 4: What does 'economic growth' measure?
- The rise in living standards
- An increase in the real GDP of an economy over time (Correct answer)
- A reduction in unemployment
- The expansion of a firm's market share
Correct answer: An increase in the real GDP of an economy over time
Economic growth refers to an increase in real GDP (GDP adjusted for inflation) over time, representing greater productive capacity and potential for improved living standards.
Question 5: What is the 'infant industry argument' for protectionism?
- Protection of industries that make children's products
- Protecting new domestic industries from foreign competition until they mature and can compete internationally (Correct answer)
- Banning all foreign imports
- Subsidising agriculture only
Correct answer: Protecting new domestic industries from foreign competition until they mature and can compete internationally
The infant industry argument justifies temporary protection (tariffs, quotas) for new domestic industries that have potential for comparative advantage but need time to develop economies of scale and compete globally.
Question 6: What is 'deadweight loss'?
- Revenue lost by governments
- The loss of economic efficiency (total surplus) that occurs when the optimal output is not produced (Correct answer)
- The weight of imported goods
- The cost of unemployment
Correct answer: The loss of economic efficiency (total surplus) that occurs when the optimal output is not produced
Deadweight loss is the loss of total welfare (consumer plus producer surplus) resulting from market distortions such as taxes, price controls, or monopoly pricing, which move output away from the allocatively efficient level.
A-Level H2 Economics 4
What is the AD-AS model used for?