The primary function of an economic system is to
Economic systems exist to address the fundamental problem of scarcity by deciding what, how, and for whom to produce, ensuring efficient distribution of limited resources among competing uses to meet societal needs.
A free market economy is characterized by
In a free market, prices act as signals guiding resource allocation through voluntary exchanges, where supply and demand interact freely without government intervention to determine equilibrium.
An increase in the price of a good will lead to
A price change causes a movement along the existing demand curve, as consumers adjust quantity demanded in response to the new price, following the law of demand (higher price, lower quantity demanded).
A fall in the cost of raw materials will cause the supply curve to
Lower input costs reduce production expenses, incentivizing firms to supply more at each price level, shifting the supply curve rightward and potentially lowering equilibrium prices.
Income elasticity of demand measures the responsiveness of demand to a change in
Income elasticity is calculated as the percentage change in quantity demanded divided by the percentage change in income, indicating whether goods are normal (positive), inferior (negative), or necessities/luxuries.
If income elasticity of demand is positive, the good is likely
Positive income elasticity signifies a normal good, where demand rises with income; if greater than 1, it's a luxury; between 0 and 1, a necessity; contrasts with inferior goods where demand falls as income rises.
A firm’s shutdown point occurs when
At the shutdown point in the short run, if price falls below average variable cost, the firm cannot cover variable expenses and should halt production to minimize losses to fixed costs only.
Which of the following is a non-renewable resource?
Petroleum is a fossil fuel formed over millions of years, depleted faster than replenished, unlike renewable sources like water cycles, solar power, or sustainably managed timber.
The fixed cost of production includes
Fixed costs remain constant regardless of output level, such as rent for premises, which must be paid even if production is zero; variable costs like wages, materials, and utilities fluctuate with activity.
In an oligopolistic market, firms often engage in
Oligopolies feature few interdependent firms that often follow price leadership or tacit collusion, resulting in uniform pricing to avoid destructive price wars and maintain stable profits.
Stagflation is a situation where there is
Stagflation combines stagnant economic growth with high inflation and unemployment, challenging traditional Keynesian policies as demand-side stimuli could worsen inflation without reducing joblessness.
Which of the following is a monetary policy tool?
Central banks adjust interest rates to influence borrowing, spending, and investment; raising rates cools inflation, lowering them stimulates growth, as part of monetary policy controlling money supply.
The capital account in the balance of payments records
The capital account tracks cross-border investments like portfolio and direct investments, loans, and asset transfers, reflecting financial flows that affect a country's net foreign assets.
A trade deficit occurs when
A trade deficit in the current account arises when the value of imports surpasses exports, indicating higher domestic consumption of foreign goods and potential pressure on currency reserves.
Appreciation of a currency will
Currency appreciation increases its value relative to others, lowering the domestic price of foreign goods and making imports more affordable, but rendering exports less competitive abroad.
The smallest component of government revenue in developing countries is often
In developing economies, fees and charges (e.g., licenses, fines) form a minor revenue source compared to taxes, grants from donors, or loans, due to limited administrative capacity for broader collections.
A specific tax is one where
Specific taxes impose a constant monetary amount per unit of the good (e.g., $1 per liter of fuel), unlike ad valorem taxes which are percentage-based, making them simpler but less responsive to value changes.
A disadvantage of indirect taxes is that they
Indirect taxes like sales tax burden lower-income groups disproportionately as they spend a larger share of income on taxed consumption, exacerbating inequality compared to progressive direct taxes.
The law of variable proportions applies when
Also known as the law of diminishing returns, it describes how adding more of one variable input (e.g., labor) to fixed inputs (e.g., land) eventually yields progressively smaller output increments.
A monopsony is a market with
Monopsony features one buyer facing many sellers, granting the buyer power to suppress prices or wages, analogous to a monopoly but on the demand side, common in labor markets like company towns.
Gross National Product (GNP) differs from GDP because it includes
GNP measures total income earned by a country's residents, including net factor income from abroad (e.g., profits from foreign investments), while GDP focuses solely on domestic territorial production.
Structural unemployment is caused by
Structural unemployment results from mismatches between workers' skills and job requirements, often due to technological advancements or industry shifts, requiring retraining rather than cyclical recovery.
The marginal efficiency of capital refers to
MEC, per Keynes, is the expected rate of return on an additional capital investment, influencing firms' decisions to invest when it exceeds the interest rate, driving capital accumulation.
A surplus budget occurs when
A budget surplus arises when government revenues (e.g., taxes) surpass expenditures, allowing debt repayment or savings, contrasting with deficits that require borrowing.
The banker to the government is the
The central bank manages government accounts, handles public debt, acts as fiscal agent, and conducts monetary policy, serving as the primary financial intermediary for the state.
The liquidity preference theory is associated with
Keynes' liquidity preference explains money demand for transactions, precautionary, and speculative motives, determining interest rates as the price equilibrating money supply and demand.
A flexible exchange rate is determined by
Floating or flexible rates fluctuate based on supply and demand in forex markets, influenced by trade balances, interest differentials, and speculation, without central bank pegging.
An increase in public debt may result in
Rising public debt often necessitates future tax hikes or spending cuts to service interest and principal, crowding out private investment and potentially slowing long-term growth.
A key indicator of economic underdevelopment is
Low life expectancy reflects poor healthcare, nutrition, and living standards prevalent in underdeveloped economies, contrasting with higher indicators in advanced nations.
The main purpose of the African Development Bank (AfDB) is to
The AfDB provides loans, grants, and technical assistance for infrastructure, agriculture, and social projects in Africa, aiming to reduce poverty and foster sustainable economic growth.
An embargo is a
An embargo prohibits all trade in specific goods or with certain countries, often for political reasons like sanctions, differing from tariffs or quotas which allow limited trade.
The law of diminishing returns states that as more of a variable input is added
Beyond optimal input levels, additional units yield progressively less output due to overcrowding or inefficiency, raising marginal costs and signaling the need for scale adjustments.
A bilateral monopoly involves
Bilateral monopoly pits a monopolistic seller against a monopsonistic buyer, leading to indeterminate outcomes resolved through bargaining, common in labor markets with unions and single employers.
Dynamic pricing is used to
Dynamic pricing, or surge pricing, varies charges in real-time according to demand fluctuations, supply constraints, or consumer behavior, maximizing revenue as in airlines or ride-sharing.
A firm’s total profit is calculated as
Total economic profit equals total revenue from sales minus total costs (fixed plus variable), indicating overall efficiency; zero profit covers normal returns in competitive long-run equilibrium.
A decrease in the retirement age may
Lowering the retirement age encourages older workers to exit the labor force earlier, creating vacancies for younger entrants and potentially alleviating youth unemployment through generational turnover.
An example of a final good is
Final goods like bread are consumed directly by end-users, valued in GDP at market price; intermediate goods like flour or wheat are inputs in production, avoided double-counting.
The principle of economies of scale implies that
Economies of scale occur as firms expand, spreading fixed costs, gaining bulk discounts, and specializing, lowering average costs per unit and enabling competitive pricing or higher margins.
A fall in the interest rate will likely
Lower interest rates reduce borrowing costs, encouraging businesses and consumers to invest in capital projects or durable goods, stimulating aggregate demand and economic expansion.
The Gini Coefficient measures
The Gini index quantifies income or wealth distribution inequality on a 0-1 scale (0 perfect equality, 1 perfect inequality), aiding policymakers in assessing and addressing disparities.
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