FINALTERM EXAMINATION
Spring 2009
ECO401- Economics (Session - 2)
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: ► 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.
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: ► 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: ► 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.
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: ► 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.
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: ► 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.
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.
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: ► 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.
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.
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: ► A deflationary gap.
► Hysteresis.
► Hyperinflation.
► An inflationary gap.
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.
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.
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: ► 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.
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: ► 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.
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.
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. Question No: 52 ( Marks: 10 )
A. Differentiate between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS).
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?
(Marks: 4+6)
Question No: 53 ( Marks: 10 )
Define M0 and M1. Briefly discuss the three broad motives of holding money. (Marks:4+6)
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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