CAIE AS Level Economics 9708 MCQs Points and Strategy

CAIE A Level Economics 9708 has always been a challenging subject. In order to ace your AS Level Economics P1 (MCQs) exam, we have some points and strategy which you can adopt to be fully prepared for your exam!

1. The depletion of resources will shift the production possibility curve inwards. PPC curve represents the combination of output that an economy can produce with its given resources, so if resources reduces that means potentially to produce will reduce also, that’s why PPC shifts inward.
2. A small market will prevent a firm gaining the maximum benefit from the division of labor. A small market represents that there are less consumers to be satisfied, whereas division of labour means dividing the workers, giving them specific task to take them specialize and this will increase output. But if consumers are less, an increase in output won’t help the firm.
3. A bank deposit is the most abundant form of money (measured by value) in a developed economy.
4. An economist establishes the market demand curve for a private good by horizontally combining individual demand curves
5. A reduction in the prices of steel would result in an increase demand by private motorists for petrol because a reduction in price of steel will make motor bikes being available cheaper and therefore increase in the demand for petrol. They are considered to be complement, a decrease in price of one good will increase the demand for other goods, there is a negative relationship
6. Along a demand curve, price elasticity is different at every price. It starts will greater than 1 (>1), equal to 1 (=1) and then less than 1 (<1)
7. For inferior good with no close substitute, income elasticity of demand will be negative. An increase in income will make individual better off and the person will prefer buying normal goods (positive relationship between income and demand) whereas a fall in income will worse off the situation of that individual and the person will now have to purchases inferior good (negative relationship between income and demand)
8. For a complement good, cross elasticity of demand will be negative. For e.g car and petrol. A fall in prices of a car will increase the demand for petrol. On the other hand, a rise in the price of car will decrease the demand for petrol.
9. The vertical distance between the two supply curve in the per unit tax.
10. The removal of an effective maximum price on the good will simultaneous increase in both price and quantity traded in the market for a normal good.





11. Street lightning is a public good because no one can be prevented from enjoying the benefits. The characteristics are non rival, non excludable and non reject able. This makes street lights as a public good. Other examples can be defense. There is no mechanism to charge the price that’s why government intervene and provide the good solely and charge through taxes.
12. A government believes that consumers derive greater benefit from a good than consumers themselves realize, i.e. merit good. this is due to the lack of information on part of consumers. Examples are health care and education, social benefit is greater than private benefit i.e. it creates positive externalities or external benefit but is under produced and consumed which results in market failure
13. When opportunity cost ratios( comparative advantage) are constant there will be no gains from trade between countries. For example, Country A can produce 1X:2Y and Country B can produce 1X:2Y. Production possibility curve of both countries will be parallel which also represents that their ratios will be same, so no trade or cease the trade or no gains from trade,
14. The index for a country’s term of trade changed from 100 in year 2021, to 104 in year 2022, this mean that there is an appreciation of the country’s currency. Terms of Trade= (Avg x prices/Average. M prices) x100. So, if TOT is increased that means numerator (X prices) must have increased, which can happen when there is appreciation (exchange rate and prices have positive relationship) in exchange rate, inflation in the country and increase in demand, decrease in supply etc.
15. An in increase in trade union power cause cost push inflation. Trade union works to protect the workers in an organization. If there is an increase in trade union power, that means more influence by trade union on firm to increase the wages or improve the conditions of the workers, this is likely to increase the cost of the firm- therefore cost push inflation.





16. When the rate of inflation is positive, money lose its value or cost of living increase. Whether the rate of inflation is increasing or decreasing.
17. Ceterius Paribus: An assumption that others factors are held constant or the effect of a change of one variable is being considered in isolation. In this situation are only considering price (movement along the curve and keeping all other factors (shift in demand) constant.
18. If a country on a fixed exchange rate experiences a higher rate of inflation than its trading partners, then its exports will decrease and imports will increase. Inflation is the persistent and sustained increase in the general prices level over a given period of time. Inflation will make our goods uncompetitive in the international market, therefore fall in exports and import goods will appear cheaper in the domestic market, therefore rise in in imports; thus, worsening balance of trades





19. In an open economy with a flexible exchange rate , the rate of interest is increased, this would result in exchange rate appreciation. An increase in interest rate will encourage foreign investors to save their money in our bank. for that they need to convert their currency and purchase our currency; thus will increase the demand for our currency and therefore appreciation in the exchange rate.
20.  Tariff, a tax on imported goods is a method of protection raises revenue for the government
21. When the economy reaches it’s PPC, a reduction in unemployment result in an increase in inflation.
22. An argument against trade protection is that it will increase domestic price levels. Trade protection will make imported goods expensive in the domestic market; domestic residents will switch from imported goods to domestic goods, therefore increasing the demand for domestic goods and therefore increase in the price level.
23. If imports prices are rising at a slower rate than is export prices, then the terms of trade will be moving in a country’s favor.





24. The main economic problem facing all societies is how to allocate resources because of unlimited wants, limited resources, scarcity and choice.
25. To increase the demand for home produced goods, a government and introduces tariffs and quotas.
26. If inflation is low (lower export prices and higher import prices) and currency is weak (depreciation), this combination is most likely to cause a surplus in a country’s trade in goods and services.
27. Lower export prices and higher import prices will results in balance of trade in surplus and the same effect will be of depreciation on the economy
28. A reduction in direct taxes is most likely to cause demand pull inflation. From consumer point: A reduction in direct tax will increase their disposable income and hence would increase the demand for goods and services, if firms are not able to respond to high demand, then prices will increase. Disposable income= Income – Direct Taxes
29. There are no markets for free goods because the supply of free goods is sufficient to satisfy all demand at zero prices.
30. Private production is present in a mixed economy but not in a planned economy. Mixed economy comprises of public and private sector (private production)
31. A product has a low price elasticity of supply (inelastic supply – a change in price will bring a lesser percentage change in quantity supplied); this explains that the product has a perishable nature
32. When price acts as a means to allocate resources, it is not correct to determine the supply of public goods ( non rival, non excludable)
33. Total Revenue= Price x Quantity
    Total Revenue= Total expenditure= consumer expenditure
    Profit= Total revenue – Total Cost
34. Education is considered as a merit good as its benefits both the recipient and society as a whole; example education and healthcare, these goods create positive externalities or external benefit i.e. social benefit exceed private benefit.
35. A subsidy is a methods of protection which is most likely to be used by a government to increase the country’s exports
36. An increase in taxes on imports would likely to increase inflation in economy i.e. imported inflation. This occurs when a country imports a product like a raw material which has inelastic demands
37. A country with a free floating exchange rate has persistent deficit on the current account of its balance of payments; it can correct this disequilibrium by increasing the tax rates. An increase in the tax rate will decrease the disposable income of the individual and therefore they will not be able to import, which will result in fall in the flow of currency from the country, thus reducing the deficit.
38. The government imposes a sales tax to reduce consumption. To have the greatest effect, the price elasticity of demand should be elastic and price elasticity of supply should be inelastic.
39. An increase in labor productivity would be likely to decrease inflation in an economy, When labor productivity increase, this increases aggregate supply and therefore reducing inflation.
40. In mixed and planned economy, government might control prices. Mixed economy comprises of private and public sector, so government has control in it and in planned economy. Public sector solely controls the system.
41. Demand pull inflation can be caused by lower direct taxes. A reduction in a direct tax will increase the disposable income and therefore increases consumption expenditure. Aggregate demand comprise of consumption, investment, government and net exports, so an increase in consumption will increase aggregate demand and therefore resulting in demand pull inflation.
42. Under a system of flexible exchange rate, the overall supply of and demand for a currency determines the foreign exchange value of a currency.
43. An increase in direct taxes is a measure used to correct balance of payments current account deficit which would be classified as an expenditure dampening policy
44. The concept of ceteris paribus allows economists to isolate the effect of one variable on another variable i.e. keeping all other factors constant.
45. A deficit on the current account of the balance payments is likely to worsen when the prices of imported products that are demand inelastic increase significantly. As demand for imported goods is price inelastic that means a large change in price brings a smaller percentage change in quantity demand, so if prices of imported goods increases this means a country will have to pay more than before for that imported good, this will increase their expenditure i.e. more money flowing out of the economy.
46. As prices falls, a person switches away from rival products towards the product is consistent with an individual demand curve that slopes down from left to right.
47. Bank notes have advantage over coins that they are cheaper to produce
48. A rise in interest rate is most likely to cause a rise in a country’s exchange rate
49. An increase in the level of import tariff will both increase demand pull and cost push inflation
50. An economy has a high level unemployment and a large BOP deficit on the current account. Devaluing the currency would be suitable policy for the government to adopt. Exchange rate and prices have positive relationship.

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