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without the authorization of anybody.
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Answer two questions. Each question is worth [25 marks]. Answers must be written in the
answer boxes provided

1. The demand for Alba’s pounds, the currency of Alba, in the USA is given by the
function

Qd = 81 - 3p

While the supply of Alba’s pounds in the USA is given by the function

Qs = 8p - 18

where the p is the quantity of US$ exchanged for £1 (Alba), Qd is the daily quantity
demanded and Qs is the daily quantity supplied in millions Alba pounds

(a) (i) State one factor that may influence the quantity demanded of Alba pounds
on foreign exchanges in the USA. [1]

Answer may include:

● Exports,
● Foreign demand for domestic assets (shares, bonds etc.)
● Speculation.
● Any other reasonable factor

(ii) Outline one reason why the supply of Alba pounds on foreign exchanges
in the USA may shift to the right. [2]

Answer may include:

● Increased demand for imports in Alba
● Reduced interest rates increasing demand for imports.
● Increased economic growth in Alba increasing demand for imports
● Any other reasonable explanation

(b) Calculate the equilibrium exchange rate and quantity of Alba pounds in the USA
foreign exchange market. [2]

Qd=QS => 81 - 3p = 8p - 18 => 99 = 11p => p = 9

81 - 3p when p = 9 => 81 - 3(9) => 81 -27 => 54

Answer: exchange rate £1 = $9 and quantity £54 million

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(Question 1 continued)

(c) A bottle of single malt whisky produced in Alba costs £15 in Alba, calculate its
price in the USA at the exchange rate calculated in part (b) [3]

15 x 9 = 135

Answer: $135

(d) Define the Marshall-Lerner Condition. [2]

This condition states that a depreciation, or devaluation, of a currency will only lead to an
improvement in the current account balance if the sum of the elasticity of demand for
exports plus the elasticity of demand for imports is greater than one.

The table below gives the quantity of exports and imports from Alba at different prices.

Price

20 30

Quantity of Exports 50 25

Quantity of Imports 50 40

(e) Calculate the PED (price elasticity of demand) for imports and exports if the
prices of exports falls from £30 to £20 and the price of imports rises from £20
to £30 as a result of a depreciation. [4]

PEDx = %𝜟Qx/%𝜟Px => 50/33 => 1.51

PEDm = %𝜟Qm/%𝜟Pm => 10/50 => 0.4

Answer: PEDx = 1.51 and PEDm = 0.4

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(Question 1 continued)

(f) With reference to parts c and d, explain whether Alba fulfills the Marshall-Lerner
condition. [2]

Marshall-Lerner condition: PEDx + PEDm > 1

PEDx + PEDm => 1.51 + 0.4 =>1.91
Combined elasticities are greater than 1

Alba fulfills the Mashal-Lerner condition

(g) Sketch a diagram below, labelling the axis, and write an explanation illustrating
the effect of the J-curve on a country such as Alba [5]

As Alba fulfills the Marshall-Llerner condition, the depreciation in currency results in an

improvement in the current account, at least in the long run. In the short run, the current
account initially worsens after the depreciation before improving so creating the J shape.

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(Question 1 continued)

Alba is joining a trading bloc, explain the terms:

(h) (i) trade creation. [2]

Alba joining the trading bloc results in lower prices on most goods and so an increase
in trade and economic growth creating also greater employment

(ii) trade diversion. [2]

Alba joining the trading bloc results in higher prices on a few goods and so a fall in
output and trade for those goods also greater unemployment

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2. The daily demand for a bowling hall that has a monopoly in a small town is given
below

Qd = 40 - 3p

when p is the price is € (euros) and Qd is the quantity demanded daily.

(a) (i) Explain the relationship between average revenue received by the firm and
the price paid by the consumer,. [1]

The price for the consumer is the same as the Average Revenue for the firm

(ii) Using the demand function given above and your answer to part (a)(i), give the
functions for AR (Average Revenue) and MR (Marginal Revenue) for the bowling
hall. [2]

Qd = 40 - 3p => Q = 40 - 3AR => 3AR = 40 - Q => AR = 40/3 -1/3Q =>

AR = 13.33 - 0.33Q

MR is twice the slope of AR so: MR = 13.33 - 0.66Q

The daily supply for a bowling hall is given below

Qs = -20 + 5p

when p is the price is € (euros) and Qs is the quantity supplied daily.

(b) (i) Explain why a firm’s supply function is, on a diagram, the same as the firm’s
marginal cost function. [1]

The marginal cost defines the quantity and so the price at which a firm maximises

profits, where MC = MR, and supply is defined as the quantity a firm is willing to supply

at a given price so MC and price are the same thing

(ii) Using the supply function given above and your answer to part (b)(i), give the
functions for MC (Marginal cost) for the bowling hall. [2]

Qs = -20 + 5p => Q = -20 + 5MC => 5MC = 20 + Q => MC = 20/5 +1/5Q =>

MC = 4 + 0.2Q
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(c) (i) Using the supply and demand functions given, calculate the equilibrium price
and quantity for the bowling hall. [3]

Qd = 40 - 3p and Qs = -20 + 5p => 40 - 3p = -20 + 5p => 60 = 8p =>

p = 60/8 => p = 7.5

Q = 40 - (3 x 7.5) => 40 - 22.5 => 17.5

Answer: Equilibrium price €7.5 and Equilibrium quantity 17.5

(ii) Using the functions given in your answers to part (a)(ii) and (b)(ii), calculate the
profit maximising quantity and price for the bowling hall. [3]

MR = 13.33 - 0.66Q and MC = 4 + 0.2Q => 13.33 - 0.66Q = 4 + 0.2Q =>

9.33 = 0.86Q => Q = 9.33/0.86 => Q = 10.85

Qd = 40 -3p => 10.85 = 40 -3p => 3p = 29.15 => p = 29.15/3 => p = 9.72

Answer: Equilibrium price €9.72 and Equilibrium quantity 10.85

(iii) Explain why the profit maximising price and quantity calculated in part (c)(ii) is
not the same as the market equilibrium calculated in part (c)(i) [2]

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(d) Write the functions for the bowling hall’s AR, MR and MC from your answers in parts
(a)(ii) and (b)(ii) in the space below and plot the functions on the diagram. [4]

AR = 13.33 - 0.33Q .................................................................................................

MR = 13.33 - 0.66Q ...................................................................................................

MC = 4 + 0.2Q ...........................................................................................................

(e) (i) Using the diagram constructed in part (d), calculate change in consumer
surplus experienced as a result of the bowling hall’s monopoly position. [2]

Initial consumer surplus: ((7.5 - 4) x 17.5)/2 => 30.63

Subsequent consumer surplus: ((13.33 - 9.72) x 10.85)/2 => 19.58

51.01 - 19.58 = 31.43 Loss of consumer surplus = €31.43

(ii) Using the diagram constructed in part (d), calculate the change in producer
surplus experienced as a result of the bowling hall’s monopoly position. [3]

Initial producer surplus: ((13.33 - 7.5) x 17.5)/2 => 51.01

Subsequent producer surplus: ((9.72 - 6.22) x 10.85) +((6.22 - 4) x 10.85)/2 =>

37.98 + 12.04 => 50.02 Loss of consumer surplus = €1.02

€1 is acceptable

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(iii) Using the diagram constructed in part (d), calculate the welfare loss experienced
by society as a result of the bowling hall’s monopoly position. [2]

((17.5 - 10.85) x (9.72 - 6.22))/2 => 11.63

Welfare loss is €11.63 .............................................................................................

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3. (a) The table below gives macro-economic statistics for Germany for five years.

Nominal GDP GDP Unemployment Real GDP Economic

(billions $) deflator % (billions $) Growth (%)

2012 3 503 100 5.5 3 503 -

2013 3 647 102.1 5,3 3 572 1,97

2014 3 810 104.4 5.1 3 649 2,16

2015 3 920 106.8 4.8 3 670 0,58

2016 4 046 109.3 4.2 3 702 0,87

(a) Calculate and complete the table:

(i) the real GDP (billions $) [4]

2013: (3647/102,1) x100 = 3572 2014: (3810/104,4) x100 = 3649

2015: (3920/106,8) x100 = 3670 2016: (4046/109,3 x100 = 3702

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(ii) the economic growth (%) [4]

2013: ((3572/3503) - 1) x100 = 1,97% 2014: ((3649/3572) - 1) x100 = 2,16%

2015: ((3670/3649) - 1) x100 = 0,58% 2016: ((3702/3670) - 1) x100 = 0,87%

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(Question 3 continued)

(b) Explain the term business cycle and explain where the German macro-
economy is in the cycle. [3]

Marks

The work does not reach a standard described by the descriptors below. 0

Stating that the German macro-economy is growing or expanding. 1

Stating that there is a cycle of growth and recession long run and that the German
macro-economy is growing or expanding. 2

Stating that shifts in AD results in the continuous cycle of growth and recession in the
long run and that the German macro-economy is growing or expanding. 3

(c) The marginal propensity to consume domestically produced goods in Germany

is 0.6 and government spending in 2015 was €250billion:

(i) Calculate the value of the Keynesian multiplier for Germany [2]

Multiplier = 1/1 - MPCdom → ∆GDP = 1/1 - 0.6 → 2,5

Answer: 2,5

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(ii) Calculate the effect of government spending on GDP [3]

∆GDP = ∆G (1/(1 - MPCdom )) → ∆GDP = 2,5 (1/(1 - 0,6))

→ ∆GDP = 2,5 (1/(0,4)) → ∆GDP = 2,5 (2,5) → ∆GDP = 6,25

Answer: €6,25 billion

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(Question 3 continued)

(iii) Give one possible reason why this change in GDP is not the same
as the increase in GDP over the same period on the table (2015-16) [3]

Marks

The work does not reach a standard described by the descriptors below. 0

Stating that the German macro-economy has grown by more than the multiplier calculates 1

Stating that government spending is one component of GDP and that other components
(e.g. exports) have an effect on GDP 2

Stating that government spending is one component of GDP and that other components
(e.g. exports) have an effect on GDP have risen so the multiplier effect is less. 3

(d) Sketch a diagram of the Phillips Curve, labelling the axis, on the graph below. [4]

(e) With reference to the table, explain to what degree the figures follow the
Phillips Curve. [2]

Marks

The work does not reach a standard described by the descriptors below. 0

Stating that unemployment is falling while the GDP deflator is rising 1

Stating that unemployment is falling while the GDP deflator is rising at an accelerating
rate (a faster rate) 2