FINAL TERM EXAMINATION
Spring 2009
ECO401- Economics (Session - 2)
Question No: 1 ( M a r k s: 1 ) http://vuzs.net
In a free-market economy, the allocation of resources is determined by:
► Votes taken by consumers.
► A central planning authority.
► Consumer preferences.
► The level of profits of firms.
Question No: 2 ( M a r k s: 1 ) http://vuzs.net
The concave shape of the production possibilities curve for two goods X and Y illustrates:
► Increasing opportunity cost for both goods.
► Increasing opportunity cost for good X but not for good Y.
► Increasing opportunity cost for good Y but not for good X.
► Constant opportunity cost for both goods.
Question No: 3 ( M a r k s: 1 ) http://vuzs.net
If the quantity demanded of a product is greater than the quantity supplied of a product, then:
► There is a shortage of the product.
► There is a surplus of the product.
► The product is a normal good.
► The product is an inferior good.
Question No: 4 ( M a r k s: 1 ) http://vuzs.net
The supply curve is upward-sloping because:
► As the price increases, consumers demand less.
► As the price increases, suppliers can earn higher levels of profit or justify higher marginal costs to produce more.
► None of the given options.
► As the price increases, so do costs.
Question No: 5 ( M a r k s: 1 ) http://vuzs.net
When an industry's raw material costs increase, other things remaining the same:
► The supply curve shifts to the right.
► Output increases regardless of the market price and the supply curve shifts upward.
► Output decreases and the market price also decrease.
► The supply curve shifts to the left.
When quantity supplied at a given price decreases, the whole curve shifts to the left as there is a decrease in supply. This is generally caused by an increase in the cost of production or decrease in the number of sellers. An increase in wages, cost of raw materials, cost of capital, ceteris paribus, will decrease supply.
Why might the supply curve shift to the left?
- Rise in wage costs
- Rise in raw material costs
- Reduced labour productivity
- An increase in indirect taxes
- Reduced, or elimination of, subsidies
- The exit of existing firms from the industry
Question No: 6 ( M a r k s: 1 ) http://vuzs.net
When the price of petrol rises by 12%, the quantity of petrol purchased falls by 8%. This shows that the demand for petrol is:
► Perfectly elastic.
► Unit elastic.
► Elastic.
► Inelastic.
P€d= % change in Q demand
% change in P
Price= 8% = 0.666 , e
12%
Question No: 7 ( M a r k s: 1 ) http://vuzs.net
Suppose price rises from $15 to $17 and quantity demanded decreases by 20%. We can conclude:
► Demand is unitary elastic.
► Demand is elastic.
► The elasticity of demand is 2.
► Total revenue will decrease.
Question No: 8 ( M a r k s: 1 ) http://vuzs.net
"Utility" is most closely related to the term:
► Useless.
► Require.
► Necessary.
► Satisfaction.
Question No: 9 ( M a r k s: 1 ) http://vuzs.net
When the marginal utility of a good is zero, this implies that:
► The consumer would not spend any additional income to buy more of that good.
► Consumption of additional units would have positive marginal utility.
► Total utility is minimized.
► Total utility is also zero.
Question No: 10 ( M a r k s: 1 ) http://vuzs.net
When the substitution effect of a lowered price is counteracted by the income effect, the good in question is:
► An inferior good.
► A substitute good.
► An independent good.
► A normal good.
Question No: 11 ( M a r k s: 1 ) http://vuzs.net
Diminishing marginal returns implies:
► Decreasing marginal costs.
► Increasing marginal costs.
► Decreasing average variable costs.
► Decreasing average fixed costs.
Question No: 12 ( M a r k s: 1 ) http://vuzs.net
A graph showing all the combinations of capital and labour available for a given total cost is the:
► Budget constraint.
► Expenditure set.
► Isoquant.
► Isocost.
ISOQUANT
An isoquant represents different combinations of factors of production that a firm can employ
to produce the same level of output.
Question No: 13 ( M a r k s: 1 ) http://vuzs.net
When an isocost line is just tangent to an isoquant, we know that:
► Output is being produced at minimum cost.
► Output is not being produced at minimum cost.
► The two products are being produced at the medium input cost to the firm.
► The two products are being produced at the highest input cost to the firm.
Question No: 14 ( M a r k s: 1 ) http://vuzs.net
In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive but can be resold and are therefore an example of:
► A fixed cost.
► A variable cost.
► An implicit cost.
► An opportunity cost.
Question No: 15 ( M a r k s: 1 ) http://vuzs.net
The good produced by a monopoly:
► Has perfect substitutes.
► Has no substitutes at all.
► Has no close substitutes.
► Can be easily duplicated.
Question No: 16 ( M a r k s: 1 ) http://vuzs.net
Welfare economics is the branch of economics which deals with:
► Positive issues.
► Normative issues.
► Micro issues.
► Macro issues.
WELFARE ECONOMICS
It is a branch of economics dealing with normative issues (i.e., what should be).
Question No: 17 ( M a r k s: 1 ) http://vuzs.net
The oligopoly model which predicts that oligopoly prices will tend to be very rigid is the:
► Cournot model.
► Cobweb model.
► Dominant firm model.
► Kinked demand model.
The primary use of the kinked-demand curve is to explain price rigidity in oligopoly.
Question No: 18 ( M a r k s: 1 ) http://vuzs.net
The kinked demand curve model is based on which of the following assumptions?
► Each firm considers its rival's output to be fixed.
► Each firm considers its rival's price to be fixed.
► Each firm believes rivals will match all price changes.
► None of the given options.
The theory of kinked demand curve rests on the two assumptions that if one firm raises prices, no one else will raise their prices and so the firm will face declining revenues (elastic demand).
However if one firm lowered its price, everyone else would lower their prices as well and everyone’s revenues, including the first firm’s revenues would fall (inelastic demand).
Question No: 19 ( M a r k s: 1 ) http://vuzs.net
Which of the following is NOT conducive to the successful operation of a cartel?
► Market demand for the good is relatively inelastic.
► The cartel supplies all of the world's output of the good.
► Cartel members have substantial cost advantages over non-member producers.
► The supply of non-cartel members is very price elastic.
Question No: 20 ( M a r k s: 1 ) http://vuzs.net
Cartels are:
► Organizations of independent firms, producing similar products, that work together to raise prices and restrict output.
► Organizations of interdependent firms, producing similar products, that work together to raise prices and restrict output.
► Organizations of independent firms, producing different products, that work together to raise prices and restrict output.
► Considered as part of monopolistic competition.
A cartel is a formal (explicit) agreement among firms. Cartels usually occur in an oligopolistic industry, where there are a small number of sellers and usually involve homogeneous products.
Question No: 21 ( M a r k s: 1 ) http://vuzs.net
The marginal revenue product is:
► Upward sloping due to the law of demand.
► Upward sloping due to the law of marginal utility.
► Downward sloping due to the law of diminishing returns.
► Downward sloping due to the law of supply.
Question No: 22 ( M a r k s: 1 ) http://vuzs.net
A reason why some economists basically ignore the short run is because they believe that the economy:
► Has self-correcting mechanisms.
► Can only be graphed with a horizontal curve.
► Never needs correction.
► None of the given options.
Question No: 23 ( M a r k s: 1 ) http://vuzs.net
The long run aggregate supply curve will shift to the right if:
► The price level increases.
► Factors of production (such as labor and capital) increase.
► Expenditures (such as consumption and net exports) increase.
► The prices of inputs used to produce goods and services (such as wages and the price of oil) decrease.
Question No: 24 ( M a r k s: 1 ) http://vuzs.net
A primary implication of Keynesian economics is:
► The best government is the least government.
► Flexible wages and prices ensure full employment.
► Monetary policy is far superior to fiscal policy.
► Business-cycle instability is best corrected through government policies.
He argued that government policies could be used to promote demand at a macro level, to fight high unemployment and deflation of the sort seen during the 1930s.
Question No: 25 ( M a r k s: 1 ) http://vuzs.net
The economic analysis most closely related to Say's Law is:
► Short-run aggregate market.
► Production possibilities.
► Imperfect competition.
► Circular flow.
Question No: 26 ( M a r k s: 1 ) http://vuzs.net
Which of the following is NOT a reason of downward slope of aggregate demand curve?
► The exchange-rate effect.
► The wealth effect.
► The classical dichotomy / monetary neutrality effects.
► The interest-rate effect.
1. The first reason for the downward slope of the aggregate demand curve is Pigou's wealth effect.
2. The second reason for the downward slope of the aggregate demand curve is Keynes's interest-rate effect.
3. The third reason for the downward slope of the aggregate demand curve is Mundell-Fleming's exchange-rate effect.
Question No: 27 ( M a r k s: 1 ) http://vuzs.net
The upward-sloping aggregate supply curve indicates that:
► As firms increase their level of output, the cost of producing an extra unit increases.
► An increase in aggregate demand causes little, if any increase in real output the economy is operating in the long run.
► Any increase in aggregate demand causes the output of producers to fall because the general price level rises.
► None of the given options.
Keynes said that output can be increased after increasing the price. In short run, it is possible for the people to do overtime, so in short run AS curve is positively sloped and in the long run it becomes vertical.
Question No: 28 ( M a r k s: 1 ) http://vuzs.net
An important difference between the Classical and Keynesian approaches to achieve a macroeconomic equilibrium is that:
► Keynesian economists actively promote the use of fiscal policy while the classical economists do not.
► Keynesian economists actively promote the use of monetary policy to improve aggregate economic performance while the classical economists do not.
► Classical economists believe that monetary policy will certainly affect the level of output while the Keynesians believe that money growth affects only prices.
► Classical economists believe that fiscal policy is an effective tool for achieving economic stability while the Keynesians do not.
Question No: 29 ( M a r k s: 1 ) http://vuzs.net
According to classical economists, the:
► Aggregate demand curve is downward sloping and the aggregate supply curve is vertical.
► Aggregate demand curve is downward sloping and the aggregate supply curve is upward sloping.
► Aggregate demand curve is vertical and the aggregate supply curve is upward sloping.
► Aggregate demand curve is vertical and the aggregate supply curve is horizontal.
Question No: 30 ( M a r k s: 1 ) http://vuzs.net
How many methods are there to measure Gross Domestic Product?
► Three.
► Four.
► Five.
► Six.
We can measure GDP by using any of the three methods—the output method, income method or expenditure method.
Question No: 31 ( M a r k s: 1 ) http://vuzs.net
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.
Question No: 32 ( M a r k s: 1 ) http://vuzs.net
Which of the following is NOT a stock variable?
► Government debt.
► Capital.
► The amount of money held by the public.
► Inventory investment.
Question No: 33 ( M a r k s: 1 ) http://vuzs.net
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.
Marginal propensity to save:
MPS = ΔS / ΔYd=40,000/50,000=0.8
Question No: 34 ( M a r k s: 1 ) http://vuzs.net
Which of the following plays the key balancing role in making sure that the economy reaches and stays at equilibrium at the potential output level?
► Real exchange rate.
► The production function.
► Real price level.
► Real interest rate.
Question No: 35 ( M a r k s: 1 ) http://vuzs.net
If injections are less than withdrawals at the full-employment level of income then there arises:
► A deflationary gap.
► Hysteresis.
► Hyperinflation.
► An inflationary gap.
Inflationary gap The excess of national expenditure over income (and injections over withdrawals) at the full-employment level of national income.
Question No: 36 ( M a r k s: 1 ) http://vuzs.net
The labour force is made up of:
► The number of people employed minus the number of people unemployed.
► The number of people employed plus the number of people unemployed.
► Just the number of people employed.
► The whole population.
Question No: 37 ( M a r k s: 1 ) http://vuzs.net
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.
Deflation is a decrease in the overall price level. Prolonged periods of deflation can be just as damaging for the economy as sustained inflation.
Question No: 38 ( M a r k s: 1 ) http://vuzs.net
Which of the following will result if there is a decrease in aggregate demand?
► Expansion; inflation.
► Recession; deflation.
► Expansion; deflation.
► Recession; inflation.
A decrease in the natural rate of unemployment will:
► Shift the Phillips curve to the left.
► Result in a decrease in the inflation rate along the Phillips curve.
► Shift the Phillips curve to the right.
► Result in an increase in the inflation rate along the Phillips curve.
The Phillips curve, named after A. W. Phillips, describes a negative relationship between the unemployment rate and the inflation rate.
Question No: 40 ( M a r k s: 1 ) http://vuzs.net
The Phillips curve will shift to the right:
► If there is a decrease in the expected inflation rate.
► If there is an increase in the expected inflation rate.
► If there is a decrease in the natural rate of unemployment.
► If there is a favorable supply shock.
If inflationary expectations increase, the Phillips curve will shift to the right. This worsens the trade-off between inflation and unemployment.
Question No: 41 ( M a r k s: 1 ) http://vuzs.net
If a country has flexible exchange rate and has more rapid inflation rate than other countries, its currency will:
► Appreciate.
► Depreciate.
► Not effect.
► All of the given are possible.
Question No: 42 ( M a r k s: 1 ) http://vuzs.net
The nominal exchange rate is defined as the:
► Market on which currencies of various nations are traded for one another.
► Price of one unit of foriegn good in terms of domestic good.
► Price of one unit of foriegn currency in terms of domestic currency.
► All of the given options.
The nominal exchange rate (NER) is the price in domestic currency of one unit of a foreign
currency.
Question No: 43 ( M a r k s: 1 ) http://vuzs.net
Current account deficit is equal to:
► Private sector resource deficit.
► Government budget deficit.
► Private sector resource deficit + Government budget deficit.
► None of the given options.
Current account deficit = Private sector resource deficit + Government budget deficit
Question No: 44 ( M a r k s: 1 ) http://vuzs.net
In the exogenous growth model, if investment exceeds depreciation, the capital stock will ----------- and output will-------------- until the steady state is attained.
► Increase; increase.
► Increase; decrease.
► Decrease; decrease.
► Decrease; increase.
Question No: 45 ( M a r k s: 1 ) http://vuzs.net
Endogenous growth theory differs in what essential aspect from the Solow theory of economic growth?
► Endogenous growth theory is a monetary theory whereas the Solow theory is a real theory.
► Endogenous growth theory assumes diminishing returns to capital and the Solow theory assumes constant returns.
► In endogenous growth theory, economies with the same technology and saving rate need not converge to the same steady state as in the Solow model.
► All of the given options are correct.
Question No: 46 ( M a r k s: 1 ) http://vuzs.net
A currency appreciation should:
► Reduce net exports and therefore increase aggregate demand.
► Raise net exports and therefore decrease aggregate demand.
► Reduce net exports and therefore decrease aggregate demand.
► Raise net exports and therefore increase aggregate demand.
Question No: 47 ( M a r k s: 1 ) http://vuzs.net
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.
M1: is M0 + all current (or checking) deposits held with commercial banks. Checking deposits are accounts from which the holders can withdraw money at any time.
Question No: 48 ( M a r k s: 1 ) http://vuzs.net
Commercial banks in Pakistan are supervised by:
► State bank.
► National bank.
► Finance minister.
► World bank.
Question No: 49 ( M a r k s: 1 ) http://vuzs.net
What would result from a depreciation of the pound on the foreign exchange market?
► An increase in the price of imported computers.
► A fall in the purchasing power of US tourists in London.
► A fall in the price of imported computers.
► An increase in the purchasing power of UK tourists overseas.
Question No: 50 ( M a r k s: 1 ) http://vuzs.net
An example of hysteresis having a negative effect on a country's economy would be:
► Hyperinflation caused by excessive demand.
► Nervous investors selling all their shares, causing the stockmarket to crash.
► Unemployed workers not taking available jobs.
► Women being kept out of jobs traditionally held by men.
Hysteresis occurs when an unemployed person, particularly one who has been unemployed for a long time, finds it hard to re-enter the job market, due to atrophied skills, loss of self-confidence, or even fear of losing government benefits. This would explain why prolonged high unemployment rates might not fall quickly even when wage demands are reduced and new jobs are created.
Question No: 51 ( M a r k s: 5 )
Briefly discuss the concept of comparative advantage with the help of example.
Question No: 52 ( M a r k s: 10 )
A. Differentiate between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS).
B. Suppose a household has the consumption function (C) presented in the figure given below:
a. Find consumption when disposable income is $8,000 and $10,000.
b. Find consumption when disposable income is $ 6,000. How can a household consume more than its disposable income?
c. What is true for every point on the 450 line?
(M a r k s: 4+6)
Question No: 53 ( M a r k s: 10 )
Define M0 and M1. Briefly discuss the three broad motives of holding money.
(M a r k s:4+6)
Question No: 54 ( M a r k s: 10 )
Recall the Equation of Quantity theory of money and calculate the missing figure in each of the following cases:
a) Money supply (M) =100, Price (P) = 3 and real output (Q) = 200. Calculate the missing figure.
b) Velocity of money (V) = 4, Price (P) = 5 and output (Q) =100. Calculate the missing figure.
c) Money supply (M) = 200, velocity of money (V) = 7 and output (Q) = 700. Calculate the missing figure.
d) Money supply (M) =150, velocity of money (V) = 8, Price level (P) = 3. Calculate the missing value.
(M a r k s: 2.5 each)
