Nov 12 2009

NEW! Exam Questions of the Week

Published by at 8:00 pm under Exam Questions of the Week

Always looking for new ways to help students and teachers better grasp and learn economics, I have decided to begin a new feature on this blog. Once a week, I will post sample examination questions similar to those found on both the Advanced Placement and the International Baccalaureate exams. The purpose is to provide teachers and students with original questions that they can use for discussion in their own classes or as warm-up activities to begin a class.

The sections of the syllabus covered will vary each week, and will most likely reflect the topics I’m currently covering in my four economics classes. Since I teach both year 1 and year 2 IB Economics, AP Macro and AP Micro, the questions could cover any and all sections of the IB and AP syllabi. I will make it clear which section each question covers, as well as whether it is an IB style or AP style question.

So, without further ado, your first “Exam Questions of the Week”

IB Question of the week: Unit 4 – International Economics

Explain why a country’s large current account deficit puts downward pressure on its exchange rate and and why this may be inflationary for the country.

AP Question of the week: Unit 2.2 – Elasticities

Assume that hamburgers and french fries are complementary goods. The government decides to begin taxing the production of beef, an input in the production of hamburgers.

For each of the following markets, draw a supply and demand diagram showing the effect of a tax on beef producers.

  1. The beef market
  2. The hamburger market
  3. the French fry market

Assume that the demand for hamburgers inelastic in the short-run. How will the tax on beef affect the revenues of hamburger producers.

In the long-run demand for hamburgers is elastic. Explain why this may be.


About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

5 responses so far

5 Responses to “NEW! Exam Questions of the Week”

  1. Andyon 14 Nov 2009 at 1:46 pm

    Is it necessarily true that a current account deficit puts downward pressure on the exchange rate? What if financial flows are driving the deficit?

  2. Jason Welkeron 15 Nov 2009 at 3:24 am

    Andy,

    I think you're confusing the financial account of the balance of payments (sometimes referred to as the capital account) with the current account. Current account refers to the balance of trade in goods and services. Financial flows are measured in the financial (capital) account.

    Jason

  3. Andyon 15 Nov 2009 at 8:13 am

    What I meant is that suppose a country's current account deficit is (mainly) driven by financial asset purchases (a financial account surplus) rather than the causation being from imports which then results in the financial account surplus.

    In the latter case (which is usually empirically relevant), we might expect the exchange rate to depreciate so that foreigners will hold domestic assets, but particularly in the former case it is not a logical necessity, is it?

    Hopefully that makes sense. I think it's clear what the question is going for, I may just be nitpicking to try to make sure of my own understanding.

    Thanks…

  4. Jason Welkeron 15 Nov 2009 at 6:16 pm

    Andy, I see what you're saying. The question, however, asks specifically about the current account deficit. I agree that a financial account surplus would put upward pressure on a country's exchange rate, and a current account deficit is by definition countered by a financial account surplus. But this question asks about the deficit in the current account.

    In my classes, we teach that a country's demand for imports requires the conversion of its currency on foreign exchange markets for other countries' currencies. In the forex market, supply of the importing nation's currency increases while demand for exporting nations' currencies increases. Thus the downward pressure on the importing nation's currency.

    If the question were asking about the effect of a movement towards surplus in the financial account, then the explanation would involve increasing demand for the nation's currency, thus an appreciation. It's the other side of the BoP however, in the case of the above question.

    Thanks again!

  5. Mike Fladlienon 16 Nov 2009 at 7:58 pm

    I posted this excellent question on the CEE site, Teaching AP Economics. I look forward to more questions and answers.