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Each Question is worth two marks. Please indicate whetherthe statements below are true or false. 1....

Each Question is worth two marks. Please indicate whetherthe statements below are true or false.

1. The elasticity of demand measures how responsive quantity demanded is to changes in price.

2. Due to interdependence, oligopolistsface a kinked demand curve  

3. Net exports is equal to GDP – C - I - G

4. At the potential level of output, there is only frictional and structural unemployment

5. In an economy operating above full employment, inflation is likely to be a problem

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Answer #1

(1) The statement is true as the elasticity of demand is indeed a measure of how responsive quantity demanded is to changes in price. It is calculated as % change in quantity / % change in price

(2) The statement is true as oligopolist face a kinked demand curve. This is because firms face different effects of change in prices as rival firms may react differently to price increase and decrease

(3) The statement is true as using the expenditure method, GDP = C + I + G + NX

=> NX =  GDP – C - I - G

(4) The statement is true as at the potential level of output, unemployment is at its natural level which means that the cyclical unemployment is 0

(5)  The statement is true as if the economy is operating at above the full employment level, the unemployment rate is lower than natural rate and there will be an increase in prices due to the overheating of the economy.

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