CAF2-Intorduction to Economics and Finance_Questionbank

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2015

INTRODUCTION TO

ECONOMICS AND FINANCE

QUESTION BANK


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Question

Bank I C A P

PIntroduction to

economics and finance


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© Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

Second edition published byEmile Woolf LimitedBracknell Enterprise & Innovation HubOcean House, 12th Floor, The RingBracknell, Berkshire, RG12 1AX United KingdomEmail: [email protected]

© Emile Woolf International, January 2015

All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any form or by any means, electronic, mechanical, photocopying,recording, scanning or otherwise, without the prior permission in writing of Emile WoolfPublishing Limited, or as expressly permitted by law, or under the terms agreed with theappropriate reprographics rights organisation.

You must not circulate this book in any other binding or cover and you must impose thesame condition on any acquirer.

NoticeEmile Woolf International has made every effort to ensure that at the time of writing thecontents of this study text are accurate, but neither Emile Woolf International nor its directorsor employees shall be under any liability whatsoever for any inaccurate or misleadinginformation this work could contain.


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© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

Certificate in Accounting and FinanceIntroduction to economics and finance

CContents

Page

Question and Answers Index v

Questions

Section A Multiple choice questions 1

Section B Objective test and long-form questions 25

Answers

Section C Multiple choice answers 55

Section B Objective test and long-form answers 65


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Introduction to economics and finance

© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan


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© Emile Woolf International v The Institute of Chartered Accountants of Pakistan


IIndex to Objective test and

long-form questions and

answers

QUESTION

PAGE

ANSWER

PAGE

CHAPTER 1 – ECONOMIC CONCEPTS

1.1 FACTORS OF DEMAND 25 66

1.2 PRODUCTION POSSIBILITY CURVE 25 67

1.3 ECONOMIC GROWTH 25 67

1.4 ISLAMIC ECONOMIC SYSTEM 27 68

CHAPTER 2 - MICROECONOMICS

2.1 TYPES OF GOODS 27 69

2.2 QUANTUM OF SUPPLY OF A PRODUCT 27 69

2.3 MOVEMENT 27 70

2.4 A MARKET ECONOMY 27 71

CHAPTER 3 – DEMAND AND SUPPLY: ELASTICITIES

3.1 ELASTICITY OF DEMAND 27 73

3.2 ELASTICITY OF DEMAND 2 27 74

3.3 ELASTICITY OF DEMAND 3 28 75

3.4 CALCULATE PEDS 28 76

3.5 CONCEPTS OF DEMAND 28 76


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QUESTION

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3.6 COFFEE MARKET 28 78

3.7

COMPETITIVE GOODS AND

COMPLEMENTARY GOODS 29 79

3.8 PRICE ELASTICITY OF SUPPLY 29 81

3.9 CROSS ELASTICITY OF DEMAND 29 81

3.10 PRICE ELASTICITY OF DEMAND 29 82

3.11 TOTAL EXPENDITURE METHOD 29 82

3.12PROPORTIONATE OR PERCENTAGEMETHOD

29 82

3.13 GEOMETRICAL METHOD 29 83

3.14NUMERICAL EXERCISE: PRICEELASTICITY OF DEMAND

29 85

3.15IMPORTANCE OF PRICE ELASTICITY OFDEMAND

30 85

CHAPTER 4 – UTILITY ANALYSIS

4.1 CONSUMER’S EQUILIBRIUM 30 87

4.2 INDIFFERENCE CURVES 30 88

4.3 CONCEPTS 30 89

4.4 PRICE EFFECT 31 90

4.5 INCOME EFFECT 31 91

4.6 SUBSTITUTION EFFECT 31 92

4.7 LAW OF DIMINISHING UTILITY 31 92

4.8 INDIFFERENCE CURVES 1 31 93

4.9 INDIFFERENCE CURVES 2 31 94

4.10 MARGINAL RATE OF SUBSTITUTION 31 96

CHAPTER 5 – COSTS, REVENUES AND FIRMS

5.1 MONOPOLIST PROFIT 32 98

5.2 PERFECT COMPETITION 32 99

5.3 INCREASING RETURNS 32 100


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Index to questions and answers

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QUESTION

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5.4 LARGE FIRMS 32 100

5.5 THE SCALE OF PRODUCTION 32 102

5.6 MONOPOLY AND COMPETITION 34 103

5.7 PROFIT MAXIMISATION AND DEMAND ANALYSIS

35 104

5.8 REVENUES AND COSTS 36 105

5.9 COSTS AND REVENUES 36 106

5.10 TYPES OF COSTS 36 107

5.11 MONOPOLY SETUP 36 108

5.12 CONSUMPTION GOODS 36 108

5.13 EQUILIBRIUM OF THE FIRM 37 109

5.14 MARKET FUNCTIONING 37 110

5.15 FREE FORCES 37 111

5.16 PRICE OUTPUT DETERMINATION 37 112

5.17OLIGOPOLY AND DUOPOLY:DIFFERENCE 37 113

5.18 PRICE CARTELS AND COLLUSION 37 113

5.19 PRICE LEADERSHIP 37 114

5.20 KINKED DEMAND CURVE 37 114

5.21 NON-PRICE COMPETITION 37 114

CHAPTER 6 – MACROECONOMICS INTRODUCTION

6.1 NATIONAL INCOME 38 114

6.2 MEASURING NATIONAL INCOME 38 115

6.3 CIRCULAR FLOW OF INCOME 38 117

6.4 INJECTIONS AND WITHDRAWALS 38 118

6.5 AGGREGATE SUPPLY: SHORT RUN 38 119

6.6 AGGREGATE SUPPLY: LONG RUN 38 120

6.7 AGGREGATE DEMAND 39 120


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QUESTION

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6.8MACROECONOMIC EQUILIBRIUM:RECESSION - KEYNESIAN

39 122

6.9 MACROECONOMIC EQUILIBRIUM:INFLATIONARY GAP

39 123

6.10 DEFLATIONARY GAP 39 124

6.11 CALCULATION OF GDP 1 39 126




CHAPTER 7 – CONSUMPTION, SAVINGS AND INVESTMENT

7.1 CIRCULAR FLOW OF INCOME 41 130

7.2 INVESTMENT AND MEC 42 131

7.3 CONSUMPTION FUNCTION 42 132

7.4 PRIVATE INVESTMENT 42 133

CHAPTER 8 – MULTIPLIER AND ACCELERATOR

8.1 MULTIPLIER 43 134

8.2 MULTIPLIER 1 43 134

8.3 MULTIPLIER 2 43 135

8.4 ACCELERATOR QUESTION 44 136

CHAPTER 9 – MONEY

9.1 THE MONEY SUPPLY 45 138

9.2 MONEY SUPPLY AND QUANTITYTHEORY

45 139

9.3 IMPORTANT FUNCTIONS 46 141

9.4 UNEMPLOYMENT 46 142

9.5 PHILLIPS CURVE 46 143

9.6 LIQUID FORM 46 144

9.7 MONEY FUNCTIONS 46 145


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Index to questions and answers

© Emile Woolf International ix The Institute of Chartered Accountants of Pakistan

QUESTION

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CHAPTER 10 – GROWTH AND TAXES

10.1 INDIRECT TAXES 46 146

10.2 MACROECONOMIC POLICY 46 146

10.3 DIRECT AND INDIRECT TAXATION 47 147

10.4 TRADE CYCLE 47 150

10.5 MIXED ECONOMY 48 151

10.6 GROWTH RECESSION INDICATORS 48 152

10.7 ECONOMIC POLICY OBJECTIVES 48 153

10.8 AGGREGATE DEMAND AND AGGREGATESUPPLY

48 154

CHAPTER 11 – MONETARY POLICY

11.1 FINANCIAL INTERMEDIATION 48 155

11.2 THE CENTRAL BANK 48 155

11.3 MONEY MARKETS 48 157

11.4 INTEREST RATE RISE 49 157

11.5 TYPES OF BANKS 49 157

11.6 CENTRAL BANKS 49 158

11.7 MONETARY POLICY 1 49 159

11.8 MONETARY POLICY 2 49 160

11.9 MONETARY AND FISCAL POLICY 49 161

CHAPTER 12 – CREDIT

12.1 CREDIT 50 161

12.2 BANKS 50 162

12.3COMMERCIAL BANKS AND CREDITCREATION

50 163

CHAPTER 13 – BALANCE OF PAYMENTS AND TRADE

13.1 A BALANCE OF PAYMENTS DEFICIT 51 165

13.2 BALANCE OF PAYMENT AND BALANCEOF TRADE 51 166


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© Emile Woolf International x The Institute of Chartered Accountants of Pakistan

QUESTION

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13.3 BALANCE OF PAYMENTS 51 167

13.4 DISEQUILIBRIUM 51 167

13.5 BALANCE OF PAYMENTS: COMPONENTS 51 168

13.6 CURRENT ACCOUNT DEFICIT CAUSES 51 169

13.7CURRENT ACCOUNT DEFICITNONMONETARY MEASURES

52 169

13.8CURRENT ACCOUNT DEFICITMONETARY MEASURES

52 170

13.9 OPEN MARKET OPERATIONS 52 171

13.10 CHANGE IN EXCHANGE RATES 52 171

CHAPTER 14 – FINANCIAL MARKETS

14.1 USE OF MONEY AND CAPITAL MARKETS 52 171

14.2 DERIVATIVES 52 172

14.3 CAPITAL MARKET 53 173

14.4 CAPITAL MARKET INSTRUMENTS 53 174


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© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan


S E C

T I O N

AMultiple choice questions


1 Which of the following is not a factor of production?

A Land

B Labour

C Money

D Entrepreneurship

2 Which of the following is not an economic resource?

A Air

B Water

C Sulphuric acid

C Books

3

Which of the following concepts is NOT illustrated by the Production Possibility

Curve?

A Efficiency

B Opportunity cost

C Equity

D Trade-off

4 Which of the following are regarded as withdrawals from the circular flow of income?

A Saving and taxation

B Export and import

C Investment and saving


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5 The curvature of the Production Possibility Curve is due to:

A change in opportunity cost

B increase in resources

C decrease in demand

D decrease in supply

6

Which one of the following is a basic economic problem?

A Unlimited wants and scarce resources

B Lower incomes and higher indirect taxes

C Unemployment and inflation

D Recession


7 All of the following are determinants of supply except:

A price

B income level

C level of technology

D objectives of the firms

8 The demand curve slopes downward because of:

A consumer indifference

B elasticity of demand

C inelastic demand

D law of diminishing marginal utility

9 The supply curve of a factor for a firm that is in perfect competition in the input marketis:

A elastic

B inelastic

C perfectly elastic

D perfectly inelastic

10 Which ONE of the following will cause the demand curve for a good to move to theright (outwards from the origin)?

A A decrease in the costs of producing the good

B A fall in the price of the good

C An increase in the price of a complementary good

D An increase in the price of a close substitute good


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Question bank: Multiple choice questions


11 When only a small proportion of a consumer's income is spent on a good,

A the demand for the good will be highly price elastic

B the good is described as 'inferior'

C a rise in the price of the good will strongly encourage a search for substitutes

D the demand for the good will be price inelastic

12

When the price of a good is held above the equilibrium price, the result will be

A excess demand

B a shortage of the good

C a surplus of the good

D an increase in demand

13

The demand for and supply of a good are in equilibrium. An indirect tax is levied on

the good. Which one of the following will show the new equilibrium? A A shift in the supply curve to the right

B A shift in the demand curve to the right

C A shift in the supply curve to the left

D A shift in the demand curve to the left

14

A shift to the right in the supply curve of a good, the demand remaining unchanged,

will reduce its price to a greater degree

A the more elastic the demand curve

B the less elastic the demand curveC the nearer the elasticity of demand to unity

D the more elastic the supply curve


15 Which of the following products is likely to have the lowest price elasticity of demand?

A Salt

B Cars

C Houses

D Apples

16 Which statement is true of a curve with a constant slope?

A It is a straight line

B It is non linear

C It runs parallel to Y-axis

D It runs parallel to X-axis


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17 Production and employment in which of the following industries would be leastaffected by recession?

A Sugar

B Steel

C GarmentsD Vehicles

18 If the market price of a product increases from Rs. 35 to Rs. 40 and in response, thequantity demanded decreases from 1400 units to 1200 units, the value of its priceelasticity of demand is:

A 0.9

B 1

C 1.1

D 1.2

19 Which of the following is NOT a method for the measurement of price elasticity ofdemand?

A Total outlay

B Total savings

C Point method

D Arc method

20

If the price of a good fell by 10% and, as a result, total expenditure on the good FELL

by 10%, the demand for the good would be described as A perfectly inelastic

B perfectly elastic

C unitary elastic

D elastic

21

Which one of the following statements about the elasticity of supply is not true?

A It tends to vary with time.

B It is a measure of the responsiveness of supply to changes in price.

C It is a measure of changes in supply due to greater efficiency.

D It tends to be higher for manufactured goods than for primary products.

22 If the demand for a good is price inelastic, which ONE of the following statements is

correct?

A If the price of the good rises, the total revenue earned by the producerincreases.

B If the price of the good rises, the total revenue earned by the producer falls.

C If the price of the good falls, the total revenue earned by the producer increases.

D If the price of the good falls, the total revenue earned by the producer isunaffected.


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23 An inferior good is one which has an income elasticity of demand that is

A positive but less than unity

B negative

C unitary

D zero

24

A business, currently selling 10,000 units of its product per month, plans to reduce

the retail price from £1 to £0.90. It knows from previous experience that the priceelasticity of demand for this product is -1.5.

Assuming no other changes, the sales which the business can now expect will be

A 8,500 units

B 9,000 units

C 11,000 units

D 11,500 units

25

If the demand for a good is price elastic, a fall in price will lead to

(i) a rise in sales

(ii) a fall in sales

(iii) a rise in total expenditure on the good

(iv) a fall in total expenditure on the good

Which of the above are correct?

A (i) and (iii) only

B (i) and (iv) only

C (ii) and (iii) only

D (ii) and (iv) only

26 The price elasticity of supply means the

A change in supply divided by price

B responsiveness of the quantity supplied to a change in price

C responsiveness of the quantity supplied to a change in demand

D time taken for supply to adjust to a change in price

27 Price elasticity coefficient of 0.2 implies that the %age change in quantity for a 5%

change in price will be:

A 0.2

B 2.5

C 5

D 1


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28 Assume that a fall in price of a commodity form Rs10 to Rs.9 per unit results in an

increase in weekly sales from 100 units to 110 units. Price elasticity of demand wouldbe:

A 1.9

B Unity

C 2

D Zero

E 0.9

F 0.1

29 Very small or zero Co-efficient of price elasticity of demand means that the good is:

A a necessity

B a comfort

C a luxuryD any of the above

E none of the above.

30 The standard measure for measuring demand and supply elasticity is

A Zero

B Unity

C Infinity

D Two

31 The income elasticity of demand for an income inferior good has an arithmetic sign.

A Positive

B Zero

C Negative

D No sign

32 From the demand schedule below, the price elasticity of demand following a fall in

price from Rs 25 to Rs. 20 is:

Price (Rs.) Quantity (units)30 15

25 20

20 25

15 30

A -1

B -1.25

C -1.50D -1.75


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33 If the price of a good fell by 20% but total expenditure on the good remained the

same, the demand curve could be described as

A Perfectly elastic

B Elastic

C Perfectly inelasticD Unitary elasticity

34 Prices are most volatile when:

A supply is elastic, demand is elastic

B supply is inelastic, demand is inelastic

C supply is elastic, demand is inelastic

D supply is inelastic, demand is elastic

CHAPTER 4–

UTILITY ANALYSIS

35

Which statement is true, in respect of every point on an indifference curve?

A The price of each good is the same.

B The level of satisfaction is the same.

C All of these statements are true.

D None of these statements is true.

36

Which of the following best defines marginal utility?

A The satisfaction of a want that results from consuming a good or service.

B The change in total utility as a result of consuming an additional unit of aproduct.

C The ability to buy more of a product or service when real income increases.

D The decrease in satisfaction that results from consuming an additional unit of aproduct.

37

With the principle of diminishing marginal utility in effect, increasing consumption will:

A lower total utility

B produce negative total utility

C lower marginal utility, and therefore total utility

D lower marginal utility, but may increase total utility

38 If a consumer’s marginal rate of substitution equals 2 apples for 1 carrot

A the consumer’s indifference curve will be positively sloped

B the consumer’s indifference curve will be convex to the origin

C the ratio of marginal utility of 1 apple must be ½ of 1 carrotD all of the above


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39 If all prices remain constant, an increase in income results in

A an increase in the slope of the budget line

B a decrease in the slope of the budget line

C an increase in the intercept of the budget line

D a decrease in the intercept of the budget line

E Both a and c

40 Indifference curve for the consumer is always:

A Concave

B Straight

C Convex to Origin

D Upward Sloping

41

Shift in consumer equilibrium due to change in price is called:

A Price effect

B Income effect

C Substitution effect

D None of the above

42 Marginal rate of substitution of X for Y along an ordinary indifference curve is:

A Diminishing

B Increasing

C Constant

D All of the above

E None of the above

43 The budget line of a consumer explains various combinations of two commodities

that:

A are actually purchased at market prices

B can be purchased at market prices

C equate consumers’ expenditure to his money income

D b and c above

E None of the above.


44 Under perfect market conditions, the supply curve of a firm is the same as:

A MC curve

B MR curve

C AR curveD AC curve


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45 In a perfectly competitive market ___________ is/are the price maker(s):

A the individual firm

B the industry

C a large number of consumers

D the trade association

46

Which of the following is NOT included in the explicit costs of a firm?

A Wages paid to labour

B Interest paid for borrowed capital

C Payments for purchases of materials

D Normal profit

47

Monopoly power may be based on:

A economies of large scale production

B patents

C control of key natural resources

D all of the above

48

Which of these is NOT a component of cost function of a product?

A Market price of the product

B Operating technology of the plant

C Operating capacity

D All of the above

49 The demand for a Factor of Production is called:

A quantity demand

B derived demand

C factor price

D cost of production

50 As its output increases, a firm’s short-run marginal cost will eventually increasebecause of:

A diseconomies of scale

B a lower product price

C the firm’s need to break even

D diminishing returns


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51 A firm that breaks even after all the economic costs are paid, is earning:

A economic profit

B no profit

C normal profit

D super normal profit

52

When diminishing returns begin to operate, the total variable cost curve will start to

A fall at an increasing rate

B rise at a decreasing rate

C fall at a decreasing rate

D rise at an increasing rate

53

Marginal cost is best defined as

A the difference between total fixed costs and total variable costs.

B costs which are too small to influence prices.

C the change in total costs when output rises by one unit.

D fixed costs per unit of output.

54 The 'law of diminishing returns' can apply to a business only when

A all factors of production can be varied.

B at least one factor of production is fixed.

C all factors of production are fixed.

D capital used in production is fixed.

55 Which of the following always rise when a manufacturing business increases its

output?

(i) fixed costs

(ii) marginal cost

(iii) average variable cost

(iv) total costs

A (i) and (ii) only

B (ii) and (iii) only

C (iii) and (iv) only

D (iv) only

56

The minimum price needed for a firm to remain in production in the short run is equal

to

A average fixed cost

B average variable cost

C average total cost

D marginal cost


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57 A business employs 11 workers at a wage of £24 per day. To attract one more worker

it raises the wages to £25 per day.

The marginal cost of employing the extra worker is

A £1

B £12C £25

D £36

58

The long-run average cost curve for a business will eventually rise because of

A the law of diminishing returns

B increasing competition in the industry

C limits to the size of the market for the good

D diseconomies of scale

59 Economies of scale

A can be gained only by monopoly firms

B are possible only if there is a sufficient demand for the product

C do not necessarily reduce unit costs of production

D depend on the efficiency of management

60 If the total cost curve is plotted, marginal cost curve can be illustrated by:

A U shapes curve cutting the total cost curve from its minimum point.

B a straight line cutting the curve at its lowest point.

C a straight line cutting the curve at its lowest point

D the slope of a tangent to the curve at any given output.

61 A firm, in the short run, would stop production if:

A marginal cost was equal to marginal revenue

B total costs were equal to total revenue

C total revenue were less than total variable cost

D total revenue were less than total fixed cost

E variable cost were to rise above fixed costs

62 The long term shape of the average cost curve is due to:

A economies of scale

B variable proportions

C change in technology

D imperfect competition

E diseconomies of the scale

F a and e

G b and d

H none of the above


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63

In a diminishing cost industry, an increase in industry output causes the Average total

cost curve of a typical firm to shift:

A Upward

B Downward

C To the rightD To the left

64 In an increasing cost industry, an increase in output causes the Average total cost

curve of a typical firm to shift.

A To the left

B To the right

C Downward

D Upward

65

What does it mean to say that firms in an oligopoly are interdependent?

A The firms must charge identical prices for the products

B The firms economic profits must equal zero in the long run

C Barriers block the entry of new firms into the industry

D The output price decisions of one firm affect the output price decisions ofother firms in the industry

66

Marginal cost curve intersects Average total cost curve at:

A the minimum point of ATC

B the minimum point of MC

C the minimum points of both the MC and ATC

D all of the above

E none of the above.

67 Duopoly is a special case of which of the following:

A Perfect competition

B Monopoly

C Monopolistic competitionD Oligopoly

E None of the above

68 Oligopoly is a type of market organization in which there exists:

A a single firm

B two firms

C a large number of firms

D few firms


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69 Which of the following distinguishes oligopoly market from other forms of market

organization?

A Interdependence of producers

B Differentiated products

C Many firms in a small marketD Firms are price takers

E Price discrimination

70

Which of the following describes the dominant firm model?

(I) The dominant firm produces at the intersection of market demand by its MCcurve.

(II) The small firms are price takers.(III) The dominant firm’s demand curve is derived by subtracting output supplied

by small firms from total market demand.

A II only

B III only

C I only

D II and II

E None of the above

71

All members of a cartel:

A produce at the same average cost

B produce where their MC equals price

C adopt independent price and output policy

D share the market equally

E None of the above

72 A cartel is a collusive agreement:

A among largest firms in an industry

B among smallest firms in an industry

C sanctioned by the government

D among firms to increase profit by reducing output

73 Duoplists producing homogeneous products will in the long run charge:

A uniform price

B different prices

C any of the above

D none of the above


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74

Which of the following is a measure of income earned by a factor of production?

A Indirect taxes

B Depreciation

C Rent

D Corporate taxes

75

In the long-run, price is determined by:

(a) cost of production

(b) number of consumers

(c) influence of tastes and fashion

(d) competitive forces

76 The aggregate demand curve would shift to the right if:

A government taxes increase

B net exports increase

C government spending decreases

D the nominal money supply decreases

77

Which of the following topics are studied in Macro Economics?

A Theory of Demand

B Aggregate Demand and Aggregate Supply

C Equilibrium of Industry

D None of the above

78 Which of the following would decrease aggregate demand?

A Increased investment

B Increase in export revenue

C Increased taxation

D Increased consumption

79 A prolonged and deep recession is called: A Hyperinflation

B Depression

C Stagflation

D Great depression

80 The aggregate supply curve:

A is the sum of the individual supply curves in the economy

B is a market supply curve

C embodies the same logic that lies behind an individual firm’s supply curve D none of the above


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81

Which of the following represent withdrawals from the circular flow of national

income?

(i) Distributed profits

(ii) Interest paid on bank loans

(iii) Income tax payments(iv) Imports

A (i) and (ii) only

B (ii) and (iii) only

C (i) and (iii) only

D (iii) and (iv) only

82

An isolated island community produces only one good, fish. In a typical week the

island's fishermen manage to earn £800 selling their catch to the island's fishwholesaler. She, in turn, sells the catch to the island's two fish shops for a total of£1,200. To make a profit and pay wages to their employees the two shopkeepers sellthe fish to the island's population for £1,500.

What will be the value of the island's output over the course of a year (52 weeks)?

A £140,400

B £182,000

C £78,000

D £36,400

83

An inflationary gap exists in an economy when

A the government has a budget deficit

B aggregate demand is greater than the full employment level of income

C withdrawals exceed injections at the full employment level of income

D the money supply rises faster than national income

84

Which ONE of the following would cause a fall in the level of aggregate demand in an

economy?

A A decrease in the level of imports

B A fall in the propensity to save

C A decrease in government expenditure

D A decrease in the level of income tax


85

When will savings increase in a country?

A When interest rate rises

B When inflation increases

C When more credit cards are issued by the banksD When production of consumer goods decreases


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86 An inflationary gap exists in an economy when

A the government has a budget deficit

B aggregate demand is greater than the full employment level of income

C withdrawals exceed injections at the full employment level of income

D the money supply rises faster than national income

87

Which of the following is likely to shift the marginal efficiency of capital (MEC)

schedule to the right?

(1) An increase in the supply of funds available

(2) Introduction of cost reducing technology

(3) A reduction of government subsidies on investment

A l only

B 2 only

C 3 only

D l and 2 only

88 Which of the following statements does not reflect the Keynesian view of the

economy?

A The economy will naturally settle at a level of output that ensures fullemployment

B Government can move the economy towards full employment by managingaggregate demand

C Measures to stimulate private consumption will raise the level of incomeD The level of aggregate monetary demand will affect the level of income

89

Which of the following describes the effect of improved technology on the marginal

efficiency of capital curve?

A It will shift it to the left

B It will shift to the right

C The curve will be unaffected

D The curve will become more inelastic


90

Which of the following factor is not used in the multiplier formula for the open

economy?

A Marginal propensity to save

B Marginal propensity to import

C Marginal propensity to tax

D Marginal propensity to export


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91 The concept of the Multiplier discusses:

A Savings and investments

B Income and investments

C Income and expenditure

D Income and savings

92

In an economy where, out of every extra £100 of national income, £25 is paid in tax,

£10 is spent on imports and £15 is saved, the value of the multiplier will be

A 2

B 2.5

C 5

D 10

93 Which of the following is the basic concept which underlies the accelerator theory of

investment?

A Investment depends on the level of savings

B Investment is inversely related to the rate of interest

C Investment is determined by the volume of commercial bank lending

D Investment rises when there is an increase in the rate of growth of demand inthe economy

94

In a given economy, of each additional £1 of income, 30% is taken in taxes, 10% is

spent on imports and 40% is spent on domestically produced goods.

The multiplier is:

A 2.5

B 1.67

C 1.25

D 0.6

CHAPTER 9 – MONEY

95

Money does NOT function as a:

A medium of exchange

B hedge against inflation

C store of value

D measure of value

96

Which of the following is not a function of money?

A Store of value

B Unit of account

C Standard of deferred paymentD Payment of interest


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97 The term “Precautionary motive” has been discussed in:

A Quantity theory of money

B Theory of consumer behaviour

C Liquidity preference theory

D Multiplier accelerator theory

98 Which of the following is not one a Keynesian motive for holding money?

A Investment motive

B Precautionary motive

C Speculative motive

D Transaction motive

99 On a short-run Phillips Curve, high rates of inflation coincide with:

A low interest rates

B high unemployment rates

C low unemployment rates

D low discount rates

100

Which of the following would reduce inflation?

A An increase in direct taxes

B An increase in indirect taxes

C Increase in government spending

D Increase in income

101

In the Keynesian theory of demand for money, the transactions demand for money is

determined by:

A the rate of interest

B the level of consumers’ income

C expected changes in consumer prices

D the amount of money in circulation

102 Which of the following is NOT a method of holding wealth?

A Bonds and equities

B Human wealth

C Consumer durables

D Commodities

103 According to the theory underlying the Phillips Curve:

(i) the rate of change in money 0wages is positively correlated with the level ofunemployment.

(ii) there is a natural rate of unemployment in the economy.

(iii) money wage stability is only possible at full employment.

(iv) the rate of change in money wages is negatively correlated with the level ofunemployment.


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Which of the above statements is correct?

A (ii) and (iv)

B (i), (ii) and (iii)

C (i), (iii) and (iv)

D (iv) only

104 Which of the following is most likely to lead to a fall in the money supply?

A A fall in interest rates

B Purchases of government securities by the central bank

C Sales of government securities by the central bank

D A rise in the amount of cash held by commercial banks

105

According to Keynesian liquidity preference theory, an increase in the money supply

will

(i) raise the price of financial assets

(ii) reduce the price of financial assets

(iii) lower the rate of interest

(iv) increase the quantity of money people are willing to hold

Which of the above are correct?

A (i), (iii) and (iv) only

B (ii), (iii) and (iv) only

C (i) and (iii) onlyD (ii) and (iii) only

CHAPTER 10 – GROWTH AND TAXES

106

Fiscal deficit can be controlled by reducing:

A Taxes

B Imports

C Unemployment

D Public expenditure

107

Which of the following is a direct tax?

A Sales tax

B Capital gains tax

C Federal excise duty

D Value added tax


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108 Which of the following is an example of indirect tax?

A Income tax

B Sales tax

C Capital gains tax

D Property tax

109

The four main phases of a business cycle does NOT include:

A Depression

B Inflation

C Boom

D Recession

110

Which one of the following is NOT a feature of a good tax system?

A It should be equitable

B It should be economical

C The rate should be same for everybody

D It should be certain

111

Economic growth in an industrial society results from:

A Technological change

B Innovation

C Capital production

D All of the above

CHAPTER 11 – MONETARY POLICY

112 Which of the following is a financial intermediary?

A Pension fund

B International Monetary Fund

C State Bank of Pakistan

D Stock exchange

113

Which of the following is NOT considered to be a credit instrument?

A IOU

B Draft

C Bond

D Stock


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114 Which one of the following is NOT an asset of a commercial bank?

A Balances at the central bank

B Money at call

C Customers' deposits

D Advances to customers

115

Which of these appears as a liability on a bank’s balance sheet?

A Reserves

B Checking accounts

C Loans

D Investments and securities

116

If the Reserve Ratio is 40%, and Rs.10,000 is deposited in a commercial bank, what

is the final outcome for the economy?

A Rs. 4,000

B Rs. 10,000

C Rs. 25,000

D Rs. 40,000

117 Which of the following is NOT the function of a central bank?

A Lender of the last resort

B Monetary policy

C Fiscal policy

D Credit creation

118

Which of the following is a central bank unable to do?

A Influence banks to tighten or loosen their credit policies

B Create a climate of monetary ease or restraint

C Directly set market interest rates

D Influence the interest rate on new treasury bonds

119

To counteract a recession, the Central Bank should:

A raise the reserve requirement and the discount rate

B sell securities on the open market and lower the discount rate

C buy securities on the open market and raise the discount rate

D buy securities on the open market and lower the discount rate

120 An increase in the Cash Reserve Ratio would:

A decrease prices

B reduce inflation

C control lending

D all the above


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CHAPTER 12 – CREDIT

121

Which of the following is most likely to be affected by a change in interest rates?

A Consumer spending

B Investment spending

C Government spending

D Exports

122

A stimulative fiscal policy combined with a restrictive monetary policy will necessarily

cause:

A gross domestic product to increase

B gross domestic product to decrease

C interest rate to fall

D interest rates to rise

123 The government makes a new issue of bonds and sells them on the open market,

where they are bought by private investors using cheques drawn on their banks.

Which of the following describes the effect this has on the commercial banks?

A They can raise lending because their cash base will rise.

B There is no effect on bank lending.

C They must cut lending to maintain an appropriate ratio of cash to loans.

D They will only be able to increase long term loans.

CHAPTER 13 – BALANCE OF PAYMENTS AND TRADE

124 If the American dollar is overvalued relative to the Pakistan rupee:

A Pakistani goods are cheaper than US goods.

B the Pakistan rupee is undervalued relative to the dollar.

C the rupee price of the dollar must rise.D the cost of Pakistani goods in the United states must be increasing.

125

Index price of exports ÷ Index price of imports is equal to:

A Balance of trade

B Balance of payment

C Terms of trade

D Inflation


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126 Which of the following measures would immediately increase the cost of imports?

A Tariff

B Quota

C Embargo

D Subsidies

127

Currency is usually devalued to:

A increase exports

B increase imports

C decrease inflation

D increase prices

128

Which ONE of the following would appear as a DEBIT item on the current account of

the balance of payments?

A Payment of interest on debts owed to overseas commercial banks

B Expenditure by tourists visiting the country

C Overseas capital investment by domestic companies

D Repayment of debts to overseas central banks

129

Which of the following is most likely to cause a country's balance of payments to

move towards a deficit?

A A devaluation of that country's currency

B An expansionary fiscal policy

C A contractionary fiscal policy

D A rise in the rate of domestic saving

130 The 'current account' of the balance of payments includes all the following items

EXCEPT which ONE?

A The inflow of capital investment by multinational companies

B Exports of manufactured goods

C Interest payments on overseas debts

D Expenditure in the country by overseas visitors

131 Which of the following might cause a country's exports to decrease?

A A fall in the exchange rate for that country's currency

B A reduction in other countries' tariff barriers

C A decrease in the marginal propensity to import in other countries

D A rise in that country's imports


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CHAPTER 14 – FINANCIAL MARKETS

132

Which of the following instruments are NOT traded in the capital market?

A Corporate bonds

B Treasury billsC Mortgages

D Shares

133

Other things being equal, all of the following would lead to a rise in share prices

EXCEPT which ONE?

A A rise in interest rates

B A reduction in corporation tax

C A rise in company profits

D A decline in the number of new share issues

134 Which of the following does not engage in the buying and selling of shares in other

companies?

A Investment trusts

B Stock exchanges

C Insurance companies

D Pension funds

135

An investor who buys a call option is:

A buying the right to buy shares at a particular price

B buying the right to sell shares at a particular price

C selling the right to buy shares at a particular price

D selling the right to sell shares at a particular price

136 Which of the following occurs within a traditional money market?

A the issue of sterling certificates of deposit

B interbank lending in the sterling inter-bank market

C discount houses buying short term government debt in the discount market

D local authority borrowing in the euro-currency market


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Certificate in Accounting and Financeudit and ssurance

S E C

T I O N

BObjective test and

long-form questions


1.1 FACTORS OF DEMAND

(a) Explain any four factors on account of which the demand of a product maychange even when its price remains the same. (06)

(b) Explain the role of State in a mixed economy. (05)

(11)

1.2 PRODUCTION POSSIBILITY CURVE

Draw and briefly explain the “Production Possibility Curve”. (07)

1.3 ECONOMIC GROWTH

The achievement of economic growth has been a major objective of most governmentsthroughout the second half of the twentieth century. That period of time has seen asignificant rise in living standards in the western world. One way to measure growth isby measuring the annual rate of growth of ‘real’ GDP per capita. This statistic iscommonly used as an index of improvements in living standards. Although growth ishighly desirable, and should lead to a rise in economic welfare, in recent years concern

has grown about the extent to which economic growth can continue. Economists havebegun to consider not just the opportunity cost of resource allocation decisions, butalso the extent to which current rates of economic growth in the world are sustainable.

Required:

(a) Use your knowledge of economic principles to complete the following statementsrelating to economic growth:

(i) The phrase, ‘rate of growth of real GDP per capita’ means…..

Your answ er must not exceed 30 words (02)

(ii) Economic growth will lead to a rise in the economic of

society. (01)


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(b) The diagram below can be used to illustrate the idea of economic growth.Complete the following statements about it:

(i) The curves in the diagram are referred to as curves. (02) (ii) The shift from curve 1 to curve 2 indicates that has

occurred. (01)

(iii) Point X suggests an economy where there is either…….. Your answer must not exceed 15 words (02)

(iv) Point Y is currently (01)

(v) Assuming that all resources are currently employed, the opportunity cost ofincreasing food production from 12 million units to 22 million units is……

Your answer should not exceed 5 words (01)

(c) State one factor which will encourage economic growth to occur:Your answer must not exceed 15 words (02)

(d) State whether each of the following statements about economic growth is t rue orfalse :

(i) A rise in output, occurring as an economy recovers from a deep recessionwith high unemployment, is usually regarded as an example of economicgrowth.

True or False (01)

(ii) A high level of growth is possibly unsustainable because there is a limit tothe increases in output that can be achieved through technological

advances.True or False (01)

(iii) High levels of economic growth may be unsustainable without a degree ofenvironmental pollution.

True or False (01)

(iv) Sustainable economic growth means increasing output in the presentwithout compromising the ability of future generations to meet their ownneeds.

True or False (01) (16)


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Question bank: Objective test and long-form questions


1.4 ISLAMIC ECONOMIC SYSTEM

(a) Explain how the Islamic religion has impacted upon its economic system. (10)

(b) What are its similarities and differences with the free market economic system?(06)

(16)


2.1 TYPES OF GOODS

Differentiate between substitute goods, complimentary goods and independent goods.Give two examples of each. (06)

2.2 QUANTUM OF SUPPLY OF A PRODUCT

According to the law of demand, supply of a product increases when the priceincreases.

Briefly describe the other factors that affect the quantum of supply of a product. (09)

2.3 MOVEMENT

Explain what is Movement along the Demand Curve and Shift in the Demand Curvehighlighting the difference between these two concepts. Also illustrate the difference bymeans of diagrams. (09)

2.4 A MARKET ECONOMY

(a) Explain how the price system works to allocate resources in a market economy.(10)

(b) Describe the main reasons why markets do not always allocate resources in anefficient manner. (10)

(20)


3.1 ELASTICITY OF DEMAND

(a) What is meant by Elasticity of Demand? List and explain briefly the factors whichdetermine the Elasticity of Demand of a product. (07)

(b) Briefly describe when Demand for a product is considered to be:

Highly Elastic Unit Elastic

Relatively Inelastic (03)(10)

3.2 ELASTICITY OF DEMAND 2

(a) Explain the concepts of price elasticity of demand and income elasticity ofdemand and the factors which determine their values for different goods. (12)

(b) Explain the usefulness to a business of information on price and income elasticityof demand for its product. (08)

(20)


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3.3 ELASTICITY OF DEMAND 3

(a) Define Arc elasticity of demand and provide the formula to measure it. (05)

(b) Differentiate between point elasticity and Arc elasticity of demand. (03)

(08)

3.4 CALCULATE PEDS

For each of the following diagrams calculate the following information;

(a) The price elasticity of demand (assume the change comes about from a fall inprice). (09)

(b) The total sales revenue earned at the old and new price. (03)

(12)

3.5 CONCEPTS OF DEMAND

Explain briefly by means of diagrams, the concepts of Unitary Elastic Demand,Relatively Elastic Demand, and Relatively Inelastic Demand. Also, state the impact of adecrease in price on total expenditure in each of the different types of elasticities ofdemand. (12)

3.6 COFFEE MARKET

The following passage is based on newspaper articles and refers to the market forcoffee.

Supermarkets recently ended ten years of cheap coffee when some raised the price oftheir own brands of instant coffee by up to 12%. Major producers of ground coffee saidthat their prices would also increase, but probably not for some weeks.

Reports of severe frost damage to Brazilian coffee plantations sent the open marketprice of coffee beans for September delivery up from $3,100 a ton to $4,000 a ton – thehighest level since 1986. The price has risen five-fold since 1993. Even before the frost

damage, the price had been rising because some coffee farmers, discouraged by theprevious low price of coffee, had moved to other, more profitable crops. The depressedprice of coffee before 1993 was partly due to the collapse of the International Coffee Agreement. This Agreement, effectively a cartel, had kept prices artificially high. Whenthe Agreement broke down, supplies flooded into the market and the price of coffeefell.

The current price increases will end a golden age of cheap coffee for consumers. From1986 to 1993, the retail price had fallen by more than 15%; given that these years wereones of rapid inflation, the real price of coffee fell even more steeply. This caused aboom in coffee drinking and the sales of coffee in the UK exceeded those of tea. Now itlooks as if there may be a switch back to tea. This may be similar to the switch to teawhich happened in the 1970s – the last time when coffee prices rose sharply. Duringthat period, many coffee drinkers, especially young people, switched their consumptionto tea.


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Requirements:

Using BOTH your knowledge of economic theory AND information in the passage:

(a) (i) identify and explain TWO reasons why the price of coffee has risenrecently, using an appropriate diagram (04)

(ii) explain the concept of 'price elasticity' and 'demand' AND show how it isimportant in determining the size of the rise in coffee prices (04)

(iii) explain the meaning of the statement 'the real price of coffee fell evenmore steeply'. (02)

(b) Explain the concept of 'cross elasticity of demand' AND use it to explain therelationship between the level of coffee prices and the demand for tea. (07)

(17)

3.7 COMPETITIVE GOODS AND COMPLEMENTARY GOODS

(a) What is meant by “Competitive goods” and “Complementary goods”? Give twoexamples of each. (04)

(b) Explain briefly the factors which determine the Price Elasticity of Demand. (06)

(c) Illustrate the relationship between the price and quantity demanded with thehelp of a diagram when the price elasticity of demand is Elastic, Unitary Elasticand Inelastic.

(Explanation is not required) (06) (16)

3.8 PRICE ELASTICITY OF SUPPLY

Describe briefly the factors influencing price elasticity of supply. (05)

3.9 CROSS ELASTICITY OF DEMAND

Write a comprehensive note on Cross elasticity of Demand. (05)

3.10 PRICE ELASTICITY OF DEMAND

Write a note on the relationship between Price elasticity of Demand and Revenue. (05)

3.11 TOTAL EXPENDITURE METHOD

Describe briefly the Total Outlay or Total Expenditure Method. (05)

3.12 PROPORTIONATE OR PERCENTAGE METHOD

Write a note on Proportionate or Percentage method giving numerical illustration. (05)

3.13 GEOMETRICAL METHOD

Explain Geometrical measure of point elasticity of demand. (08)

3.14 NUMERICAL EXERCISE: PRICE ELASTICITY OF DEMAND

Product A, currently sells at Rs. 40/- per unit and its demand at this price was 500units. If price fell to Rs. 35/- P.U, its demand extends to 525 units. Product B,

currently sells at Rs. 70 per unit and its demand at this price was 300 units, it pricefell to Rs. 60/- per unit, its demand extends to 400 units.


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Required:

(i) Calculate price elasticity of demand for both the products. (05)

(ii) Calculate changes in total revenue if demand is met in full before and after thechange in price. (05)

(10)

3.15 IMPORTANCE OF PRICE ELASTICITY OF DEMAND

Elaborate the usefulness of the concept of Price elasticity of demand. (08)

CHAPTER 4 – UTILITY ANALYSIS

4.1

CONSUMER’S EQUILI RI

UM

Demonstrate your familiarity with the indifference curve approach to the problem of

consumer’s equilibrium. Support your description by drawing a suitable diagram. (12)

4.2 INDIFFERENCE CURVES

a) Explain why on an indifference map, the curve is convex? What concept doesthis represent? (08)

b) Explain why this indifference map doesn’t fit with economic theory.

(08)(16)

4.3 CONCEPTS

Explain the following concepts with reference to consumer behaviour, usingappropriate diagrams:

Price effect

Substitution effect

Income effect (12)


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4.4 PRICE EFFECT

Define price effect and display price effect using diagrams for.

Substitute goods

Independent goods

Complementary goods. (06)

4.5 INCOME EFFECT

Define Income effect using diagrams for.

Normal goods

When product X, is inferior

When product Y, is inferior (06)

4.6 SUBSTITUTION EFFECT

Sliding over the same IC is called Substitution effect. Explain with the help of adiagram. (05)

4.7 LAW OF DIMINISHING MARGINAL UTILITY

(a) Describe the Law of Diminishing Marginal Utility. (03)

(b) When is a consumer in an Equilibrium position? (02)

(c) Narrate the assumptions applicable to the indifference curve approach. (03)

(d) With the help of Indifference Curves show how consumers maximize their levelsof satisfaction. Support your decision by drawing a suitable diagram. (07)

(15)

4.8 INDIFFERENCE CURVES 1

(a) Narrate the basic assumptions applicable to the Indifference Curve Approach.(03)

(b) Explain consumer’s equilibrium with the help of a diagram using indifferencecurves. (09)

(12)

4.9 INDIFFERENCE CURVES 2

(a) Define Indifference Curve. (03) (b) Prove that indifference curves are always convex to origin. (06)

(c) Prove that indifference curves do not intersect each other. (04)

(13)

4.10 MARGINAL RATE OF SUBSTITUTION

Write a detailed note on Marginal Rate of Substitution. (05)


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5.1 MONOPOLIST PROFIT

Explain the process of profit-maximization by a monopolist with the help of anappropriate diagram. (08)

5.2 PERFECT COMPETITION

(a) Briefly describe the important characteristics of a market under perfectcompetition. (05)

(b) Explain the equilibrium of a firm under perfect competition, with the help of anappropriate diagram. (05)

(10)

5.3 INCREASING RETURNS

Explain the law of increasing returns. How does the law apply in the case of a

manufacturing industry? (05)

5.4 LARGE FIRMS

Although the average factory size has not changed greatly over the past fifty years, thegrowth of firms has been significant. This can be explained to some extent byeconomies of scale and how the growth of the firm has been achieved. One of themain consequences of firms of very large size is that competition has declined and theconsumer is the loser.

Using both your knowledge of economic theory and the passage above:

(a) explain how economies of scale may be achieved (05)

(b) using a diagram to illustrate your answer, what determines the optimum scale ofthe firm in the long run? (05)

(c) explain the different economies of scale that may occur, if a firm grows by mergeror take-over (04)

(d) why might firms of very large size be justified? (02)

(16)

5.5 THE SCALE OF PRODUCTION

The twentieth century has seen a fairly significant rise in the size of the firm. In the UK,for example, in 1909, the 100 biggest manufacturing firms produced 16% of

manufactured goods. By 1980, this figure had risen to more than 40%.

Many motives have been identified for this growth trend, including the desire to achieveeconomies of scale, market domination, and greater security for the firm.

Some of this growth has been internal or organic, but a significant amount has beenachieved through merger activity.

Required:

Use your knowledge of economic concepts to answer the following questions relatingto the above passage:

(a) The diagram below illustrates the cost structures for different sizes of firm in a

particular industry. Study it and then complete the statements that follow:


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(i) SRAC stands for….

Your answer mu st not exceed 4 wor ds (01)

(ii) LRAC stands for….

Your answer mu st not exceed 4 wor ds (01)

(iii) The significance of output level Q1 is that at this level the firm achieves thescale of production usually referred to as the…

Your answer must n ot exceed 5 words (01)

(iv) Between Q1 and Q2 the firm is experiencing….


(v) The shape of the SRAC curves in the diagram is based on the law ofdiminishing returns (also known as the law of variable proportions).

The law states that……

Your answ er must not exceed 50 words (04)

(vi) The behaviour of LRAC beyond output level Q2 is due to what economistscall….


(vii) State two specific examples of the phenomenon you identified in (vi) above:

Your answer mu st not exceed 50 words (04)

(13)


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5.6 MONOPOLY AND COMPETITION

The traditional view in economics is that the perfectly competitive market will providebenefits for society which are unlikely to occur under conditions of monopoly. Indeed,the introduction of the Monopolies Commission in 1948, and the ongoing developmentsince then of controls on the activities of large dominant firms, suggest that monopoly

presents considerable problems for society. However, there is an argument thatmonopoly is not necessarily always inferior to competition.

Required:

Using your knowledge of economic theory, answer the following questions relating tothe above passage:

(a) (i) Complete the diagram below to illustrate the profit maximising:

position for a firm in a monopolistic situation

(ii) Assume that, at the profit maximising level of output, the profit earned is£20,000, average cost is £15 and average revenue is £25. Calculate theprofit maximising level of output: (02)

(b) State whether each of the following statements about monopoly is true or false:

In a monopolistic market:

(i) normal profits are likely in the long run

True or False (01)

(ii) although the firm in perfect competition will, in the long run, produce at thelowest possible average cost, it will not necessarily produce more cheaply

than a monopolistic firmTrue or False (01)

(iii) output in a market is likely to be lower if the market is monopolistic ratherthan perfectly competitive

True or False (01)

(iv) economies of scale may allow a monopolist to produce a larger output atlower cost than would be possible if the market is perfectly competitive

True or False (01)


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(c) Complete the diagram below to show the long run position for a firm in a perfectlycompetitive market:

(04)

(d) Complete the following statement: A firm in a perfectly competitive market is said to be technically efficient becauseit will produce the level of output at which…..

Your answer must not exceed 10 words. (02)

(16)

5.7 PROFIT MAXIMISATION AND DEMAND ANALYSIS

The following data refer to the costs of a firm and the demand for its product.

Quantity sold Price Total cost£ £

1 34 122 30 203 27 344 25 535 23 756 21 1027 19 131

Requirements:

Using BOTH your knowledge of economic theory AND the data above,

(a) Calculate for each level of output

(i) the marginal cost (02) (ii) the marginal revenue. (02)

(b) Calculate the level of profit at EACH level of output AND identify the profit-maximising level of output. (02)

(c) Calculate the price elasticity of demand for the good for a price fall from £25 to£23. (04)

(d) Identify the factors which might explain the value of the elasticity of demand forthis good. (05)

(e) Explain how you would expect the demand curve for this firm to vary if thenumber of firms in the industry were to rise. (05)

(20)


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5.8 REVENUES AND COSTS

The following data refer to the revenue and costs of a firm.

Output Total revenue Total costs0 - 1101 50 140

2 100 1623 150 1754 200 1805 250 1856 300 1947 350 2198 400 2699 450 32510 500 425

(a) Calculate the marginal revenue for the firm and state which sort of market it isoperating in. (04)

(b) Calculate the firm's fixed costs and the marginal cost at each level of output.(04) (c) What level of output will the firm aim to produce and what amount of profit will it

make at this level? (04)

(d) Describe and explain the effect on the firm's output and profits of the entry ofnew producers into the industry. (08)

(20)

5.9 COSTS AND REVENUES

Consider a monopolistically competitive firm.

(a) State the effect of a rise in the firm's costs at all levels of output on:

(i) the equilibrium price and output; (01)

(ii) total profits. (1)

(b) State what would happen to the firm's average and marginal revenue curvesand its equilibrium price and output if:

(i) consumer incomes rose; (2)

(ii) new firms entered the industry. (2)

(c) Explain the ways in which the firm might attempt to discourage the entry of newfirms into its industry. (8)

(14)

5.10 TYPES OF COSTS

Explain the relationship between different types of costs using a table. (10)

5.11 MONOPOLY SETUP

Briefly describe the disadvantages of having a monopoly setup. (08)

5.12 CONSUMPTION GOODS

(a) Describe consumption goods and state the main determinants of demand for

these goods. (02)


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(b) Define Price Elasticity of Demand. Compute the price elasticity of a product ifa decline in the price of the product from Rs. 12 per unit to Rs. 11 per unitincreases its demand from 48,000 units to 60,000 units. (04)

(06)

5.13 EQUILIBRIUM OF THE FIRM

(a) Explain the term Equilibrium of the Firm. (02)

(b) State the conditions which are essential for the existence of PerfectCompetition in a market. (05)

(c) Explain by means of a diagram how price and output are determined in thelong-run for a firm operating under conditions of Perfect Competition. (08)

(15)

5.14 MARKET FUNCTIONING

Explain six different features which distinguish a market functioning in an

environment of perfect competition from a market which operates as a monopoly.(09)

5.15 FREE FORCES

(a) How do free forces of demand and supply determine equilibrium price andequilibrium quantity? Support your answer with the help of a diagram. (07)

(b) Explain briefly why the short-run average cost curve is “U” shaped. (06) (13)

5.16 PRICE OUTPUT DETERMINATION

Explain with the help of an appropriate diagram, the price output determination

under monopolistic competition in the short-run. (10)

5.17 OLIGOPOLY AND DUOPOLY: DIFFERENCE

Define and differentiate duopoly market and oligopoly market. (04)

5.18 PRICE CARTEL AND COLLUSION

Define price cartel or price ring and collusion. (04)

5.19 PRICE LEADERSHIP

When price leadership occurs? (03)

5.20 KINKED DEMAND CURVE

What is kinked demand curve? (04)

5.21 NON-PRICE COMPETITION

Write a note on Non-Price Competition. (06)


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6.1 NATIONAL INCOME

(a) Briefly describe three different approaches of measuring National Income. (06)

(b) What difficulties are usually faced in measuring National Income? (06)(12)

6.2 MEASURING NATIONAL INCOME

(a) Explain the income, output and expenditure methods of measuring nationalincome. (6)

(b) Describe some of the difficulties involved in their calculation. (14)

(20)

6.3 CIRCULAR FLOW OF INCOME

(a) Draw a Diagram of Circular Flow of Income. (04)

(b) Identify and explain briefly the three different types of Withdrawals andInjections from the Circular Flow of Income. (06)

(10)

6.4 INJECTIONS AND WITHDRAWALS

(a) Explain what is meant by 'injections' and 'withdrawals' in the circular flow ofincome model AND show their role in determining the level of national income.

(12)

(b) How might the business sector be affected if there were a rise in the savingsrate in households? (8)

(20)

6.5 AGGREGATE SUPPLY: SHORT RUN

(a) The neo-classical branch of economists believe that there is a short runaggregate supply curve (SRAS) and a long run aggregate supply curve (LRAS).

Draw a SRAS curve. (02)

(b) Draw a shift in the supply curve as a result of a decrease in the cost of labourthroughout an economy. (04)

(c) What are 6 reasons for a backward shift in a SRAS? (06)

(15)

6.6 AGGREGATE SUPPLY: LONG RUN

(a) Delete/ insert where appropriate:

Going from the short run to the long run, the aggregate supply curve gets. This is because in the resources areused at their most efficient point. The long run aggregate supply curve (LRAS)is a line as it is completely ofthe price level. (04)

(b) Is the LRAS more, or less likely to fluctuate than the SRAS? Explain youranswer. (04)

(08)


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6.7 AGGREGATE DEMAND

(a) What are the 5 components of aggregate demand (AD), and what is theequation? (04)

(b) Draw a shift in the AD curve as a result of consumers having less disposableincome. Give two other examples that could cause this shift. (06)

(c) Define what Keynes meant by “effective demand”. (02)(12)

6.8 MACROECONOMIC EQUILIBRIUM: RECESSION - KEYNESIAN

(a) Draw a graph using a Keynesian aggregate supply curve where the economy isin a deep recession. (04)

(b) The government increases spending in the economy. Show how this will changethe equilibrium in the economy. Make particular reference to:

(i) the general price level

(ii) the level of output in the economy (04) (c) How would a neo-classical model of the economy interpret an increase of

government spending in a recession? Show with a diagram. (06)(14)

6.9 MACROECONOMIC EQUILIBRIUM: INFLATIONARY GAP

(a) Define an output gap. What are positive and negative output gaps known as? (03)

(b) Draw a positive output gap on a graph. (04)

(c) Explain how a positive gap is possible within an economy. (09)(16)

6.10 DEFLATIONARY GAP

Explain, using a diagram, the concept of deflationary gap in the economy. (06)

6.11 CALCULATION OF GDP 1

Given the following data of a firm in an economy during a certain period of time.Calculate GDP according to

(a) Income approach

(b) Expenditure approach

(c) Value added approach. Rupees

(i) Raw material imports 400,000

(ii) Wages and salaries paid 900,000(iii) Output sold 2,000,000

(iv) Profits 700,000

(v) Pays its post-tax profits to Shareholders as dividend 400,000

(vi) Taxes on labor are 200,000 and on the company 300,000

(vii) Domestic consumer's expenditure 1,100,000

(1,100,000 = 700,000 wages + 400,000 (profits) dividends)

(viii) Government expenditures

(500,000 = 200,000 tax on labor + 300,000 tax on company) 500,000

(ix) Exports 400.000(12)


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The following data relates to the economy of a country over one year period.

Rs. in million

Consumers expenditures 20,000

Federal government expenditures 4,500

Capital formation 5,100

Physical decrease in stocks (100)

Exports receipts 7,000

Imports payments 6,500

Taxes on expenditures 6,000

Subsidy 500

Net property income from abroad 500

Depreciation (Capital consumption Expenditures) 2,000

Required

(i) GDP at market prices

(ii) GDP at factor cost

(iii) GNP at market prices

(iv) GNP at factor cost

(v) National income at factor cost

(vi) NNP at Market price

(12)


The Economic Survey of the government of Pakistan discloses the following

Rupees in millions

Government expenditure 7,500

Sales value of output of firms 30,000

Imports 6,000

Profit before tax of firms 10,500

Consumers’ expenditure 16,500

Wages etc. received by employees 12,000

Tax deducted out of wages 1,500

Exports 6,000

Cost of goods and services purchased from outside country firms 6,000

You are required to compute Gross Domestic Product (GDP) by using:

(i) expenditure approach

(ii) income approach

(iii) value added approach


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Following data relates to the economy of a country over a year period.

Capital consumption 2,625

Subsidies 450

Exports 9,675

Imports (9,360)

Consumers’ expenditure 27,600

Taxes on expenditure (4,140)

Net property income from abroad 315

Value of physical decrease in stocks (30)

Gross domestic fixed capital formation 7,380

General government final consumption 6,810

Required:

You are required to compute the following, showing necessary workings

a. Gross Domestic Product (GDP) at market prices and at factor cost

b. Gross National Product (GNP) at market prices and at factor cost

c. National Income at factor cost and at Market price


7.1 CIRCULAR FLOW OF INCOME

The following diagram shows the circular flow of income for an economy.

Requirements:

(a) State which of the lettered flows in the diagram refer to:

(i) a government purchase of computer equipment from a UK producer;

(ii) households' transfer incomes;

(iii) corporation tax;

(iv) reinvestment of business profits to finance capital investment;

(v) a UK firm's sales of goods to a firm in Japan. (5)

Firms

Banking system Rest of the world

Households

Government

A

J

G

ID

H

CF

EB


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(b) For an open economy, state:

(i) the three injections into the circular flow;

(ii) the three withdrawals (leakages) out of the circular flow. (3)

(c) Explain the effect on the business sector of an economy of an increase in the

household savings rate. (4)(12)

7.2 INVESTMENT AND MEC

(a) Explain (with a diagram) how a fall in interest rates will affect the level ofinvestment. (4)

(b) How might the motives for an investment by a government and a private sectorfirm differ? And give examples of the projects that they might undertake. (6)

(c) Complete the following sentence: if the _____ generated from investment isgreater than the ______, then profit maximising firms will invest. (2)

(d) What might cause a shift in the Marginal Efficiency of Capital curve? (4)(16)

7.3 CONSUMPTION FUNCTION

(a) Briefly explain the relationship between consumption, income and savings. (02)

(b) How does an increase of income affect the level of consumption in an economy?How does Keynes explain the difference based on household income, and whatare the implications of this? (10)

(c) How stable is the consumption function? (04)(16)

7.4 PRIVATE INVESTMENT

State briefly how a government can influence the level of private investment in thecountry. (10)


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8.1 MULTIPLIER

(a) Explain what you understand by the term Multiplier. (03)

(b) What are the limitations of the Multiplier? (06)(09)

8.2 MULTIPLIER 1

Output determination occurs when the savings of all of the households in an economyare equal to the desired investment opportunities.

The diagram shows an economy in equilibrium.

(a) Explain how savings become investment in an economy. Which type oforganisation usually facilitates it? (04)

(b) Are the levels of savings and investment planned, or actual levels? Comment onthe significance. (02)

(c) Explain how if output was greater than M (i.e. in disequilibrium), the economy

would revert to equilibrium. (04)(10)

8.3 MULTIPLIER 2

(a) Fill in this description of the multiplier: “the consumption of one person becomesthe ___ ___ ___” (02)

(b) Explain, with the help of separate diagrams, why Keynes believed it wasnecessary to boost AD during a Depression, and not AS. (06)

(c) Explain three limitations to the effectiveness of the multiplier. (06)

(18)

S = Savings, I = Investment, Q* = maximum GNP output, E = Equilibrium,M = current level of output, B = zero savings level of output


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8.4 ACCELERATOR QUESTION

(a) Define gross investment, and explain its importance in the accelerator principle.(04)

(b) Complete the following example to calculate gross investment: (04)

Example:

Year Y

(=Output)

Stock of

capital

[1]

Net

investment

[2]

Depreciation

[3]

Gross

investment

[4]

(0) (200) (600)

1 200

2 220

3 240

4 250

5 250

[1]: Capital : output ratio = 3:1

[2]: Net investment = 3*change in output compared to previous year

[3]: Depreciation = 0.1*Stock of previous year’s capital

[4]: Gross investment = Net investment + depreciation

(c) Using your answer from part (b), determine the rate of change of Grossinvestment. (04)

Example:

Year Y

(=Output)

change in Y Gross

investment

change in

gross

investment

(0) (200)

1 200 from (b)

2 220 from (b)

3 240 from (b)

4 250 from (b)

5 250 from (b)

The shows the disparity in the rates of change of output and gross investment.

(d) Comment on the relationship between %change in output and % change in grossinvestment. (03)

(15)


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CHAPTER 9 - MONEY

9.1 THE MONEY SUPPLY

(a) Explain what is meant by the term 'the money supply'. (04)

(b) Why do governments believe that it is important to control the growth of themoney supply? (08)

(c) Describe the methods by which the government can attempt to control the moneysupply. (08)

(20)

9.2 MONEY SUPPLY AND QUANTITY THEORY

The following data for the UK refer to the rate of inflation, as measured by the retailprice index (RPI), and the growth of the money supply (M0).

Growth of Rate of

money supply inflation(% rise in M0) (% rise in RPI)

1976 11.2 12.91977 13.1 17.61978 13.7 7.81979 11.9 15.61980 5.8 16.91981 2.4 10.91982 3.2 8.71983 6.0 4.21984 5.4 4.51985 3.8 6.9

1986 5.3 2.41987 4.3 4.41988 7.7 4.81989 5.7 8.21990 2.7 9.81991 3.1 5.51992 2.8 3.71993 6.0 1.41994 6.9 2.31995 6.1 3.5

(Source: Economic Trends, HMSO)

Requirements:

Using BOTH your knowledge of economic theory AND material contained in the table,

(a) Describe the apparent relationship between the money supply (M0) and the rateof inflation. (04)

(b) Explain the quantity theory of money. (06)

(c) Describe the extent to which the data given are in line with the predictions of thequantity theory of money. (06)

(d) Explain how the effects of a change in the money supply might differ between theshort run and the l

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CAF2-Intorduction to Economics and Finance_Questionbank