ECO401 Finalterm Solved Paper 2009 | VULMS Help: Virtual University of Pakistan

FINALTERM EXAMINATION

Fall 2009

ECO401- Economics

Time: 120 min

M a r k s: 87

Question No: 1 ( 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.

In the real world, some resources are better suited to food production and others to clothing – we cannot expect to move resources from X to Y without any loss of productive capacity, and vice versa. When this is taken into account, the proper shape of a production possibility frontier is drawn concave to the origin.

Question No: 2 ( M a r k s: 1 ) http://vuzs.net

When college students leave town for the summer, the demand for meals at the local restaurants decline. This results in:

► A decrease in equilibrium price and an increase in quantity of meal.

► An increase in equilibrium price and quantity of meal.

► A decrease in equilibrium price and quantity of meal.

► An increase in equilibrium price and a decrease in quantity of meal.

The demand curve shifts to the left because the town population declines, resulting in lower prices and quantity.

Question No: 3 ( M a r k s: 1 ) http://vuzs.net

A demand curve is price elastic when:

► Changes in demand are proportionately greater than changes in price.

► Changes in demand are equal to changes in price.

► None of the given options.

► Changes in demand are proportionately smaller than changes in price.

Price elastic means that change in demand is greater than the change in price of that good.

Question No: 4 ( M a r k s: 1 ) http://vuzs.net

The numerical measurement of a consumer’s preference is called:

► Use.

► Pleasure.

► Utility.

► Satisfaction.

Utility is the usefulness, benefit or satisfaction derived from the consumption of goods and services.

Question No: 5 ( M a r k s: 1 ) http://vuzs.net

Which of the following is TRUE about price-consumption curve for good X?

► Nominal income falls as the price of X falls.

► The absolute price of X falls, but the relative price between X and the composite good Y stays the same.

► It is always downward sloping for a normal good.

► It represents only those market baskets that are optimal for the given price ratio and preference pattern and therefore a demand curve can be plotted from it.

The price consumption curve (PCC) traces out the optimal choice of consumption at different prices. The PCC can be used to derive the demand curve, which shows the relationship between price & quantity demanded.

Question No: 6 ( M a r k s: 1 ) http://vuzs.net

Marginal profit is equal to:

► Marginal revenue minus marginal cost.

► Marginal revenue plus marginal cost.

► Marginal cost minus marginal revenue.

► Marginal revenue times marginal cost.

Question No: 7 ( M a r k s: 1 ) http://vuzs.net

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.

Its MC curve above the minimum point of the AVC curve.

Question No: 8 ( M a r k s: 1 ) http://vuzs.net

Second-degree price discrimination is the practice of charging:

► The reservation price to each customer.

► Different prices for different blocks of the same good or service.

► Different groups of customers different prices for the same products.

► Each customer the maximum price that he or she is willing to pay.

2ND DEGREE PD

In this type, different prices charged to customers who purchase different quantities

Question No: 9 ( M a r k s: 1 ) http://vuzs.net

A market with few entry barriers and with many firms that sell differentiated products is:

► Purely competitive.

► A monopoly.

► Monopolistically competitive.

► Oligopolistic.

Monopolistic competition is also characterized by a large number of buyers and sellers and absence of entry barriers, and the characteristics of a monopolistically competitive market are almost the same as in perfect competition, with the exception of heterogeneous products

Question No: 10 ( M a r k s: 1 ) http://vuzs.net

The market structure in which strategic considerations are most important is:

► Monopolistic competition.

► Oligopoly.

► Pure competition.

► Pure monopoly.

Question No: 11 ( M a r k s: 1 ) http://vuzs.net

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.

Inelastic demand of any product means that if price of that product increases there is very small effect on its quantity demanded. As price increases, total revenue also increases in case of inelastic demand.

Question No: 12 ( M a r k s: 1 ) http://vuzs.net

Consumption spending, investment expenditures, government expenditures and net exports are:

► The components of household income.

► The components of aggregate supply.

► The components of aggregate demand.

► The components of government revenue.

AD ≡ C + I + G + (X-M);

Where, AD is aggregate demand, C is consumption, I is investment, G is government spending, X is exports, M is imports.

Question No: 13 ( M a r k s: 1 ) http://vuzs.net

Classical economics was replaced as the dominant theory of macroeconomic analysis by:

► Monetarism.

► Rational expectations.

► Keynesian economics.

► Neoclassical economics.

Keynesian Theory is an economic theory based on the ideas of the 20th-century British economist John Maynard Keynes.

Question No: 14 ( M a r k s: 1 ) http://vuzs.net

According to classical economics, the economy will always tend toward full employment due to:

► Minimum wages.

► Flexible wages and prices.

► Extended periods of unemployment.

► Inequality between saving and investment.

Question No: 15 ( M a r k s: 1 ) http://vuzs.net

The real interest rate will increase:

► If there is an excess supply of loanable funds in the financial markets.

► If there is an excess demand for loanable funds in the financial markets.

► If there is an excess supply of loanable funds in the foreign exchange markets.

► If there is an excess demand for loanable funds in the foreign exchange markets.

As the money supply is contracted, interest rates rise, investment will fall, consumption will fall and net exports will fall.

Question No: 16 ( M a r k s: 1 ) http://vuzs.net

A source of fluctuations in investment spending is:

► Changes in government expectations of future output growth.

► Changes in household's expectations about future output growth.

► Changes in household's expectations about future risk.

► Changes in investor's expectations about future profits.

Question No: 17 ( M a r k s: 1 ) http://vuzs.net

What does the term "balance of payment deficit" refer to?

► An increase in official international reserves.

► A positive statistical discrepancy.

► A negative statistical discrepancy.

► A decline in official international reserves.

Question No: 18 ( 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.

M0: also called base money, high powered money or the monetary base. M0 is the value of all the currency notes and coins that are in circulation in the economy. Note that any currency or coins lying with the central bank (which in Pakistan’s context, would be the State Bank of Pakistan) does not count as M0, as it is not in circulation.

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: 19 ( M a r k s: 1 ) http://vuzs.net

When one producer can produce a given amount of output with fewer inputs, which of the following would occur?

► Comparative advantage.

► Comparative disadvantage.

► Absolute advantage.

► Absolute disadvantage.

The Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service.

Question No: 20 ( 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: 21 ( M a r k s: 1 ) http://vuzs.net

The news on the television reports that the dollar has strengthened relative to the Japanese yen. This means that:

► The dollar can now purchase more yen.

► The US trade balance with the Japanese economy has improved.

► The yen can now purchase more dollars.

► The dollar has depreciated relative to the yen.

Question No: 22 ( M a r k s: 1 ) http://vuzs.net

In Keynesian economics, if aggregate expenditures are less than aggregate output then:

► The price level rises.

► Inventories decrease.

► Employment decreases.

► Aggregate output increases.

Question No: 23 ( M a r k s: 1 ) http://vuzs.net

In the Keynesian cross model, the aggregate expenditure line has a slope of:

► 1.

► 0.

► Infinity.

► Less than 1.

Question No: 24 ( M a r k s: 1 ) http://vuzs.net

Demand is elastic when the elasticity of demand is:

► Greater than 0 but less than 1.

► Greater than 1.

► Less than 0.

► Equal to 1.

Question No: 25 ( M a r k s: 1 ) http://vuzs.net

Which of the following statements is TRUE about cartels?

► These are considered as part of monopolistic competition.

► These are organizations of independent firms, producing similar products, that work together to raise prices and restrict output.

► These are organizations of interdependent firms, producing similar products, that work together to raise prices and restrict output.

► These are organizations of independent firms, producing different products, that work together to raise prices and restrict output.

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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: 26 ( M a r k s: 1 ) http://vuzs.net

After the collusion, oligopolists are able to:

► Raise price but not restrict output.

► Raise price and restrict output but not attain the monopoly profit.

► Raise price and restrict output and therefore attain the monopoly profit.

► Restrict output but not raise price.

Question No: 27 ( M a r k s: 1 ) http://vuzs.net

Which of the following statements is TRUE about 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.

Question No: 28 ( M a r k s: 1 ) http://vuzs.net

If production remains the same and all prices double, then which of the following will happen?

► Real GDP and nominal GDP will both remain constant.

► Real GDP will remain constant and nominal GDP will reduce by half.

► Real GDP will remain constant and nominal GDP will double.

► Real GDP will double and nominal GDP will remain constant.

Question No: 29 ( M a r k s: 1 ) http://vuzs.net

Assume that there is no government or foreign sector, if the marginal propensity to consume (MPC) is 0.9, then the value of multiplier will be equal to:

► 2.

► 5.

► 8.

► 10.

Formula = [1/(1-MPC)]

Question No: 30 ( M a r k s: 1 ) http://vuzs.net

Firm A produces cotton worth Rs. 1000 and sells it to firm B. From this, firm B makes yarn worth Rs. 1500 and sells to firm C. Firm C manufactures cloth worth Rs. 2500 and sells to consumers. The value added is:

► 1000+1500+2500 = Rs. 5000

► 1000+500+2500 = Rs. 4000

► 1000+500+1000 = Rs. 2500

► 1000+1500+1000 =Rs. 3500

Question No: 31 ( M a r k s: 1 ) http://vuzs.net

Which of the following is a transfer payment?

► Payment made to housewife.

► Pocket allowance to children.

► Maintenance allowance to old parents.

► All of the given options.

Question No: 32 ( M a r k s: 1 ) http://vuzs.net

The relationship between hours provided by labor and wage rate is:

► Positive.

► Negative.

► Ambiguous.

► Very strong.

Question No: 33 ( M a r k s: 1 ) http://vuzs.net

Market failure occurs when:

► Competitive markets do not achieve equitable outcomes.

► Competitive markets do not achieve efficient outcomes.

► Government takes steps to intervene in markets.

► All of the given happen.

Question No: 34 ( M a r k s: 1 ) http://vuzs.net

A graph that depicts the relationship between the total quantity of goods and services demanded and the price level is known as:

► Aggregate demand curve.

► Average price level.

► Circular flow model.

► GDP curve.

Question No: 35 ( M a r k s: 1 ) http://vuzs.net

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

► The aggregate demand, the short-run aggregate supply and the long-run aggregate supply curves.

► The short-run aggregate supply and the long-run aggregate supply curves.

► The aggregate demand and the short-run aggregate supply curves.

► The aggregate demand and the long-run aggregate supply curves.

Question No: 36 ( M a r k s: 1 ) http://vuzs.net

Changes in aggregate demand can be caused by changes in:

I. Wages.

II.Raw materials costs.

III. Government spending.

IV. Government regulations that increase the cost of doing business.

► I, II, III, and IV.

► I and III only.

► I, III, and IV.

► III only.

Question No: 37 ( M a r k s: 1 ) http://vuzs.net

In the long run, the output level is determined by:

► Aggregate demand.

► Aggregate supply.

► The government.

► Household income.

Question No: 38 ( M a r k s: 1 ) http://vuzs.net

Which of the following is TRUE?

► 1 − MPS = MPC

► 1 + MPS = MPC

► 1 / MPS = MPC

► 1 × MPS = MPC

Question No: 39 ( M a r k s: 1 ) http://vuzs.net

The above figure shows disposable personal income on the horizontal axis and consumption per period on the vertical axis. Which of the following is TRUE at every point on the 45-degree line?

► The value of disposable income equals the sum of personal saving and consumption.

► The value of disposable income equals consumption.

► The value of disposable income equals personal saving.

► The value of disposable income and consumption equals 1.

Question No: 40 ( M a r k s: 1 ) http://vuzs.net

If the government wishes to achieve a fall in unemployment, which of the following policies should it adopt?

► Reduce the real value of income tax free allowances.

► Reduce government spending on capital projects.

► Raise Value Added Tax (VAT).

► Start public job training programs.

Question No: 41 ( M a r k s: 1 ) http://vuzs.net In the long run, sustained inflation is due to:

► A one-time increase in money growth.

► A continuous increase in the money growth rate.

► A continuous increase in aggregate demand.

► The rising price of oil.

Question No: 42 ( M a r k s: 1 ) http://vuzs.net

The situation when a country imports more than it exports is known as:

► A trade deficit.

► A trade surplus.

► An expansion.

► A recession.

Question No: 43 ( M a r k s: 1 ) http://vuzs.net Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

► Consumption.

► Gross private investment.

► Government purchases.

► Public investment.

Question No: 44 ( M a r k s: 1 ) http://vuzs.net

The government has a balanced budget if:

► Its total revenues are equal to its total expenditures.

► Its total revenues are less than its total expenditures.

► Its total revenues are greater than its total expenditures.

► The money supply is less than total expenditures.

Question No: 45 ( M a r k s: 1 ) http://vuzs.net

In general, personal income taxes:

► Rise automatically during a recession.

► Rise automatically during an expansion.

► Fall automatically during an expansion.

► Remains same in all phases of economic fluctuations.

Question No: 46 ( M a r k s: 1 ) http://vuzs.net

A tax on individual’s income is known as:

► Sales tax.

► Excise tax.

► Corporate income tax.

► Personal income tax.

Question No: 47 ( M a r k s: 1 ) http://vuzs.net

Which of the following is TRUE for banks?

► They deal with money only.

► They deal with shares and assets.

► They not only deal with money but also create money.

► They deal with money but do not create money.

Question No: 48 ( M a r k s: 1 ) http://vuzs.net

In a period of boom, credit creation is:

► Small.

► Heavy.

► Unchanged.

► Zero.

Question No: 49 ( M a r k s: 1 ) http://vuzs.net

What will be the impact of an increase in taxes?

► It will shift the IS curve to the left and decrease both the interest rate and the level of income.

► It will shift the IS curve to the right and increase both the interest rate and the level of income.

► It will shift the IS curve to the right and increase the level of income but decrease the interest rate.

► It will shift the LM curve downward (to the right) and increase the level of income but decrease the interest rate.

Question No: 50 ( M a r k s: 1 ) http://vuzs.net

To determine whether an economy’s output is growing or shrinking, one must keep track of:

► Changes in nominal GDP.

► Changes in the growth rate of nominal GDP.

► Changes in the general price level.

► Changes in real GDP.

To determine whether the economy of a nation is growing or shrinking in size, economists use a measure of total output called real GDP.

Question No: 51 ( M a r k s: 1 ) http://vuzs.net

Suppose the price of rail tickets decreases, what will happen to the demand for airline travel?

► The demand curve for airline travel shifts left.

► The demand curve for airline travel shifts right.

► The supply curve of airline travel shifts left.

► The supply curve of airline travel shifts right.

Question No: 52 ( M a r k s: 1 ) http://vuzs.net

Production possibilities curve will shift upward if there is:

► A reduction in unemployment.

► An increase in the production of capital goods.

► A reduction in discrimination.

► All of the given options.

Question No: 53 ( M a r k s: 1 ) http://vuzs.net

Which of the following is NOT included in the perfect information assumption of perfect competition?

► Consumers know their preferences.

► Consumers know their income levels.

► Consumers know the prices available.

► Consumers can anticipate price changes.

Question No: 54 ( M a r k s: 1 ) http://vuzs.net

Suppose a monopolist set his output at the level where marginal revenue, marginal cost and average total cost are equal. In this case, economic profit will be:

► Negative.

► Positive.

► Zero.

► Indeterminate from the given information.

Question No: 55 ( M a r k s: 3 )

Differentiate between the terms flow and stock.

A stock variable is measured at one specific time, and represents a quantity existing at that point in time (say, December 31, 2004), which may have accumulated in the past. A flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense.

Question No: 56 ( M a r k s: 5 )

What should be the optimal role of government in an economy according to the Classical school of thought? Discuss.

Question No: 57 ( M a r k s: 5 )

Explain the difference between current account and capital account.

Question No: 58 ( M a r k s: 10 )

(A) The above demand curve has two distinct segments which have different elasticities that join to form a corner or kink. Why the firms are reluctant to change the price in these two segments?

(B) What are the major advantages that an oligopoly offers for public interests?

(M a r k s: 5+5)

Question No: 59 ( M a r k s: 10 )

The items of balance sheet of State Bank of Pakistan are given as follows:

Forex reserves = Rs. 500

Notes and coins = Rs. 800

Credit to government = Rs. 200

Government and commercial bank deposits = Rs. 300

Credit to private sector = Rs. 700

Liquidity paper = Rs. 300

Prepare the balance sheet in its proper format of asset and liabilities side. Also calculate total assets and total liabilities.

Solution: