Practice set Quiz 1

Difficulty-Intermediate to hard

1. “When there is too much money in circulation in the economy, there is inflation in the long-run.
Inflation is a kind of tax on the people in the economy.” Explain the second part of this
statement.
2. Pakistan is currently implementing import controls to curb the outflow of dollars from the
economy. Using the principle of “trade makes everyone better off”, argue why this may not be
the correct course of action. You may want to include an argument along the lines that could
illustrate how allowing imports may lead to an improvement in the existing weak foreign
exchange situation.
3. You have three options, A, B and C. Option A gives you $100, B gives you $250, and option C
gives $130. The opportunity cost of B is $230. True/false, explain.
4. My opportunity cost of paint a piece of art is 3 cakes. Yours is 2 cakes. Draw two PPFs, one for
each of us, and label the axes well. You may use hypothetical numbers for the axes, but make
sure they are consistent with the information given. Take cake on the x-axis. Who should paint
and who should bake?
5. By trading with each other, countries can become better off. How can we depict this using the
PPF model?
6. Why might the PPF not be linear? Give examples other than labour.
7. India and Pakistan can spend their total budget on military or human development. If India
focuses more on human development and Pakistan on military, which country would benefit
more from a peace treaty? Explain using their positions on a PPF where “arms” are on the x-axis
and “people” are on the y-axis. You may show the positions of India and Pakistan on the same
PPF.
8. The tickets to the exhibition match of the PSL at Bugti Stadium in Quetta are on sale. Their price
has been fixed at Rs. 20/ticket. Draw a supply and demand diagram keeping in mind this
information and the fact that the supply of tickets depends on the seating capacity in the
stadium. Do you think this market would clear?
9. Draw a diagram for the market for cakes at cake shops. If the price of sugar rises and
simultaneously people become concerned that cakes can cause obesity, what would the new
equilibrium be? Illustrate your answer.
10. The price of sugar is rising. Consider the market for sugar. Draw a diagram to show why the
following may or may not explain this.
i. A discovery that rice cause diabetes
ii. A drought that reduced the production of rice
iii. An increase in the income of the average household
iv. An increase in price of wheat which can be used as a substitute for rice
11. Consider the market for battery electrical vehicles. People are increasingly concerned with
reducing global warming. At the same time, the batteries used in these cars are becoming more
expensive. As a result, prices of EVs falls. Show the new equilibrium in this case.