FINALTERM EXAMINATION
Spring 2009
ECO401 – Economics
Time: 120 min
Question No: 1 ( M a r k s: 1 )
In pure capitalism, the role of government is best described as:
► Significant.
► Extensive.
► Nonexistent.
► Limited.
Question No: 2 ( M a r k s: 1 )
A new technology which reduces costs for firms:
►Shifts the supply curve to the right.
► Shifts the supply curve to the left. ► Reduces the equilibrium quantity.
► Raises the equilibrium price.
Question No: 3 ( M a r k s: 1 )
When constructing a typical production possibilities curve, economists assume that:
► Economic resources are underutilized.
► Resources are equally productive in many alternative uses.
► All available resources are employed efficiently.
► Production technology is allowed to vary.
Lesson 02
Question No: 4 ( M a r k s: 1 )
If you sum all of the marginal utilities for the consumption of units one through five, you will get:
► The marginal utility for the consumption of the fifth unit.
► The marginal utility for the consumption of the sixth unit.
► The total utility for the consumption of the first five units.
► The average utility for the consumption of the first five units.
Question No: 5 ( M a r k s: 1 )
If your demand price for one unit of a good is $100 and the market price is $75, your consumer's surplus is:
►$25.
► $50.
► $75.
► $100.
Question No: 6 ( M a r k s: 1 )
An individual with a constant marginal utility of income will be:
► Risk loving.
► Risk neutral.
► Risk averse.
► Insufficient information for a decision.
Question No: 7 ( M a r k s: 1 )
Ali initially leased one-room space and started a small day care centre with only 4 children and one staff member. But he found that the cost per child is very high. He wants to expand the centre. Which of the following will happen when Ali expand the centre?
►Economies of scale.
► Diseconomies of scale.
► Decreasing returns to the labor inputs.
► Increasing returns to the labor inputs.
Economies of scale:
The increase in efficiency of production as the number of goods being produced increases.
Question No: 8 ( M a r k s: 1 )
A self-employed accountant spends a lot of money identifying clients and advertising his services. These activities are an example of:
► External costs.
►Transaction costs.
► Fixed inputs.
► Marginal returns.
External costs (also called externalities), are the costs that people other than the buyer are forced to pay as a result of the transaction.
Question No: 9 ( 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.
Diminishing marginal rate of substitution represents that Indifference curves are convex. As one moves down a (standardly convex) indifference curve, the marginal rate of substitution decreases. This is known as the law of diminishing marginal rate of substitution.
Question No: 10 ( M a r k s: 1 )
If isoquants are straight lines, it means that:
► Only one combination of inputs is possible.
► There is constant returns to scale.
► Inputs have fixed costs at all use rates.
► The marginal rate of technical substitution of inputs is constant.
When the isoquants are straight lines, the MRTS is constant.
Question No: 11 ( M a r k s: 1 )
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.
Question No: 12 ( M a r k s: 1 )
The supply curve for a competitive firm is:
► Its entire marginal cost curve.
►The upward-sloping portion of its marginal cost curve.
► Its marginal cost curve above the minimum point of the average variable cost curve.
► Its marginal cost curve above the minimum point of the average total cost curve.
Supply curve for a competitive firm is discrete is MC when P> AVC
Question No: 13 ( M a r k s: 1 )
Following are the disadvantages of monopoly EXCEPT:
► Monopolists earn higher profits.
►Monopolists produce high quality goods at higher prices.
► Most of the “surplus” (producer + consumer surplus) accrues to monopolists.
► Monopolists do not pay sufficient attention to increasing efficiency.
Disadvantages of monopolies
1. Monopolists produce lower quantities at higher prices compared to perfectly competitive firms. This is because monopolists do not produce where P=MC (the point of allocative efficiency) nor at P= AC minimum (the point of cost efficiency).
2. Monopolists earn supernormal profits compared to perfectly competitive firms
3. Most of the “surplus” (producer + consumer surplus) accrues to monopolists.
4. Monopolists do not pay sufficient attention to increasing efficiency in their production processes.
Question No: 14 ( M a r k s: 1 )
When a firm charges each customer the maximum price that the customer is willing to pay, the firm:
► Engages in a discrete pricing strategy.
► Charges the average reservation price.
► Engages in second-degree price discrimination.
►Engages in first-degree price discrimination.
In this type, everyone charged according to what he can pay. Seller can charge the highest
price of any product from customers.
Question No: 15 ( M a r k s: 1 )
Unlike the classical economists, Keynes believed that the economy could get stuck in the short run for a significant period of time because of:
► Insufficient aggregate supply.
► Insufficient aggregate demand.
► Quick self correcting mechanism.
► Government purchases of too many goods and services.
Question No: 16 ( M a r k s: 1 )
Price exceeds marginal revenue in which of the following market structure(s)?
► Differentiated oligopoly and monopoly only.
► Standardized oligopoly and pure competition only.
►Monopolistic competition and monopoly only.
►Monopolistic competition, oligopoly and monopoly.
Price will exceed marginal revenue in any industry in which firms face a downward-sloping demand curve. Pure competition is the only industry in which this is not the case.
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.
Ref by Saqib Kamran:
There are two extremes; monopoly and perfect Competition. The Oligopoly/ cartels is the one having qualities of both. So this is much like a pure monopoly except it has members who make a group to control and price and output. The group of people acts as monopoly. It is either possible that the members of firm tend to cheat on agreed price and output strategies.
Question No: 18 ( M a r k s: 1 )
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: 19 ( M a r k s: 1 )
Which of the following is a negative externality connected to attending the college?
► The fact that completion of a college degree acts as a signaling mechanism to employers.
► The fact that other costs, such as books and materials, are incurred in addition to tuition and fees.
►The fact that the people in the next room play loud music at hours you want to sleep.
► The fact that you will get benefits from college that you don't currently anticipate.
A negative externality arises from the harmful spillover effect of production or consumption for society.
Question No: 20 ( M a r k s: 1 )
A profit maximizing firm will employ labour up to the point where:
► Marginal revenue = Marginal product.
► Marginal cost = Marginal product.
► Marginal revenue product = Average cost of labour.
► Marginal revenue product = Marginal cost of labour.
Ref:
Question No: 21 ( M a r k s: 1 ) 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: 22 ( M a r k s: 1 )
The classical economists thought that the economy would quickly overcome any short run instability because:
► Price level and quantity are flexible.
► Prices would get stuck at a low level.
► The long run aggregate supply would shift to the left.
► Prices and wages are flexible.
Ref by Syed Toqeer.
The primary disagreement between new classical and new Keynesian economists is over how quickly wages and prices adjust. New classical economists build their macroeconomic theories on the assumption that wages and prices are flexible.
Question No: 23 ( M a r k s: 1 )
The aggregate demand curve is downward sloping because of all of the following reasons EXCEPT:
► The central bank raises real interest rate as inflation increases.
► The central bank raises nominal interest rate as inflation rises.
► The central bank intentionally tries to increase the level of aggregate demand when inflation rises.
►The central bank intentionally tries to reduce the level of aggregate demand when inflation rises.
Because inflation is demand based and that’s why central bank will reduce demand to curb inflation.
Question No: 24 ( M a r k s: 1 )
Which school of thought believes that the self-correcting mechanism works slowly?
► Keynesian.
►Monetarist.
► Rational expectations.
► Keynesian and monetarist only.
Many people who like to focus on the self-correcting mechanism and the automatic stabilizers as free-market, “laissez-faire” ways to influence the economy may also follow a school of thought called Monetarism (called Monetarists).
Question No: 25 ( M a r k s: 1 )
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 )
Under new classical macroeconomics, monetary policy:
► Affects the level of equilibrium output.
► Affects the composition of equilibrium output.
► Affects both the level and composition of equilibrium output.
► None of the given options.
Question No: 27 ( M a r k s: 1 )
The average propensity to consume is the ratio of:
►A change in consumption to a change in disposable income.
► A change in consumption to total disposable income at a specific income level.
► Total consumption to total disposable income at a specific income level.
► Total consumption to a change in disposable income.
Average propensity to consume (APC) is the ratio of total consumption to total disposable income.
Question No: 28 ( M a r k s: 1 )
According to Keynesian economics, inflexible wages and prices:
► Cause the aggregate product market to always remain in equilibrium.
► Cause real production and employment to fall when aggregate expenditures decline.
►Cause real production and employment to remain at their full employment levels.
► Fall in the early stages of a recession, when aggregate expenditures decline.
According to Keynesian economics, inflexible wages and prices cause real GDP and employment to fall when aggregate demand decreases.
Question No: 29 ( M a r k s: 1 )
A £1 increase in government spending will have a larger impact upon national income than a £1 tax cut because:
► The government prints the pound it spends.
► Not all of a tax cut is spent.
► When taxes are cut, so too is government spending.
► Taxes are an injection into the system.
Question No: 30 ( M a r k s: 1 )
Each of the following is one of the four sets of factors that determine the level of total spending EXCEPT:
►Consumer's baseline spending C0.
►Foreign real GDP Yf.
► Government purchases G.
► Investor's baseline spending in the stock market.
The record of a country's transactions in goods, services and assets with the rest of the world is its:
► Current account.
► Balance of trade.
► Capital account.
► Balance of payments.
The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers.
Question No: 32 ( M a r k s: 1 )
Which of the following is NOT an account in the balance of payments?
► Capital account.
► Financial account.
► Current account.
Question No: 33 ( M a r k s: 1 )
If imports = exports, then we have:
► Current account balance.
► Capital account balance.
► Statistical discrepancy.
►Balanced Budget.
Question No: 34 ( M a r k s: 1 )
Unemployment benefits may increase the unemployment rate because:
► Unemployment benefits reduce the cost of job search.
► Unemployment benefits encourage people to quit their jobs.
►Unemployment benefits reduce the benefits of additional job searching.
► Unemployment benefits enable people to quit searching for work.
Question No: 35 ( M a r k s: 1 )
An increase in ''per capita'' national income implies that:
► Everyone in the nation is enjoying a better standard of living.
► The population has increased.
► National income has risen faster than the population has risen.
► The distribution of income has improved.
Ref:
Question No: 36 ( M a r k s: 1 ) 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.
As long as total savings exceeds(investment) the amount required to replace depreciated capital, the economy continues to add to its capital stock and move towards K*.
Question No: 37 ( M a r k s: 1 )
According to Keynesian economics, aggregate expenditures are the sum of desired or planned spending undertaken by:
► All four sectors only when the economy is at full employment.
► All four sectors at a specific aggregate production level.
► The household sector after taxes.
►The business and government sectors.
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.
A currency appreciation reduces aggregate demand and raises aggregate supply.
Question No: 39 ( M a r k s: 1 )
Which of the following is a more expansionary way for government to finance a budget deficit?
► Borrowing money in the money market.
► Borrowing money in the goods market.
► Creating new money.
► Increasing taxes.
The government runs a budget deficit and finances it by printing more money.
Question No: 40 ( M a r k s: 1 )
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.
Question No: 41 ( M a r k s: 1 )
In terms of the IS-LM model, an increase in tax rates should move the:
►IS curve leftward.
► IS curve rightward.
► LM curve rightward.
► LM curve leftward.
Question No: 42 ( M a r k s: 1 )
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.
The primary way that the central bank can affect the monetary base is by open market operations or sales and purchases of second hand government debt, or by changing the reserve requirements. If the central bank wishes to lower interest rates, it purchases government debt. Question No: 43 ( M a r k s: 1 )
Which of the following statements is TRUE?
► Net National Product = Gross National Product – Depreciation.
► Net National Product = National Income.
► Net National Product = Disposable Personal Income.
► Net National Product = Personal Income.
NNP = GNP – Depreciation allowance
Question No: 44 ( M a r k s: 1 )
Gross National Product (GNP) is:
► Net National Product (NNP) plus depreciation.
► National income discounted by the GDP deflator.
► Income from foreign investments.
► Gross Domestic Product (GDP) minus depreciation.
GNP= NNP+ Depreciation allowance
Question No: 45 ( 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.
Question No: 46 ( M a r k s: 1 )
According to the quantity theory of money, if there is inflation, what must have caused it?
► Higher oil prices.
► An increase in the money supply.
►Increased velocity.
► Higher budget deficits.
The velocity of money is not stable, thus making the predictions of the quantity theory of money – i.e. that monetary growth must necessarily lead to inflation.
Question No: 47 ( 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.
Question No: 48 ( M a r k s: 1 )
Which of the following may cause an increase in national income?
►Rise in exports.
► Rise in imports.
► Fall in consumer spending.
► Increase in saving.
Question No: 49 ( M a r k s: 1 )
The gold standard was an example of what kind of exchange-rate system?
► A managed floating exchange rate.
► A fixed exchange rate.
► A non-convertible exchange rate.
► A freely floating exchange rate.
Question No: 50 ( M a r k s: 1 )
The basic difference between oligopoly and monopolistic competition is that.
► Products are differentiated in oligopoly.
► There are no barriers to entry in oligopoly.
► There are barriers to entry in oligopoly.
► An oligopoly includes downward sloping demand curves facing the firm.
OLIGOPOLY
Because there are barriers to entry in oligopoly which keep out potential competitors, there is the possibility of positive long run profits.
Question No: 51 ( M a r k s: 5 )
A. Differentiate between final goods and intermediate goods with the help of examples.
B.
Year | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 |
Real GDP Growth Rate | 1% | -5% | 1% | 3% | 4% | 5% | 2% | 1% |
a. Calculate the average growth rate between 1982 and 1985.
b. Calculate the average growth rate between 1979 and 1986.
(M a r k s: 3+2)
B.Calculate the average growth rate between 1982 and 1985.
Calculate the average growth rate between 1979 and 1986.
Question No: 52 ( M a r k s: 10 )
From the information given in the following table, calculate the Marginal Physical Product and Marginal Revenue Product of labor in the perfectly competitive market.
Labor per week | Total Product per week | Marginal Physical Product | Marginal Revenue | Marginal Revenue Product |
0 | 0 | ? | 10 | ? |
1 | 30 | ? | 10 | ? |
2 | 40 | ? | 10 | ? |
3 | 47 | ? | 10 | ? |
4 | 53 | ? | 10 | ? |
5 | 57 | ? | 10 | ? |
(M a r k s: 5+5)
Question No: 53 ( M a r k s: 10 )
c.What is meant by public goods? Briefly explain the public goods in economics with the help of examples.
d.What are the characteristics of public goods?
Question No: 54 ( M a r k s: 10 )
Market for loanable funds is the market of money. Explain the Classical and Keynesian views about the demand and supply of loanable funds in this market.
