The Academic Guide
Words from the committee
Let the knowledge of economic and financial principles be
an asset for every individual. Let this common knowledge
improve our freedom, politics, and society.
About the European Economics Olympiad (EEO)
The EEO was established in 2016 by the Institute of Economic Education (INEV) – a non–
profit organization in Czech Republic.Throughout the years, it has become the biggest
economics and finance competition in Czech Republic and Slovakia, with over 30,000
students and more than 550 schools in Europe taking part each year. The EEO aims to fill the
gap between teaching economics and finance in high schools and strengthening the logical
thinking, problem-solving and critical thinking skills of students, sparking their interest and
supporting them on their career path.
For more information regarding EEO, please visit https://www.economicsolympiad.com
About the Organizer
Institute of Economic Education (INEV) is a leading non-profit organization in economics
and financial education, sponsored by many organizations, such as the Czech Ministry of
Education, Youth and Sports, the Czech Central Bank, University of Economics, Prague, PwC,
etc. It aims to establish a platform to identify and support young talents in economics and
finance, as well as to improve the economics education and financial literacy of students.
INEV is working intensively on promoting European Economics Olympiad internationally
and providing academic support in economics and finance for high school teachers.For
more information on INEV, please visit https://inev.cz//en
ASDAN China (ASDAN Academy) is an exclusive partner to INEV and since 2020 we have
hosted the National Round of EEO in China. INEV and ASDAN aim to offer high school
students in China with an enriched experience of learning and applying economics
education at an international level.
Whether you feel fully prepared for the European Economics Olympiad (EEO) Preliminary Competition,
you have already made a wise economic decision by deciding to use this booklet. With its clear and
concise format, this booklet will help you review important concepts based on the given examination
outlines and provides tips for success for the preliminary round. Every question in the booklet comes
with a detailed explanation.
1 First, it is necessary to recognize what economics is. Why is it an interesting subject of study?
According to the official definition, 'Economics is the study of how individuals, businesses, and
governments make decisions on how to use their limited resources.'
To answer this question, you can refer to case 1.
2 This booklet comprises of six sections containing various case studies and materials, in accordance with
the six modules of EEO.
3 Within the case studies you may see different applicable economic concepts. Try and observe if you
find patterns between the concepts used in each case study.
4 Economics is not an aloof or mysterious subject, but a subject that you can apply and observe in your
daily environment! For example, the Peking duck is an interesting cultural phenomenon that can be
explained by economics. Why is it the Peking duck and not the Sichuan duck or Guangzhou duck? The
answer lies in the comparative advantage of sourcing for fresh and locally produced ingredients at a
lower cost in Beijing, relative to other cities such as Guangzhou or Chengdu.
5 In the context of the EEO, every single economics concept that you've learnt is like a 'weapon', and
each question that you face is a 'monster'. You may already have a vast arsenal of weapons through the
school curriculum, but you may not know which weapon you should use. The cases in this booklet will
improve your eye for 'selecting weapons' and familiarizing yourself with each of them.
6 After completing each section, review the learning targets to ensure that you have fully mastered the
required knowledge. Some questions have been marked with the specific point knowledge point to
master. (e.g. module 1 point 1 is denoted as (M1,01))
Ⅱ
 Table of Contents M3 QUIZ Answer Keys 37
M3 Glossary 37
M3 Learning Targets 37
About the European Economics Olympiad (EEO) Ⅱ
About the Organizer Ⅱ
Module 4 International Trade 38
Words from the committee Ⅱ
4.1 Case Study 1: How did the energy crisis boost the Japanese economy? 38
How to use this booklet Ⅴ
4.2 Case Study 2: The origins of the Plaza Accord 41
Study tips and suggestions Ⅵ
Summary 43
Module 1 Methodology of Economics, Basic Terms,and History of Economic Thought 01 External Resources (3) 44
M4 QUIZ 45
1.1 Case Study 1: How do you fill your plate in a buffet? 01 M4 QUIZ Answer Keys 47
1.2 Case Study 2: Does your toaster oven have a light? 04 M4 Glossary 47
1.3 Case Study 3: Why is Tesla unique in the electronic vehicle market? 06 M4 Learning Targets 47
Summary 10
External Resources (1) 10 Module 5 EU Economy 48
M1 QUIZ 11
M1 QUIZ Answer Keys 14
5.1 Case Study 1: Why do Europeans prefer to purchase cars with smaller engines? 48

M1 Glossary 14
5.2 Case Study 2: The origin of the European Central Bank (ECB) 49

M1 Learning Targets 14
5.3 Case Study 3: The economic costs and benefits of joining the EU 51
Summary 52
Module 2 Microeconomics 15 External Resources (4) 53
M5 QUIZ 54
2.1 Case Study 1: Why do pubs provide free salty nuts but charge for water? 15
M5 Answer Keys 56
2.2 Case Study 2: Why do software developers provide their products for free? 17
M5 Glossary 56
2.3 Case Study 3: Why don't all hotels offer free breakfast? 20
M5 Learning Targets 56
Summary 22
M2 QUIZ 23 Module 6 Financial Literacy 57
M2 QUIZ Answer Keys 26
M2 Glossary 26 6.1 Case study 1: How is money generated in a financial market? 57
M2 Learning Targets 26 6.2 Factors affecting the degree of Market Efficiency 59
Summary 60
Module 3 Macroeconomics 27 M6 QUIZ 60
M6 Quiz Answer Keys 61
3.1 Case Study 1: How can government income be managed? 27
M6 Glossary 61
3.2 Case Study 2: Why are GDP per capita and unemployment rate not good measures? 29
M6 Learning Targets 61
3.3 Case Study 3: Bitcoin: The best-known example of digital currency 31
Summary 33 Learning outcomes for each module 62
External Resources (2) 33 Reference 68
M3 QUIZ 34

Ⅲ Ⅳ
 How to guide this booklet Guidance

备战手册使用方法 : 指导老师篇 备战手册建议指导方案

指导手册共分为两大部分：

• 第一部分 初级挑战答题技巧和小贴士 以下按照时间方案，为老师们推荐如下使用本书的方法：

• 第二部分 初级挑战考纲六大模块知识点的实际应用场景和小测 指导方案分为：距离参加初级挑战还有半个月、一个月、两个月的学习推荐方法。

备考时间 学习任务 学习任务安排

指导笔记 方案 1 第一周 带领同学完成第一部分阅读，和第二部分的 6 个单元 Section G 查询记忆

第一部分
距离挑战约
第二部分 第二周 完成第二部分 Module 1 - 6，通过 Section A 完成 Section F
半个月
第二部分含有 6 个单元（Module），每单元将围绕初级挑战考纲中的知识点归类，分别为 ： 第一周 带领同学完成第一部分阅读，和第二部分的 6 个单元 Section G 查询记忆
Module 1: Methodology of Economics, Basic Terms,and History of Economic Thought 方案 2 第二周 完成第二部分 Module 1、2，通过 Section A、B 完成 Section C、F
第一部分
Module 2: Microeconomics 距离挑战约
第二部分 第三周 完成第二部分 Module 3、4，通过 Section A、B 完成 Section C、F
Module 3: Macroeconomics 一个月
Module 4: International Trade 第四周 完成第二部分 Module 5、6，通过 Section A、B 完成 Section C、F

Module 5: EU Economy 第一周 带领同学完成第一部分阅读，和第二部分的 6 个单元 Section G 查询记忆

Module 6: Financial Literacy 第二周 完成第二部分 Module 1、2，通过 Section A、B 完成 Section C、D

第三周 完成第二部分 Module 1、2，通过 Section F、H 检验学生知识掌握情况

注意：每个 Module 分为 7 个小节（Section），分别为：
方案 3 第四周 完成第二部分 Module 3、4，通过 Section A、B 完成 Section C、D
Section A : 学习目标（objects） 第一部分
距离挑战约
Section B: 经济学案例（case study） 第二部分 第五周 完成第二部分 Module 3、4，通过 Section F、H 检验学生知识掌握情况
两个月
Section C : 案例知识点小测（quick quiz） 第六周 带领同学完成 6 个单元 Section E 的拓展阅读收集实事热点材料
Section D : 知识点总结（summary）
第七周 完成第二部分 Module 5、6，通过 Section A、B 完成 Section C、D
Section E : 知识点延伸（external resources）
第八周 完成第二部分 Module 5、6，通过 Section F、H 检验学生知识掌握情况
Section F : 实战演练（module quiz）
Section G：词汇表（glossary）
Section H : 成果检验（learning targets）
* 欧洲经济学挑战采用 Project-based 学习方法，若同学准备时间不多，建议按照方案 1 完成备战后，即可参与初级挑战。
其中，Section E 为拓展阅读，若时间充裕的情况下，可带领学生进行阅览学习。 在初级挑战后，再按照本书进行系统学习，报名参加全国总决战。通过测评实战，升级理论，再进行实践的效果更佳。

详细的板块详情可参考下一页中的学习进度表。
指导老师版的备战指南页附上三个指导工具
1. 建议指导方案 （Page Ⅵ )
2. 学习进度表 Record of progress （Page Ⅴ )
3. Skills Sheet 模板：Plan & Review，供老师 / 家长指导学生学习每个单元 SectionC 使用（Page 9-10）
4. 各单元习题答案详细解析 Learning outcomes for each module（Page 62）

Ⅴ Ⅵ
 Record of progress Skill sheet
Skills sheet 模板 : Plan
Section C for each Module in this booklet is mainly research exercise for learners to explore their business
Record of progress 学习进度表 knowledge in the real world context. Learners are suggested to use this skillsheet to plan their learning
before starting the excercise. Note: This skill sheet (Plan) should be used together with the follow up
skill sheet (review). You can choose any Module as an example to use this skill sheet, this is to cultivate
This form is used to check the learner's completion progress.
learner's plan-do-review habit.If you need more practice with the 9 modules, please print it by yourself.
下列图表包含了每个单元的习题需求和详情，使用者可利用该表检查学习进度。每完成一部分试题，可在下方进行勾
选，随时了解学习进度。 You fill in which Which question are you
Module: module you are Challenge: planning to do for the
doing challenge
Challenge Challenges completed Description of the activity that will help me develop my
Modules Requirement Skills I plan to use:
Cross out the Question number you completed ( 请在完成的题号标“X”） skills:
( 建议完成标准）
Teamwork
Section Complete Questions Number
Learning & Research
C All 1.A 1.B 1.C 1.D 1.E 2.1 2.2 2.3 3.1 3.2 3.3 Coping with Problems
1. Methodology of
Economics, Basic 3.4 3.5 3.6 Use of English
Terms,and History Learners should briefly describe the task here.
Use of Maths
of Economic F All 1 2 3 4 5 6 7 8 9 10 11
Use of IT
Thought
H 8 or 9 1 2 3 4 5 6 7 8 9 Presentation & Public speaking
C All 1.1 2.1 2.2 3.1 3.2 Creativity

F All 1 2 3 4 5 6 7 8 9 10 11 How I plan to do it:

2. Microeconomics
12

H 7 or 8 1 2 3 4 5 6 7 8
Learners should briefly describe the plan to complete the task
C All 1.1 1.2 2.1 2.2 3.1 3.2

F All 1 2 3 4 5 6 7 8 9 10 11
3. Microeconomics
12 13 What I will need:
H 5 or 6 1 2 3 4 5 6

C All 1.1 2.1 2.2

What skills do the learners' need to complete the task? Is there any help needed for the learner to
4. International 1 2 3 4 5 6 7 8 9 10 complete?
F All
Trade
H 6 or 7 1 2 3 4 5 6 7

C All 1.1 2.1 2.2 3.1 3.2

Who else is involved: When will it be done by: Where it will be done:
5. EU Economy F All 1 2 3 4 5 6 7 8 9 10

H 6 or 7 1 2 3 4 5 6 7
Set a deadline to complete the Location to complete the
Who's help is the learner planning to get?
C All 1.1 1.2 1.3 task task

6. Financial Literacy F All 1 2 3 4 5

H 2 or 3 1 2 3 4 I confirm that I have planned what I need to do and have agreed it with my tutor:

Student signature: signature Tutor signature: signature Date:

** Refer to the attachement for a fillable/printable version

VII VIII
 How to use this booklet Study tips and suggestions

1 First, master the general study tips and suggestions to learn economics (Page X) 1 When in doubt, graph it out. In the free response section, you will be required to draw graphs, but
this can be very helpful in the multiple section as well. A small graph drawn in the margin can easily
lead you to the correct answer.
2 Second, research the glossary from each module which is located in the last page of each module.

2 Absolutely not the right choice. Be careful when dealing with a question that uses absolutes in its
3 Third, read objective of this module and find learning goals.
answer options. Whenever a possible answer uses an absolute word, such as always, never, rarely, or
none, it is usually not the correct one.
4 Fourth, with the question in mind, review the case study.
3 Stay positive but recognize the negatives. Make sure to read every word of the question carefully.
This sample question shows a common way that test writers employ negatives:
5 Fifth, do the module quiz to test your economic knowledge.
The productivity will increase with an increase in all of the following, except

6 A. Capital Stock
Sixth, review the learning target and the learning outcome in last page to check if you reach target.
B. Labor supply
C. Real Interest rate
！ Finally! Explore more about Economics through External Resources section in each module to find D. Rate of technological change

much more fun fact.

4 Don't be intimidated by a question's looks. Some questions can look overwhelmingly difficult, but
when they are approached correctly, they are less intimidating.

5 Mind your price curve (ps) and quantity curve (qs). Always label your graphs fully. For short-answer
questions, you are guaranteed to have to draw graphs, and you will get points for labeling your
graph correctly. At a minimum, this means putting the correct labels on the x- and y-axes and all your
curves. Also, be sure to use an arrow to show when the curve shifts and clearly identify any changes
in price or quantity. For example, if the demand curve increases, leading to an increase in price, you
could label the first curve and the new curve.

6 A well-drawn graph is better than a thousand words. When grading your exam, judges are looking
for specific labels and information, and a well-drawn net graph with correct shifts can clearly display
your understanding of the content.

7 Macroeconomics graphs (Big 7)

When you are required to draw a graph, it will most likely be for one of the Big 7: the Circular Flow
Model, the Business Cycle, the Production Possibility Frontier (PPF), Aggregate Supply and Demand,
the Philips Curve, the Money Market, and the Foreign Exchange Market.

Master the use of each model through the following illustrations.

IX X
 Macroeconomics Graph (Big 7)
2. Business Cycle
( Normally used in an economic period prediction question with a given market background )
1. Circular Flow Model
( Normally used in cash flow, and business relationship question between money and output )

Pay Income(money) Resource Market Pay rent or wages

(Factor Market)

Provide Resource Sold Factors of

(ex: Labor Production
and land)

Households Firms The business cycle shows a complete economic fluctuation.

Expansions are periods of increasing economic activity—these last until the peak. Then
comes the contraction phase, and economic activity declines sustainably. The trough is the
end of contraction and the beginning of the expansion.

Market for 3. Production Possibility Frontier (PPF)

Provide goods & goods & services
Sold goods &
services (Product Market) services ( Normally used in an economic period prediction question with a given market background )

Spending on Shopping Pay for Products

(goods & services)

The circular flow model shows how households and firms interact with one another in the
Product market and in the Resource market. It will

For example, Mike (Household) works for Cookie's factory (Resource Market) to produce
cookies. Once Mike finishes the Cookie's order from the supermarket (Product Market), he
will receive income. When consumers (Households) demand more cookies, the Cookie's
Company (Firm) will require its factory to produce more goods to fulfill the Cookie's order.
Once workers (Households) finish the order, they will receive a higher income.
From this model, you can conclude: A society's ability to generate income for its citizens will
greatly depend on its ability to produce output.
The PPF captures the limit of two goods an economy can produce when all resources are
used efficiently.
Points on the PPF ( like A ): efficient, all resources are fully utilized.
Points under the PPF ( like B ): not efficient, since some resources are underutilized.
Points above the PPF ( like C ): not possible, since we do not have enough resources.

XI XII
 4. Aggregate Supply and Demand
( Normally used to illustrate how the national demand and the national supply change the GDP
and the price level in an national income measurement question )
The AS/AD model highlights the factors that determine output (GDP), income, employment,
and price level in the economy.
Aggregate demand is the demand for all goods and services by all households, business,
governments, and foreigners.
Aggregate supply is the supply of all goods and services by all producers in the economy.
Long-Run Aggregate Supply is the aggregate supply after wages and other resource prices
have adjusted to long-run conditions.
5. Phillips Curve
( Normally used in the inflation and unemployment questions to describe the impact of expansion
or contraction policy )
A Phillips curve graphs the inverse relationship between inflation and unemployment.
XIII
6. Money Market
( Normally used to illustrate the influence of the contraction or expansion monetary policy in central
bank tools and monetary policy questions )
The money market is made up of the supply and demand for money. The central bank
determines the supply of money in the economy. The demand for money is determined by
how much households, firms, governments, and foreigners want to hold.
7. Foreign Exchange Market
( Normally used in international trade question to illustrate the degree of demand for foreign or
domestic goods )
The Foreign exchange market model illustrates the demand for a specific currency (like the
dollar, $) in the international exchange market is how many dollars are wanted in exchange
for a foreign currency (like the yen, ¥).
XIV
Module 1
Methodology of Economics, Basic Terms, and History of Economic Thought
Quick Quiz
This module will help you to:
Consider the different scenarios below. If you were Sally, what choices would you make according to the
• define economics and the concept of scarcity. principles of economics? ( There is no standard answer to these questions. As long as you think like an
• identify opportunity cost, marginal analysis, and the benefits of market and trade. economist, your answer is correct. )
• distinguish between positive analysis vs. normative analysis.

• explain how comparative advantage results in benefit from trade.

• identify the concepts underlying a demand curve and a supply curve. • Scenario A. Sally is a huge Westlife fan. Sally is supposed to join Max for a buffet dinner tonight, but
she just found out that a live Westlife show is to take place at the same time. What will Sally do? (M1,02)¹

1.1 Case Study 1

How do you fill your plate in a buffet? • Scenario B. There is a wide selection of delicious meals in front of Sally, but the buffet will only last
for half an hour. How will Sally fill up her plate? (M1,01)
—— The economic principles hidden around you

• Scenario C. Fried rice seems delicious, but smoked salmon is also tempting. Which one will Sally
choose?

• Scenario D. Sally loves eating fish because fish contains unsaturated fatty acids that provide health
benefits. Max is at a buffet with Sally, and he asks sally for food recommendation. What kind of food will
Sally recommend that he eat?

Keywords : opportunity cost, marginal change, incentive, trade

Consider this example. Sally goes to a buffet, where there's a wide selection of delicious meals. However,
her stomach's capacity is limited, and the restaurant also has a time limit for the buffet. So, what would
Sally choose? Sally is likely to go for the rarer dishes such as salmon— as it is priced much higher than
many other dishes like fried rice or dumplings.
• Scenario E. Sally wants to try another popular buffet, but she doesn't have enough money to eat
there. Max recommended her to take a part time job to teach children English, because the employer
needs a part time teacher urgently and the compensation should be considerable. Will sally take the
advice from max?

Economists assume that people make rational choices based on self-interest, which means that it is
possible to predict how a customer and restaurant will respond to an external change. The study of
economics can even help forecast the effects of business decisions, government policies, and election
outcomes. A knowledge of economics can also help you make better decisions for your material
wellbeing and financial stability.
¹ (M1,02) stands for Module 1, learning target 02. It indicates the key term of this question. When you are confused about what
the question is asking, you can check it to determine which concept can be used.
1 2
 1.2 Case Study 2
In economics, every choice you make has a principle behind it. There is a very well-known concept calls
Ten Principle of Economics.

Try to match the economic principle that you think best explains your choice in above scenario.
Does your refrigerator have a light?
—— The application of income elasticity

• Principle I. People face trade-offs.

• Principle II. The cost of something is what you give up to get it.

• Principle III. Rational people think at the margin.

• Principle IV. People respond to incentives.

• Principle V. Trade can make everyone better off.

Scenario A Principle I

Scenario B Principle II

Scenario C Principle III

Scenario D Principle IV Keywords : opportunity cost, marginal change, incentive, trade

Scenario E Principle V

Fact:
P.S. Trade means transaction between buyers and sellers. Such as shopping, restaurant, hospital, services
and so on. Basically, all these trade can make people life easier. Refrigerator is common appliances used in the kitchen. Have you ever realized that some refrigerators
have light, and some don't have light inside?

This design reasoning is that, since the main function of refrigerators is to store food cool, having a light
inside is an addition benefits, but not a MUST necessary. Having a light inside it make it easier to find
Review: things, especially during midnight. It provides convenience for people who find their midnight snacks.

( I B; II A; III C; IV D; V E ) So, despite a refrigerator with light has a higher price, but with the cost of adding a light in this case, is
considerably beneficial for consumers. The value of this benefits is larger than the price (cost). Hence, it is
common to have more people who are willing to pay a higher price for a refrigerator with lights inside.

3 4
 Quick Quiz
1.3 Case Study 3
1. A high-income consumer might purchase a refrigerator with a light in its freezer and an ice drawer.
Which concept is appropriate for explaining this phenomenon? Why is Tesla unique in the electronic vehicle market?
A. Income elasticity of demand
—— The application of income elasticity
B. Rational people think at the margin

C. Allocative efficiency

D. Comparative advantage

2. The cost of the light bulb is not influenced by how often you open the door. This cost is called
the ____, and _____ is the key term used to explain how a supplier makes the decision of whether to
install a light.

A. variable cost, popular

B. total cost, cost–benefit analysis

C. fixed cost, cost–benefit analysis

D. marginal cost, marginal benefit

Source: https://finance.yahoo.com/quote/TSLA?p=TSLA&.tsrc=fin-srch
*The Income elasticity of demand: Consumers with higher income are more willing to purchase better
goods and services. Keywords: absolute advantage, comparative advantage, average total cost, economies of scale,
equilibrium point, price discrimination, deadweight loss
3. Referring to the scenario above, please quote one
There are two common types of statements Tesla is clearly in the lead in its market value and stock price compared to other electronic vehicle
positive statement or one normative statement.
in Economics, one calls normative companies.
A normative statement:
statement, which is subjective and value-
e.g., The European Central Bank should increase the based; it considers questions involving Fact:
euro supply. goals, values, and ethics.
Tesla's market value is the same as the market value of the world's nine largest carmakers combined,
A positive statement: Another calls positive statement: which is including automotive giants such as Volkswagen and Toyota (Michelle, 2021).
e.g., Cost-benefit analysis will help you earn more objective; it considers questions involving To evaluate a company, economists usually focus on its cost minimization and productivity maximization
money. cause and effect. abilities. These critical skills determine whether a company can have a large global market share. Since
larger market share represents stronger pricing power, every company concentrates on achieving cost
minimization and productivity maximization. Refer to the table below.
A company having comparative advantage in SUV production implies that it could minimize SUV
Review: production cost.
If two companies produce same product. A company having absolute advantage in SUV production
1. A. Considering the income elasticity of demand, people who have higher incomes will be willing to pay
implies that it could maximize SUV productivity.
more for this feature.

2. C.

3. Positive statement: Having a light inside it make it easier to find things, especially during midnight.
Normative statement: Refrigerator is a common appliance used in the kitchen.

5 6
 Following on from Q3, if advertising significantly increases car sales, it allows the firm to take advantage
Labor hours needed to The opportunity cost of TSLA producing 1 SUV is 1/3 of economies of scale, thus lowering Average total cost (ATC).
make one car of a truck because 10 labor hours are only enough to
produce 1/3 of a truck. The opportunity cost of RIVN
Truck SUV
producing 1 SUV is 1.3 trucks Because the opportunity
cost of TSLA producing a SUV is lower than the
TSLA 30 10 opportunity cost of RIVN producing a SUV, we say TSLA
has a comparative advantage in producing SUVs, and it
RIVN 15 20 can minimize SUV production cost.
How does one take advantage of economies of scale?
For example, it's far cheaper and efficient to serve 500 customers at a cinema than one. Because the
total cost of operating a cinema is fixed, a sales increase implies more seats can share the total cost, and
Quick Quiz the ATC shifts to the left.

1. Assume that Tesla (TSLA) and Rivian² (RIVN) can switch between producing trucks and SUVs at a
constant rate.

Refer to the table above. Which of following answer is correct? (M1,06).
A. Tesla has a comparative advantage in the production of Trucks and Rivian have a comparative
advantage in the production of SUVs.
4. People usually apply economies of scale in business. Give examples in which economies of scale have
been applied. Imagine that you are the boss of ASDAN airline, how would you use this strategy in
business? (Hint: more seat sales can benefit your profit, why?)

B. Tesla has a comparative advantage in the production of SUVs and Rivian have a comparative
advantage in the production of truck.

C. Both cars and Rivian have an absolute advantage in the production of both cars.

D. Neither car nor Rivian has an absolute advantage in the production of both cars.

2. Referring to the same table above, Tesla should focus on the production of SUV to accomplish
___________ maximization and ___________ minimization.

3. Elon Musk, the CEO of Tesla, and the wealthiest

person in the world according to the Forbes'
real-time billionaires list, shares his opinions
frequently on Twitter, on topics such as Bitcoin,
his new factories, poetry, new car models, etc.
What impact do you think Musk's tweets have
on Tesla's stock price? (Hint: Think about the
advertising impact.) (M1,08)
Advertising has two potential effects on
demand:
5. Refer to the given figure above. Which of the following best describes the movement of Tesla's
• Advertising increases demand because equilibrium³ point moves from to ? (M1,09)
more people want to buy the product.
A. A huge Consumer Price Index ⁴ (CPI) boosts salaries and the cost of raw materials.
• Advertising makes demand less elastic
by generating brand loyalty, so consumers B. There has been an improvement in the technology used to produce Model Y.
become less responsive to price changes.
C. Model Y has become very popular.

D. The price of XPENG G3i has decreased.

³ Equilibrium is the quantity and price at which quantity supplied equals quantity demanded; graphically, it is the point where the
market supply curve intercepts the market demand curve.
² Rivian is an American electric vehicle automaker and automotive technology company founded in 2009.
⁴ The Consumer Price Index is a measure of the average change over time in the price paid by urban consumers for a market
basket of consumer goods and services.
7 8
 6. Deadweight loss (DWL) occurs when a car is too expensive to purchase.
When Price of demand increase,
Price of supply decrease.
Summary
• You can find economic principles everywhere. For example, the opportunity cost of eating
at a buffet is the show you could have gone to instead. Rational people choose to eat
expensive seafood because they reason at the margin.

• Refrigerators consumers are willing to pay the cost of light installing based on cost benefit
analysis. Price- income elasticity shows that people who have higher incomes are willing to
In order to avoid deadweight loss, Tesla used price discrimination strategy (as per picture shown below). pay more for better services.

• Since Tesla has comparative and absolute advantages in producing electric vehicles, it
can capture a large market share because it can significantly produce more cars at a lower
cost. Price discrimination and advertising impact boosted Tesla's sales further to help Musk
become the wealthiest person in the world.

External Resources (1)

Source: https://www.tesla.com/en_GB/

Refer two both graphs above, try and explain how If you want to know more about Tesla and its economic strategies, watch the following video.

Tesla use the price discrimination srtategy to reduce Price discrimination example: Concerts use Go to www.youtube.com and search for ' 美股查理 '.
the deadweight loss? (Hint: Model 3 and Model Y) price discrimination to sell tickets at different Title of Video: 特斯拉财报：利润增长来自哪里？新工厂对产能有什么影响？自动驾驶出租车要来了？
prices according to the distance between the
seat and the stage.

Review
1. B

2. productivity; cost.

3. Due to the advertising impact, more consumers purchase Tesla products, resulting in an increase in
Tesla's revenue and stock price.
If you want to review the 10 principles of economics that we've covered, watch the following.
4. You should focus on strategy to sell the air ticket as much as possible for 1 particular flight, to decrease
Go to www.youtube.com and search for maddi connolly.
the shared operating cost, then, your company's profit will increase.
Title of Video: The 10 principles of economics
5. A

6. Tesla offers two versions of Model Y—low mileage and high mileage. The high-mileage version
is priced considerably higher, based on the theory that buyers willing to pay for more mileage are
more likely to have a high willingness to pay in general. But providing a lower cost car, provides an
opportunity to target consumers who are more budget friendly, hence, the sales of the low-mileage
version will increase the profit for for a similar reason. Thus, consumer surplus and producer surplus will
increase, and deadweight loss will decrease.

9 10
 5. Refer to the figure. For this economy, as more and more hammers are produced, the opportunity cost
M1 QUIZ of an additional hammer produced (M1,05)

A. remains constant.
Complete All questions. Check your answers in the Answer Keys at the end of the module.
B. increases.
1. Economics is the study of how society manages its (M1,01)
C. decreases.
A. limited wants and unlimited resources.
D. cannot not be determined from the graph.
B. unlimited wants and unlimited resources.

C. limited wants and limited resources.

Module 1 contains half of the 'Big 7'. In other words, mastering the M1 implies you've scored half
D. unlimited wants and limited resources. of the graph questions

2. The cost of flying a 200-seat plane is $100,000 for an airline, and there are 10 empty seats on a flight. If
the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline 6. Which of the following transactions does not take place

should in the market when considering the factors of production in

the circular flow diagram? Q6 and Q7 for the circular flow
A. sell the ticket because the marginal benefit exceeds the marginal cost. model usually test your knowledge
A. A landowner leases land to a farmer. o n p ro f i t f l o w a n d l a b o r f l o w.
B. sell the ticket because the marginal benefit exceeds the average cost. Besides that, you will be asked which
B. A farmer hires a teenager to help harvest.
C. not sell the ticket because the marginal benefit is less than the marginal cost. character will occur in a specific
C. A construction company rents trucks for its business. scenario. You should be able to draw
D. not sell the ticket because the marginal benefit is less than the average cost. a detailed graph that includes labor
D. A woman buys corn for dinner.
and cash flow.
3. Yulia has $120 to spend and wants to buy either a new amplifier for
her guitar or new AirPods to listen to music while working out. Both 7. In the circular flow diagram,
Questions related to the
the amplifier and AirPods cost $120, so she can only buy one. Which 10 principles of economics A. profit flows from households to firms. B. labor flows from households to firms.
basic concept does this illustrate? (M1,02) will require you to utilise an
economics concept in a given C. services flow from households to firms. D. All of the above are correct.
A. Trade can make everyone better off.
scenario. You will be able
B. People face trade-offs. to master these questions 8. Refer to the figures. Which of the following is not a result of the economy's PPF shift from Panel (a) to
once you are familiar with the Panel (b)? (M1,05)
C. Rational people think at the margin.
principles!
A. The trade-off between the production of donuts and coffee changes.
D. Decisions made at the margin are not particularly important.
B. The opportunity cost of a cup of coffee is higher at all levels of coffee production.

4. Joyce decides to spend three hours working overtime instead of going to the park with her friends. C. The production of four donuts and two cups of coffee is possible.
She earns $20 per hour for overtime work. Her opportunity cost of working is (M1,02)
D. The production of one donut and four cups of coffee becomes efficient.
A. the $60 she earns working.

B. the $60 she earns minus the enjoyment she would have received from going to the park.

C. the enjoyment she would have received had she gone to the park.

D. nothing, since she would have received less than $60 worth of enjoyment from going to the park.

11 12
 PPF questions are usually of two types. One involves a figure, like in Q4. The other involves a table, like in
Q8. The former is very clear; you can find the answer directly from one variable. Table-based questions,
M1 QUIZ Answer Keys
however, test your calculation. These are bonus questions to try out once you are able to calculate the
opportunity cost quickly. Don't forget the tricky aspect: 'the number of hours needed to produce one 1–5 : D, A, B, C, B
product and the number of products produced in ten hours.' 6–11 : D, B, D, A, C, D

9. In a market economy, supply and demand determine

M1 Glossary
A. both the quantity of goods produced and the price at which they are sold.

B. the quantity of goods produced but not the price at which they are sold.
A Absolute Advantage M Marginal Change
C. the price at which goods are sold but not the quantity of goods produced.
Average Total Cost N Normative Statement
D. neither the quantity of goods produced nor the price at which they are sold.
C Comparative Advantage O Opportunity Cost

Cost Benefit Analysis P Positive Statement

10. Refer to the figure. If the price is $10, then there
would be a (M1,07) D Deadweight Loss Price Discrimination

A. shortage of 400 units, and the price would rise. E Economies of Scale

B. surplus of 400 units, and the price would rise. Equilibriumt

C. shortage of 600 units, and the price would rise. I Income Elasticity of Demand

D. surplus of 600 units, and the price would rise. Incentive

11. Refer to the figure. Which of the following M1 Learning Targets

movements would illustrate the effect of a decrease
in young adults' incomes on the market for Ramen
Try and answer the following questions, please check the answer key once you finished. If you √ all the
noodles, assuming that Ramen noodles are inferior
answers, it means you master module
goods? (M1,08 & M1,09)
1. How does society manage its scarce resources?
A. Point A to Point B
2. What must be given up to acquire something else?
B. Point C to Point B
3. Which analysis considers questions involving cause and effect?
C. Point C to Point D 4. How can the production possibilities curve (PPC) be shifted to the right?
D. Point A to Point D 5. How does the production possibilities frontier (PPF) show opportunity costs?

6. How does a comparative advantage result in benefits from trade?

7. How does the price adjust when the market is not at equilibrium?

8. Which factors can shift demand?

9. What kinds of factors will shift supply?

13 14
Module 2
Microeconomics
Review
This module will help you to:
Alcoholic beverages and water are substitutes. Thus, when the price of water increases, customers will
• describe the concepts of complement and substitute.
choose an alternative drink that much cheaper. In addition, alcoholic beverages have higher marginal
• identify the concept of cross-price elasticity.
benefits than water. It means the profit of selling one more bottle of wine is more than the profit of
• define public goods and common resources.
selling one more bottle of water. Thus, barkeepers set higher prices for water to induce customers to
• compare and contrast the four market structures. purchase more substitute beverages.

Peanuts and alcoholic beverages are complements, like a car and gasoline. When the price of gasoline
decreases, you will find car sales increase. When customers eat peanuts as appetizers, they will be more
2.1 Case Study 1 likely to purchase beverages, in this case-alcoholic beverage, because they feel thirsty. Barkeepers give
them free peanuts so that they will drink more. In this scenario, the cross-price elasticity of demand ⁵ is
Why do pubs provide free salty nuts but charge for water? negative.

Quick Quiz - practice time

—— How to apply complement and substitute relationships in business

Let's see what you would do if you were the owner of Shanxi Noodle

Your restaurant offers three different products: bottled water, beef noodle (soup), and fried dumplings.
Which of the following strategies could lead to your customers ordering more beef noodles? (M2,03)

A. Decrease the Price of noodles directly.

B. Increase the price of dumpling.

C. Increase the price of bottled water.

Can you explain your selection?

Keywords : substitutes, complements, cross-price elasticity of demand, necessary goods, public goods,
common resources goods

Fact
As we all know, peanuts are more expensive than water (assuming the same quantity). To increase net
income, peanuts should be charged at a higher price than water. However, in pubs and bars owners
provide nuts for free but not water. Why do most pubs follow this strategy? Are all barkeepers charitable?
Fun Fact

Don't buy water bottled at a place you would never visit just to buy a bottle of water.

⁵ Cross-Price Elasticity is the percentage change in demand for good X if there is a price change for good Y. If the number is
negative, they are complements, and if it is positive, they are substitutes.

15 16
 2.2 Case Study 2

Inelastic demand indicates

Why do software developers provide their products for free? consumers are not very
responsive to price changes.
—— Changing price demand elasticity to expand the business Ginger and garlic are examples
of goods with inelastic
demand.

Source: https://twitter.com/kashthefuturist/status/1188345711491866624

1. Refer to the above graph showing the subscription fees for each company. Users constantly provide
advice to Netflix on how to improve its revenue. Which advice would you not follow if you were Netflix's
COO? (M2,01&03)

A. Increase the compatibility of Netflix.

B. Increase the trial period.

C. Make Netflix an included software app in smartphones.

D. Increase the subscription fees.

Keywords : inflation, perfect competition, monopolistic competition, oligopoly, monopoly

Review
Fact
Users tend to be concerned about software compatibility, such as MS Office.
When you purchase a new smartphone, it has an Android or iOS operating system as well as software Users also follow habits, such as when they are familiar with using MS Office or prefer to watch dramas
such as Google Apps, Netflix, Spotify, and MS Office. on Netflix. They are less likely to spend time getting used to other software applications. even if there is
other application that might be better. As a result, the demand for such software becomes stickier even
It was previously necessary to purchase these software programs via an app store. Some of them are
when subscription fees rise because the product is considered a necessity, like ginger and salt. Thus, the
expensive. But now you don't need to pay for them. Why do software developers now give these apps
subscription volume remains stable.
for free to cellphone manufacturers?
Due to the long-term profits obtained, software developers are willing to provide their products to
Before getting to the answer, let;s look at Netflix as an example. The Federal Reserve increasing the
cellphone manufacturers freely.
money supply to help residents survive the unemployment impact of covid. This inflation causes
subscription fees to rise. Since streaming media are not necessary goods and services for consumers,
Consumers then cancel their memberships to save more money for goods with inelastic demand. In
Quick Quiz
the first quarter of 2022, Netflix ⁶ reported a loss of 200,000 subscribers; its stock price decreased by over
1. It was mentioned that inflation causes subscription fees to rise. Refer to the above case study
20%.
mentioned that, how does inflation come about?

⁶ Netflix is an American subscription streaming service and production company.

17 18
 There are four market structures in society, they are:

Perfect competition: A market structure with a large number of sellers of a standardized product 2.3 Case Study 3
such as pokers or pencils.

Monopolistic competition: A market structure with many firms selling similar but differentiated
products, such as Starbucks, COCO, and Luckin Coffee. Why don't all hotels offer free breakfast?
Oligopoly: A market structure with a few dominant firms, such as Microsoft and Apple. —— How to distinguish common goods and private goods

Monopoly: A market structure with a single seller of a product with no close substitutes, such as the
State Grid Corporation of China ( 中国电网 ).

Keywords: Private goods, public goods, common resources goods

2. Netflix has many rivals in the field of streaming media, such as Hulu, HBO, Disney, and Amazon Prime.
But Android doesn't. Refer to the explanation above, please match these companies (given in bold) with
Fact:
the corresponding market structure. (M2,05&06)

Most hotels provide free Wi-Fi to their customers, irrespective of the room type selected. However, only
some customers receive free breakfast coupons. Why do you think this difference exists?

Hint: This scenario can be explained by product allocation

(1) rival vs non-rival
(2) excludable vs non-excludable.
Let's look at a few examples for the different product allocation.

Rivalry is when the same

goods and services
cannot be shared.

Review Excludability is when it

is possible to exclude
1. Inflation comes from a powerful quantitative easing (QE) policy. The central bank increases money people who receive
goods and services freely.
supply to meet society's needs for a long time. Inflation then occurs.

2. Monopolistic Competition: Netflix, Hulu, HBO

Oligopoly: Amazon Prime, Android

19 20
 Quick Quiz
1.Wi-Fi, breakfast coupon, and air
Please identify the type of goods to the following based on the information table given below: (M2,08)
Private goods
(goods that are rivals in terms of
consumption and are excludable)
Public goods
(goods that are non-rivals in terms of
consumption and are non-excludable)
2. Based on your answer to Q1 above, imagine if you are the hotel owner, what do you think are the
differences between giving free Wi-Fi and free breakfast coupons? (Hint: ten principle of economics -
marginal thinking)
21
Non-rival private goods
(goods that are non-rivals in terms of
consumption and are excludable)
Common resource goods
(goods that are rivals in terms of
consumption and are non-excludable)
Review:
Private goods Non-rival private goods
(goods that are rivals in terms of (goods that are non-rivals in terms of
consumption and are excludable) consumption and are excludable)
Breakfast Coupon Wi-Fi
Public goods
(goods that are non-rivals in terms of
Common resource goods
(goods that are rivals in terms of
consumption and are non-excludable)
consumption and are non-excludable)
Air
1.Customers cannot share their coupons with many other people. However, they can all use a hotel's Wi-
Fi simultaneously. Air is public goods, you can breathe freely with others.
2.Most hotels purchase internet packages with sufficient traffic to cover the hotel's traffic usage
completely. The marginal cost of Wi-Fi is zero. Thus, hotels can increase occupancy levels by offering free
Wi-Fi services.
However, the marginal cost of a hotel breakfast is positive. A hotel cannot endlessly buy new ingredients
to make breakfast. The purchasing department has a budget and a plan. The number of coupons issued
depends on how many customers the hotel has, as the maximum profit only occurs at equilibrium (MC =
MB).
Summary
• The pub's strategies introduce two relationships between goods. For example, Pepsi and
Cola are substitutes; if the price of Cola decreases, fewer customers will purchase Pepsi. Car
batteries and cars are complements, lowering the price of batteries can promote car sales.
• Goods will be allocated to four different market structures according to their industry
and the price elasticity of demand, because these two kinds of information can indicate
the degree of industry competition. A monopoly has no competitor, an oligopoly has few
competitors, in monopolistic competition like Netflix there are many competitors, and in
perfect competition all are competitors of each other.
• Goods differ in whether they are excludable and whether they are rival in consumption.
Markets work best for private goods, which are both excludable and rival in consumption.
22
 M2 QUIZ 4. Refer to the figure. An increase in the price of a complement would be represented by a movement
from

Complete All questions. Check your answers in the Answer Keys at the end of the module. A. A to B

1. Which of these shows the willingness of consumers to buy a product at a different price? B. B to A

A. Demand curve B. Supply curve C. D1 to D2.

C. Production possibilities frontier D. Marginal cost curve D. D2 to D1

Question 4 figure
2. Refer to the figure. Which area represents a decrease in producer surplus when the market price falls
5. Electric car manufacturers want to sell more electric cars at
from P2 to P1? (M2,04)
higher prices. Which of the following events can support this?
Q5 doesn't contain any keywords
A. C + E such as price elasticity, normal
A. Technological advancement in the production of
B. A + C + E electric car batteries goods, etc. But choice C mentions
lithium as a complement, and choice
C. A + B B. An increase in the number of manufacturers of electric
D specifies the gasoline car as a
cars
D. B + D substitute. Therefore, you should
Question 2 figure C. A decrease in the price of lithium, which is used in not only focus on the questions but
electric car batteries also the given choices, as these are
In equilibrium, the value of deadweight loss is zero. A shortage or surplus also occurs
important.
because of taxes and government price control. Focus on connecting these key terms when D. An increase in the price of gasoline
reviewing them because they can help you establish an overall understanding of multiple
6. Refer to the figure. What is the value of the portion of
conditions leading to deadweight loss, such as in Q2 and Q6.
consumer surplus that has been transferred to producer
surplus as a result of the price floor?
3. The figure represents the market for iced tea. Assume that
this is a competitive market. Which of the following statements A. $1,200 B. $1,500
holds true at an output of 30,000 units? C. $1,800 D. $2,000
A. The marginal cost of iced tea is greater than the
marginal benefit; therefore, the output is inefficiently high. 7. Refer to the figure. What is the value of the
deadweight loss after the imposition of the price floor?
B. Producers should raise the price to $3 in order to sell
the demanded quantity of 30,000. A. $600 B. $1,800

C. The marginal benefit of iced tea is greater than the C. $2,700 D. $3,300 Question 6&7 figure
marginal cost; therefore, the output is inefficiently low.

D. The marginal benefit of iced tea is greater than the 8. For-profit producers will produce only private goods because (M2,08)
marginal cost; therefore, the output is inefficiently high. Question 3 figure
A. markets exit for private goods but not for public goods.

B. the cost of production can be easily determined.

The principles of marginal thinking can be applied in each module. The goal of marginal
thinking is profit maximization when the marginal benefit equals the marginal cost. Business C. buyers will be willing to pay for the goods since the benefits are excludable.
should cease when the marginal cost exceeds the marginal benefit.
D. all external benefits can be internalized using market prices.

23 24
 9. Generally, demand is more ____ in the ____ because consumers can fully adjust to price changes.
(M2,01) M2 QUIZ Answer Keys
A. elastic; short run 1–5 : A, C, A, D, D
B. elastic; long run 6–10 : A, A, C, B, C
C. unit elastic; long run 11–12 : A, A
D. inelastic; short run
M2 Glossary
10. Consumers are less responsive to price increases when a good is a (M2,02)
C Common Resources Goods
A. large share of their budget.
Complements
B. frequently advertised item.
Cross-price elasticity
C. necessity.
I Inflation
D. branded good.
M Monopoly
11. In general, when the price elasticity of demand is greater than one and a firm wants to increase total
Monopolistic competition
revenue, the firm should (M2,02)
O Oligopoly
A. decrease prices.
P Private goods
B. increase prices
Public goods
C. advertise less.
S Substitutes
D. advertise more.

12. Complementary goods have a ____ cross-price elasticity of demand (M2,03)

M2 Learning Targets
A. negative
Try and answer the following questions, please check the answer key once you finished. If you √ all the
B. positive
answers, it means you master module
C. absolute
1. What does the price elasticity of demand measure?
D. zero
2. How is the price elasticity of demand interpreted?

3. What do cross-price elasticity and income elasticity measure?

4. How do changing prices affect consumer surplus and producer surplus?

For Q12. You can refer to the value of cross price elasticity to identify the
5. What are the characteristics of the four market structures?
relationship between two goods. A positive number means substitute, and a
negative number implies a complementary relationship. 6. How can you identify perfect competition?

7. How does a firm maximize its profit in a market with perfect competition?

8. How can public goods and common resources goods be distinguished?

25 26
Module 3
Macroeconomics
During recession
This module will help you to:
• determine the effects of taxes and government price controls

• describe how GDP per capita is measured and identify other measure of national economy

• define the unemployment rate and the labor force participation rate.

• identify the three roles of money and the concept of liquidity

Considering this, how can the problem of budget deficit be solved?

3.1 Case Study 1 The importance of solving budget deficit is, when the government has sufficient budget, it can decrease
unemployment rate by develop more construction project.

How can government income be managed? The government can introduce Quantitative Easing policy to increase money supply as well, people can
take out a loan with low interest to start their business.
—— Fiscal policies introduction
Quick Quiz
1. Taxes on goods and services by sellers will generally (M3,03)

A. shift the supply curve to the right.

B. shift the supply curve to the left.

C. shift the demand curve to the right.

D. create market efficiency.

2. A price floor is intended to benefit

A price floor is a law that sets a minimum price,
A. consumers. generally above equilibrium (e.g. Minimum wage
Keywords : budget deficit, government spending, recession, price floor
B. suppliers. laws)

C. only the poor. A price ceiling is a law that sets a maximum

Fact price, generally below equilibrium (e.g. energy
D. only the wealthy.
price control)
Just like a household or corporation, a government needs to generate profit, otherwise it will incur a
budget deficit and government shutdown. Fact
A government usually has two options to maintain its income. It can decrease government spending The US introduced a policy to reduce the influence of rising taxes. Earned income tax credit (EITC) is a
or increase tax income. However, no citizen likes a higher tax rate because it increases the operating refundable tax credit for low-income working individuals and couples. When an individual earns money
costs of suppliers. They cannot produce the usual number of products, and consumers will have to pay from a job, this credit eliminates any federal tax owed. They can save more money for their own life.
more to share the burden with suppliers. In other words, prices level will rise. Some might expect a higher
deadweight loss and recession.
Review
With any policy change, Opponents usually worry that such change would be costly for taxpayers. As
long as the proceeds from a tax increase are fairly distributed among the people, a happy outcome can
be achieved for all.

27 28
 3.2 Case Study 2
Why are GDP per capita and unemployment rate not good measures?
—— how to evaluate a good economy measure
Keywords : GDP, GDP per capita, labor-force participant rate, unemployment rate, discourage workers
Over the past decade, EU and most other developed countries have pursued GDP per capita growth
as a mean of improving quality of life. However, EU admitted that there is a need for additional work on
economic welfare because GDP per capita is not sufficient for a good measurement of economic welfare.
Imagine this, Country α's government decide to use GDP per capita to measure the wellbeing of nation,
below is the calculation of the GDP per capita.
GDP=Consumption+Investment+Government Spending+Net Export
GDP =GDP per capita×Population
If Country α's government follow the above calculation for the below scenario, could you show them
what error would occur behind this data?
1. Assume Alex is the head of country α, which has an initial population of 1000. Country α's per capita
GDP is $100.
A monster named Ken invades α. Alex works with four brave men from country β to defeat Ken. To
help α rebuild and learn advanced techniques, β sends over 500 people for post-war reconstruction.
500 alien per capita income rises from $50 to $60. Country α's second GDP increases from $100,000 to
$145,000.
a. Please compare the two periods of country α's per capita GDP (before and after the invasion by
Ken). Hint: Use the formulae to calculate.
b. Based on your answer to (a), what can you conclude? (M3,04)
29
Currently, the unemployment rate gets plenty of media coverage. Such as Wall Street Journal, CNBC,
Yahoo Finance. This ratio represents the percentage of people in the labor force without jobs who've
been actively looking for work within a four-week period. Many people believe that it's a good measure
of the economy's overall strength. Based on the story below, could you recognize its flaws?
2. Alex's country had an 80% labor force participant rate before Ken approached. 800 people were
employed, and 200 people were unemployed. Because a tyrant ruled country α, 30 graduate students
became discouraged workers ⁷ because they don't believe they can find a good work in this period.
a. Please compare country α's unemployment rates during the two periods （before and after the
invasion by Ken). Hint: Use the formulae to calculate.
b. Based on your answer to (a), what can you conclude? (M3,04)
Review
1a. GDP per capita in the second period:
$145,000÷(1000+500)=$97<$100
Country α's GDP in the second period (exclude the immigration):
$145,000-$60×500=$115,000
Country α's GDP per capita in the second period (exclude the immigration):
$115,000÷1,000=$115>$100
Country α's GDP in the first period:
1000×$100=$100,000
1b. Based on the results of 1a, the lives of country α's citizens and the 500 aliens from country β
improved. However, country α's GDP per capita is less than the previous. Thus, GDP per capita alone
cannot be used to measure the wellbeing of nation.
2a. Unemployment rate in the second period:
(200-30)÷(800+200-30)=17.5%
Unemployment rate in the first period:
200÷(200+800)=20%
2b. You may wonder why the unemployment rate has decreased; it is impossible for Ken to be a good
leader. The unemployment rate doesn't account for discouraged workers and is not sufficient to judge
the economic environment.
In conclusion, in order to judge the national wellbeing, the unemployment rate and the GDP per capita
are not sufficient, we need additional statistic to evaluate the economic environment such as Consumer
Price Index (CPI), GDP deflator and so on.
⁷ Discouraged workers are non-working individuals who are willing and able to work, have worked or sought employment in the
prior 12 months, but currently are not looking for work because they do not believe they will be able to find an appropriate job.
30
 3.3 Case Study 3 2. Let's estimate the potential of Bitcoin to play a similar function as money. Refer to the bitcoin price
chart given which shows the change in value of Bitcoin across 4 years.

Bitcoin: The best-known example of digital currency Figure 1. Coinbase Bitcoin Price Chart (2018-2022)

—— Three functions of money

Source: FRED ECONOMIC DATA (Coinbase, 2022, September 15)

( 1 ) Given the information in the chart, how likely do you think the Bitcoin can be used as a reliable store
of value?

Keywords : unit of account, medium of exchange, store of value

Fact

Bitcoin was created in 2009 and has become an important alternative to money, as it can be transferred ( 2 ) Given the information in the chart, how widely accepted do you think the Bitcoin can be used as a
anonymously. In 2016, the value of a Bitcoin ranged from $400 to $1,000. It increased to $19,379 by medium of exchange?
December 2017 and then decreased by 50% within two weeks.

Even though Bitcoin is a convenient medium of exchange over the Internet, its price can change
dramatically in the short run. How does it fulfill the three functions of money?

1. The functions and descriptions of money are listed in the 2 columns below; please match them ( 3 ) Can more businesses potentially use the Bitcoin as a unit of account in the future?
correctly. (M3,06)

Review
Bitcoin functions well as a medium of exchange because it can be converted to other currencies.
However, as its value in terms of those other currencies fluctuates, it cannot be a standard unit of account
and store of value. No one can survive in a society where prices fluctuate drastically because of the fear
that the currency currently in use will become wastepaper one day. Then, no one will care about its store
of value.

31 32
 Summary M3 QUIZ
• Government needs enough money to help people start business, survive from recession. Complete All questions. Check your answers in the Answer Keys at the end of the module.
Otherwise, government shutdown, business go bankrupt, people will lose their property.
1. Which of the following items would NOT be included in the
• Alex's story tells you the GDP per capita and the unemployment rate are not sufficient for a value of GDP? (M3,04)
Q1 and Q3 focus on goods and
good measurement of national wellbeing. They are useful but not perfect.
A. Fabric purchased by a family services that are not be counted in
• More and more country accept bitcoin as transaction money, people can use bitcoin to a country's GDP. You should identify
B. Fabric purchased by a shirt factory
purchase cars and houses. However, can we regard bitcoin as fiat money (money's value backed the GDP's composition to answer
by government). Case 3 introduces three functions of money. Because bitcoin cannot be a C. A lawnmower purchased by a family these questions.
standard unit of account and store of value, it will not be able to replace fiat money.
D. A lawnmower purchased by a company

2. What is the measure of earned income plus unearned

External Resources (2) income minus taxes?

EITC and the minimum wage policy have similar functions. If you want to know more about these policies
to determine which is better, check out these essays.
Go to www.wsj.com.
Title of Article: An Overhyped Tax Credit
Q2,5,7 are 'definition questions'
A. Personal income t h a t a r e a s k e d f r e q u e n t l y.
Using E-flash card can help you
B. National income
memorize these definitions more
C. Disposable personable income easily.
Go to investopedia.com.
D. Take-home income
Title of Article: Can a Family Survive on the US
Minimum Wage? 3. Which of the following is NOT one of the problems associated with using GDP per capita to measure
standard of living?

A. GDP does not include nonmarket production.

B. GDP does not account for the environmental and health impacts of production.

C. GDP does not account for the average amount of leisure time.

D. GDP does not include services.

4. Which measure provides a business with the best estimate

of the economic health of its typical consumer in an The best estimate requires you to
economy? (M3,04) choose a real value over a nominal
value. This rule also applies to other
A. GDP
questions because nominal value
B. Real GDP includes inflation, which limits the
accuracy of data.
C. GDP per capita

D. Real GDP per capita

33 34
 Complete All questions. Check your answers in the Answer Keys at the end of the module. 9. Which of the following is NOT an appropriate way to

5. Which statistic measures the average price level faced by the citizens of a country as they make their cope with imperfections, such as unemployment rate, in

household purchases? macroeconomic statistics?

When dealing with questions
A. GDP deflator A. Understand how each statistic is calculated to know its
that appear open-ended with
limitations.
B. Producer price index no clear economic concept
B. Be aware of supplemental data that the government to be applied, consider the
C. Gross national product collects, as it might provide insights on an issue. simple process of elimination
D. Consumer price index to choose your final answer.
C. When different versions of a statistic are available,
Choices that include absolute
use the version that is most appropriate for the analysis
6. When people are living on a fixed income, inflation will phrases are usually incorrect.
being conducted.
A. increase the real value of their income. D. Assume that macroeconomic statistics should not be
B. increase the nominal value of their income. relied on to provide measures of economic issues.

C. decrease the real value of their income. 10. What stage of the business cycle immediately follows a recession?
D. decrease the nominal value of their income.
A. Trough

B. Peak

Q6, 8 and 13 required students apply the concept. When inflation occurs, what will happen C. Expansion
if you receive same amount of income. Calculating the unemployment rate based on the
D. Contraction
definition of unemployment.
11. When other measures remain the same, if the long-run aggregate supply curve shifts to the left, prices

A. and output both increase.

7. The labor force consists of
B. and output both decrease.
A. all persons aged 16 or older in a country.
C. increase, and output decreases.
B. the entire population of a country.
D. decrease, and output increases.
C. all persons aged 16 or older who are classified as employed or unemployed.

D. all persons aged 21 or older who desire a job. 12. Refer to the figure. Starting from point B, and assuming that aggregate
demand is held constant, in the long run, the economy is likely to experience
8. Jonia's population of 500,000 includes 95,000 children below the age of 16, 80,000 retirees, 20,000
A. a falling price level and a falling level of output as the economy moves
discouraged workers, 228,000 employed persons, and 12,000 unemployed persons. What is Jonia's
to point C.
unemployment rate?
B. a falling price level and a rising level of output as the economy moves
A. 3.7%
to point A.
B. 2.4%
C. a rising price level and a falling level of output as the economy moves
C. 2.28% to point A.

D. 5.0% D. a rising price level and a rising level of output as the economy moves
Question12 figure
to point C.

35 36
 Module 4
International Trade
13. Wang, a high-school student with a part-time job, saves some money every day, believing that it will
This module will help you to:
provide her with the purchasing power to pay tuition when she attends college in three years. She is
relying heavily on money as a (M3,06) • Apply the concept of comparative advantage in international trade.

A. unit of account.
• Explain how international trade increase total surplus.

• Identify the economic impact of policies that restrict trade.

B. store of value.
• Identify the factors influence short-term interest rates.
C. medium of exchange.

D. standard of deferred payment.

4.1 Case Study 1

M3 QUIZ Answer Keys How did the energy crisis boost the Japanese economy?
1–5 : B, C, D, D, D 6–10 : C, C, D, D, A 11–13 : C, C, B —— The volume of net export is a critical point for national GDP.

M3 Glossary

B Budget deficit M Medium of exchange

D Discourage workers P Price floor

G GDP R Recession

GDP per capita U Unemployment rate

Government spending Unit of account

L Labor-force participant rate S Store of value

Keywords : Money supply, depreciation, shortage, running inflation

M3 Learning Targets
Try and answer the following questions, please check the answer key once you finished. If you √ all the
answers, it means you master module.
1. Understand the aggregate supply (AS) and aggregate demand (AD) models.
2. What factors can lead to shifts in the AS and AD curves?
3. What are the effects of taxes and government price controls?
4. How do GDP and other indexes measure national income?
Fact
Two energy crises occurred in the 1970s. At that time, most countries faced substantial petroleum
shortages and elevated prices. For example, over 99.7% of Japan's petroleum demand relied on imports.
Thus, the Japanese government had to increase its money supply to purchase oil. This money supply
helps Japanese banks have more money reserve, so they can offer cheap loans ⁸ to help business
purchase productive material such as petroleum. You may be aware that running inflation ⁹ occurs once
the money supply large increases.

5. How is the inflation rate calculated?

⁸ Cheap loan is a loan or credit with a low interest rate by banks.
6. What are the three roles of money?
⁹ The rate at which the price level increases in this period is very high, may be even above 10%. This increase in price level takes
place within a short span of time. Normally, the price level will only increase 2% per annum.

37 38
 Product prices rose sharply with significant inflation. Japanese citizens decided to lower their The Japanese government realized that it needed to change its industry focus, otherwise many families
consumption to save money. However, the yen's value decreases dramatically due to the energy crisis would face bankruptcy. Thus, Japanese industries shifted from product concentration to technology
and low-interest rates, which challenge citizens' intention to buy things. This phenomenon caused a concentration in the 1970s.
lower consumer demand, leading to a decrease in product supply. Because of the reduction in product
Product concentration focuses on manufacturing industry, it lacks self-own brands, and self-developed
supply, each product's value becomes higher, which causes the product prices to rise further. Let's see
products. Domestic business cannot earn considerable profit in this mode because the majority profit
how this work:
from brands and products belong to foreign companies. Whereas technology concentration focuses
on self-developed products. For example, Sony, Toshiba, Panasonic, Nikon, and Toyota focus on self-
cause cause
Goverment increase developed products. These companies started to grow dramatically during this period. For instance,
Energy Crisis oil shortage
money supply Toyota's annual output in 1960 was only 150,000. By 1980, its annual output had increased by 2200% to
3,300,000. Japanese businesses became integrated into the Western world and not just through cars.
cause For example, SONY produced the Walkman, Toshiba produced air conditioners, Panasonic produced
washing machines, and Nikon sold cameras. The Western world—particularly the US and Canada—was
cause cause
Decreased Japanese' Yen doing well and could afford the best of everything, no matter where in the world it was produced. As a
Create challenge in
consumption Depreciate result, Japanese export increase rapidly.
consumption due to
the high price level
Table 1. Japan's GDP, 1973–1988
cause
cause
Decrease Product Value (price
product supply level) increase further

Quick Quiz

Refer to the scene above, can you use the Aggregate Supply / Aggregate Demand model or money
market model to predict what would happen next? * Big 7 (AS/AD model and money market model)
has detail explanation.

39 40
 Americans suddenly developed a passion for Japanese exports. Panel A depicts the market for yen business have no profit due to low demand and high price level. Employers cannot pay high wage with
(Japanese currency), showing there was an increase in the demand for yen, as American importers low profit. In response, Federal Reserve Chairman Paul Volcker decrease money supply to increase the
needed to obtain yen to purchase Japanese products. The increased demand for yen resulted in the federal fund rate to 19%. This rate increment later leds to a smaller inflation and higher value of dollar
appreciation of yen ( to ). currency.

More American-imported goods and services appeared in Japan since Paul Volcker raised the value of
the dollar. Consumer surplus (or consumer's benefit) rose in the US, hence Japanese product are sold
in a lower price, and more buyers were buying. However, US domestic industries were hit hard, domestic
sellers sold less and at lower prices and earn lower profit. Due to the growth of its trade deficit ¹⁰ and
pressures from US unions, the US started a trade war with Japan. In particular, the US imposed many
trade restrictions on Japanese goods and services. For example, it imposed an import quota on
Japanese vehicles and a 100% tariff on Japanese electronics, such as those produced by Nikon and
SONY. The quota limited the amount of Japanese vehicles to be imported. Because the fewer Japanese
Panel A car sales in America, the higher price need to be paid for a Japanese car. 100% tariff implies American
consumer need to pay double price to get those electrics. However, protectionism and the trade war

4.2 Case Study 2 could not reduce the US trade deficit. The negative prospect of trade restrictions spurred the White
House to begin the negotiations that led to the event of Plaza Accord.

The origins of the Plaza Accord On September 22, 1985, the finance ministers and central bank governors of the United States, France,
Germany, Japan, and Great Britain met at the Plaza Hotel in New York City and came to an agreement
—— Various tools of Trade restriction
that announce except US dollar, the four other currencies appreciate to decrease dollar's value.
Keywords : federal funds rate, consumer surplus, trade deficit “Some further orderly appreciation of the non-dollar currencies is desirable.”

<The Plaza Accord, 30 Years Later>

The following Monday, when the meeting was made public, the dollar fell by 4% in comparison to other
currencies. Since this meeting occurred in Plaza Hotel, official media calls this meeting is Plaza Accord.
Some people believe the Plaza France, Germany, Japan, and Great Britain the sold their reserve dollars to the public. As a result, the
Accord contributed to the Japanese
supply curve shifted to the right. Meanwhile, the demand curve shifted to the left, as foreigners and firms
recession in the late 1980s. Before
would get less dollar value for each domestic currency.
we determine the truth of this
assumption, I would like to guide
you through the origins of the Plaza
Accord.

Fact
Following the last case, the US was also affected by the energy crises. Facing inflation of over 14%,
the US was forced to enter stagflation due to an energy crisis and frequent recessions, which raised
unemployment and did little to reduce inflation. During stagflation, few people will consume because Panel B

the high inflation put up the price level. At the meanwhile, unemployment remains steadily high because
¹⁰ Excess of a nation's imports over its exports. Trade surplus means excess of nation's exports over its imports.

41 42
 Quick Quiz External Resources (3)
1. Which of the following would cause Japan's balance of trade to be in surplus? (M4,01)
If you are interested in the Japanese bubble of the 1970s, you can learn more information from the video
A. A loose monetary policy
below.
B. Americans losing interest in Japanese products
Go to youtube.com and search for 小 Lin 说
C. An appreciation of yen
Title of Video: 20 分钟详解日本经济泡沫
D. Low levels of income relative to the Western World

2. If interest rates in US higher than the France interest rate, then

A. the value of the dollar will appreciate

B. the value of the dollar will depreciate

C. exchange rates will be affected but not the value of the euro

D. the exchange rate will not change

Review
1. 'D' is the correct answer. Because Japan has low per capita income relative to the Western World,
low income represents low value of yen. so it may not be able to afford to import Western goods. Lower
import in Japan, but higher export of Japanese good, hence, This would result in a trade surplus.
Aside from trade restrictions, some countries apply Free Trade Agreements (FTAs) to their trading
partners. If you want to know more about FTAs, you can learn more from the information below:
Go to www.wsj.com

2. 'A' is the correct answer. High interest rates would attract French investors, who would acquire more Title of Article: Global Free Trade Is in Crisis
dollars to invest in the United States. This would increase the demand for dollars, thereby appreciating
the dollar.

Summary

Module 4 introduced the study of international trade by a legend history. Japanese exporters
specialize on self-develop technologies and products to survive from two energy crisis. They
enlarge their market share not only by the high technology, but also the low world price.
Therefore, the US needs Plaza Accord to reduce dollar's value. For protecting jobs, helping infant
industries, preventing unfair competition, some country will impose trade restrictions. However,
the cost of restricting trade is higher price to the consumer. Some economists believe that free
trade is usually the better policy.

43 44
 5. In India, one source of competitive advantage is ____________ because India has the second-highest
M4 QUIZ population in the world.

A. natural resources
Complete All questions. Check your answers in the Answer Keys at the end of the module.
B. technological know-how
1. Trade is not a zero-sum game because
When you have finished the previous C. abundant labor
A. net exports do not equal zero modules, do not forget to review
them. Questions such as Q1, Q6, D. the business environment
B. trade always has a winner and a loser
and Q8 go beyond the concepts
C. if zero goods are exchanged, then trade has not covered in Module 4 to test your 6. In the figure, which of these represents consumer
occurred ability to connect old and new surplus if trading occurs? (M4,02)
concepts.
D. all parties that engage in trade can benefit from it A. B + C B. B + C + D

C. A D. A + B
2. If the world price of a good is higher than its domestic price, then the nation in question will become Question 6 figure
an _______ of the good, and the nation's _________ will increase. (M4,01) 7. When Germany is said to have a negative trade balance, this can be referred to as

A. exporter; producer surplus A. a budget deficit

B. exporter; consumer surplus B. a trade deficit
C. importer; producer surplus C. a trade surplus
D. importer; consumer surplus D. exporting more goods than it imports

3. A tariff _______ the price of imports and _______ the volume of imports. (M4,03) 8. ________ allows countries to consume beyond their production possibilities frontier. (M4,07)

A. increases; increases A. Absolute advantage

B. decreases; decreases B. A fixed level of resources
C. increases; decreases C. Free trade
D. decreases; increases D. Marketing

4. _________ is the amount of one country's good that is exchanged for a different good from another
9. The _______ price occurs under self-sufficiency and
country. Home country price is not a required
when domestic supply equals domestic demand.
concept. However, you can still arrive
A. The terms of trade (M4,01)
at this answer by elimination. When the
B. The exchange rate A. US consumer domestic demand = domestic supply,
imports and exports are not needed,
C. Free trade B. producer
so you can dismiss B and D. There is no
D. Money C. home country reason for A. Thus, you should choose C.

D. world

45 46
 Module 5
EU Economy
10. Complete specialization by countries does not occur because:
This module helps you to:
A. countries want to protect domestic producers
• Describe how economic growth can improve a country's well-being
B. services can be cost-effectively traded on a global scale • Identify the major factors that determine productivity

C. governments often do not support international trade • Explain fractional reserve banking and the ways that banks create money

• Describe the system of European Central Bank

D. technical skills vary greatly from country to country

M4 QUIZ Answer Keys 5.1 Case Study 1

1–5 : D, A, C, A, C 6–10 : C, B, C, C, D
Why do Europeans prefer to purchase cars with smaller engines? ¹¹

M4 Glossary —— Domestic lifestyles are formed by domestic policies

C Consumer surplus

D Depreciation

F Federal funds rate

I Import quota

M Money supply

S Shortage

T Trade deficit

M4 Learning Targets

Try and answer the following questions, please check the answer key once you finished. If you √ all the
Keywords : fuel tax, fiscal policy
answers, it means you master module.

1. When does a country become an importer or exporter of a good?

Fact
2. How will consumer surplus and producer surplus be impacted with and without free trade?
Take the BMW 5 Series as an example. Most European drivers choose the 1.6-liter engine with four
3. What are the impacts of trade restrictions?
cylinders, but the smallest option available in the US is a 3-liter, six-cylinder engine. In general, cars sold
4. What are the arguments for restricting trade?
in Europe have much less displacement and fewer cylinders than those sold in the US. Which of the
5. What additional benefits are gained through international trade? following do you think explains this phenomenon?
6. What factors can shift the curves in the foreign exchange graph?

7. What are the differences between an open economy and a closed economy?
¹¹ Robert, (2007). THE ECONOMIC NATURALIST: Why Economics Explains Almost Everything

47 48
 Quick Quiz
A. Crowded European roads discourage consumers from purchasing high-performance cars
B. Europe's per capita income is much lower than that of the US.
C. Many European motorways have speed limits
D. Some European countries tax cars based on their level of engine displacement
Review
'D' is the correct answer. Answer A is not correct as European roads are not crowded since their
population is not large. Answer B is also not correct as some European countries like Denmark have a
similar GDP per capita income ($67,758) with the US ($69,231). Answer C is wrong as there are no speed
limits on many European motorways, and it is common to see Porsche drivers speeding at 150 miles per
hour.
'D' is the correct answer as fuel is heavily taxed in Europe and costs almost twice as much as in the US.
The behaviour in different countries tend to depend heavily on the local policy.
5.2 Case Study 2
The origin of the European Central Bank (ECB)
—— How does ECB save European Economy
Keywords : central bank, fait money, reserve requirements
Fact
All countries around the world use money issued by a central bank, which is an institution that determines
the quantity of money circulating in society. The money that the central bank issues is also called fiat
money in economics.
In 1999, when all EU member countries adopted the euro as their common fiat money, the euro system
was created. The central banks of all countries that adopted the euro also became regional banks in the
euro system. The European Central Bank (ECB), located in Frankfurt, Germany, is the headquarters of the
euro system.
Regional banks earn profit by charging borrowers an interest that is higher than the saver's interest.
However, if banks cannot make sufficient profits from borrowers, they will not be able to further expand
and diversify their business and, more crucially, lack the money to meet the withdrawal needs of the
original depositors.
49
Regional banks earn profit by charging borrowers an interest that is
higher than the saver's interest. However, if banks cannot make sufficient
profits from borrowers, they will not be able to further expand and
diversify their business and, more crucially, lack the money to meet the
withdrawal needs of the original depositors.
Banking panic describes the
situation when a bank goes
The ECB serves as a last-resort lender that can step in and lend money to
banks in the event of banking panic. bankrupt because it doesn't
have enough money to meet the
To prevent banking panic (aka bank run), the ECB sets a policy called withdrawal needs of depositors.
reserve requirement. This means that banks need to maintain a
minimum of 10% of deposits as reserves to ensure that they can meet the
demands of customers who want to make withdrawals. Banks can then
use the remaining deposits to offer loans or to buy investments.
Quick Quiz
1. Referring to the last paragraph above, what banking system do you think the ECB uses?
A. Fractional reserve banking system
B. Full reserve banking system
2. Which of the following happens when the ECB lowers the reserve requirement? (M5,04)
A. Banks will hold more reserves and make more loans.
B. Banks will make more loans at low interest rates, thus decreasing the money supply.
C. Banks will make more loans at low interest rates, thus increasing the money supply.
Review
1. 'A' is the correct answer. Fractional reserve banking is the banking practice of keeping a fraction of
deposits available as reserves.
2. 'C' is the correct answer because banks would then have permission to make more loans and earn
profits, creating extra money.
50

5.3 Case Study 3
The economic costs and benefits of joining the EU
—— What are the characteristics of the EU as a single market
2. Countries must promote their food production techniques to enter the EU. However, they cannot
easily develop new technologies without an abundance of input from professors ( human capital ), new
infrastructure ( physical capital ), and land/woods ( natural resources ). Can you use the Aggregate Supply
/ Aggregate Demand model to show what will occur when a country decides to enter the EU in the short
run? (M5,03)

Review
1. 'A' is the correct answer because the euro is available in many countries.

2. In the short run, Point A will move to Point B.

Keywords : productivity, human capital, physical capital, natural resources

Fact
The European Union is a single market with three characteristics. Firstly, people in member countries can
work and travel freely in any member country, eliminating the need for work or business visas. Secondly,
the euro is the official currency of 19 out of 27 EU member countries, thus financial transactions can be
made easily within the EU. Thirdly, the EU bloc has signed an agreement amongst all member countries
to sell and trade goods and services without trade registration in the form of quotas and tariffs.

Despite these benefits, the costs of these conveniences are high. Countries must decide whether they
are willing to adopt the euro because when they do so, it implies they need to share monetary risks
together with the EU. The EU also regulates everything, and countries must promote their production
techniques ( productivity ) and standards across all industries. In the US, for example, most of the food
is not allowed to reach the EU market, such as peanuts, sugar, and corn, due to the EU's genetically
modified organism (GMO) and pesticide regulations.
Quick Quiz
1. Referring to the underlined sentence in the case study, which of the following function of the euro has
been highlighted? (Recall the 3 functions of money given in Module 3)
A. Medium of exchange B. Unit of account
C. Store of value D. Reserve deposit
Summary
• Heavy fuel tax limits European drivers from buying high-performing cars; therefore, smaller
cars are more prevalent in the EU than in other countries
• Most countries' behavior or buying habits are formed by local policy
• The European Central Bank (ECB) regulates the banking system in Europe to guarantee
economic growth at a steady pace. It also serves as a lender of last resort to banks in EU
countries (like the Federal Reserve in the United States)
• The EU is one of the largest trading blocs in the world. As there are no customs duties levied
on EU members, such as tariffs or visitor visa requirements, several countries want to join the
EU. However, the EU will only accept countries with advanced productivity and who can prove
their high potential for advancing economic growth in the EU.

51 52
 *Tips
External Resources (4) Here are some concepts that are relevant to Module 5 that you can also review:
• EU fiscal policy such as Tax Policy update;
If you are interested in learning more about European fuel prices and tax cut policies, you can refer to the
• EU monetary policy such as the impact after ECB raised its interest rates twice;
following:
• International trade policy such as the reduction of the customs tariff policy based on the food
Go to www.wsj.com shortage problem in the EU
• National account such as France GDP, the unemployment rate in Italy, and the index of consumer
Title of Article: Germany's Tax-Cut Inflation Cure price in Greece
• European economist and their contribution such as Philippe Aghion, Alberto Alesina, Elisabeth
Altmann-Gottheiner

(Not limited to the above only).

Here are few suggested sources to help you understand these European issues

• Option 1: Read more EU news in Economic aspect. The Economist https://www.economist.com/

europe

• Option 2: Follow EU strategies update through EU Commission https://ec.europa.eu/info/index_en

European Central Bank website https://www.ecb.europa.eu/home/html/index.en.html

• Option 3: Please feel free to check this economic contribution in oxford economics.
https://www.oxfordeconomics.com/vacancy/european-economist/

M5 QUIZ
The EU uses a trade agreement called the Customs Union. You can refer to the link below to learn more
about how the EU applied the Customs Union to grow its economy.
Complete all questions. Check your answers in the Answer Keys at the end of the module

Go to ec.europa.eu
1. Fiat money
Title of Article: EU Customs Union – unique in the world
A. is not backed by any precious commodity.
One of the conditions to enter the
B. can be exchanged for gold. EU is advanced productivity, and the
level of productivity are determined
C. is backed by gold but cannot be exchanged for it.
by the factors of economic growth.
D. can be backed by gold or silver. Keep this in mind as you choose
your answers.
2. Human capital per worker affects productivity because (M5,01)

A. having more machines per human allows workers to be more productive.

B. funds to pay salaries are necessary if firms are to attract productive workers.

C. the skill and knowledge levels of workers are positively related to their productivity.

D. replacing humans with machines increases the efficiency of production.

53 54
 3. If the Bank of Waterloo receives a €10,000 deposit and the reserve requirement is 10%, how much can
the bank loan out? (Assuming that the bank has met the legal reserve requirement before this deposit.) 9. If Zhen decided to invest more in the German economy
To answer Q9, you must use the
than previously, then the real interest rate of Germany would
A. €1,000 B. €9,000 loanable funds market model.
be expected to (M5,02&04)
However, if the question asks you to
C. €10,000 D. €11,000 predict the change in the nominal
A. fall and the equilibrium quantity of funds to increase.
interest rate, then you should apply
4. Italy Commerce bank has €900 billion in deposits and $20 billion in excess reserves. The reserve B. fall and the equilibrium quantity of funds to decrease. the money market model. Please
requirement is 10%. How much does Italy Commerce bank have in total reserves?
C. rise and the equilibrium quantity of funds to decrease. pay careful attention to the details
A. €110 billion B. €90 billion of each question.
D. rise and the equilibrium quantity of funds to increase.
C. €22 billion D. €2 billion
10. Tariffs and quotas on imports
5. Which is NOT a tool used by the ECB to control the euro supply?
A. result in higher domestic prices. B. promote trade between countries.
A. open market operations B. discount rate lending
C. do not necessarily affect domestic prices. D. are ways to fight inflation.
C. interest rates on bank reserves D. deposit insurance

6. ECB typically does NOT (M5,05) M5 Answer Keys 1–5 : A, C, B, A, D 6–10 : D, A, A, A, A

A. determine the quantity of fiat money in circulation.

B. help regulate a country's banking system. M5 Glossary

C. serve as a bank for banks.
C Central bank N Natural resources
D. serve as a commercial bank for individual depositors.
F Fiat money P Physical capital
7. Refer to the figure. When the money supply shifts from MS1 to MS2, at an interest rate of 3%,
households and firms will (M5,02) Fiscal policy Productivity

A. buy treasury bills. H Human capital R Reserve requirements

B. sell treasury bills. Question 7 figure

C. neither buy nor sell treasury bills. M5 Learning Targets

D. want to hold more money.
Answer the following questions and check the answer key once you are done. If you √ all the answers, it
You may not know what treasury bills are. However, this figure shows that as interest rates decrease, means you have mastered this module!
money will depreciate. Therefore, option A must be chosen to reduce the quantity of money. 1. What are the main determinants of productivity?

2. How do EU treasury securities work, and why do people value them?

8. If the ECB buys bonds in the secondary market (M5,02&04)
3. What type of monetary policy increases the aggregate demand curve?
A. the euro supply will increase.
4. How does the ECB use treasury securities to provide financing for government debt?
B. the euro supply will decrease. 5. What is the mandate of the ECB?
C. the euro supply will not be affected. 6. What are the differences between the real and nominal exchange rates?

D. the euro will appreciate. 7. What are the characteristics of the EU as a single market?

55 56
Module 6
Financial Literacy
your own funds to cover your entertainment needs. Here are the financial markets you can invest in to
This module helps you to: raise the funds you need.
• Identify the main functions of the financial market.

• Describe why it is important for the financial system to intermediate between buyers and sellers.

• Describe the main institutions in the financial market and the role that each of them play.

• List the factors that affect market efficiency.

One way of raising funds is through the bond market. A bond is a certificate of indebtedness that enables
6.1 Case Study 1 you to borrow directly from the public. However, because no official institution can prove that you are
able to repay your debt, you cannot qualify as a bond issuer.
How is money generated in a financial market? Another way to raise your entertainment funds is to join the stock market. Some stocks, such as dividend
—— Financial Institutes introduction stocks, provide you with a monthly payout. For example, Apple is a dividend stock that provides a regular
fixed bonus of $0.2 per share as monthly dividend.

Shareholders have access to different amounts of information. For example, people who hold Apple
stock for a long time usually know more about the trends of Apple's stock prices through Apple's
earnings reports. Because they have experience in estimating what kinds of earning reports can make
investors satisfied. Therefore, do not make the wrong selection by not gathering enough information;
otherwise, you will lose a lot.

Quick Quiz

Aside from raising funds through the bond market or stock market, you can also deposit your money in
Keywords : Financial markets, bond, stock, diversification, future value the bank at a 5 percent annual interest rate for three years. If you leave the annual interest in the bank to
earn even more interest, what do you think the future value of your 20,000 yuan will be?
Fact
1. What type of interest does the underlined phrase above refer to? (M3,03)
The basic purpose of financial markets is to match people who want money to spend now (buyers) with
A. compounded interest
people who want to save money over time (seller).
B. simple interest
Financial markets offer a wide variety of financial products targeted at people with various investment
and saving needs. These markets help people manage their assets and protect themselves against 2. Try and calculate the future value with 20,000 yuan using simple and compound interest (M6,04)
depreciation of their money value.
For simple interest:
Just as grocery stores, restaurants, and cafés act as a bridge between farmers and consumers, firms and
institutions mediate between savers and borrowers in a financial market (Karlan & Morduch, 2021).
For compounded interest:
Imagine that you've received 20,000 yuan as lucky money from your family. You want to purchase a PS5,
Bose speaker, or 4k screen, however, the lucky money you've received is not sufficient to buy these
products, and your parents are not willing to give you additional money. You hence decide to generate

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 3. Provides two ways that you may be able to reduce the risk of your investment. (Hint: diversification)
(M6,01) Summary

• This module introduces some financial systems that help students become more familiar with
the financial market.

Create • Once you start earning income, you will need to consider how you can manage your funds
and build an investment portfolio with the highest return.
Investment
Bank Deposit Invest Apple • Diversifying your investment can help you to lower your risk. Don't put all your eggs in one
Portfolio
basket.

Review • According to the Efficient-market hypothesis, financial markets process available information
1. A rationally, so the stock price of a business is always the best estimate of the value of that
business.
2. The future value (compound interest) is 23,152.5 yuan).

The future value (simple interest) is 23,000 yuan.

To conclude, 'Don't put all your eggs in one basket.' Risk can be reduced by placing a large number of M6 QUIZ
small bets. You should reduce risk through investment diversification.
Complete all questions. Check your answers in the Answer Keys at the end of the module

6.2 Case Study 2 1. In an informationally efficient capital market

A. active managers can generate abnormal profits.

Factors affecting the degree of Market Efficiency
B. security prices quickly reflect new information.
—— How to evaluate an efficient market?
Keywords : efficient market hypothesis C. investors react to all information releases rapidly.
In a highly efficient market, investors typically expect the current values (market prices) of stocks to reflect D. security prices reflect new information slowly.
their intrinsic values. For example, when you are thinking about purchasing a new car, you may expect to
have a 20% discount off a car selling for $10,000 because you read some reviews on the internet about 2. If we invest $75,000 today at a stated annual interest rate of 7% compounded quarterly, then the value
this car and you believe that the intrinsic value of the car is $8,000.A highly efficient market provides of this money in 6 years will be closest to: (M6,04)
information available to people to estimate a product's intrinsic value. When people invest, they normally
buy stocks in which they think the intrinsic value is greater than the market price, and they sell stocks in A. $112,555 B. $113,330
which they think the intrinsic value is lower than the market value. C. $113,733 D. $114,000
The degree of market efficiency is influenced by various factors:
3. The ability of insurance to spread risk is limited by
1. The greater the number of investors, analysts, and traders entering the market, the more efficient
the market is as small markets and firms can be easily controlled. A. risk aversion and moral hazard.

2. The more information available to investors, the less insider trading ¹² will occur and the more B. risk aversion and adverse selection.

efficient the market will be. C. moral hazard and adverse selection.

3. The higher the cost of information, analysis, and trading, the more inefficient the market will be. D. risk aversion only.

¹² Insider trading is the trading of a public company's stock or other securities (such as bonds or stock) based on material,
nonpublic information about the company.
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 4. According to the Efficient-markets hypothesis,
Learning outcomes for each module
A. change in stock prices are impossible to predict from public information.

B. Excessive diversification can reduce an investor's expected portfolio returns.

C. the stock market moves based on the changing 'animal spirits' of investors.
Module 1
D. actively managed mutual funds should give higher returns than index funds.
1 How does society manage its scarce resources?
5. Which of the following market regulation will most likely contribute to Market Efficiency? (M6,02) Economics helps individuals, business, and governments make decisions on how to use their
limited resources.
A. Restricting traders' ability to short sell.

B. Allowing unrestricted foreign investor trading. 2 What must be given up to acquire something else?
The opportunity cost is what must be given up to acquire something else.
C. Penalizing investors who trade with nonpublic information.

D. Making private information unavailable. 3 Which analysis considers questions involving cause and effect?
Positive analysis considers questions involving cause and effect.

M6 Answer Keys 4 What can shift the production possibilities curve (PPC) to the right?
Economic growth shifts PPC to the right.
1–5 : A, C, B, A, D
5 How does the production possibilities frontier (PPF) show opportunity costs?
In PPF, the absolute value of the slope shows the opportunity cost of producing goods on a vertical
M6 Glossary line.

6 How does comparative advantage result in trade benefits?

B Bond F Financial markets The ability to produce a product at a lower opportunity cost than a trading partner gives a producer

D Diversification Future value a comparative advantage in trade.

E Efficient markets hypothesis S Stock 7 How does the price adjust when the market is not at equilibrium?
When the going price is too high, there is a surplus.
When the going price is too low, there is a shortage.
M6 Learning Targets
8 Which factors can lead to a change in demand?
Income and macroeconomic conditions
Answer the following questions and check the answer key once you are done. If you √ all the answers, it
Prices of related goods
means you have mastered this module!
Buyers' expectations
1. What approaches can help you predict the stock value? Tastes and preferences
2. How can Market Efficiency be maintained? Population and demographics
Taxes and subsidies
3. What is the role of the financial system?
Exchange rates
4. How can we calculate the present value and the future value with different frequent compounding
interest?

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 9 Which factors can lead to a change in supply?
New production technology and automation
Changes in resource cost
Changes in profitability of alternative products
Entry and exit of sellers
Supply shocks
Changes in sellers' expectations
Changes in regulations, subsidies, and taxes on sellers
Module 2
1 What does the price elasticity of demand measure?
Price elasticity of demand measures how responsive the quantity demanded is to price changes.
2 How do we calculate the price elasticity of demand?
Price elasticity of demand is measured by the percentage change in quantity divided by the
percentage change in price.
3 What do cross-price elasticity and income elasticity measure?
Cross-price elasticity of demand measures how responsive quantity demanded is to changes in
the price of another product. Income elasticity of demand measures how responsive quantity
demanded is to changes in consumer income.
4 How does a change in price affect consumer surplus and producer surplus?
Lower prices increase the consumer surplus of existing customers and new customers.
Higher prices increase the producer surplus of existing sellers and new sellers.
5 What are the characteristics of the four market structures?
Perfect competition is a market structure with a very large number of sellers of a standardized
product.
Monopolistic competition is a market structure with many firms selling similar but differentiated
products.
An oligopoly is a market structure with a few dominant firms that are highly interdependent.
A monopoly is a market structure with high barriers to entry in which a single seller supplies a
product that has no close substitutes.
6 How can you identify perfect competition?
In perfect competition, each firm is a price taker.
In perfect competition, a large number of firms sells identical products and each firm loses the
ability to control prices.
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7 How does a firm maximize its profit in a market with perfect competition?
All firms maximize profits at the quantity where marginal revenue equals marginal cost.
8 How can public goods and common resources goods be distinguished?
Public goods are neither rival in consumption nor excludable. Common resources are rival in
consumption but not excludable.
Module 3
1 What do the aggregate supply (AS) and aggregate demand (AD) models tell us?
AD/AS models are the models that most economists use to explain short-run fluctuations in
economic activity in long-run trends.
The AD curve tells us the quantity of all goods and services demanded in the economy at any given
price level.
The AS curve tells us the total quantity of goods and services that firms produce and sell at any
given price level.
Because the price level does not affect the long-run determinants of real GDP, the long-run
aggregate-supply (LRAS) curve is vertical.
2 What factors can lead to shifts in the AS and AD curves?
The AD curve shifts due to changes in consumption, investment, government spending, and net
exports.
The LRAS and short-run aggregate supply (SRAS) curves shift due to changes in labor, capital,
national resources, and technology.
The SRAS curve also shifts due to changes in prices.
3 What are the effects of taxes and government price controls?
When a price ceiling is binding, it distorts the market and causes a shortage that persists.
When a price floor is binding, it distorts the market and causes a surplus that persists.
A tax on sellers reduces supply and creates a higher price for buyers, leading to a deadweight loss.
4 How do GDP and other indexes measure national income?
Real GDP is a measure of GDP using constant prices to adjust for inflation.
Nominal GDP is a measure of GDP using current prices that does not adjust for inflation.
The government measures nominal GDP directly by using prices and then estimates real GDP by
taking out the effects of inflation.
Real GDP per capita is real GDP per person, calculated as real GDP divided by population.
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 5 How is the inflation rate calculated?
6 What are the three roles of money?
As a unit of account, money provides a standard way of measuring prices.
As a medium of exchange, money is an asset that is widely used for purchasing other goods and
services.
As a store of value, money serves as an asset that people can use as a place to put their savings.
Module 4
1 When does a country become an importer or exporter of a good?
A country exports goods that it can produce at a relatively low opportunity cost, and imports goods
for which it would have a high opportunity cost for producing domestically.
2 How will free trade impact consumer surplus and producer surplus?
Consumer surplus in the exporting country will fall because fewer buyers will buy and at a higher
price.
However, producer surplus will rise in the exporting country, as sellers are able to sell more and at a
higher price.
Consumer surplus in the importing country will rise because more buyers will buy and at a lower
price.
However, producer surplus will fall in the importing country, as sellers are able to sell less and at a
lower price.
3 What are the reasons for why some countries impose trade restrictions?
Reasons can include protecting jobs, defending national security, helping infant industries,
preventing unfair competition, and responding to foreign trade restrictions.
4 What are the impacts of trade restrictions?
Tariffs placed on imported goods increase the domestic price, decreases the quantity imported,
and increases the quantity supplied domestically.
Quotas restrict the quantity of imported goods.
5 What benefits can be gained through international trade?
Trade results in more choice for consumers as they can purchase goods from more countries.
Trade results in an increased exchange of ideas, as free trade provides a means for exporting and
importing information, ideas, art, and different ways of doing things.
Trade increases competition, which leads to greater innovation and lower prices for consumers.
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6 What factors can shift the curves in the foreign exchange graph?
When foreigners want more/less domestic products.
When foreigners want to invest more/less in domestic products.
When locals want more/less foreign products.
When locals want to invest more/less in foreign products.
7 What are the differences between an open economy and a closed economy?
A closed economy is a hypothetical economy with no foreign trade.
An open economy is an economy with foreign trade.
Module 5
1 What are the main determinants of productivity?
Physical capital; Human capital; Technological progress; Natural resources
2 How do EU treasury securities work, and why do people value them?
When the ECB buys treasury securities, the seller receives new fiat money.
When the ECB sells treasury securities, the monetary base is decreased.
Open market operations first affect the amount of bank reserves, but over time this also impacts
the amount of cash held by the public.
3 What type of monetary policy increases the aggregate demand curve?
Expansionary monetary policy increase money supply to boost AD curve.
4 How does the European Central Bank (ECB) use treasury securities to provide financing for
government debt?
When ECB purchases treasury securities, this increases the money supply. Therefore, people can
take out cheap loans to develop their business. When people are able to develop their business,
they can make more money to pay taxes, and hence the government can receive more taxes to
reduce its debt.
5 What is the mandate of the ECB?
To control the money supply and supervises all the depository institutions within EU
6 What are the differences between real and nominal exchange rates?
The nominal exchange rate tells how much foreign currency can be exchanged for a unit of
domestic currency.
The real exchange rate tells how much the goods and services in the domestic country can be
exchanged for the goods and services in a foreign country.
7 What are the characteristics of the EU as a single market?
Free trade in goods and services; Mobility of labor; Free Movement of capital
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 Module 6 Reference

1 What approaches can help you predict the stock value? Dean, K. & Jonathan, Morduch. (2021). ECONOMICS: Improve Your World. Available from
Fundamental analysis; Technical analysis; Efficient-market hypothesis
https://www.mheducation.com/highered/product/economics-karlan-morduch/M9781260225310.html

2 How to maintain market efficiency?
Greater number of investors, lower cost of information, more information available.
3 What are the roles of the financial system?
Intermediating between savers and borrowers; providing liquidity, diversifying risk
4 How can we calculate the present value and the future value with different frequent compounding
interest
FERD ECONOMIC DATA Coinbase Bitcoin (CBBTCUSD) (2022, September 15).
Frankel, Jeffrey. (2015). The Plaza Accord, 30 Years Later. National Bureau of Economic Research.
Retrieved Sep 20, 2022
Michelle, F. (2021). Analysis: Tesla surpasses $1 trillion valuation after Hertz order. bbc.com. Retrieved July
13, 2022, from
https://www.bbc.com/news/business-59045100

Robert, H. F. (2007). THE ECONOMIC NATURALIST: Why Economics Explains Almost Everything. Basic
Books. Available from
rs = nominal interest rate
m=number of periods https://www.google.com.au/books/edition/The_Economic_Naturalist/MbPEvz16C38C?hl=en
N=number of years

Congratulations! You have now amassed a wide range of weaponry and defeated a number of monsters along
the way. You are now ready to take on the EEO preliminary competition.

The economic world is vast, and we have only discovered part of its territory.

If you have more resources or case studies that you would like to share with us,

please send them to economics@seedasdan.org.

Every contribution you make can help us discover more

about the wider world of economics.

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