ECO401- Economics Finalterm paper 2009

FINALTERM  EXAMINATION

Spring 2009

ECO401- Economics (Session - 2)

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Question No: 1    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 The supply curve is upward-sloping because:

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       ► 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    ( Marks: 1 )    - Please choose one

 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.

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Question No: 6    ( Marks: 1 )    - Please choose one

 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.

   

Question No: 7    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 "Utility" is most closely related to the term:

       ► Useless.

       ► Require.

       ► Necessary.

       ► Satisfaction.

   

Question No: 9    ( Marks: 1 )    - Please choose one

 When the marginal utility of a good is zero, this implies that:

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       ► 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    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 Diminishing marginal returns implies:

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       ► Decreasing marginal costs.

       ► Increasing marginal costs.

       ► Decreasing average variable costs.

       ► Decreasing average fixed costs.

   

Question No: 12    ( Marks: 1 )    - Please choose one

 A graph showing all the combinations of capital and labour available for a given total cost is the:

       ► Budget constraint.

       ► Expenditure set.

       ► Isoquant.

       ► Isocost.

   

Question No: 13    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 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.

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Question No: 15    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 Welfare economics is the branch of economics which deals with:

       ► Positive issues.

       ► Normative issues.

       ► Micro issues.

       ► Macro issues.

   

Question No: 17    ( Marks: 1 )    - Please choose one

 The oligopoly model which predicts that oligopoly prices will tend to be very rigid is the:

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       ► Cournot model.

       ► Cobweb model.

       ► Dominant firm model.

       ► Kinked demand model.

   

Question No: 18    ( Marks: 1 )    - Please choose one

 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.

   

Question No: 19    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 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.

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Question No: 21    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 A reason why some economists basically ignore the short run is because they believe that the economy:

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       ► Has self-correcting mechanisms.

       ► Can only be graphed with a horizontal curve.

       ► Never needs correction.

       ► None of the given options.

   

Question No: 23    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 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.

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Question No: 25    ( Marks: 1 )    - Please choose one

 The economic analysis most closely related to Say's Law is:

       ► Short-run aggregate market.

       ► Production possibilities.

       ► Imperfect competition.

       ► Circular flow.

   

Question No: 26    ( Marks: 1 )    - Please choose one

 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.

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Question No: 27    ( Marks: 1 )    - Please choose one

 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.

   

Question No: 28    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 According to classical economists, the:

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       ► 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    ( Marks: 1 )    - Please choose one

 How many methods are there to measure Gross Domestic Product?

       ► Three.

       ► Four.

       ► Five.

       ► Six.

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Question No: 31    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 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.

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Question No: 34    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 If injections are less than withdrawals at the full-employment level of income then there arises:

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       ► A deflationary gap.

       ► Hysteresis.

       ► Hyperinflation.

       ► An inflationary gap.

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Question No: 36    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 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.

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Question No: 38    ( Marks: 1 )    - Please choose one

 Which of the following will result if there is a decrease in aggregate demand?

       ► Expansion; inflation.

       ► Recession; deflation.

       ► Expansion; deflation.

       ► Recession; inflation.

   

Question No: 39    ( Marks: 1 )    - Please choose one

 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.

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Question No: 40    ( Marks: 1 )    - Please choose one

 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.

   

Question No: 41    ( Marks: 1 )    - Please choose one

 If a country has flexible exchange rate and has more rapid inflation rate than other countries, its currency will:

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       ► Appreciate.

       ► Depreciate.

       ► Not effect.

       ► All of the given are possible.

   

Question No: 42    ( Marks: 1 )    - Please choose one

 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.

   

Question No: 43    ( Marks: 1 )    - Please choose one

 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.

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Question No: 44    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 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    ( Marks: 1 )    - Please choose one

 A currency appreciation should:

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       ► 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    ( Marks: 1 )    - Please choose one

 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.

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Question No: 48    ( Marks: 1 )    - Please choose one

 Commercial banks in Pakistan are supervised by:

       ► State bank.

       ► National bank.

       ► Finance minister.

       ► World bank.

   

Question No: 49    ( Marks: 1 )    - Please choose one

 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.

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Question No: 50    ( Marks: 1 )    - Please choose one

 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.

   

Question No: 51    ( Marks: 5 )

 Briefly discuss the concept of comparative advantage with the help of example.

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Question No: 52    ( Marks: 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?

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(Marks: 4+6)

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Question No: 53    ( Marks: 10 )

 Define M0 and M1. Briefly discuss the three broad motives of holding money.

(Marks:4+6)

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Question No: 54    ( Marks: 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.

(Marks: 2.5 each)

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