FINALTERM EXAMINATION
Fall 2008
ECO401- Economics (Session - 3)
Time: 120 min
m a r k s: 85
ECO401 Question No: 1
To calculate the price elasticity of demand, you need to know ____________________ point(s) on the ____________________ demand curve.
► One, same.
► Two, same.
► One, opposite.
► Two, opposite.
To calculate price elasticity of demand need two points on the same demand curve.
ECO401 Question No: 2
Governments protect domestic industries from foreign competition by _____________.
► Encouraging agreements like NAFTA.
► Using tariff and non tariff barriers.
► Discouraging union membership.
► Keeping the minimum wage low.
Lesson 44
ECO401 Question No: 3
To make the equation of exchange in the quantity theory of money:
► V and Q are assumed to be constant.
► The money supply is assumed to be produced by the banking system and not exclusively in currency.
► The quantity of money is assumed to determine the amount of Real GDP.
► M and P are considered constant.
Lesson 35
ECO401 Question No: 4
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.
Lesson 35
V is the velocity of money (the no. of times money is circulated in the economy in a year).
ECO401 Question No: 5
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.
ECO401 Question No: 6
Disposable income is:
► Total income plus transfer payments.
► Total income minus saving.
► Total income plus net taxes.
► Total income minus net taxes.
Disposable income is obtained by subtracting income tax from total income.
ECO401 Question No: 7
How should monetary policy be used during recessions?
► Decrease money supply to increase interest rate and increase aggregate demand.
► Increase money supply to increase interest rate and increase aggregate demand.
► Decrease money supply to decrease interest rate and increase aggregate demand.
► Increase money supply to decrease interest rate and increase aggregate demand.
ECO401 Question No: 8
Which of the following policy options would simultaneously increase interest rates and decrease output?
► The central bank sells bonds through open market operations.
► The federal government increases its defense purchases.
► The central bank expands the money supply.
► The federal government increases the tax rate.
ECO401 Question No: 9
An increase in the money supply will cause interest rates to:
► Rise.
► Fall.
► Remain unchanged.
► None of the given options.
ECO401 Question No: 10
Commercial banks in Pakistan are supervised by:
► State bank.
► National bank.
► Finance minister.
► World bank.
ECO401 Question No: 11
Fiscal policy is the government program with respect to its:
► Expenditure and tax revenue.
► Increase in unemployment.
► Steel Mill Privatization.
► Unemployment reduction.
In economics, fiscal policy is the use of government expenditure and revenue collection to influence the economy. ECO401 Question No: 12
An expansionary fiscal policy can:
► Raise the national debt.
► Decrease the national debt.
► Have no effect on national debt.
► None of the given options.
EXPANSIONARY FISCAL POLICY: A form of fiscal policy in which an increase in government purchases, a decrease in taxes, and/or an increase in transfer payments are used to correct the problems of a business-cycle contraction.
The total stock of government bonds and interest payments outstanding, from both the present and the past, is known as the national debt.
ECO401 Question No: 13
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.
Lesson 39
The Exogenous growth model, also known as the Neo-classical growth model or Solow growth model states that as a fixed stock of labor, the impact on output of the last unit of capital accumulated will always be less than the one before.
ECO401 Question No: 14
If the prices of all goods and services rise during the year:
► Real GDP may fall.
► Nominal GDP must fall.
► Nominal GDP may increase.
► Real GDP must rise.
ECO401 Question No: 15
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: 16
Economic activity moves from a trough into a period of --------------- until it reaches a ------------------ and then into a period of ------------------.
► Expansion; trough; recession
► Recession; trough; expansion
► Expansion; peak; recession
► Recession; peak; expansion
An expansion is one of two basic business cycle phases. The other is contraction. The transition from expansion to contraction is termed a "peak" and the changeover from contraction to expansion is a trough.
ECO401 Question No: 17
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.
ECO401 Question No: 18
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.
ECO401 Question No: 19
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: 20
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.
Lesson 30
MPS = ΔS / ΔYd=40,000/50,000=0.8
ECO401 Question No: 21
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: 22
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: 23
Real Gross Domestic Product (GDP) is measured:
► At base year prices.
► At current year prices.
► At a constant output level but at current prices.
► As the difference between the current year's GDP and last year's GDP.
The key is that real gross domestic product is measured in constant prices, the prices for a specific base year.
ECO401 Question No: 24
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: 25
According to classical economics, the economy was unlikely to experience:
► Full employment.
► Flexible wages and prices.
► Equality between saving and investment.
► High rates of unemployment.
ECO401 Question No: 26
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.
ECO401 Question No: 27
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: 28
According to Keynes, the economy does not self correct quickly because:
► With less consumption and more savings the interest rate will drop.
► In the short run workers are fully employed and cannot produce enough to get to long run equilibrium.
► Wages and prices are flexible in the short run.
► Wages and prices are sticky in the short run.
ECO401 Question No: 29
Which of the following will lead to an increase in aggregate demand?
► An increase in government tax revenues.
► An increase in household savings.
► An increase in business capital investment.
► An increase in demand for imports.
ECO401 Question No: 30
The aggregate supply curve is the relationship between:
► The price level and the real domestic output purchased.
► The price level and the real domestic output produced.
► The price level which producers are willing to accept and the price level purchasers are willing to pay.
► The real domestic output purchased and the real domestic output produced.
The total supply of goods and services produced within an economy at a given overall price level in a given time period. It is represented by the aggregate-supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide.
ECO401 Question No: 31
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.
ECO401 Question No: 32
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.
ECO401 Question No: 33
"The situation in which two or more firms set their prices and output according to a plan agreed upon between them in order to divide the market among themselves". Which of the following best desribes this situation?
► Strategic interaction.
► Monopolistic competition.
► Oligopoly.
► Collusion.
ECO401 Question No: 34
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: 35
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: 36
Welfare economics is the branch of economics which deals with:
► Positive issues.
► Normative issues.
► Micro issues.
► Macro issues.
ECO401 Question No: 37
A welfare loss occurs in monopoly where:
► The price is greater than the marginal cost.
► The price is greater than the marginal benefit.
► The price is greater than the average revenue.
► The price is greater than the marginal revenue.
ECO401 Question No: 38
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: 39
Graphically, the Marginal Cost curve cuts through the Average Total Cost curve at:
► The lowest point on the MC curve.
► The highest point on the MC curve.
► The lowest point on the ATC curve.
► The middle of the upward-sloping portion of the total cost curve.
ECO401 Question No: 40
If current output is less than the profit-maximizing output then which of the following must be TRUE?
► Total revenue is less than total cost.
► Average revenue is less than average cost.
► Marginal revenue is less than marginal cost.
► Marginal revenue is greater than marginal cost.
ECO401 Question No: 41
A production function:
► Relates inputs with output.
► Generates a curve that is upward sloping.
► Shows diminishing marginal product of an input, since it gets flatter as output rises.
► All of the given options.
ECO401 Question No: 42
A normal good can be defined as one which consumers purchase more of as:
► Prices fall.
► Prices rise.
► Incomes fall.
► Incomes increase.
Lesson 12
As income increases, quantity demanded for normal goods also increases.
ECO401 Question No: 43
If a market basket is changed by adding more to at least one of the goods, then every consumer will:
► Rank the market basket more highly after the change.
► Rank the market basket more highly before the change.
► Rank the market basket just as desirable after the change.
► Be unable to decide whether he prefers the first market basket to the second or the second to the first.
ECO401 Question No: 44
The concept of a risk premium applies to a person that is:
► All of the given options.
► Risk averse.
► Risk neutral.
► Risk loving.
ECO401 Question No: 45
Law of diminishing marginal utility indicates that the slope of the marginal utility curve is:
► Horizontal.
► Vertical.
► Negative.
► Positive.
Lesson 09
The law of diminishing marginal utility states that as you consume more and more of a particular good, the satisfaction or utility that you derive from each additional unit falls.
ECO401 Question No: 46
The extra value that consumers receive above what they pay for that good is called:
► Producer surplus.
► Utility.
► Marginal utility.
► Consumer surplus.
Consumer surplus measures the extra value that consumers receive above what they pay for a commodity.
ECO401 Question No: 47
If a decrease in price increases the total revenue then:
► Demand is elastic.
► Demand is inelastic.
► Supply is elastic.
► Supply is inelastic.
Lesson 07, ELASTIC DEMAND Є > 1
Price falls: As P decreases, Q increases
Percentage change in P < percentage change in Q
TR = P x Q TR will also increase
ECO401 Question No: 48
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.
ECO401 Question No: 49
While moving from left to right, the typical production possibilities curve has:
► An increasingly steep negative slope.
► A decreasingly steep negative slope.
► An increasingly steep positive slope.
► A constant and negative slope.
ECO401 Question No: 50
Our economy is characterized by:
► Unlimited wants and needs.
► Unlimited material resources.
► No energy resources.
► Abundant productive labor.
ECO401 Question No: 51 ( m a r k s: 5 )
Define foreign exchange markets. Also give some examples of foreign exchange markets.
ECO401 Question No: 52 ( m a r k s: 10 )
What will be the role of government in the foreign exchange market in the following cases?
a. If the supply curve of dollars shifts to the right due to rise in exports.
b. If the demand curve for dollars shifts to right due to rise in imports.
ECO401 Question No: 53 ( m a r k s: 10 ) (m a r k s: 2+4+4)
Define fiscal policy. Differentiate between contractionary and expansionary fiscal policy. In which situations, budget deficit and budget surplus exist?
ECO401 Question No: 54 ( m a r k s: 10 ) (m a r k s:4+3+3)
A. If there is a gradual increase in the saving rate over time, would this lead to sustained economic growth? Give your answer with brief explanation.
If this is true, why do people not increase their rate of saving?
B. If there is a higher participation rate and GDP per capita rises, would output per worker also rise? Give your answer with brief explanation.
