FINALTERM EXAMINATION
Spring 2009
ECO401- Economics (Session - 2)
ECO401 Question No: 1 ( M a r k s: 1 )
Aslam decides to stay at home and study for his exam rather than going out with his friends to a movie. His dilemma is an example of:
► The economic perspective.
► Marginal analysis.
► Allocative efficiency.
► Opportunity cost.
ECO401 Question No: 2 ( M a r k s: 1 )
A good for which income and quantity demanded are inversely related is known as:
► Inferior good.
► Complementary good.
► Normal good.
► None of the given options.
ECO401 Question No: 3 ( M a r k s: 1 )
An increase in supply is shown by:
► Shifting the supply curve to the left.
► Shifting the supply curve to the right.
► Upward movement along the supply curve.
► Downward movement along the supply curve.
ECO401 Question No: 4 ( M a r k s: 1 )
Price floor results in:
► All of the given options.
► Excess supply.
► Equilibrium.
► Excess demand.
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ECO401 Question No: 5 ( M a r k s: 1 )
The price elasticity of demand measures the responsiveness of quantity demanded to:
► Quantity demanded.
► Quantity supplied.
► Price.
► Output.
ECO401 Question No: 6 ( M a r k s: 1 )
Assume that the total utilities for the fifth and sixth units of a good consumed are 83 and 97, respectively. The marginal utility for the sixth unit is:
► -14.
► 14.
► 83.
► 97.
ECO401 Question No: 7 ( M a r k s: 1 )
Indifference curves that are convex to the origin reflect:
► An increasing marginal rate of substitution.
► A decreasing marginal rate of substitution.
► A constant marginal rate of substitution.
► A marginal rate of substitution that first decreases, then increases.
ECO401 Question No: 8 ( M a r k s: 1 )
To find the profit maximizing level of output, a firm finds the output level where:
► Price equals marginal cost.
► Marginal revenue and average total cost.
► Price equals marginal revenue.
► None of the given options.
The profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output. Indeed, the condition that marginal revenue equal marginal cost is used to determine the profit maximizing level of output of every firm, regardless of the market structure in which the firm is operating.
ECO401 Question No: 9 ( M a r k s: 1 )
As compared to existing firms, a new firm entering in monopolist market has:
► High costs.
► Low costs.
► Equal costs.
► None of the given options.
ECO401 Question No: 10 ( M a r k s: 1 )
A firm is charging a different price for each unit purchased by a consumer. This is called:
► First-degree price discrimination.
► Second-degree price discrimination.
► Third-degree price discrimination.
► None of the given options.
ECO401 Question No: 11 ( M a r k s: 1 )
McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any special meal. This practice is an example of:
► Collusion.
► Price discrimination.
► Two-part tariff.
► Bundling.
ECO401 Question No: 12 ( M a r k s: 1 )
The price elasticity of demand for any good must be less than or equal to zero unless:
► The good is a necessity.
► The good is a luxury.
► The good is a Giffen good.
► None of the given options.
ECO401 Question No: 13 ( M a r k s: 1 )
Figure
In figure given above, the marginal utility of income is:
► Increasing as income increases.
► Constant for all levels of income.
► Diminishes as income increases.
► None of the given options.
ECO401 Question No: 14 ( M a r k s: 1 )
In monopoly, which of the following is NOT true?
► Products are differentiated.
► There is freedom of entry and exit into the industry in the long run.
► The firm is a price maker.
► There is one main seller.
ECO401 Question No: 15 ( M a r k s: 1 )
Welfare economics is the branch of economics which deals with:
► Positive issues.
► Normative issues.
► Micro issues.
► Macro issues.
ECO401 Question No: 16 ( M a r k s: 1 )
Under the kinked demand curve model, an increase in marginal cost will lead to:
► An increase in output level and a decrease in price.
► A decrease in output level and an increase in price.
► A decrease in output level and no change in price.
► Neither a change in output level nor a change in price.
ECO401 Question No: 17 ( M a r k s: 1 )
Which of the following market situation is much like a pure monopoly except that its member firms tend to cheat on agreed upon price and output strategies?
► Duopoly.
► Cartel.
► Market sharing monopoly.
► Natural monopoly.
ECO401 Question No: 18 ( M a r k s: 1 )
In the complete classical model, a rightward shift of the labor supply curve will:
► Decrease the price level and increase the nominal wage.
► Decrease the nominal wage and increase the price level.
► Decrease both the price level and the nominal wage.
► Increase both the price level and the nominal wage.
ECO401 Question No: 19 ( M a r k s: 1 )
Which of the following events could cause the aggregate demand curve to shift to the right?
► An increase in the rate of inflation.
► A decrease in government expenditures.
► A decrease in investment spending.
► A decrease in income tax rates.
ECO401 Question No: 20 ( M a r k s: 1 )
The Great Depression of 1930s opened the door to the __________ revolution in macroeconomic theory.
► Keynesian.
► New classical.
► Old classical.
► New Keynesian.
ECO401 Question No: 21 ( M a r k s: 1 )
Keynesian economics was the predominant economic theory:
► Prior to the late 1700s.
► From the late 1700s to the early 1900s.
► From 1930s to 1970s.
► Since 1970s.
ECO401 Question No: 22 ( M a r k s: 1 )
Classical economics was replaced as the dominant theory of macroeconomic analysis by:
► Monetarism.
► Rational expectations.
► Keynesian economics.
► Neoclassical economics.
ECO401 Question No: 23 ( M a r k s: 1 )
According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause:
► Both prices and output to rise.
► Prices to fall and output to remain unchanged.
► Both prices and output to fall.
► Prices to rise and output to remain unchanged.
ECO401 Question No: 24 ( M a r k s: 1 )
Intermediate goods are meant for:
► Direct use by the consumers.
► Further processing.
► The term do not exist.
► None of the given options.
ECO401 Question No: 25 ( M a r k s: 1 )
Final goods are meant for:
► Direct use by the consumers.
► Further processing.
► The term do not exist.
► None of the given options.
ECO401 Question No: 26 ( M a r k s: 1 )
Which of the following is a flow variable?
► The value of the house in which you live.
► The balance in your savings account.
► Your monthly consumption on food items.
► The number of carrots in your refrigerator at the beginning of the month.
ECO401 Question No: 27 ( M a r k s: 1 )
Which of the following is NOT a stock variable?
► Government debt.
► Capital.
► The amount of money held by the public.
► Inventory investment.
ECO401 Question No: 28 ( M a r k s: 1 )
All other things remain the same, Gross Domestic Product (GDP) will rise if:
► Imports rises.
► Exports falls.
► Durable goods consumption rises.
► Military spending falls.
ECO401 Question No: 29 ( M a r k s: 1 )
If disposable income increases from $5 trillion to $6 trillion and as a result, consumption expenditure increases from $7 trillion to $7.8 trillion, the Marginal Propensity to Consume is:
► 1.0.
► 0.8.
► 5/7 = 0.71.
► 6/7.8 = 0.77.
ECO401 Question No: 30 ( M a r k s: 1 )
The slope of the consumption function (or line) is the:
► Average propensity to save.
► Average propensity to consume.
► Marginal propensity to save.
► Marginal propensity to consume.
ECO401 Question No: 31 ( M a r k s: 1 )
Suppose that your income increases from $100,000 to $150,000 and your consumption increases from $80,000 to $120,000. Your Marginal Propensity to Save (MPS) is:
► 0.2.
► 0.4.
► 0.6.
► 0.8.
ECO401 Question No: 32 ( M a r k s: 1 )
The unemployment rate is equal to:
► Number of employed / labour force x 100.
► Number of unemployed / labour force.
► (Number of unemployed / labour force) x 100.
► None of the given options.
ECO401 Question No: 33 ( M a r k s: 1 )
The traditional Phillips Curve shows the:
► Inverse relationship between the rate of inflation and unemployment rate.
► Inverse relationship between the nominal and real wage.
► Direct relationship between unemployment and demand-pull inflation.
► Tradeoff between the short run and long run.
ECO401 Question No: 34 ( M a r k s: 1 )
Deflation is:
► An increase in the overall level of economic activity.
► An increase in the overall price level.
► A decrease in the overall level of economic activity.
► A decrease in the overall price level.
ECO401 Question No: 35 ( M a r k s: 1 )
Is Grosss Domestic Product (GDP) an accurate measure of a country’s well being?
► Yes, it is the best measure of national well being.
► Yes, provided we use real GDP and not nominal GDP.
► Uncertain, depending on whether GDP is rising or falling.
► No, it is not.
ECO401 Question No: 36 ( M a r k s: 1 )
Real Gross Domestic Product (GDP):
► Is nominal GDP adjusted for changes in the price level.
► Is also called nominal GDP.
► Measures GDP minus depreciation of capital.
► Will always change when prices change.
ECO401 Question No: 37 ( M a r k s: 1 )
If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the exogenous model predicts that output will grow and the new steady state will approach:
► A higher output level than before.
► The same output level as before.
► A lower output level than before.
► The Golden Rule output level.
ECO401 Question No: 38 ( M a r k s: 1 )
A currency appreciation:
► Reduces aggregate demand and increases aggregate supply.
► Reduces both aggregate demand and aggregate supply.
► Increases aggregate demand and reduces aggregate supply.
► Increases both aggregate demand and aggregate supply.
ECO401 Question No: 39 ( M a r k s: 1 )
M1 component of money supply consists of:
► Paper currency and coins.
► Paper currency, coins and check writing deposits.
► Paper currency, coins, check writing deposits and savings deposits.
► Paper currency, coins, check writing deposits, savings deposits and certificates of deposits.
ECO401 Question No: 40 ( M a r k s: 1 )
Personal income:
► Is income received by individuals during a given year.
► Is the income individuals have available for spending during a given year.
► Equals national income minus indirect taxes.
► Is the sum of wages plus interest received by individuals during a given year.
ECO401 Question No: 41 ( M a r k s: 1 )
Real Gross National Product (GNP) is best defined as:
► The pound value of all final goods and services produced in the economy during a particular time period and measured in current prices.
► The pound value of all goods produced for final consumption by households in a particular year and measured in constant prices.
► The current pound value of all new and used goods produced and sold in the economy during a particular time period.
► The market value of all final goods and services produced by the economy during a given time period, with prices held constant relative to some base period.
ECO401 Question No: 42 ( M a r k s: 1 )
Which of the following statements describes the difference between nominal and real Gross Domestic Product (GDP)?
► Real GDP includes only goods; nominal GDP includes goods and services.
► Real GDP is measured using constant base-year prices; nominal GDP is measured using current prices.
► Real GDP is equal to nominal GDP less the depreciation of the capital stock.
► Real GDP is equal to nominal GDP multiplied by the CPI.
ECO401 Question No: 43 ( M a r k s: 1 )
If we compare Gross Domestic Product (GDP) with Gross National Product (GNP) then:
► GNP = GDP – Net income from abroad.
► GNP = GDP + Net income from abroad.
► GNP = NNP – Net income from abroad.
► GNP = NNP + Net income from abroad.
ECO401 Question No: 44 ( M a r k s: 1 )
Gross domestic product (GDP) is the market value of:
► All transactions in an economy during one-year period.
► All goods and services exchanged in an economy during one-year period.
► All final goods and services exchanged in an economy during one-year period.
► All final goods and services produced in a domestic economy during one-year period.
ECO401 Question No: 45 ( M a r k s: 1 )
Which of the following shows the Fisher equation of exchange?
► MT=PV.
► VT=PM.
► MV=PQ.
► MY=VP.
ECO401 Question No: 46 ( M a r k s: 1 )
An exchange rate that varies according to the supply and demand for the currency in the foreign exchange market is called:
► Overvalued exchange rate.
► Undervalued exchange rate.
► Fixed exchange rate.
► Flexible exchange rate.
ECO401 Question No: 47 ( M a r k s: 1 )
In the equation MV = PQ, according to the crude quantity theory of money:
► M has no effect on the price level.
► V is the number of times each dollar is spent per year.
► Q is the real price level.
► P rises as V falls, other things constant.
ECO401 Question No: 48 ( M a r k s: 1 )
In the Keynesian cross model, the 45-degree line has a slope of:
► 45.
► Infinity.
► 1.
► 0.
ECO401 Question No: 49 ( M a r k s: 1 )
In Keynesian economics, equilibrium can occur:
► Only at full employment level.
► Only at levels less than full employment.
► Only at levels greater than full employment.
► At any level of aggregate output which is equal to aggregate expenditures.
ECO401 Question No: 50 ( M a r k s: 1 )
After a decrease in the wage, the substitution effect implies that:
► Only the amount demanded of capital decreases.
► Only the amount demanded of labor decreases.
► Only the amount demanded of capital increases.
► The amount demanded of all inputs increases.
ECO401 Question No: 51 ( M a r k s: 5 )
Briefly discuss the private cost of advertising. How we can calculate the marginal social cost?
ANSWER: Private Cost Of Advertising: The private cost of advertising is the cost incurred by firm in making the advertisement i.e newspaper adds, tv commercials etc. The firms do not take into account the nuisance faced by people due to these advertisements otherwise the firms would do less advertisement.
Marginal Social Cost: Marginal social cost is not a monetary based cost. It is the cost borne by the society as a whole. It is the cost of consumption of one next unit.
ECO401 Question No: 52 ( M a r k s: 10 )
A. What conclusions are derived from exogenous growth theory?
ANSWER: Exogenous Growth Theory: The major conclusions derived from the exogenous growth are as follows:
· The steady growth rate of real GDP depends on exogenous rates of growth of population (n) and technology (t). There are no policies for government for how to affect the steady growth rate of a country. Higher savings can only have a little effect on income it cannot cause long term growth because savings cause diminishing returns to investment and capital accumulation.
· If one country started with lower income and capital than another country, the poorer country will grow faster to catch up the richer country and then both the countries will grow together.
B. What is meant by convergence theory? Explain the convergence theory in the given graph.
(M a r k s: 4+6)
ECO401 Question No: 53 ( M a r k s: 10 )
Define fiscal policy. Differentiate between contractionary and expansionary fiscal policy. In which situations, budget deficit and budget surplus exist?
Answer: Fiscal Policy: Fiscal policy is the government’s about the
- expenditure in form of purchases, subsidies and interest payments on debt etc.
- revenue in form of taxes etc.
Difference between Contractionary and Expansionary Fiscal Policy:
| Contactionary Fiscal Policy | Expansionary Fiscal Policy |
| In conactionary fiscal policy government decreases its expenditure. | In expansionary fiscal policy government increases its expenditure. |
Budget Deficit and Budget Surplus: Budget deficit exists if government expenditure increases the revenue earned. In this case government needs to finance its expenditure through borrowing.
Budget surplus exists when revenue exceeds the government expenditure. In this condition government can easily pay off its debt borrowings.
(M a r k s: 2+4+4)
ECO401 Question No: 54 ( M a r k s: 10 )
Discuss the basic theories regarding IMF’s stabilization program. Are these theories successful? If not, give reasons.
Answer: IMF’s Stabilization Theories:
· Tight Fiscal Policy: It works through higher revenues and reduced government expenditure.
· Devaluation: Switching from imports to home produced goods. It increases competitiveness, exports and increase investors confidence in local currency.
· Tight Monetary Policy: Higher interest rates resulting in reduced private sector consumption and investment demand. It reduces inflation and increases savings. High interest rates also results in higher capital inflow.
Theses theories are generally not successful in lower income countries (LICs). Because they caused the problems of:
- Devaluation: It raises the price of imports and also increased the inflation while the real wage rate could not increase.
- Stabilization hurts poor: decrease in expenditure always badly effects the poor which can then cause political instability.
