SUGGESTED ANSWERS FOR PART 1

• Unit 1:
1. How does capitalism answer what question?
In capitalism, the what question is answered by consumers as they spend their dollars for the
goods and services that they most desire.
2. How does socialism answer how question?
In socialist economies, the central planners answer the how question. They determine how to
combine society’s inputs in order to produce outputs desired.
3. What is free market economy?
A free market economy is an economic system in which the market is supposed to be regulated
by the law of supply and demand.
Or
A free market economy is an economic system in which the market – that is the relation between
producers and consumers, buyers and sellers, investors and workers, management and labour- is
supposed to be regulated by the law of the supply and demand.
4. Can you tell us the definition of the term planned economy?
A planned economy is an economic system in which production and consumption quotas are
fixed beforehand.
Or
A planned economy is a system whereby the structure of the market is deliberately planned by
the state, in which production and consumption quotas are fixed beforehand, and where there is
no real competition between industrial or commercial organizations.
5. What is mixed economy?
A mixed economy is an economic system in which some goods and services are produced by the
government and some by private enterprise.
(Extra information: It lies between a command economy and a complete laissez-faire economy).

• Unit 2:
1. How is demand defined?
Demand is the quantity of a good that buyers wish to purchase at each conceivable price.
2. What is the definition of supply?
Supply is the quantity of a good that sellers wish to sell at each conceivable price.
3. How do supply and demand operate together?
As the price of the good goes down, the quantity demanded rises, and the quantity supplied falls.
As the price of the good goes up, the quantity demanded falls, and the quantity supplied rises.
4. What is an equilibrium price of a good?
 It is the price at which the quantity demanded and the quantity supplied meet.
Or
An equilibrium price of a good is a price of any good or service will find the level at which the
quantity demanded and the quantity supplied are balanced.

• Unit 3:
1. What is inflation?
Inflation is an economic condition in which prices for consumer goods increase and the value of
money or purchasing power decreases.
(Extra information: A rise in the general level of prices, and an increase in the money supply).
2. Can you tell me one cause of inflation?
( Ss can choose one in three causes listed below)
- The first cause of inflation may be excessive government spending.
- The second cause of inflation
occurs when the money supply increases faster than the supply of goods.
- Finally, if labour unions demand that wages of workers be increased to cover the high cost of
living, industry will meet this demand and add other costs of production on to the customers
3. How is inflation measured in Britain and in the US?
Inflation is measured by the retail price index (RPI) in Britain and the consumer price index
(CPI) in the US.
( Extra information: These measure the cost of a “basket” of goods and services, including
food, clothing, housing, fuel, transport and medical care.)
4. What is moderate inflation?
Single-digit inflation is usually described by economists as moderate inflation.
5. What is galloping inflation?
Double or triple-digit inflation, (which some countries have survived for quite long periods), is
known as galloping inflation.)
6. What is hyperinflation?
Inflation of four or more digits is known as hyperinflation (Eg. in Germany in the early 1920s,
and Argentina in the early 1980s)
• Unit 4
1. What are direct taxes?
A direct tax is imposed on a person, a household, or an enterprise with the expectation that that
taxpayer will bear the tax burden and not be able to recover it by passing it on to someone else.
Or
It is a tax ( which is) imposed on people’s income and companies’ profits.
 2. What are indirect taxes?
Indirect taxes are taxes imposed on consumers of goods and services, or on enterprises with the
expectation that the taxes will be passed on to customers in the form of higher prices.
3. Why does the government use different kinds of taxes and vary the tax rates?
To distribute the tax burden among individuals or classes of the population (Extra information:
involved in taxable activities, such as business) or to redistribute resources between individuals
or classes in the population.
4. What is the role of income tax?
Raise revenue and effect the distribution of income among income categories.
(Extra information: In industrial market economies, the individual income tax, the tax on
persons or households, plays an important role in raising revenue and in effecting the
distribution of income among income categories.)
5. What is the function of indirect taxes?
All indirect taxes have the function of raising revenue and diverting purchasing power from
households and enterprises to the state.

• Unit 5
1. What are central banks?
They are the banks that are owned by the public/ that are public owned. They manage a state’
currency, money supply and interest rates.
2. What is a bank run?
It is a sort, kind of panic, a situation in which investors or simply customers of the banks run to
the bank and take their money out (Extra information: because they realize or they think that
their bank is not trustworthy any more.)
3. How can the central bank avoid the bank run?
The central bank has to make sure they have a sufficient liquidity ratio if they want to avoid it.
4. How is a bank governor nominated?
By the prime minister subject to the approval of the National Assembly (Parliament).

• Unit 6
1. In general terms, what is the purpose of accounting?
It provides a financial picture of a business firm.
2. What are the two types of records that are prepared by most businesses?
They are income statement and balance sheet.
3. What is an income statement?
It is one of the financial statements of a company and shows the company’s revenues and
expenses during a particular period.
 4. What is the definition of ‘Return on Investment-ROI’?
It is a performance measure used to evaluate the efficiency of an investment or to compare the
efficiency of a number of different investments.

• Unit 7:
1. What is credit card?
Credit card is a small plastic card issued by a bank, business, etc., allowing the holders to purchase
goods or services on credit.
2. What is the most important benefit of credit cards?
They permit people to make large purchases without paying in advance.

• Unit 8:
1. What is international trade?
The exchange of goods and services in the world, or global market is known as international trade.
2. Name one benefit of international trade.
( Ss can choose one in three)
- It makes scarce goods available to nations that need or desire them.
- It allows a nation to specialize in production of those goods for which it is particularly suited.
- The third benefit of international trade is its political effects.
3. What resources help determine which products a nation will specialize in?
Natural, human, and technical resources help determine which products a nation will specialize in.
4. According to the theory of comparative advantage, what should a nation concentrate on?
A nation ought to concentrate on the products that it can produce most efficiently and profitably.
5. What does specialization often result in?
It results in increased output, decreased costs, and a higher national standard of living.