Level I Economics practice questions

Per capita real GDP growth is the ratio of total real GDP growth to population growth minus 1:

• Option B (2.30%): Uses the approximation $g_{pc} \approx g_Y - g_{pop} = 3.5\% - 1.2\% = 2.30\%$, ignoring compounding.
• Option C (4.70%): Adds rates $3.5\% + 1.2\%$, which is conceptually wrong (population growth reduces per capita growth).

For GBP/USD, the dealer buys GBP (base) at the bid. The client selling GBP receives the bid (1.2970 USD/GBP).

• Option A uses the ask (1.2990), which applies when the client buys GBP.
• Option C uses the midrate: $\frac{1.2970 + 1.2990}{2} = 1.2980$; $1{,}000{,}000 \times 1.2980 = 1{,}298{,}000$.

Set Qd = Qs and solve for P, then compute Q.

Equate demand and supply:

Substitute back to find Q (use either curve):

(Checking with supply: $Q = 20 + 3(16) = 20 + 48 = 68$ matches.)

Therefore, equilibrium is P = 16 and Q = 68.

• Option A makes an arithmetic slip on the left side: $100 - 20 = 70$ giving $70 = 5P\Rightarrow P = 14$ and then $Q = 100 - 2(14) = 72$.
• Option B divides the correct difference 80 by the wrong slope difference 4 instead of 5: $\frac{80}{4} = 20\Rightarrow P = 20$, then $Q = 100 - 2(20) = 60$.

In perfect competition, the short-run shutdown rule is to produce if $P \geq AVC$. Here, $P = 12$ and $AVC = 10$, so the firm should produce, even though $P < ATC$, and incur a loss.

• Option B is wrong because the shutdown comparison is to AVC, not ATC; since $P > AVC$, the firm should not shut down.
• Option C is wrong because $P = 12 < ATC = 14$; price does not exceed average total cost.

For a small country, a binding quota set to match the import reduction from a tariff raises the domestic price by the same amount as the tariff. The key difference is who captures the rents.

• Option A is wrong: With free license allocation, government revenue under the quota is zero, whereas the tariff raises government revenue.
• Option B is wrong: With the same import reduction, the deadweight loss is the same; the difference lies in rent distribution, not efficiency.

Correct: Under the quota with free domestic licenses, quota rents accrue to domestic license holders; under the tariff, the government collects tariff revenue.

Monetary policy decisions can be made and enacted quickly (short inside lags) but take time to work through the economy (longer outside lags). Fiscal policy usually faces long inside lags (planning/legislation) but, once implemented, can affect demand more directly (shorter outside lags).

• Option B is wrong because fiscal policy generally has longer inside lags, not shorter.
• Option C is wrong because central banks do not require legislative approval for routine policy rate changes, so monetary inside lags are not typically long.

Potential growth is the compounded product of productivity and hours growth minus 1:

• Option A (7.00%): Simply adds rates ($4.0\% + 3.0\%$), ignoring the cross term from compounding.
• Option C (4.00%): Ignores growth in aggregate hours, using productivity growth only.

Under CIP, the no-arbitrage forward premium/discount equals the nominal interest rate differential. Therefore, the currency with the lower interest rate trades at a forward premium relative to the higher-rate currency.

• Option B reverses the direction: the higher-rate currency trades at a forward discount, not a premium, under CIP.
• Option C confuses CIP with PPP/UIP: the CIP relation ties the forward premium to interest rates, not inflation.

First find equilibrium by setting demand equal to supply:

Price at equilibrium:

Choke price (where Q = 0) on demand is 50. Consumer surplus (triangle under demand above $P^*$):

• Option A forgets the one-half for the triangle: $(50 - 23.3333) \times 53.3333 = 26.6667 \times 53.3333 = 1{,}422.22$.
• Option B incorrectly uses the demand Q-intercept (100) instead of $Q^*$: $\tfrac{1}{2} \times (50 - 23.3333) \times 100 = 1333.33$.

Under perfect competition, price equals marginal cost.

For a linear demand $P = 100 - Q$, marginal revenue is $MR = 100 - 2Q$. Set $MR = MC$ for monopoly output.

Deadweight loss is the triangle between $Q_m$ and $Q_c$ with height $P_m - MC$:

• Option B calculates the rectangle area instead of the triangle: $(Q_c - Q_m)\times(P_m - MC) = 30 \times 30 = 900$.
• Option C incorrectly uses $P_c - MC$ as the height: $\tfrac{1}{2} \times 30 \times (40 - 40) = 0$.