# ECO401 SUper File Final term papers

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```					                                                   Final Term
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Reduced labour productivity
An increase in indirect taxes
Reduced, or elimination of, subsidies
The exit of existing firms from the industry
Question No: 1 ( Marks: 1 )                                               Question No: 6 ( Marks: 1 )
In a free-market economy, the allocation of resources is                  When the price of petrol rises by 12%, the quantity of petrol
determined by:                                                            purchased falls by 8%. This shows that the demand for petrol is:
► Votes taken by consumers.                                               ► Perfectly elastic.
► A central planning authority.                                           ► Unit elastic.
► Consumer preferences.                                                   ► Elastic.
► The level of profits of firms.                                          ► Inelastic.
P€d= % change in Q demand
Question No: 2 ( Marks: 1 )                                                     % change in P
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 )
If the quantity demanded of a product is greater than the
quantity supplied of a product, then:
► There is a shortage of the product.                                  Price= 8%    = 0.666 , e<1 inelastic
► There is a surplus of the product.
► The product is a normal good.                                        12%
► The product is an inferior good.                                     Question No: 7 ( Marks: 1 )
Suppose price rises from \$15 to \$17 and quantity demanded
Question No: 4 ( Marks: 1 )                                               decreases by 20%. We can conclude:
The supply curve is upward-sloping because:                                   ► Demand is unitary elastic.
► As the price increases, consumers demand less.                         ► Demand is elastic.
► As the price increases, suppliers can earn higher levels of             ► The elasticity of demand is 2.
profit or justify higher marginal costs to produce more.                      ► Total revenue will decrease.
► None of the given options.
► As the price increases, so do costs.                                Question No: 8 ( Marks: 1 )
"Utility" is most closely related to the term:
► Useless.
Question No: 5 ( Marks: 1 )                                                  ► Require.
When an industry's raw material costs increase, other things                ► Necessary.
remaining the same:                                                          ► Satisfaction.
► The supply curve shifts to the right.
► Output increases regardless of the market price and the supply
curve shifts upward.                                                      Question No: 9 ( Marks: 1 )
► Output decreases and the market price also decrease.                When the marginal utility of a good is zero, this implies that:
► The supply curve shifts to the left.                                     ► The consumer would not spend any additional income to
When quantity supplied at a given price decreases, the whole curve      buy more of that good.
shifts to the left as there is a decrease in supply. This is generally         ► Consumption of additional units would have positive marginal
caused by an increase in the cost of production or decrease in the        utility.
number of sellers. An increase in wages, cost of raw materials, cost of        ► Total utility is minimized.
capital, ceteris paribus, will decrease supply.                                ► Total utility is also zero.
Why might the supply curve shift to the left?
Question No: 10 ( Marks: 1 )
Rise in wage costs
When the substitution effect of a lowered price is counteracted by
Rise in raw material costs                                    the income effect, the good in question is:
► An inferior good.
► A substitute good.
► An independent good.
► A normal good.
Question No: 19 ( Marks: 1 )
Question No: 11 ( Marks: 1 )                                                 Which of the following is NOT conducive to the successful
Diminishing marginal returns implies:                                       operation of a cartel?
► Decreasing marginal costs.                                                ► Market demand for the good is relatively inelastic.
► Increasing marginal costs.                                                 ► The cartel supplies all of the world's output of the good.
► Decreasing average variable costs.                                         ► Cartel members have substantial cost advantages over non-
► Decreasing average fixed costs.                                        member producers.
► The supply of non-cartel members is very price elastic.
Question No: 12 ( Marks: 1 )
A graph showing all the combinations of capital and labour                 Question No: 20 ( Marks: 1 )
available for a given total cost is the:                                     Cartels are:
► Budget constraint.                                                        ► Organizations of independent firms, producing similar
► Expenditure set.                                                     products, that work together to raise prices and restrict output.
► Isoquant.                                                                 ► Organizations of interdependent firms, producing similar
► Isocost.                                                             products, that work together to raise prices and restrict output.
ISOQUANT                                                                         ► Organizations of independent firms, producing different
An isoquant represents different combinations of factors of production      products, that work together to raise prices and restrict output.
that a firm can employ                                                           ► Considered as part of monopolistic competition.
to produce the same level of output.                                        A cartel is a formal (explicit) agreement among firms. Cartels usually
occur in an oligopolistic industry, where there are a small number of
Question No: 13 ( Marks: 1 )                                                sellers and usually involve homogeneous products.
When an isocost line is just tangent to an isoquant, we know that:
► Output is being produced at minimum cost.                            Question No: 21 ( Marks: 1 )
► Output is not being produced at minimum cost.                        The marginal revenue product is:
► The two products are being produced at the medium input cost            ► Upward sloping due to the law of demand.
to the firm.                                                                   ► Upward sloping due to the law of marginal utility.
► The two products are being produced at the highest input cost           ► Downward sloping due to the law of diminishing returns.
to the firm.                                                                   ► Downward sloping due to the law of supply.

Question No: 14 ( Marks: 1 )                                                Question No: 22 ( Marks: 1 )
In order for a taxicab to be operated in New York City, it must            A reason why some economists basically ignore the short run is
have a medallion on its hood. Medallions are expensive but can be           because they believe that the economy:
resold and are therefore an example of:                                         ► Has self-correcting mechanisms.
► A fixed cost.                                                           ► Can only be graphed with a horizontal curve.
► A variable cost.
► An implicit cost.                                                       ► Never needs correction.
► An opportunity cost.                                                    ► None of the given options.
Question No: 15 ( Marks: 1 )
The good produced by a monopoly:                                           Question No: 23 ( Marks: 1 )
► Has perfect substitutes.                                            The long run aggregate supply curve will shift to the right if:
► Has no substitutes at all.                                             ► The price level increases.
► Has no close substitutes.
► Factors of production (such as labor and capital) increase.
► Can be easily duplicated.
Question No: 16 ( Marks: 1 )                                                   ► Expenditures (such as consumption and net exports) increase.
Welfare economics is the branch of economics which deals with:                 ► The prices of inputs used to produce goods and services (such
► Positive issues.                                                    as wages and the price of oil) decrease.
► Normative issues.
► Micro issues.                                                       Question No: 24 ( Marks: 1 )
► Macro issues.                                                        A primary implication of Keynesian economics is:
WELFARE ECONOMICS                                                                ► The best government is the least government.
It is a branch of economics dealing with normative issues (i.e., what            ► Flexible wages and prices ensure full employment.
should be).                                                                      ► Monetary policy is far superior to fiscal policy.
► Business-cycle instability is best corrected through
Question No: 17 ( Marks: 1 )                                                government policies.
The oligopoly model which predicts that oligopoly prices will tend         He argued that government policies could be used to promote demand
to be very rigid is the:                                                    at a macro level, to fight high unemployment and deflation of the sort
► Cournot model.                                                       seen during the 1930s.
► Cobweb model.
► Dominant firm model.                                                 Question No: 25 ( Marks: 1 )
► Kinked demand model.                                                 The economic analysis most closely related to Say's Law is:
The primary use of the kinked-demand curve is to explain price                 ► Short-run aggregate market.
rigidity in oligopoly.                                                         ► Production possibilities.
► Imperfect competition.
Question No: 18 ( Marks: 1 )                                                   ► Circular flow.
The kinked demand curve model is based on which of the
following assumptions?                                                      Question No: 26 ( Marks: 1 )
► Each firm considers its rival's output to be fixed.                   Which of the following is NOT a reason of downward slope of
► Each firm considers its rival's price to be fixed.                   aggregate demand curve?
► Each firm believes rivals will match all price changes.                  ► The exchange-rate effect.
► None of the given options.                                               ► The wealth effect.
The theory of kinked demand curve rests on the two assumptions that             ► The classical dichotomy / monetary neutrality effects.
if one firm raises prices, no one else will raise their prices and so the       ► The interest-rate effect.
firm will face declining revenues (elastic demand).                             1. The first reason for the downward slope of the aggregate
However if one firm lowered its price, everyone else would lower their               demand curve is Pigou's wealth effect.
prices as well and everyone‘s revenues, including the first firm‘s              2. The second reason for the downward slope of the aggregate
revenues would fall (inelastic demand).                                              demand curve is Keynes's interest-rate effect.
3.    The third reason for the downward slope of the aggregate            ► Real exchange rate.
demand curve is Mundell-Fleming's exchange-rate effect.              ► The production function.
► Real price level.
Question No: 27 ( Marks: 1 )                                                   ► Real interest rate.
The upward-sloping aggregate supply curve indicates that:
► As firms increase their level of output, the cost of               Question No: 35 ( Marks: 1 )
producing an extra unit increases.                                          If injections are less than withdrawals at the full-employment
► An increase in aggregate demand causes little, if any increase      level of income then there arises:
in real output the economy is operating in the long run.                         ► A deflationary gap.
► Any increase in aggregate demand causes the output of                    ► Hysteresis.
producers to fall because the general price level rises.                        ► Hyperinflation.
► None of the given options.                                               ► An inflationary gap.
Keynes said that output can be increased after increasing the price. In    Inflationary gap The excess of national expenditure over income (and
short run, it is possible for the people to do overtime, so in short run   injections over withdrawals) at the full-employment level of national
AS curve is positively sloped and in the long run it becomes vertical.     income.
Question No: 28 ( Marks: 1 )                                               Question No: 36 ( Marks: 1 )
An important difference between the Classical and Keynesian                The labour force is made up of:
approaches to achieve a macroeconomic equilibrium is that:
► Keynesian economists actively promote the use of fiscal               ► The number of people employed minus the number of people
policy while the classical economists do not.                              unemployed.
► Keynesian economists actively promote the use of monetary              ► The number of people employed plus the number of people
policy to improve aggregate economic performance while the classical       unemployed.
economists do not.                                                            ► Just the number of people employed.
► Classical economists believe that monetary policy will                 ► The whole population.
certainly affect the level of output while the Keynesians believe that
money growth affects only prices.                                          Question No: 37 ( Marks: 1 )
► Classical economists believe that fiscal policy is an effective      Deflation is:
tool for achieving economic stability while the Keynesians do not.               ► An increase in the overall level of economic activity.
► An increase in the overall price level.
Question No: 29 ( Marks: 1 )                                                    ► A decrease in the overall level of economic activity.
According to classical economists, the:                                        ► A decrease in the overall price level.
► Aggregate demand curve is downward sloping and the                  Deflation is a decrease in the overall price level. Prolonged periods of
aggregate supply curve is vertical.                                        deflation can be just as damaging for the economy as sustained
► Aggregate demand curve is downward sloping and the                   inflation.
aggregate supply curve is upward sloping.                                  Question No: 38 ( Marks: 1 )
► Aggregate demand curve is vertical and the aggregate supply           Which of the following will result if there is a decrease in
curve is upward sloping.                                                   aggregate demand?
► Aggregate demand curve is vertical and the aggregate supply               ► Expansion; inflation.
curve is horizontal.                                                            ► Recession; deflation.
Question No: 30 ( Marks: 1 )                                                  ► Expansion; deflation.
How many methods are there to measure Gross Domestic                           ► Recession; inflation.
Product?
► Three.
► Four.                                                                 A decrease in the natural rate of unemployment will:
► Five.                                                                      ► Shift the Phillips curve to the left.
► Six.                                                                       ► Result in a decrease in the inflation rate along the Phillips
We can measure GDP by using any of the three methods—the output            curve.
method, income method or expenditure method.                                     ► Shift the Phillips curve to the right.
Question No: 31 ( Marks: 1 )                                                     ► Result in an increase in the inflation rate along the Phillips
Which of the following is a flow variable?                                curve.
► The value of the house in which you live.                             The Phillips curve, named after A. W. Phillips, describes a negative
► The balance in your savings account.                                 relationship between the unemployment rate and the inflation rate.
► Your monthly consumption on food items.                              Question No: 40 ( Marks: 1 )
► The number of carrots in your refrigerator at the beginning of        The Phillips curve will shift to the right:
the month.                                                                       ► If there is a decrease in the expected inflation rate.
► If there is an increase in the expected inflation rate.
Question No: 32 ( Marks: 1 )                                                     ► If there is a decrease in the natural rate of unemployment.
Which of the following is NOT a stock variable?                                  ► If there is a favorable supply shock.
► Government debt.                                                       If inflationary expectations increase, the Phillips curve will shift to
► Capital.                                                              the right. This worsens the trade-off between inflation and
► The amount of money held by the public.                               unemployment.
► Inventory investment.                                                 Question No: 41 ( Marks: 1 )
If a country has flexible exchange rate and has more rapid
Question No: 33 ( Marks: 1 )                                               inflation rate than other countries, its currency will:
Suppose that your income increases from \$100,000 to \$150,000                    ► Appreciate.
Marginal Propensity to Save (MPS) is:                                            ► Not effect.
► 0.2.                                                                      ► All of the given are possible.
► 0.4.                                                                 Question No: 42 ( Marks: 1 )
► 0.6.                                                                  The nominal exchange rate is defined as the:
► 0.8.                                                                       ► Market on which currencies of various nations are traded for
Marginal propensity to save:                                               one another.
MPS = ΔS / ΔYd=40,000/50,000=0.8                                                 ► Price of one unit of foriegn good in terms of domestic good.
Question No: 34 ( Marks: 1 )                                                     ► Price of one unit of foriegn currency in terms of domestic
Which of the following plays the key balancing role in making             currency.
sure that the economy reaches and stays at equilibrium at the                    ► All of the given options.
potential output level?                                                     The nominal exchange rate (NER) is the price in domestic currency of
one unit of a foreign                                                       losing government benefits. This would explain why prolonged high
currency.                                                                   unemployment rates might not fall quickly even when wage demands
Question No: 43 ( Marks: 1 )                                                are reduced and new jobs are created.
Current account deficit is equal to:                                       Question No: 51 ( Marks: 5 )
► Private sector resource deficit.                                     Briefly discuss the concept of comparative advantage with the
► Government budget deficit.                                           help of example.
► Private sector resource deficit + Government budget
deficit.                                                                    Question No: 52 ( Marks: 10 )
► None of the given options.                                               A.    Differentiate between Marginal Propensity to Consume
Current account deficit = Private sector resource deficit + Government          (MPC) and Marginal Propensity to Save (MPS).
budget deficit                                                              B. Suppose a household has the consumption function (C)
Question No: 44 ( Marks: 1 )                                                presented in the figure given        below:
In the exogenous growth model, if investment exceeds                                     a. Find consumption when disposable income is
depreciation, the capital stock will ----------- and output will---------                 \$8,000 and \$10,000.
----- until the steady state is attained.                                                 b. Find consumption when disposable income is \$
► Increase; increase.                                                                6,000. How can a household consume more than its
► Increase; decrease.                                                                disposable income?
► Decrease; decrease.                                                                c.    What is true for every point on the 450 line?
► Decrease; increase.
(Marks: 4+6)
Question No: 45 ( Marks: 1 )                                                   Question No: 53 ( Marks: 10 )
Endogenous growth theory differs in what essential aspect from              Define M0 and M1. Briefly discuss the three broad motives of
the Solow theory of economic growth?                                        holding money.
► Endogenous growth theory is a monetary theory whereas the
Solow theory is a real theory.                                              (Marks:4+6)
► Endogenous growth theory assumes diminishing returns to                Question No: 54 ( Marks: 10 )
capital and the Solow theory assumes constant returns.                       Recall the Equation of Quantity theory of money and calculate
► In endogenous growth theory, economies with the same                  the missing figure in each of the following cases:
technology and saving rate need not converge to the same steady                            a) Money supply (M) =100, Price (P) = 3 and real
state as in the Solow model.                                                               output (Q) = 200. Calculate the missing figure.
► All of the given options are correct.                                                b) Velocity of money (V) = 4, Price (P) = 5 and
output (Q) =100. Calculate the missing figure.
Question No: 46 ( Marks: 1 )                                                               c)    Money supply (M) = 200, velocity of money (V)
A currency appreciation should:                                                            = 7 and output (Q) = 700. Calculate the missing figure.
► Reduce net exports and therefore increase aggregate demand.                          d) Money supply (M) =150, velocity of money (V) =
► Raise net exports and therefore decrease aggregate demand.                            8, Price level (P) = 3. Calculate the missing value.
► Reduce net exports and therefore decrease aggregate
demand.                                                                     (Marks: 2.5 each
► Raise net exports and therefore increase aggregate demand.                              FINALTERM EXAMINATION
Spring 2009
Question No: 47 ( Marks: 1 )                                                                 ECO401- Economics (Session - 2)
M1 component of money supply consists of:                                  Question No: 1 ( Marks: 1 )
► Paper currency and coins.                                             Aslam decides to stay at home and study for his exam rather than
► Paper currency, coins and check writing deposits.                     going out with his friends to a movie. His dilemma is an example
► Paper currency, coins, check writing deposits and savings             of:
deposits.                                                                        ► The economic perspective.
► Paper currency, coins, check writing deposits, savings deposits           ► Marginal analysis.
and certificates of deposits.                                                   ► Allocative efficiency.
M1: is M0 + all current (or checking) deposits held with commercial            ► Opportunity cost.
banks. Checking deposits are accounts from which the holders can              Question No: 2 ( Marks: 1 )
withdraw money at any time.                                                  A good for which income and quantity demanded are inversely
Question No: 48 ( Marks: 1 )                                                related is known as:
Commercial banks in Pakistan are supervised by:                                 ► Inferior good.
► State bank.                                                              ► Complementary good.
► National bank.                                                            ► Normal good.
► Finance minister.                                                         ► None of the given options.
► World bank.
Question No: 3 ( Marks: 1 )
Question No: 49 ( Marks: 1 )                                                An increase in supply is shown by:
What would result from a depreciation of the pound on the                     ► Shifting the supply curve to the left.
foreign exchange market?                                                       ► Shifting the supply curve to the right.
► An increase in the price of imported computers.                          ► Upward movement along the supply curve.
► A fall in the purchasing power of US tourists in London.                 ► Downward movement along the supply curve.
► A fall in the price of imported computers.
► An increase in the purchasing power of UK tourists overseas.          Question No: 4 ( Marks: 1 )
Price floor results in:
Question No: 50 ( Marks: 1 )                                                   ► All of the given options.
An example of hysteresis having a negative effect on a country's              ► Excess supply.
economy would be:                                                              ► Equilibrium.
► Hyperinflation caused by excessive demand.                              ► Excess demand.
► Nervous investors selling all their shares, causing the
stockmarket to crash.                                                       Question No: 5 ( Marks: 1 )
► Unemployed workers not taking available jobs.                         The price elasticity of demand measures the responsiveness of
► Women being kept out of jobs traditionally held by men.               quantity demanded to:
Hysteresis occurs when an unemployed person, particularly one who
has been unemployed for a long time, finds it hard to re-enter the job
market, due to atrophied skills, loss of self-confidence, or even fear of       ► Quantity demanded.
► Quantity supplied.                                                     ► None of the given options.
► Price.                                                              Question No: 14 ( Marks: 1 )
► Output.                                                            In monopoly, which of the following is NOT true?
► Products are differentiated.
► There is freedom of entry and exit into the industry in the
www.vuzs.net                                long run.
Question No: 6 ( Marks: 1 )                                                  ► The firm is a price maker.
Assume that the total utilities for the fifth and sixth units of a          ► There is one main seller.
good consumed are 83 and 97, respectively. The marginal utility           Question No: 15 ( Marks: 1 )
for the sixth unit is:                                                   Welfare economics is the branch of economics which deals with:
► Positive issues.
► -14.                                                                   ► Normative issues.
► 14.                                                                    ► Micro issues.
► 83.                                                                    ► Macro issues.
► 97.                                                                 Question No: 16 ( Marks: 1 )
Under the kinked demand curve model, an increase in marginal
Question No: 7 ( Marks: 1 )                                             cost will lead to:
Indifference curves that are convex to the origin reflect:                   ► An increase in output level and a decrease in price.
► A decrease in output level and an increase in price.
► An increasing marginal rate of substitution.                           ► A decrease in output level and no change in price.
► A decreasing marginal rate of substitution.                            ► Neither a change in output level nor a change in price.
► A constant marginal rate of substitution.                           Question No: 17 ( Marks: 1 )
► A marginal rate of substitution that first decreases, then         Which of the following market situation is much like a pure
increases.                                                              monopoly except that its member firms tend to cheat on agreed
upon price and output strategies?
Question No: 8 ( Marks: 1 )                                                  ► Duopoly.
To find the profit maximizing level of output, a firm finds the             ► Cartel.
output level where:                                                          ► Market sharing monopoly.
► Price equals marginal cost.                                            ► Natural monopoly.
► Marginal revenue and average total cost.                            Question No: 18 ( Marks: 1 )
► Price equals marginal revenue.                                     In the complete classical model, a rightward shift of the labor
► None of the given options.                                        supply curve will:
The profit maximizing level of output is found by equating its              ► Decrease the price level and increase the nominal wage.
marginal revenue with its marginal cost, which is the same profit            ► Decrease the nominal wage and increase the price level.
maximizing condition that a perfectly competitive firm uses to               ► Decrease both the price level and the nominal wage.
determine its equilibrium level of output. Indeed, the condition that        ► Increase both the price level and the nominal wage.
marginal revenue equal marginal cost is used to determine the profit      Question No: 19 ( Marks: 1 )
maximizing level of output of every firm, regardless of the market       Which of the following events could cause the aggregate demand
structure in which the firm is operating.                               curve to shift to the right?
► An increase in the rate of inflation.
Question No: 9 ( Marks: 1 )                                                  ► A decrease in government expenditures.
As compared to existing firms, a new firm entering in monopolist             ► A decrease in investment spending.
market has:                                                                  ► A decrease in income tax rates.
► High costs.                                                          Question No: 20 ( Marks: 1 )
► Low costs.                                                          The Great Depression of 1930s opened the door to the __________
► Equal costs.                                                       revolution in macroeconomic theory.
► None of the given options.                                              ► Keynesian.
► New classical.
Question No: 10 ( Marks: 1 )                                                 ► Old classical.
A firm is charging a different price for each unit purchased by a           ► New Keynesian.
consumer. This is called:                                                 Question No: 21 ( Marks: 1 )
► First-degree price discrimination.                                Keynesian economics was the predominant economic theory:
► Second-degree price discrimination.                                   ► Prior to the late 1700s.
► Third-degree price discrimination.                                    ► From the late 1700s to the early 1900s.
► None of the given options.                                            ► From 1930s to 1970s.
Question No: 11 ( Marks: 1 )                                               ► Since 1970s.
McDonald's restaurant located near the high school offered a             Question No: 22 ( Marks: 1 )
Tuesday special for high school students. If high school students        Classical economics was replaced as the dominant theory of
showed their student ID cards, they would be given 50 cents off         macroeconomic analysis by:
any special meal. This practice is an example of:                            ► Monetarism.
► Collusion.                                                            ► Rational expectations.
► Price discrimination.                                                 ► Keynesian economics.
► Two-part tariff.                                                      ► Neoclassical economics.
► Bundling.                                                          Question No: 23 ( Marks: 1 )
Question No: 12 ( Marks: 1 )                                           According to the model of aggregate supply and aggregate
The price elasticity of demand for any good must be less than or       demand, in the long run, an increase in the money supply should
equal to zero unless:                                                   cause:
► The good is a necessity.                                              ► Both prices and output to rise.
► The good is a luxury.                                                 ► Prices to fall and output to remain unchanged.
► The good is a Giffen good.                                            ► Both prices and output to fall.
► None of the given options.                                            ► Prices to rise and output to remain unchanged.
Question No: 13 ( Marks: 1 )                                             Question No: 24 ( Marks: 1 )
Figure                                               Intermediate goods are meant for:
In figure given above, the marginal utility of income is:                    ► Direct use by the consumers.
► Increasing as income increases.                                       ► Further processing.
► Constant for all levels of income.                                    ► The term do not exist.
► Diminishes as income increases.                                       ► None of the given options.
Question No: 25 ( Marks: 1 )                                              ► No, it is not.
Final goods are meant for:                                               Question No: 36 ( Marks: 1 )
► Direct use by the consumers.                                      Real Gross Domestic Product (GDP):
► Further processing.
► The term do not exist.                                                 ► Is nominal GDP adjusted for changes in the price level.
► None of the given options.                                             ► Is also called nominal GDP.
Question No: 26 ( Marks: 1 )                                                ► Measures GDP minus depreciation of capital.
Which of the following is a flow variable?                                   ► Will always change when prices change.
► The value of the house in which you live.                            Question No: 37 ( Marks: 1 )
► The balance in your savings account.                               If a war destroys a large portion of a country's capital stock but
► Your monthly consumption on food items.                           the saving rate is unchanged, the exogenous model predicts that
► The number of carrots in your refrigerator at the beginning of    output will grow and the new steady state will approach:
the month.                                                                     ► A higher output level than before.
Question No: 27 ( Marks: 1 )                                                ► The same output level as before.
Which of the following is NOT a stock variable?                              ► A lower output level than before.
► Government debt.                                                       ► The Golden Rule output level.
► Capital.                                                            Question No: 38 ( Marks: 1 )
► The amount of money held by the public.                            A currency appreciation:
► Inventory investment.
Question No: 28 ( Marks: 1 )                                               ► Reduces aggregate demand and increases aggregate supply.
All other things remain the same, Gross Domestic Product (GDP)              ► Reduces both aggregate demand and aggregate supply.
will rise if:                                                                ► Increases aggregate demand and reduces aggregate supply.
► Imports rises.                                                        ► Increases both aggregate demand and aggregate supply.
► Exports falls.
► Durable goods consumption rises.                                  Question No: 39 ( Marks: 1 )
► Military spending falls.                                          M1 component of money supply consists of:

Question No: 29 ( Marks: 1 )
If disposable income increases from \$5 trillion to \$6 trillion and as       ► Paper currency and coins.
a result, consumption expenditure increases from \$7 trillion to              ► Paper currency, coins and check writing deposits.
\$7.8 trillion, the Marginal Propensity to Consume is:                        ► Paper currency, coins, check writing deposits and savings
► 1.0.                                                             deposits.
► 0.8.                                                                  ► Paper currency, coins, check writing deposits, savings deposits
► 5/7 = 0.71.                                                       and certificates of deposits.
► 6/7.8 = 0.77.
Question No: 30 ( Marks: 1 )                                           Question No: 40 ( Marks: 1 )
The slope of the consumption function (or line) is the:                 Personal income:
► Average propensity to save.
► Average propensity to consume.                                        ► Is income received by individuals during a given year.
► Marginal propensity to save.                                          ► Is the income individuals have available for spending during a
► Marginal propensity to consume.                                   given year.
Question No: 31 ( Marks: 1 )                                               ► Equals national income minus indirect taxes.
Suppose that your income increases from \$100,000 to \$150,000                ► Is the sum of wages plus interest received by individuals
and your consumption increases from \$80,000 to \$120,000. Your            during a given year.
Marginal Propensity to Save (MPS) is:
► 0.2.                                                             Question No: 41 ( Marks: 1 )
► 0.4.                                                              Real Gross National Product (GNP) is best defined as:
► 0.6.
► 0.8.                                                                  ► The pound value of all final goods and services produced in the
economy during a particular time period and measured in current
Question No: 32 ( Marks: 1 )                                             prices.
The unemployment rate is equal to:                                          ► The pound value of all goods produced for final consumption
► Number of employed / labour force x 100.                         by households in a particular year and measured in constant prices.
► Number of unemployed / labour force.                                  ► The current pound value of all new and used goods produced
► (Number of unemployed / labour force) x 100.                      and sold in the economy during a particular time period.
► None of the given options.                                            ► The market value of all final goods and services produced
Question No: 33 ( Marks: 1 )                                           by the economy during a given time period, with prices held
The traditional Phillips Curve shows the:                               constant relative to some base period.
► Inverse relationship between the rate of inflation and
unemployment rate.                                                       Question No: 42 ( Marks: 1 )
► Inverse relationship between the nominal and real wage.            Which of the following statements describes the difference
► Direct relationship between unemployment and demand-pull          between nominal and real Gross Domestic Product (GDP)?
inflation.                                                                    ► Real GDP includes only goods; nominal GDP includes goods
► Tradeoff between the short run and long run.                      and services.
► Real GDP is measured using constant base-year prices;
Question No: 34 ( Marks: 1 )                                             nominal GDP is measured using current prices.
Deflation is:                                                                ► Real GDP is equal to nominal GDP less the depreciation of the
► An increase in the overall level of economic activity.            capital stock.
► An increase in the overall price level.                                ► Real GDP is equal to nominal GDP multiplied by the CPI.
► A decrease in the overall level of economic activity.               Question No: 43 ( Marks: 1 )
► A decrease in the overall price level.                             If we compare Gross Domestic Product (GDP) with Gross
Question No: 35 ( Marks: 1 )                                           National Product (GNP) then:
Is Grosss Domestic Product (GDP) an accurate measure of a
country’s well being?                                                        ► GNP = GDP – Net income from abroad.
► Yes, it is the best measure of national well being.                   ► GNP = GDP + Net income from abroad.
► Yes, provided we use real GDP and not nominal GDP.                    ► GNP = NNP – Net income from abroad.
► Uncertain, depending on whether GDP is rising or falling.             ► GNP = NNP + Net income from abroad.
A. What conclusions are derived from exogenous growth
Question No: 44 ( Marks: 1 )                                                    theory?
Gross domestic product (GDP) is the market value of:
ANSWER: Exogenous Growth Theory: The major conclusions
► All transactions in an economy during one-year period.               derived from the exogenous growth are as follows:
► All goods and services exchanged in an economy during one-                     ·     The steady growth rate of real GDP depends on
year period.                                                                         exogenous rates of growth of population (n) and technology
► All final goods and services exchanged in an economy during                    (t). There are no policies for government for how to affect
one-year period.                                                                     the steady growth rate of a country. Higher savings can only
► All final goods and services produced in a domestic                            have a little effect on income it cannot cause long term
economy during one-year period.                                                      growth because savings cause diminishing returns to
Question No: 45 ( Marks: 1 )                                                       investment and capital accumulation.
Which of the following shows the Fisher equation of exchange?                       ·      If one country started with lower income and capital
than another country, the poorer country will grow faster to
► MT=PV.                                                                         catch up the richer country and then both the countries will
► VT=PM.                                                                         grow together.
► MV=PQ.                                                                B. What is meant by convergence theory? Explain the
► MY=VP.                                                               convergence theory in the given graph.

Question No: 46 ( Marks: 1 )                                               (Marks: 4+6)
An exchange rate that varies according to the supply and demand            Question No: 53 ( Marks: 10 )
for the currency in the foreign exchange market is called:                  Define fiscal policy. Differentiate between contractionary and
► Overvalued exchange rate.                                           expansionary fiscal policy. In which situations, budget deficit and
► Undervalued exchange rate.                                          budget surplus exist?
► Fixed exchange rate.                                                Answer: Fiscal Policy: Fiscal policy is the government‘s about the
► Flexible exchange rate.                                                       expenditure in form of purchases, subsidies and interest

Question No: 47 ( Marks: 1 )                                               payments on debt etc.
In the equation MV = PQ, according to the crude quantity theory
revenue in form of taxes etc.
of money:

► M has no effect on the price level.                                  Difference between Contractionary and Expansionary Fiscal
► V is the number of times each dollar is spent per year.              Policy:
► Q is the real price level.
► P rises as V falls, other things constant.                           Contactionary Fiscal Policy           Expansionary Fiscal Policy
In conactionary fiscal policy         In expansionary fiscal policy
Question No: 48 ( Marks: 1 )                                               government decreases its              government increases its
In the Keynesian cross model, the 45-degree line has a slope of:           expenditure.                          expenditure.
► 45.
► Infinity.                                                                Budget Deficit and Budget Surplus: Budget deficit exists if
► 1.                                                                       government expenditure increases the revenue earned. In this case
► 0.                                                                       government needs to finance its expenditure through borrowing.
Budget surplus exists when revenue exceeds the government
Question No: 49 ( Marks: 1 )                                                   expenditure. In this condition government can easily pay off its
In Keynesian economics, equilibrium can occur:                                 debt borrowings.
(Marks: 2+4+4)
► Only at full employment level.                                           Question No: 54 ( Marks: 10 )
► Only at levels less than full employment.                            Discuss the basic theories regarding IMF’s stabilization program.
► Only at levels greater than full employment.
Are these theories successful? If not, give reasons.
► At any level of aggregate output which is equal to aggregate
·     Tight Fiscal Policy: It works through higher revenues
Question No: 50 ( Marks: 1 )                                                          and reduced government expenditure.
After a decrease in the wage, the substitution effect implies that:                   ·     Devaluation: Switching from imports to home
produced goods. It increases competitiveness, exports and
► Only the amount demanded of capital decreases.                                  increase investors confidence in local currency.
► Only the amount demanded of labor decreases.                                    ·     Tight Monetary Policy: Higher interest rates
► Only the amount demanded of capital increases.                                  resulting in reduced private sector consumption and
► The amount demanded of all inputs increases.                                    investment demand. It reduces inflation and increases
savings. High interest rates also results in higher capital
Question No: 51 ( Marks: 5 )                                                          inflow.
Briefly discuss the private cost of advertising. How we can                Theses theories are generally not successful in lower income countries
calculate the marginal social cost?                                        (LICs). Because they caused the problems of:
Devaluation: It raises the price of imports and also
advertising is the cost incurred by firm in making the advertisement i.e   increased the inflation while the real wage rate could not increase.
newspaper adds, tv commercials etc. The firms do not take into
account the nuisance faced by people due to these advertisements                     Stabilization hurts poor: decrease in expenditure always
badly effects the poor which can then cause political instability
Marginal Social Cost: Marginal social cost is not a monetary based
cost. It is the cost borne by the society as a whole. It is the cost of                     FINALTERM EXAMINATION Fall 2009
consumption of one next unit.
ECO401- Economics Time: 120 min Marks: 87
Question No: 1 ( Marks: 1 )
The concave shape of the production possibilities curve
Question No: 52 ( Marks: 10 )                                                        for two goods X and Y illustrates:
The price consumption curve (PCC) traces out the optimal
► Increasing opportunity cost for both goods.                 choice of consumption at different prices. The PCC can be
► Increasing opportunity cost for good X but not for          used to derive the demand curve, which shows the
good Y.                                                           relationship between price & quantity demanded.
► Increasing opportunity cost for good Y but not for
good X.                                                           Question No: 6 ( Marks: 1 )
► Constant opportunity cost for both goods.                   Marginal profit is equal to:
► Marginal revenue minus marginal cost.
In the real world, some resources are better suited to food          ► Marginal revenue plus marginal cost.
production and others to clothing – we cannot expect to              ► Marginal cost minus marginal revenue.
move resources from X to Y without any loss of productive            ► Marginal revenue times marginal cost.
capacity, and vice versa. When this is taken into account, the
proper shape of a production possibility frontier is drawn
Question No: 7 ( Marks: 1 )
concave to the origin.
The supply curve for a competitive firm is:
► Its entire marginal cost curve.
Question No: 2 ( Marks: 1 )
► The upward-sloping portion of its marginal cost
When college students leave town for the summer, the
curve.
demand for meals at the local restaurants decline. This
results in:                                                            ► Its marginal cost curve above the minimum point
of the average variable cost curve.
► A decrease in equilibrium price and an increase in quantity of           ► Its marginal cost curve above the minimum point of
meal.                                                                 the average total cost curve.
► An increase in equilibrium price and quantity of
meal.                                                             Its MC curve above the minimum point of the AVC curve.
► A decrease in equilibrium price and quantity of
meal.                                                             Question No: 8 ( Marks: 1 )
► An increase in equilibrium price and a decrease in           Second-degree price discrimination is the practice of
quantity of meal.                                                 charging:
► The reservation price to each customer.
The demand curve shifts to the left because the town                   ► Different prices for different blocks of the same
population declines, resulting in lower prices and quantity.      good or service.
► Different groups of customers different prices for the
Question No: 3 ( Marks: 1 )                                       same products.
A demand curve is price elastic when:                                  ► Each customer the maximum price that he or she is
willing to pay.
► Changes in demand are proportionately greater
than changes in price.                                             2ND DEGREE PD
► Changes in demand are equal to changes in price.            In this type, different prices charged to customers who
► None of the given options.                                  purchase different quantities
► Changes in demand are proportionately smaller than
changes in price.                                                 Question No: 9 ( Marks: 1 )
A market with few entry barriers and with many firms
Price elastic means that change in demand is greater than the     that sell differentiated products is:
change in price of that good.
► Purely competitive.
Question No: 4 ( Marks: 1 )                                           ► A monopoly.
The numerical measurement of a consumer’s preference                  ► Monopolistically competitive.
is called:                                                            ► Oligopolistic.
► Use.
► Pleasure.                                                  Monopolistic competition is also characterized by a large
► Utility.                                                   number of buyers and sellers and absence of entry barriers,
► Satisfaction.                                              and the characteristics of a monopolistically competitive
market are almost the same as in perfect competition, with
the exception of heterogeneous products
Utility is the usefulness, benefit or satisfaction derived from
Question No: 10 ( Marks: 1 )
the consumption of goods and services.
The market structure in which strategic considerations
are most important is:
Question No: 5 ( Marks: 1 )
► Monopolistic competition.
Which of the following is TRUE about price-
► Oligopoly.
consumption curve for good X?
► Pure competition.
► Pure monopoly.
► Nominal income falls as the price of X falls.
Question No: 11 ( Marks: 1 )
► The absolute price of X falls, but the relative price
between X and the composite good Y stays the same.                 The price elasticity of demand for any good must be less
than or equal to zero unless:
► It is always downward sloping for a normal good.
► The good is a necessity.
► It represents only those market baskets that are
optimal for the given price ratio and preference pattern               ► The good is a luxury.
and therefore a demand curve can be plotted from it.                   ► 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    M0: also called base money, high powered money or the
case of inelastic demand.                                       monetary base. M0 is the value of all the currency notes and
Question No: 12 ( Marks: 1 )                                  coins that are in circulation in the economy. Note that any
Consumption spending, investment expenditures,                 currency or coins lying with the central bank (which in
government expenditures and net exports are:                    Pakistan‘s context, would be the State Bank of Pakistan)
► The components of household income.                     does not count as M0, as it is not in circulation.
► The components of aggregate supply.                      M1: is M0 + all current (or checking) deposits held with
commercial banks. Checking deposits are accounts from
► The components of aggregate demand.
which the holders can withdraw money at any time.
► The components of government revenue.
AD ≡ C + I + G + (X-M);
Question No: 19 ( Marks: 1 )
Where, AD is aggregate demand, C is consumption, I is
When one producer can produce a given amount of
investment, G is government spending, X is exports, M is
output with fewer inputs, which of the following would
imports.
occur?
Question No: 13 ( Marks: 1 )
Classical economics was replaced as the dominant
theory of macroeconomic analysis by:
► Monetarism.
► Rational expectations.
The Absolute advantage is the ability of a country,
► Keynesian economics.
individual, company or region to produce a good or service
► Neoclassical economics.                                  at a lower cost per unit than the cost at which any other
Keynesian Theory is an economic theory based on the ideas      entity produces that good or service.
of the 20th-century British economist John Maynard Keynes.       Question No: 20 ( Marks: 1 )
Question No: 14 ( Marks: 1 )                                  What would result from a depreciation of the pound on
According to classical economics, the economy will              the foreign exchange market?
always tend toward full employment due to:                           ► An increase in the price of imported computers.
► Minimum wages.                                                ► A fall in the purchasing power of US tourists in
► Flexible wages and prices.                               London.
► Extended periods of unemployment.                             ► A fall in the price of imported computers.
► Inequality between saving and investment.                     ► An increase in the purchasing power of UK tourists
Question No: 15 ( Marks: 1 )                                 overseas.
The real interest rate will increase:                             Question No: 21 ( Marks: 1 )
► If there is an excess supply of loanable funds in        The news on the television reports that the dollar has
the financial markets.                                          strengthened relative to the Japanese yen. This means
► If there is an excess demand for loanable funds in the   that:
financial markets.                                                   ► The dollar can now purchase more yen.
► If there is an excess supply of loanable funds in the         ► The US trade balance with the Japanese economy has
foreign exchange markets.                                       improved.
► If there is an excess demand for loanable funds in the        ► The yen can now purchase more dollars.
foreign exchange markets.                                            ► The dollar has depreciated relative to the yen.
As the money supply is contracted, interest rates                 Question No: 22 ( Marks: 1 )
rise, investment will fall, consumption will fall and net       In Keynesian economics, if aggregate expenditures are
exports will fall.                                              less than aggregate output then:
Question No: 16 ( Marks: 1 )
A source of fluctuations in investment spending is:                ► The price level rises.
► Inventories decrease.
► Changes in government expectations of future output          ► Employment decreases.
growth.
► Aggregate output increases.
► Changes in household's expectations about future
output growth.
Question No: 23 ( Marks: 1 )
► Changes in household's expectations about future
risk.                                                            In the Keynesian cross model, the aggregate expenditure
line has a slope of:
► Changes in investor's expectations about future
profits.                                                             ► 1.
► 0.
Question No: 17 ( Marks: 1 )                                         ► Infinity.
What does the term "balance of payment deficit" refer               ► Less than 1.
to?
► An increase in official international reserves.          Question No: 24 ( Marks: 1 )
► A positive statistical discrepancy.                       Demand is elastic when the elasticity of demand is:
► A negative statistical discrepancy.                          ► Greater than 0 but less than 1.
► A decline in official international reserves.                ► Greater than 1.
Question No: 18 ( Marks: 1 )                                     ► Less than 0.
M1 component of money supply consists of:                         ► Equal to 1.
► Paper currency and coins.
► Paper currency, coins and check writing deposits.         Question No: 25 ( Marks: 1 )
► Paper currency, coins, check writing deposits and         Which of the following statements is TRUE about
savings deposits.                                               cartels?
► Paper currency, coins, check writing deposits,                ► These are considered as part of monopolistic
savings deposits and certificates of deposits.                  competition.
► These are organizations of independent firms,                  ► Pocket allowance to children.
producing similar products, that work together to raise prices       ► Maintenance allowance to old parents.
and restrict output.                                                 ► All of the given options.
► These are organizations of interdependent firms,             Question No: 32 ( Marks: 1 )
producing similar products, that work together to raise
The relationship between hours provided by labor and
prices and restrict output.
wage rate is:
► These are organizations of independent firms,
► Positive.
producing different products, that work together to raise
prices and restrict output.                                          ► Negative.
‗                                                                    ► Ambiguous.
A cartel is a formal (explicit) agreement among firms.               ► Very strong.
Cartels usually occur in an oligopolistic industry, where          Question No: 33 ( Marks: 1 )
there are a small number of sellers and usually involve          Market failure occurs when:
homogeneous products.                                                ► Competitive markets do not achieve equitable
outcomes.
Question No: 26 ( Marks: 1 )                                         ► Competitive markets do not achieve efficient
After the collusion, oligopolists are able to:                   outcomes.
► Raise price but not restrict output.                            ► Government takes steps to intervene in markets.
► Raise price and restrict output but not attain the              ► All of the given happen.
monopoly profit.
► Raise price and restrict output and therefore attain the    Question No: 34 ( Marks: 1 )
monopoly profit.                                                  A graph that depicts the relationship between the total
► Restrict output but not raise price.                        quantity of goods and services demanded and the price
level is known as:
Question No: 27 ( Marks: 1 )                                          ► Aggregate demand curve.
Which of the following statements is TRUE about the                   ► Average price level.
difference between nominal and real Gross Domestic                    ► Circular flow model.
Product (GDP)?                                                        ► GDP curve.
► Real GDP includes only goods; nominal GDP                    Question No: 35 ( Marks: 1 )
includes goods and services.                                     In the short run, the equilibrium price level and the
► Real GDP is measured using constant base-year             equilibrium level of total output are determined by the
prices; nominal GDP is measured using current prices.            intersection of:
► Real GDP is equal to nominal GDP less the                      ► The aggregate demand, the short-run aggregate
depreciation of the capital stock.                               supply and the long-run aggregate supply curves.
► Real GDP is equal to nominal GDP multiplied by the             ► The short-run aggregate supply and the long-run
CPI.                                                             aggregate supply curves.
► The aggregate demand and the short-run aggregate
Question No: 28 ( Marks: 1 )                                     supply curves.
If production remains the same and all prices double,                ► The aggregate demand and the long-run aggregate
then which of the following will happen?                         supply curves.
► Real GDP and nominal GDP will both remain                    Question No: 36 ( Marks: 1 )
constant.                                                        Changes in aggregate demand can be caused by changes
► Real GDP will remain constant and nominal GDP             in:
will reduce by half.                                             I.        Wages.
► Real GDP will remain constant and nominal GDP             II.Raw materials costs.
will double.                                                     III.         Government spending.
► Real GDP will double and nominal GDP will remain          IV.         Government regulations that increase the cost
► I, II, III, and IV.
Question No: 29 ( Marks: 1 )                                          ► I and III only.
Assume that there is no government or foreign sector, if             ► I, III, and IV.
the marginal propensity to consume (MPC) is 0.9, then                 ► III only.
the value of multiplier will be equal to:
► 2.
Question No: 37 ( Marks: 1 )
► 5.
In the long run, the output level is determined by:
► 8.
► Aggregate demand.
► 10.
► Aggregate supply.
Formula = [1/(1-MPC)]
► The government.
Question No: 30 ( Marks: 1 )
► Household income.
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.         Question No: 38 ( Marks: 1 )
2500 and sells to consumers. The value added is:                 Which of the following is TRUE?
► 1000+1500+2500 = Rs. 5000                                     ► 1 − MPS = MPC
► 1000+500+2500 = Rs. 4000                                      ► 1 + MPS = MPC
► 1000+500+1000 = Rs. 2500                                      ► 1 / MPS = MPC
► 1000+1500+1000 =Rs. 3500                                      ► 1 × MPS = MPC
Question No: 31 ( Marks: 1 )
Which of the following is a transfer payment?                   Question No: 39 ( Marks: 1 )
► The money supply is less than total expenditures.

Question No: 45 ( Marks: 1 )

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 ( Marks: 1 )

A tax on individual’s income is known as:
► Sales tax.
► Excise tax.
► Corporate income tax.
► Personal income tax.

Question No: 47 ( Marks: 1 )
The above figure shows disposable personal income on
the horizontal axis and consumption per period on the             Which of the following is TRUE for banks?
vertical axis. Which of the following is TRUE at every               ► They deal with money only.
point on the 45-degree line?                                         ► They deal with shares and assets.
► The value of disposable income equals the sum of               ► They not only deal with money but also create
personal saving and consumption.                                  money.
► The value of disposable income equals                          ► They deal with money but do not create money.
consumption.
► The value of disposable income equals personal
Question No: 48 ( Marks: 1 )
saving.
► The value of disposable income and consumption              In a period of boom, credit creation is:
equals 1.
► Small.
► Heavy.
Question No: 40 ( Marks: 1 )
► Unchanged.
If the government wishes to achieve a fall in
► Zero.
unemployment, which of the following policies should it
► Reduce the real value of income tax free allowances.       Question No: 49 ( Marks: 1 )
► Reduce government spending on capital projects.
What will be the impact of an increase in taxes?
► Raise Value Added Tax (VAT).
► It will shift the IS curve to the left and decrease both
► Start public job training programs.
the interest rate and the level of income.
► It will shift the IS curve to the right and increase both
Question No: 41 ( Marks: 1 ) In the long run,                     the interest rate and the level of income.
sustained inflation is due to:
► It will shift the IS curve to the right and increase the
► A one-time increase in money growth.                       level of income but decrease the interest rate.
► A continuous increase in the money growth rate.                 ► It will shift the LM curve downward (to the right)
► A continuous increase in aggregate demand.                 and increase the level of income but decrease the interest
► The rising price of oil.                                   rate.
Question No: 42 ( Marks: 1 )
The situation when a country imports more than it                 Question No: 50 ( Marks: 1 )
exports is known as:
► A trade deficit.                                            To determine whether an economy’s output is growing
► A trade surplus.                                           or shrinking, one must keep track of:
► An expansion.                                                   ► Changes in nominal GDP.
► A recession.                                                    ► Changes in the growth rate of nominal GDP.
Question No: 43 ( Marks: 1 ) Public investment                      ► Changes in the general price level.
expenditure for highways, schools, and national defense                ► Changes in real GDP.
is included in which component of GDP?                            To determine whether the economy of a nation is growing or
► Consumption.                                               shrinking in size, economists use a measure of total output
► Gross private investment.                                  called real GDP.
► Government purchases.
► Public investment.
Question No: 44 ( Marks: 1 )                                   Question No: 51 ( Marks: 1 )
The government has a balanced budget if:                          Suppose the price of rail tickets decreases, what will
► Its total revenues are equal to its total                  happen to the demand for airline travel?
expenditures.                                                        ► The demand curve for airline travel shifts left.
► Its total revenues are less than its total expenditures.      ► The demand curve for airline travel shifts right.
► Its total revenues are greater than its total                 ► The supply curve of airline travel shifts left.
expenditures.                                                        ► The supply curve of airline travel shifts right.
Question No: 59 ( Marks: 10 )
Question No: 52 ( Marks: 1 )                                             The items of balance sheet of State Bank of Pakistan are
Production possibilities curve will shift upward if there               given as follows:
is:                                                                     Forex reserves = Rs. 500
► A reduction in unemployment.                                      Notes and coins = Rs. 800
► An increase in the production of capital goods.                   Credit to government = Rs. 200
► A reduction in discrimination.                                    Government and commercial bank deposits = Rs. 300
► All of the given options.                                         Credit to private sector = Rs. 700
Liquidity paper = Rs. 300
Question No: 53 ( Marks: 1 )                                            Prepare the balance sheet in its proper format of asset
Which of the following is NOT included in the perfect                   and liabilities side. Also calculate total assets and total
information assumption of perfect competition?                          liabilities.
► Consumers know their preferences.
► Consumers know their income levels.                               Solution:
► Consumers know the prices available.                              The items of balance sheet of State Bank of Pakistan are
► Consumers can anticipate price changes.                           given as follows:
Forex reserves = Rs. 500
Question No: 54 ( Marks: 1 )                                            Notes and coins = Rs. 800
Suppose a monopolist set his output at the level where                 Credit to government = Rs. 200
marginal revenue, marginal cost and average total cost                  Government and commercial bank deposits = Rs. 300
are equal. In this case, economic profit will be:                       Credit to private sector = Rs. 700
► Negative.                                                         Liquidity paper = Rs. 300
► Positive.                                                         Prepare the balance sheet in its proper format of asset
► Zero.                                                             and liabilities side. Also calculate total assets and total
► Indeterminate from the given information.                         liabilities.

Assets                                         Liabilities
Question No: 55 ( Marks: 3 )
Differentiate between the terms flow and stock.
A stock variable is measured at one specific time, and        Forex reserves = Rs. 500                       Government and commercial bank
represents a quantity existing at that point in time (say,
December 31, 2004), which may have accumulated in the         Credit to government = Rs. 200                 Notes and coins = Rs. 800
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     Credit to private sector = Rs. 700
sense.                                                                                                       Liquidity paper = Rs. 300
Total= RS 1400                                 Total= RS 1400
Question No: 56 ( Marks: 5 )                                              FINALTERM EXAMINATION Spring 2009
What should be the optimal role of government in an                                  ECO401 – Economics
economy according to the Classical school of thought?                                                                 Time: 120 min
Discuss.                                                      Question No: 1 ( Marks: 1 )
In pure capitalism, the role of government is best described as:
► Significant.
Question No: 57 ( Marks: 5 )                                       ► Extensive.
► Nonexistent.
Explain the difference between current account and
capital account.                                                   ► Limited.
Question No: 2 ( Marks: 1 )
A new technology which reduces costs for firms:
Question No: 58 ( Marks: 10 )                                      ► 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 ( Marks: 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 ( Marks: 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.
(A) The above demand curve has two distinct segments
► The total utility for the consumption of the first five units.
which have different elasticities that join to form a
► The average utility for the consumption of the first five units.
corner or kink. Why the firms are reluctant to change
Question No: 5 ( Marks: 1 )
the price in these two segments?
If your demand price for one unit of a good is \$100 and the market
(B) What are the major advantages that an oligopoly           price is \$75, your consumer's surplus is:
offers for public interests?                                       ► \$25.
(Marks: 5+5)                                                       ► \$50.
► \$75.
► \$100.                                                                       ► Monopolists earn higher profits.
Question No: 6 ( Marks: 1 )                                                        ► Monopolists produce high quality goods at higher prices.
An individual with a constant marginal utility of income will be:                  ► Most of the ―surplus‖ (producer + consumer surplus) accrues to
► Risk loving.                                                           monopolists.
► Risk neutral.                                                               ► Monopolists do not pay sufficient attention to increasing
► Risk averse.                                                           efficiency.
► Insufficient information for a decision.
Question No: 7 ( Marks: 1 )                                                   Question No: 14 ( Marks: 1 )
Ali initially leased one-room space and started a small day care              When a firm charges each customer the maximum price that the
centre with only 4 children and one staff member. But he found                customer is willing to pay, the firm:
that the cost per child is very high. He wants to expand the centre.               ► Engages in a discrete pricing strategy.
Which of the following will happen when Ali expand the centre?                     ► Charges the average reservation price.
► Economies of scale.                                                         ► Engages in second-degree price discrimination.
► Diseconomies of scale.                                                      ► Engages in first-degree price discrimination.
► Decreasing returns to the labor inputs.                                In this type, everyone charged according to what he can pay. Seller can
► Increasing returns to the labor inputs.                                charge the highest
Economies of scale:                                                           price of any product from customers.
The increase in efficiency of production as the number of goods being
produced increases.

Question No: 15 ( Marks: 1 )
Question No: 8 ( Marks: 1 )                                                   Unlike the classical economists, Keynes believed that the economy
A self-employed accountant spends a lot of money identifying                  could get stuck in the short run for a significant period of time
clients and advertising his services. These activities are an example         because of:
of:                                                                               ► Insufficient aggregate supply.
► External costs.                                                            ► Insufficient aggregate demand.
► Transaction costs.                                                         ► Quick self correcting mechanism.
► Fixed inputs.                                                              ► Government purchases of too many goods and services.
► Marginal returns.                                                      Question No: 16 ( Marks: 1 )
External costs (also called externalities), are the costs that people other   Price exceeds marginal revenue in which of the following market
than the buyer are forced to pay as a result of the transaction.              structure(s)?
► Differentiated oligopoly and monopoly only.
► Standardized oligopoly and pure competition only.
Question No: 9 ( Marks: 1 )                                                       ► Monopolistic competition and monopoly only.
Indifference curves that are convex to the origin reflect:                        ► Monopolistic competition, oligopoly and monopoly.
► An increasing marginal rate of substitution.                           Price will exceed marginal revenue in any industry in which firms face
► A decreasing marginal rate of substitution.                            a downward-sloping demand curve. Pure competition is the only
► A constant marginal rate of substitution.                              industry in which this is not the case.
► A marginal rate of substitution that first decreases, then
increases.                                                                    Question No: 17 ( Marks: 1 )
Diminishing marginal rate of substitution represents that Indifference        Which of the following market situation is much like a pure
curves are convex. As one moves down a (standardly convex)                    monopoly except that its member firms tend to cheat on agreed
indifference curve, the marginal rate of substitution decreases. This is      upon price and output strategies?
known as the law of diminishing marginal rate of substitution.                     ► Duopoly.
► Cartel.
► Market sharing monopoly.
► Natural monopoly.
Question No: 10 ( Marks: 1 )                                                  Ref by Saqib Kamran:
If isoquants are straight lines, it means that:                               There are two extremes; monopoly and perfect Competition. The
► Only one combination of inputs is possible.                            Oligopoly/ cartels is the one having qualities of both. So this is much
► There is constant returns to scale.                                    like a pure monopoly except it has members who make a group to
► Inputs have fixed costs at all use rates.                              control and price and output. The group of people acts as monopoly. It
► The marginal rate of technical substitution of inputs is               is either possible that the members of firm tend to cheat on agreed
constant.                                                                     price and output strategies.
When the isoquants are straight lines, the MRTS is constant.
Question No: 18 ( Marks: 1 )
Which of the following is NOT conducive to the successful
Question No: 11 ( Marks: 1 )                                                  operation of a cartel?
Graphically, the Marginal Cost curve cuts through the Average                     ► Market demand for the good is relatively inelastic.
Total Cost curve at:                                                              ► The cartel supplies all of the world's output of the good.
► The lowest point on the MC curve.                                           ► Cartel members have substantial cost advantages over non-
► The highest point on the MC curve.                                      member producers.
► The lowest point on the ATC curve.                                          ► The supply of non-cartel members is very price elastic.
► The middle of the upward-sloping portion of the total cost
curve.
Question No: 19 ( Marks: 1 )
Question No: 12 ( Marks: 1 )                                                  Which of the following is a negative externality connected to
The supply curve for a competitive firm is:                                   attending the college?
► Its entire marginal cost curve.                                             ► The fact that completion of a college degree acts as a signaling
► The upward-sloping portion of its marginal cost curve.                  mechanism to employers.
► Its marginal cost curve above the minimum point of the                      ► The fact that other costs, such as books and materials, are
average variable cost curve.                                                  incurred in addition to tuition and fees.
► Its marginal cost curve above the minimum point of the                      ► The fact that the people in the next room play loud music at
average total cost curve.                                                     hours you want to sleep.
Supply curve for a competitive firm is discrete is MC when P> AVC                 ► The fact that you will get benefits from college that you don't
Question No: 13 ( Marks: 1 )                                                  currently anticipate.
Following are the disadvantages of monopoly EXCEPT:                           A negative externality arises from the harmful spillover effect of
production or consumption for society.                                          ► Total consumption to total disposable income at a specific
income level.
Question No: 20 ( Marks: 1 )                                                    ► Total consumption to a change in disposable income.
A profit maximizing firm will employ labour up to the point                Average propensity to consume (APC) is the ratio of total
where:                                                                     consumption to total disposable income.
► Marginal revenue = Marginal product.                                 Question No: 28 ( Marks: 1 )
► Marginal cost = Marginal product.                                    According to Keynesian economics, inflexible wages and prices:
► Marginal revenue product = Average cost of labour.                        ► Cause the aggregate product market to always remain in
► Marginal revenue product = Marginal cost of labour.                  equilibrium.
Ref:                                                                            ► Cause real production and employment to fall when
Question No: 21 ( Marks: 1 )                                               aggregate expenditures decline.
A reason why some economists basically ignore the short run is                  ► Cause real production and employment to remain at their full
because they believe that the economy:                                     employment levels.
► Has self-correcting mechanisms.                                           ► Fall in the early stages of a recession, when aggregate
► Can only be graphed with a horizontal curve.                         expenditures decline.
► Never needs correction.                                              According to Keynesian economics, inflexible wages and prices cause
► None of the given options.                                           real GDP and employment to fall when aggregate demand decreases.

Question No: 29 ( Marks: 1 )
Question No: 22 ( Marks: 1 )                                               A £1 increase in government spending will have a larger impact
The classical economists thought that the economy would quickly            upon national income than a £1 tax cut because:
overcome any short run instability because:                                    ► The government prints the pound it spends.
► Price level and quantity are flexible.                                   ► Not all of a tax cut is spent.
► Prices would get stuck at a low level.                                   ► When taxes are cut, so too is government spending.
► The long run aggregate supply would shift to the left.                    ► Taxes are an injection into the system.
► Prices and wages are flexible.                                       Ref:
Ref by Syed Toqeer.
The primary disagreement between new classical and new Keynesian           Question No: 30 ( Marks: 1 )
economists is over how quickly wages and prices adjust. New classical      Each of the following is one of the four sets of factors that
economists build their macroeconomic theories on the assumption that       determine the level of total spending EXCEPT:
wages and prices are flexible.                                                  ► Consumer's baseline spending C0.
► Foreign real GDP Yf.
Question No: 23 ( Marks: 1 )                                                    ► Government purchases G.
The aggregate demand curve is downward sloping because of all of                ► Investor's baseline spending in the stock market.
the following reasons EXCEPT:                                              total spending =private consumption + gross investment + government
► The central bank raises real interest rate as inflation increases.   spending + (exports − imports)
► The central bank raises nominal interest rate as inflation rises.    Question No: 31 ( Marks: 1 )
► The central bank intentionally tries to increase the level of        The record of a country's transactions in goods, services and assets
aggregate demand when inflation rises.                                     with the rest of the world is its:
► The central bank intentionally tries to reduce the level of               ► Current account.
aggregate demand when inflation rises.                                          ► Balance of trade.
Because inflation is demand based and that‘s why central bank will              ► Capital account.
reduce demand to curb inflation.                                                ► 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: 24 ( Marks: 1 )
Which school of thought believes that the self-correcting
mechanism works slowly?                                                    Question No: 32 ( Marks: 1 )
► Keynesian.                                                          Which of the following is NOT an account in the balance of
► Monetarist.                                                         payments?
► Rational expectations.                                                 ► Capital account.
► Keynesian and monetarist only.                                         ► Financial account.
Many people who like to focus on the self-correcting mechanism and            ► Current account.
the automatic stabilizers as free-market, ―laissez-faire‖ ways to             ► Future account.
influence the economy may also follow a school of thought called
Monetarism (called Monetarists).
Question No: 25 ( Marks: 1 )
The economic analysis most closely related to Say's Law is:                Question No: 33 ( Marks: 1 )
► Short-run aggregate market                                          If imports = exports, then we have:
► Production possibilities.                                                ► Current account balance.
► Imperfect competition.                                                   ► Capital account balance.
► Circular flow.                                                            ► Statistical discrepancy.
► Balanced Budget.
Question No: 26 ( Marks: 1 )
Under new classical macroeconomics, monetary policy:                       Question No: 34 ( Marks: 1 )
► Affects the level of equilibrium output.                             Unemployment benefits may increase the unemployment rate
► Affects the composition of equilibrium output.                       because:
► Affects both the level and composition of equilibrium output.            ► Unemployment benefits reduce the cost of job search.
► None of the given options.                                               ► Unemployment benefits encourage people to quit their jobs.
Ref:                                                                           ► Unemployment benefits reduce the benefits of additional job
searching.
Question No: 27 ( Marks: 1 )                                                   ► Unemployment benefits enable people to quit searching for
The average propensity to consume is the ratio of:                         work.
► A change in consumption to a change in disposable income.
► A change in consumption to total disposable income at a              Question No: 35 ( Marks: 1 )
specific income level.                                                     An increase in ''per capita'' national income implies that:
► Everyone in the nation is enjoying a better standard of living.      by open market operations or sales and purchases of second hand
► The population has increased.                                        government debt, or by changing the reserve requirements. If the
► National income has risen faster than the population has             central bank wishes to lower interest rates, it purchases government
risen.                                                                      debt.
► The distribution of income has improved.
Ref:                                                                        Question No: 43 ( Marks: 1 )
Question No: 36 ( Marks: 1 )                                                Which of the following statements is TRUE?
In the exogenous growth model, if investment exceeds                           ► Net National Product = Gross National Product –
depreciation, the capital stock will ----------- and output will---------   Depreciation.
----- until the steady state is attained.                                      ► Net National Product = National Income.
► Increase; increase.                                                      ► Net National Product = Disposable Personal Income.
► Increase; decrease.                                                     ► Net National Product = Personal Income.
► Decrease; decrease.                                                  NNP = GNP – Depreciation allowance
► 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: 44 ( Marks: 1 )
Gross National Product (GNP) is:
► Net National Product (NNP) plus depreciation.
Question No: 37 ( Marks: 1 )                                                   ► National income discounted by the GDP deflator.
According to Keynesian economics, aggregate expenditures are the               ► Income from foreign investments.
sum of desired or planned spending undertaken by:                              ► Gross Domestic Product (GDP) minus depreciation.
► All four sectors only when the economy is at full employment.          GNP= NNP+ Depreciation allowance
► All four sectors at a specific aggregate production level.
► The household sector after taxes.
► The business and government sectors.                                   Question No: 45 ( Marks: 1 )
An exchange rate that varies according to the supply and demand
Question No: 38 ( Marks: 1 )                                                for the currency in the foreign exchange market is called:
A currency appreciation:                                                         ► Overvalued exchange rate.
► Reduces aggregate demand and increases aggregate supply.                   ► Undervalued exchange rate.
► Reduces both aggregate demand and aggregate supply.                        ► Fixed exchange rate.
► Increases aggregate demand and reduces aggregate supply.                   ► Flexible exchange rate.
► Increases both aggregate demand and aggregate supply.
A currency appreciation reduces aggregate demand and raises                 Question No: 46 ( Marks: 1 )
aggregate supply.                                                           According to the quantity theory of money, if there is inflation,
what must have caused it?
► Higher oil prices.
Question No: 39 ( Marks: 1 )                                                    ► An increase in the money supply.
Which of the following is a more expansionary way for                           ► Increased velocity.
government to finance a budget deficit?                                         ► Higher budget deficits.
► Borrowing money in the money market.                                  The velocity of money is not stable, thus making the predictions of the
► Borrowing money in the goods market.                                  quantity theory of money – i.e. that monetary growth must necessarily
► Creating new money.                                                   lead to inflation.
► Increasing taxes.
The government runs a budget deficit and finances it by printing more       Question No: 47 ( Marks: 1 )
money.                                                                      Real Gross National Product (GNP) is best defined as:

► The pound value of all final goods and services produced in the
Question No: 40 ( Marks: 1 )                                                economy during a particular time period and measured in current
How should monetary policy be used during recessions?                       prices.
► Decrease money supply to increase interest rate and increase              ► The pound value of all goods produced for final consumption
aggregate demand.                                                           by households in a particular year and measured in constant prices.
► Increase money supply to increase interest rate and increase              ► The current pound value of all new and used goods produced
aggregate demand.                                                           and sold in the economy during a particular time period.
► Decrease money supply to decrease interest rate and increase              ► The market value of all final goods and services produced
aggregate demand.                                                           by the economy during a given time period, with prices held
► Increase money supply to decrease interest rate and                   constant relative to some base period.
increase aggregate demand.                                                  Ref:
Question No: 48 ( Marks: 1 )
Which of the following may cause an increase in national income?
Question No: 41 ( Marks: 1 )
In terms of the IS-LM model, an increase in tax rates should move               ► Rise in exports.
the:                                                                            ► Rise in imports.
► IS curve leftward.                                                       ► Fall in consumer spending.
► IS curve rightward.                                                      ► Increase in saving.
► LM curve rightward.
► LM curve leftward.                                                   Question No: 49 ( Marks: 1 )
The gold standard was an example of what kind of exchange-rate
Question No: 42 ( Marks: 1 )                                                system?
Which of the following policy options would simultaneously                      ► A managed floating exchange rate.
increase interest rates and decrease output?                                    ► A fixed exchange rate.
► The central bank sells bonds through open market                          ► A non-convertible exchange rate.
operations.                                                                     ► A freely floating exchange rate.
► The federal government increases its defense purchases.
► The central bank expands the money supply.
► The federal government increases the tax rate.                        Question No: 50 ( Marks: 1 )
The primary way that the central bank can affect the monetary base is       The basic difference between oligopoly and monopolistic
competition is that.                                                         ► All of the given options.
► Products are differentiated in oligopoly.
► There are no barriers to entry in oligopoly.                      Question No: 3 ( Marks: 1 )
► There are barriers to entry in oligopoly.                         _______________ arises when an increase in all inputs leads to a
► An oligopoly includes downward sloping demand curves              more-than-proportional increase in the level of output.
facing the firm.                                                         _____________ means that as inputs are added to the production
OLIGOPOLY                                                                process, output increases proportionally.
Because there are barriers to entry in oligopoly which keep out
potential competitors, there is the possibility of positive long run         ► Economies of scale; constant returns to scale.
profits.                                                                     ► Constant returns to scale; decreasing returns to scale.
► Decreasing returns to scale; economies of scale.
Question No: 51 ( Marks: 5 )                                                 ► Economies of scale; decreasing returns to scale.
A. Differentiate between final goods and intermediate goods with           Question No: 4 ( Marks: 1 )
the help of examples.                                                    Total costs are the sum of:
► Marginal costs and variable costs.
B.                                                                          ► Fixed costs and variable costs.
1979      1980         1981          1982         1983         1984     1985 ► Fixed costs and marginal costs.
1986
► Average variable costs and marginal costs.
rowth
1%        -5%          1%            3%           4%           5%       2%        1%
Question No: 5 ( Marks: 1 )
As compared to existing firms, a new firm entering in monopolist
market has:
a. Calculate the average growth rate between 1982 and 1985.
► High costs.
b. Calculate the average growth rate between 1979 and 1986.                  ► Low costs.
► Equal costs.
(Marks: 3+2)                                                                 ► None of the given options.
Question No: 6 ( Marks: 1 )
B.Calculate the average growth rate between 1982 and 1985.              The maximum price that a consumer is willing to pay for a good is
Calculate the average growth rate between 1979 and 1986.                called:

► The reservation price.
Question No: 52 ( Marks: 10 )                                                ► The market price.
From the information given in the following table, calculate the             ► The first-degree price.
Marginal Physical Product and Marginal Revenue Product of                    ► The block price.
labor in the perfectly competitive market.
Labor per         Total Product per     Marginal Physical         Question Revenue        Marginal
Marginal No: 7 ( Marks: 1 )
week              week                  Product                                           Revenue Product
The market structure in which strategic considerations are most
0                 0                     ?                         10
important is:           ?
1                 30                    ?                                                 ?
10 ► Monopolistic competition.
2                 40                    ?                         10 ► Oligopoly.         ?
3                 47                    ?                         10 ► Pure competition.  ?
4                 53                    ?                         10 ► Pure monopoly. ?
5                 57                    ?                         10                      ?
Question No: 8 ( Marks: 1 )
(Marks: 5+5)                                                            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.
Question No: 53 ( Marks: 10 )                                               ► Monopolistic competition, oligopoly and monopoly.
c. What is meant by public goods? Briefly explain the public goods
in economics with the help of examples.                                  Question No: 9 ( Marks: 1 )
d. What are the characteristics of public goods?                         For a firm buying labor competitively, the marginal input cost is
equal to the:
► Wage.
► Interest rate.
Question No: 54 ( Marks: 10 )                                                ► Price of output.
Market for loanable funds is the market of money. Explain the                ► Cost of raw materials.
Classical and Keynesian views about the demand and supply of               Question No: 10 ( Marks: 1 )
loanable funds in this market.                                           Unlike the classical economists, Keynes believed that the economy
FINALTERM EXAMINATION Spring 2010                             could get stuck in the short run for a significant period of time
ECO401- Economics (Session - 1) Time: 90 min Marks: 69               because of:
Question No: 1 ( Marks: 1 )                                                 ► Insufficient aggregate supply.
As more of a good is consumed, then total utility typically:                ► Insufficient aggregate demand.
► Increases at a decreasing rate.                                        ► Quick self correcting mechanism.
► Decreases as long as marginal utility is negative.                     ► Government purchases of too many goods and services.
► Decreases as long as marginal utility is positive.                   Question No: 11 ( Marks: 1 )
► Is negative as long as marginal utility is decreasing.             According to Keynes, the economy does not self correct quickly
www.vuzs.net                                                           because:
► With less consumption and more savings the interest rate will
Question No: 2 ( Marks: 1 )                                              drop.
A production function:                                                       ► In the short run workers are fully employed and cannot produce
enough to get to long run equilibrium.
► Relates inputs with output.                                           ► Wages and prices are flexible in the short run.
► Generates a curve that is upward sloping.                             ► Wages and prices are sticky in the short run.
► Shows diminishing marginal product of an input, since it gets
flatter as output rises.                                                 Question No: 12 ( Marks: 1 )
An assumption of classical economics is:
► Prices and wages are inflexible.                                     ► Keynesian economists actively promote the use of fiscal
► Self-correction takes a long time.                                 policy while the classical economists do not.
► Supply creates its own demand.                                          ► Keynesian economists actively promote the use of monetary
► Investment and saving are seldom equal.                            policy to improve aggregate economic performance while the classical
Question No: 13 ( Marks: 1 )                                          economists do not.
The real interest rate will increase:                                        ► Classical economists believe that monetary policy will
certainly affect the level of output while the Keynesians believe that
► If there is an excess supply of loanable funds in the financial   money growth affects only prices.
markets.                                                                     ► Classical economists believe that fiscal policy is an effective
► If there is an excess demand for loanable funds in the            tool for achieving economic stability while the Keynesians do not.
financial markets.
► If there is an excess supply of loanable funds in the foreign     Question No: 22 ( Marks: 1 )
exchange markets.                                                       What will be the primary result of inflation in an economy?
► If there is an excess demand for loanable funds in the foreign
exchange markets.                                                           ► A rise in personal wealth.
Question No: 14 ( Marks: 1 )                                             ► A rise in wages.
Which of the following is a less important component of the                 ► A decline in prices.
balance of payments?                                                        ► A decline in the value of money.
► The capital account.
► The current account.                                              Question No: 23 ( Marks: 1 )
► The financial account.                                            Suppose in an economy, a war destroys a large portion of a
► All three components are equally important.                       country's capital stock but the saving rate is unchanged. In this
Question No: 15 ( Marks: 1 )                                         situation, the exogenous model predicts that output will grow and
Endogenous growth theory was developed in:                              the new steady state will approach towards:
► 1980.
► 1965.                                                                  ► A higher output level than before.
► 1970.                                                                  ► The same output level as before.
► 1950.                                                                  ► A lower output level than before.
Question No: 16 ( Marks: 1 )                                              ► The Golden Rule output level.
Per capita income is obtained by dividing national income by:           The Exogenous growth model is also known as the Neo-classical
growth model or Solow growth model. The key assumption of the
► Total labor force in the country.                                 neoclassical growth model is that capital is subject to diminishing
► Unemployed youth in the country.                                  returns. Given a fixed stock of labor, the impact on output of the last
► None of the given options.                                        unit of capital accumulated will always be less than the one before.
► Total population of that country.                                    Question No: 24 ( Marks: 1 )
Question No: 17 ( Marks: 1 )                                           Firm A produces cotton worth Rs. 1000 and sells it to firm B.
Which of the following is deducted from Gross National Product          From this, firm B makes yarn worth Rs. 1500 and sells to firm C.
to get Net National Product?                                            Firm C manufactures cloth worth Rs. 2500 and sells to consumers.
► Indirect taxes.                                                  The value added is:
► Depreciation.
► Direct taxes.                                                         ► 1000+1500+2500 = Rs. 5000
► Transfer payments.                                                    ► 1000+500+2500 = Rs. 4000
Question No: 18 ( Marks: 1 )                                                 ► 1000+500+1000 = Rs. 2500
In the Keynesian cross model, the 45-degree line has a slope of:             ► 1000+1500+1000 =Rs. 3500
Question No: 25 ( Marks: 1 )
► 45.                                                               Which of the following is NOT an item of public consumption?
► Infinity.                                                                  ► Expenditure on health.
► 1.                                                                     ► Expenditure on education.
► 0.                                                                     ► Expenditure on general administration.
► Expenditure for transfer payments.
Question No: 19 ( Marks: 1 )                                            Examples of public good are goods and services such as general
The principle economic difference between a competitive and a           administration, education, health, law-and-order, infrastructures,
non-competitive market is:                                              culture, or defense, which are in turn .financed by the net revenue of
taxation (net of the social transfers).
► The number of firms in the market.
► The extent to which any firm can influence the price of the       Question No: 26 ( Marks: 1 )
product.                                                                Changes in aggregate demand can be caused by changes in:
► The size of the firms in the market.                              I. Wages.
► The annual sales made by the largest firms in the market.         II.Raw materials costs.
Ref:                                                                    III.         Government spending.
Question No: 20 ( Marks: 1 )                                            IV.         Government regulations that increase the cost of doing
Those who hold the classical view of the labour market are likely       business.
to believe that:                                                               ► I, II, III, and IV.
► I and III only.
► Monetary but not fiscal policy will have an effect on output           ► I, III, and IV.
and employment.                                                              ► III only.
► Fiscal but not monetary policy will have an effect on output
and employment.                                                         Question No: 27 ( Marks: 1 )
► Both monetary and fiscal policy will have an effect on output     Which of the following is equal to the number of people
and employment.                                                         unemployed?
► Neither monetary nor fiscal policy will have an effect on
output and employment.                                                     ► The number of people employed minus the labor force.
Question No: 21 ( Marks: 1 )                                               ► The labor force plus the number of people employed.
Which of the following statements is TRUE about the Classical              ► The number of people employed divided by the labor force.
and Keynesian approaches to achieve a macroeconomic                        ► The labor force minus the number of people employed.
equilibrium in an economy?                                              Ref:
Question No: 28 ( Marks: 1 )                                                    ► When financial flows out of a country for goods and services
Rising inflation means:                                                    are less than financial flows into the country for its goods and services.
► When a country has a trade deficit.
► That the price level is increasing by a given percentage rate.          ► When an economy buys less from foreigners than it sells to
► That the prices of all goods and services increase from year to     them.
year.                                                                      Question No: 37 ( Marks: 1 )
► That the price level is rising at an increasing rate.               Economists define economic growth as:
► That the price level is rising at a variable rate.
Rising inflation means that the price level is rising at an increasing         ► Changes in real GDP from year to year that occur as aggregate
rate.                                                                      demand and short-run aggregate supply change.
Question No: 29 ( Marks: 1 )                                                  ► An increase in the standard of living of a nation.
If net exports are positive, this implies that the country has:                ► An increase in nominal GDP combined with price stability.
► The process through which the economy‘s potential output is
► Government budget surplus.                                            Question No: 38 ( Marks: 1 )
► Government budget deficit.                                            What will be the impact if agriculture sector is neglected in the
development process?
Question No: 30 ( Marks: 1 )
The rapid population growth in today’s developing nations is due               ► It can lead to insufficient savings.
to the:                                                                        ► It can lead to shortage of foreign exchange.
► It can lead to lower levels of production.
► High birth rates only.                                                    ► All of the given conditions can happen.
► Low death rates only.
► High birth rate and low death rate.                                  Question No: 39 ( Marks: 1 )
► Higher standard of living.                                           In which of the following situations, a monopoly occurs?

Question No: 31 ( Marks: 1 )                                                  ► When each firm produces a product that is slightly different
A tax on the accounting profits of corporations is known as:               from the other firms.
► Sales tax.                                                            ► When one firm sells a good that has no close substitutes and
► Excise tax.                                                          a barrier blocks entry for other firms.
► Corporate income tax.                                                    ► When there are many firms producing the same product.
► Personal income tax.                                                     ► In all of the given situations.

Question No: 32 ( Marks: 1 )                                               Question No: 40 ( Marks: 1 )
Suppose you keep Rs. 35 in your pocket to purchase a movie CD              Which of the following is not the property of production function?
when it will come out next month in the market. What is the                     ► Generates a curve that is upward sloping.
function of money in this context?                                              ► Shows diminishing marginal product of an input, since it gets
flatter as output rises.
► Medium of exchange.                                                       ► Marginal product at all levels is increasing.
► Unit of account.                                                          ► Relates inputs with output.
► Standard of deferred payment.
► Store of value.                                                      Question No: 41 ( Marks: 1 )
As long as all prices remain constant, a decrease in money income
Question No: 33 ( Marks: 1 )                                               results in:
What will be the impact of an increase in the money supply?
► An increase in the slope of the budget line
► It will shift the IS curve to the left and decrease both the interest        ► A decrease in the slope of the budget line
rate and the level of income.                                                  ► An increase in the intercept of the budget line
► It will shift the LM curve downward (to the right) and                  ► A decrease in the intercept of the budget line
increase both the interest rate and the level of income.                   Question No: 42 ( Marks: 1 )
► It will shift the IS curve to the right and increase the level of   What will happen to the isocost line if the price of both goods
income but decrease the interest rate.                                     decreases proportionality?
► It will shift the LM curve downward (to the right) and increase
the level of income but decrease the interest rate.                            ► It shifts farther away from the origin of the graph.
Question No: 34 ( Marks: 1 )                                                    ► It shift inward.
IS curve shows the equilibrium in:                                              ► It shifts outward.
► Money Market.                                                         ► None of the given options.
► Goods Market.                                                       If price of both inputs increases, the isocost line shifts inwards
► Labor Market.
► Financial Market.                                                   Question No: 43 ( Marks: 1 )
Question No: 35 ( Marks: 1 )                                            Monopoly profits can be invested in
International finance is the study of economics that deals with:               ► Advertisement.
► The balance of trade.                                               ► Research and development.
► The macroeconomic consequences of financial flows                       ► Human resource development.
associated with international trade.                                           ► Expansion of the market.
► International investment opportunities for American                   Question No: 44 ( Marks: 1 )
multinational corporations.                                                The characteristics of a monopolistically competitive market are
► The relationships among world currency dealers.                     almost the same as in
International finance, the field that examines the macroeconomic               ► Monopoly.
consequences of the financial flows associated with international              ► Oligopoly.
Question No: 36 ( Marks: 1 )                                                   ► Duopoly.
In which of the following conditions, a current account deficit             Question No: 45 ( Marks: 1 )
exists?                                                                    The multiplier is a related concept which formalizes the output
response to:
► When net exports are positive.                                              ► Saving.
► Investment.                                                           exactly equal to the marginal utility of the last dollar spent on any
► Taxes.                                                                other good.
► Inflation.                                                                 ► Marginal utility is equal to average utility.
Question No: 46 ( Marks: 1 )                                                 Question No: 4 ( Marks: 1 )
Factor income from abroad like worker remittances, dividends                 If a consumer’s marginal rate of substitution equals 2 eggs for 1
and interest has positive impact on:                                        hamburger then:
► Current account balance.                                               ► The consumer‘s indifference curve must be positively sloped.
► Capital account balance.                                                   ► The consumer‘s indifference curve must be convex with
► Trade balance.                                                        respect to the origin of the graph.
► Unemployment.                                                              ► The ratio of the consumer‘s marginal utility of 1 egg to that of
Question No: 47 ( Marks: 1 )                                              1 hamburger must equal ½.
Continuous technology progress is a necessary condition for the                  ► All of the given options.
high rate of:
► Inflation reduction.                                              Question No: 5 ( Marks: 1 )
► Economic growth.                                                      The optimal point of production for any individual firm is where:
► Population growth.                                                       ► Marginal Revenue = Marginal Cost.
► Employment.                                                              ► Marginal Revenue > Marginal Cost.
Question No: 48 ( Marks: 1 )                                                 ► Marginal Revenue < Marginal Cost.
Expansionary fiscal policy includes:                                           ► None of the given options.
► Increasing taxes and increasing government purchases.
► Raising interest rates, increasing taxes, and decreasing transfer     Question No: 6 ( Marks: 1 )
payments.                                                                    Under the kinked demand curve model, an increase in marginal
► Decreasing taxes and increasing government expenditures.              cost will lead to:
► Raising interest rates, decreasing taxes, and decreasing                  ► An increase in output level and a decrease in price.
government spending.                                                            ► A decrease in output level and an increase in price.
► A decrease in output level and no change in price.
Question No: 49 ( Marks: 3 )                                                    ► Neither a change in output level nor a change in price.
Differentiate between real exchange rate and nominal exchange
rate.                                                                       Question No: 7 ( Marks: 1 )
Question No: 50 ( Marks: 3 )                                                The marginal revenue product is:
Discuss the basic functions of money.                                          ► Upward sloping due to the law of demand.
► Upward sloping due to the law of marginal utility.
Question No: 51 ( Marks: 5 )                                                   ► Downward sloping due to the law of diminishing returns.
What will be the impact of following factors on Marginal                       ► Downward sloping due to the law of supply.
Propensity to Consume?
a) A fall in the rate of income tax.
b) People anticipate that the rate of inflation is about to rise.           Question No: 8 ( Marks: 1 )
c) The government redistributes income from the rich to the poor.            The unemployment rate is equal to:
d) The government gives the subsidies.                                          ► Number of employed / labour force x 100.
e) If the assets of the people increase.                                        ► Number of unemployed / labour force.
(Marks: 1 for each)                                                             ► (Number of unemployed / labour force) x 100.
Question No: 52 ( Marks: 5 )                                                    ► None of the given options.
Explain the difference between current account and capital                  Ref by Sehar Khan:
account.                                                                    The unemployment rate is defined as the ratio of the no. of
Question No: 53 ( Marks: 5 )                                                unemployed people divided by the sum of the employed and
Assume that the reserve requirement ratio (rr) of United Bank               unemployed people
Limited (UBL) is 15% and bank’s initial deposit is \$2500.                   Question No: 9 ( Marks: 1 )
a. By using this information, make initial balance sheet of MCB.             M1 component of money supply consists of:
b. Calculate money multiplier.                                                  ► Paper currency and coins.
(Marks: 3+2)                                                                    ► Paper currency, coins and check writing deposits.
FINALTERM EXAMINATION Spring 2010                                   ► Paper currency, coins, check writing deposits and savings
ECO401- Economics (Session - 3)                          deposits.
Time: 90 min Marks: 69                                  ► Paper currency, coins, check writing deposits, savings deposits
Question No: 1 ( Marks: 1 )                                                and certificates of deposits.
A market is said to be in equilibrium when:
► Demand equals output.
► There is downward pressure on price.                                 Question No: 10 ( Marks: 1 )
► The amount consumers wish to buy at the current price equals         An increase in the money supply will cause interest rates to:
the amount producers wish to sell at that price.                               ► Rise.
► All buyers are able to find sellers willing to sell to them at the      ► Fall.
current price.                                                                 ► Remain unchanged.
► None of the given options.
Question No: 2 ( Marks: 1 )
Which of the following is regarded as a general determinant of              Question No: 11 ( Marks: 1 )
price elasticity of demand?                                                 Disposable Income is obtained by subtracting ---------------- from
► Nature of the good (luxury versus necessity).                         personal income.
► Availability of close substitutes.                                        ► Indirect Taxes.
► Share of consumer's budget and passage of time.                           ► Direct Taxes.
► All of the given options.                                                 ► Both direct and indirect taxes.
► Subsidies.
Question No: 3 ( Marks: 1 )
Consumers will maximize satisfaction when:                                 Question No: 12 ( Marks: 1 )
► The price of each good is exactly equal to the price of every          Which of the following statements is TRUE about cartels?
other good consumed.                                                            ► These are organizations of independent firms, producing
► The price of each good is exactly equal to the total utility          similar products, that work together to raise prices and restrict output.
derived from the consumption of every other good.                               ► These are organizations of interdependent firms, producing
► The marginal utility of the last dollar spent on each good is         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.
► These are considered as part of monopolistic competition.

Question No: 13 ( Marks: 1 )
If disposable income increases from \$7 trillion to \$8 trillion and as
a result, consumption expenditure increases from \$9 trillion to
\$9.8 trillion, the Marginal Propensity to Consume is:
► 1.0.
► 0.80.
► 0.875.
► 0.91.

Question No: 14 ( Marks: 1 )
Which of the following is required to make the equation of
exchange in the quantity theory of money?
► V and Q are assumed to be constant.
Refer to the above figure, the potential output in this economy is:
► The money supply is assumed to be produced by the banking              ► \$7,000 billion at a price level of 1.16.
system and not exclusively in currency.                                      ► \$7,000 billion at a price level of 1.12.
► The quantity of money is assumed to determine the amount of            ► \$7,000 billion at a price level of 1.08.
Real GDP.                                                                    ► All of the given options.
► M and P are considered constant.
Question No: 15 ( Marks: 1 )                                             Question No: 21 ( Marks: 1 )
Which of the following specifies the maximum amount of a good            The short run in macroeconomic analysis is a period:
that may be imported in a given period of time?                              ► In which wages and some other prices do not respond to
► Trade restriction.                                                 changes in economic conditions.
► Quota.                                                                 ► In which full wage and price flexibility and market adjustment
► Import restriction.                                                have been achieved.
► Legislative restriction.                                               ► Of less than 12 months.
► In which all macroeconomic variables are fixed.
Question No: 16 ( Marks: 1 )
Which of the following best defines “subsidies”?                        Question No: 22 ( Marks: 1 )
► Payment by Government for purchase of goods and services.
If a \$1million rise in national income led to induced investment of
► Payment by business enterprises to factors of production.
\$2million then the accelerator coefficient will be equal to:
► Payment by companies to share holders.                                  ► 0.
► Payment by Government to business enterprises without                   ► 1.
buying any goods and services.                                                ► 2.
► 3.
Question No: 17 ( Marks: 1 )                                                Question No: 23 ( Marks: 1 )
GNP is a good indicator of:                                               In classical theory, excess supply of a product would be associated
► The total payment of factor owners.
with:
► The amount of consumption and investment.                                ► Rising interest rates.
► The conditions of production and employment.                             ► Falling interest rates.
► The amount of incomes available for spending.                            ► Rising price for the product.
► Falling price for the product.
Question No: 18 ( Marks: 1 )
Expenditure of defense is an item of:                                    Question No: 24 ( Marks: 1 )
► Public investment.
Most nations of the world are:
► Private consumption.                                                     ► Closed economies.
► Public consumption.                                                      ► Open economies.
► Private investment.                                                      ► Self sufficient.
Question No: 19 ( Marks: 1 )                                             Reference:
The information economics is a branch of:                                Question No: 25 ( Marks: 1 )
► Microeconomics.                                                      Which of the following will happen by a reduction in net exports
► Macroeconomics.
all other things being equal?
► Monetary economics.                                                      ► It will result in a movement up along the aggregate demand
► Development economics.                                              curve.
Question No: 20 ( Marks: 1 )                                                  ► It will reduce aggregate supply.
► It will reduce aggregate demand.
► It will not change aggregate demand or aggregate supply in the
domestic economy.

Question No: 26 ( Marks: 1 )
► Foreign firms open more stores in a country than the country
opens in foreign countries.
► A country's firms open more stores abroad than foreign firms
open in the country.
► A country purchases more from abroad than other countries
purchase from it.

Question No: 27 ( Marks: 1 )
The real exchange rate is defined as the:   Output     Saving        Gross         Gross investment Gross             Govt. Expenditures Taxes (T)
► Market exchange rate adjusted for     (Y)        (S)           Imports       (I)              exports           (G)
prices.                                                               (M)                            (X)
► Market exchange rate adjusted for
interest rates.
► Market exchange rate.                 650        80            80            104                  97            116                    10
► Exchange rate determined by the       700        90            80            119                  97            116                    10
government.
750        100           80            130                  97            116                    10
800        110           80            139                  97            116                    10
Question No: 28 ( Marks: 1 )
900       120           80            146                  97            116                    10
Which of the following best describes
the economic growth?                                                   Question No: 36 ( Marks: 1 )
► Continuous outward shift of aggregate demand.                     Assume that pen and ink are complements. When the price of
► A long term expansion of a country's potential GDP.              pen goes up, the demand curve for ink:
► The avoidance of a negative output gap.                              ► Shifts to the left.
► An increase in aggregate demand which causes a movement              ► Shifts to the right.
along the short-run aggregate supply curve.                                ► Remains constant.
Question No: 29 ( Marks: 1 )                                               ► Shifts to the right initially and then returns to its original
Suppose there is a steady state condition in an economy with no       position.
population growth. In which condition, the steady-state level of
capital per worker will increase?                                      Question No: 37 ( Marks: 1 )
► When the amount of investment per worker decreases.               Which of the following will happen if two indifference curves
► When the depreciation rate increases.                            cross each other?
► When the saving rate increases.                                       ► The assumption of a diminishing marginal rate of substitution
► In all of the given options.                                     will be violated.
► The assumption of transitivity will be violated.
Question No: 30 ( Marks: 1 )                                                ► The assumption of completeness will be violated.
Which of the following is TRUE for banks?                                   ► Consumers will minimize their satisfaction.
► They deal with money only.
► They deal with shares and assets.                                 Question No: 38 ( Marks: 1 )
► They not only deal with money but also create money.               Which of the following is the basic difference between oligopoly
► They deal with money but do not create money.                     and monopolistic competition?
► Products are differentiated in oligopoly.
Question No: 31 ( Marks: 1 )                                                ► There are no barriers to entry in oligopoly.
Which of the following got benefit from deflation?                         ► There are barriers to entry in oligopoly.
I. Salary earners.                                                          ► An oligopoly includes downward sloping demand curves
II. Equity holders.                                                    facing the firm.
III.       Pensioners.                                                    Question No: 39 ( Marks: 1 )
IV.      Debtors.                                                       As long as all prices remain constant, a decrease in money income
► I only.                                                         results in:
► II only.                                                             ► An increase in the slope of the budget line
► I and III.                                                           ► A decrease in the slope of the budget line
► I and IV.                                                            ► An increase in the intercept of the budget line
► A decrease in the intercept of the budget line
Question No: 32 ( Marks: 1 )
Which of the following is a characteristic of a developing country
or a third-world country?                                              Question No: 40 ( Marks: 1 )
► Low per capita income.                                            If marginal cost is Rs.15,000/- and marginal revenue is Rs.20,000/-
► Low population growth rate.                                      . The firm should:
► High investment rate.                                                 ► Reduce output until marginal revenue equals marginal cost.
► High saving rate.                                                     ► Do nothing without information about your fixed costs.
► Expand output until marginal revenue equals marginal cost.
Question No: 33 ( Marks: 1 )                                                ► None of the given options.
One of the main reasons of poverty in third world countries is:
► Generation gap.                                                   Question No: 41 ( Marks: 1 )
► Communication gap.                                                An increase in quantity demand is shown by:
► Savings gap.                                                         ► Shifting the demand curve to the left.
► Inflation gap.                                                       ► Shifting the demand curve to the right.
► Upward movement along the demand curve.
► Downward movement along the demand curve.
Question No: 34 ( Marks: 1 )
A person with a diminishing marginal utility of income is said to      Question No: 42 ( Marks: 1 )
be:                                                                     Since bread and butter are complements. When the price of bread
► Risk averse person.                                              goes down, the demand curve for butter:
► Risk neutral person.                                                 ► Shifts to the left.
► Risk loving person.                                                  ► Shifts to the right.
► None of the given options.                                           ► Remains constant.
► Shifts to the right initially and then returns to its original
Question No: 35 ( Marks: 1 )                                           position.
What questions are related with explanation? What questions are
related with what ought to be?
► Positive, negative.                                              Question No: 43 ( Marks: 1 )
► Negative, normative.                                             When the marginal revenue product of labor is less than the
► Normative, positive.                                             marginal input cost of labor then the profit maximizing firm will:
► Positive, normative.                                                ► Hire more labor.
► Hire less labor.
► Maintain the same employment level.
► Decrease output.                                                 Question No: 2 ( Marks: 1 )
Assume leisure is a normal good. If income effect equals
Question No: 44 ( Marks: 1 )                                           substitution effect then a wage rate increase will lead a person to:
In Keynesian economics, if aggregate expenditures are more than           ► Increase hours of work.
aggregate output then:                                                     ► Decrease hours of work.
► The price level rises.                                               ► Not change hours of work.
► Inventories decrease.                                                ► None of the given options.
► Aggregate output increases.
► Employment increases.                                            Question No: 3 ( Marks: 1 )
The following table shows a firm’s Total Product of labor. What is
the Marginal Product of labor between 20 and 30 units of labor?

Question No: 45 ( Marks: 1 )                                                                              Table
The record of a country's transactions in goods and services with                                        Quantity            Total
the rest of the world is its:                                                                             of Labor            Product
► Current account.
► Balance of payments.                                                                                0                   0
► Balance of trade.                                                                                   10                  100
► Capital account.                                                                                    20                  230
30                  340
Question No: 46 ( Marks: 1 )                                                                              40                  410
Revaluation of the currency encourages:                                                                   50                  460
► Imports.                                                               ► 340 units.
► Exports.                                                              ► 220 units.
► Poverty.                                                              ► 11 units.
► Inflation.                                                            ► 110 units.

Question No: 47 ( Marks: 1 )                                           Question No: 4 ( Marks: 1 )
The share of world trade happens between high income countries        The long-run average total cost curve:
is:                                                                        ► Traces out the points on the lowest short-run average total
► 55%                                                              cost curve for each level of production.
► 40%                                                                  ► Is inversely related to the depth of the short-run marginal cost
► 50%                                                              curve.
► 60%                                                                  ► Traces out the midpoints on an average of several short-run
average total cost curves.
► Is downward-sloping under decreasing returns to scale.
Question No: 48 ( Marks: 1 )                                               Question No: 5 ( Marks: 1 )
If the exchange rate is fixed, expansionary fiscal policy would not    A monopolistically competitive firm in the long run equilibrium:
have any:                                                                   ► Will make negative profit.
► Investment multiplier effect.                                        ► Will make zero profit.
► Crowding out effects.                                                ► Will make positive profit.
► Government spending effect .                                         ► Any of the given are possible.
► None of the given options.                                         Question No: 6 ( Marks: 1 )
The market structure in which strategic considerations are most
Question No: 49 ( Marks: 3 )                                           important is:
What is meant by exchange rate? Also give example of exchange
rate.                                                                      ► Monopolistic competition.
► Oligopoly.
Question No: 50 ( Marks: 3 )                                               ► Pure competition.
What is the reason of poverty in developing countries according           ► Pure monopoly.
to Prebisch-Singer hypothesis?                                         Question No: 7 ( Marks: 1 )
Question No: 51 ( Marks: 5 )                                          The market structure in which there is interdependence among
According to the values given in the following table, calculate the   firms is:
injections at each level of output.
(Marks: 1 for each)                                                        ► Monopolistic competition.
► Oligopoly.
Question No: 52 ( Marks: 5 )                                               ► Perfect competition.
What are the major weaknesses of exogenous growth theory?                 ► Monopoly.
Which theory was developed in against of exogenous growth
theory?                                                                Question No: 8 ( Marks: 1 )
Question No: 53 ( Marks: 5 )                                           Which one of the following characteristics is common in
Discuss the components on the assets and liabilities side of the      monopolistic competition and oligopoly?
balance sheet of a central bank
FINALTERM EXAMINATION Spring 2010                              ► Free entry and exit from the industry.
ECO401- Economics (Session - 2)                          ► Strategic behavior.
Time: 90 min Marks: 69        ► Standardized products.
Question No: 1 ( Marks: 1 )                                                ► Advertising.
If the equilibrium price of bread is \$2 and the government imposes     Question No: 9 ( Marks: 1 )
a \$1.50 price ceiling on the price of bread:                           The long run aggregate supply curve will shift to the right if:
► The price level increases.
► The demand for bread will decrease because suppliers will            ► Factors of production (such as labor and capital) increase.
reduce their supply.                                                       ► Expenditures (such as consumption and net exports) increase.
► A surplus of bread will emerge.                                      ► The prices of inputs used to produce goods and services (such
► More bread will be produced to meet the increased demand.        as wages and the price of oil) decrease.
► There will be a shortage of bread.
Question No: 10 ( Marks: 1 )                                            The short run in macroeconomic analysis is a period:
An assumption of classical economics is:                                     ► In which wages and some other prices do not respond to
changes in economic conditions.
► Prices and wages are inflexible.                                       ► In which full wage and price flexibility and market adjustment
► Self-correction takes a long time.                                have been achieved.
► Supply creates its own demand.                                         ► Of less than 12 months.
► Investment and saving are seldom equal.                                ► In which all macroeconomic variables are fixed.
Question No: 21 ( Marks: 1 )
Question No: 11 ( Marks: 1 )                                            Suppose investment rises by \$50 billion at each price level. If the
Real GDP is equal to:                                                   value of the multiplier is 1.5, what is the amount of change in real
GDP demanded at each price level?
► Nominal GDP – Inflation.                                               ► \$50 billion.
► Nominal GDP + Inflation.                                               ► \$75 billion.
► Nominal GDP/ Inflation.                                                ► \$125 billion.
► Inflation/ Nominal GDP.                                                ► \$150 billion.
Question No: 12 ( Marks: 1 )                                               Question No: 22 ( Marks: 1 )
If we compare Gross Domestic Product (GDP) with Gross                   According to the classical school, unemployment was responsive to
National Product (GNP) then:                                            changes in:
► M/P.
► GNP = GDP – Net income from abroad.                                    ► P.
► GNP = GDP + Net income from abroad.                                    ► M.
► GNP = NNP – Net income from abroad.                                    ► Money wages.
► GNP = NNP + Net income from abroad.                                  Question No: 23 ( Marks: 1 )
The level of output produced when the labor market is in
Question No: 13 ( Marks: 1 )                                            equilibrium is called:
Suppose an economy is at full employment equilibrium in the                  ► Target output.
classical model. What will be the long run effect of an increase in          ► Product market equilibrium output.
government spending in this economy?                                         ► Full-employment output.
► Price level will increase.                                             ► Natural output.
► The aggregate demand curve will shift upward.                        Question No: 24 ( Marks: 1 )
► Output level will remain constant.                                The relationship between inflation and unemployment is usually
► All of the given options.                                         that:
► Unemployment changes do not directly lead to changes in
Question No: 14 ( Marks: 1 )                                            inflation, but inflation changes may cause changes in unemployment.
Which of the following best describes the ''Capital widening''?              ► As unemployment falls, nothing happens to inflation.
► More capital per unit of labour.                                       ► As unemployment falls, inflation falls.
► More capital and more labour but with the same amount of               ► As unemployment falls, inflation increases.
capital per unit of labour.
► Increasing the usage of existing capital.                         Question No: 25 ( Marks: 1 )
► Importing capital from the developed world.                       Most nations of the world are:
► Closed economies.
Question No: 15 ( Marks: 1 )                                               ► Open economies.
Double counting in national income refers to:                              ► Self sufficient.
► Counting a product more than once.                                  ► Non trading nations.
► Counting a product at the final stage of output process.         Question No: 26 ( Marks: 1 )
► Counting both as product and as factor payment.
► Counting both as real goods and as money flow.
Question No: 16 ( Marks: 1 )                                          Disposable Personal Income                    Consumption
Expenditure of defense is an item of:                                   \$                                              \$
► Public investment.                                               100                                            140
► Private consumption.
200                                            220
► Public consumption.
► Private investment.                                              300                                            300
Question No: 17 ( Marks: 1 )                                         400                                            380
The discounted value of the net returns that the asset generates        500                                          460
over a period of time plus the discounted value of its disposal value
Refer to the above table, when disposable personal income is \$400,
at the end of the period minus the initial purchase cost is known
what is the amount of personal saving?
as:
► −\$40.
► Future value.
► −\$20.
► Net present value.
► \$0.
► Discounted value.
► \$20.
► Disposal value.
Question No: 18 ( Marks: 1 )
Question No: 27 ( Marks: 1 )
National defense is a good example of:
► Public good.                                                     What will happen if exchange rate increases from \$1 = Pak Rs. 80
► Inferior good.                                                   to \$1 = Pak Rs. 85?
► It will reduce exports of Pakistan.
► Giffen good.
► It will increase exports of Pakistan.
► Private good.
► It will increase imports of Pakistan.
► Its imports and exports will remain unchanged.
Question No: 19 ( Marks: 1 )
Refer to the above figure, the potential output in this economy is:
Question No: 28 ( Marks: 1 )
► \$7,000 billion at a price level of 1.16.
► \$7,000 billion at a price level of 1.12.                          Which of the following is the cause of fluctuations in economic
activity?
► \$7,000 billion at a price level of 1.08.
► An increase in aggregate demand.
► All of the given options.
► A decrease in aggregate demand.
► A decrease in short run aggregate supply.
Question No: 20 ( Marks: 1 )
► All of the given options.                                                ► The agricultural sector has been increasing in size and in
terms of labor productivity as rural farmers increasingly start to
Question No: 29 ( Marks: 1 )                                               mechanize.
In the endogenous growth model, the assumption of ------------------
is more plausible.                                                         Question No: 38 ( Marks: 1 )
► Increasing returns to capital.                                      Suppose a consumer buys two goods X and Y. The demand for X
► Decreasing returns to capital.                                      is elastic, then a rise in the price of X will cause:
► Constant returns to capital.                                             ► Total spending on good Y to rise.
► All of the given options.                                                ► Total spending on good Y to fall.
In both the exogenous and endogenous growth models, we assume                   ► Total spending on good Y to remain unchanged.
constant returns to scale and, therefore, diminishing returns to capital        ► An indeterminate effect on total spending on good Y.
at the level of the individual firm.                                       Question No: 39 ( Marks: 1 )
Question No: 30 ( Marks: 1 )                                               For which of the following good, the substitution effect of a
The optimum tax rate in which government revenue is maximized              lowered price is counteracting by the income effect?
lies somewhere between:                                                         ► For an inferior good.
► 0% and 1%.                                                               ► A substitute good.
► 0% and 50%.                                                              ► For an independent good.
► 50% and 100%.                                                            ► For a normal good.
► 0% and 100%.
Question No: 40 ( Marks: 1 )
Suppose that 90 units of output are produced by using 15 units of
Question No: 31 ( Marks: 1 )                                               labor. Which of the following is TRUE in this context?
The item which serves as a medium of exchange is known as:                     ► The marginal product of labor is 6.
► Gold.                                                                     ► The total product of labor is 1/6.
► Capital.                                                                  ► The average product of labor is 6.
► Silver.                                                                   ► None of the given options.
► Money.                                                                 Question No: 41 ( Marks: 1 )
What will happen if current output is more than the profit-
Question No: 32 ( Marks: 1 )                                               maximizing output?
Which of the following is included in M2 but not in M1?                        ► The next unit produced will increase profit.
► Currency.                                                                 ► The next unit produced will decrease revenue more than it
► Demand deposits.                                                      increases cost.
► Time deposits.                                                            ► The next unit produced will decrease cost more than it
► Debit cards.                                                          increases revenue.
► The next unit produced will increase revenue without
Question No: 33 ( Marks: 1 )                                               increasing cost.
Which of the following statements is correct?                                 Question No: 42 ( Marks: 1 )
► A single bank cannot multiply deposits.                               Suppose the price of coke increases, what will happen to the
► A single bank can multiply deposits.                                  demand for pepsi?
► Some banks can multiply deposits and others cannot.                       ► The demand curve for pepsi shifts leftward.
► The banking system as a whole can multiply deposits.                      ► The demand curve for pepsi shifts rightward.
► The supply curve of pepsi shifts leftward.
Question No: 34 ( Marks: 1 )                                                   ► The supply curve of pepsi shifts rightward.
LM curve shows the equilibrium in:
► Money Market.                                                         Question No: 43 ( Marks: 1 )
► Goods Market.                                                         Slope and elasticity of demand have
► Labor Market.
► Financial Market.                                                        ► A direct relation.
► An inverse relationship.
Question No: 35 ( Marks: 1 )                                                  ► No relation between slope and elasticity.
What will happen to LM curve if the central bank increased the                ► None of the given options.
supply of real money balances?                                              Question No: 44 ( Marks: 1 )
► It would become steeper.                                              When the slope of a demand curve is infinity, elasticity of demand
► It would become flatter.                                              is
► It would shift upward.                                                    ► Zero elastic.
► It would shift downward.                                                 ► Unit elastic.
► Less elastic.
Question No: 36 ( Marks: 1 )                                                  ► More elastic.
Which of the following is (are) the characteristic(s) of low income
countries as compared to high income countries?                            Question No: 45 ( Marks: 1 )
I. Lower rates of population growth.                                       The reduction in the value of a capital good due to the wear and
II.Greater income inequality.                                              tear caused during production is called as:
III.         A large proportion of the labor force in agriculture.             ► Devaluation.
IV.          Higher rates of unemployment.                                     ► Cost of capital.
► I only.                                                                 ► Depreciation.
► II and IV.                                                          Question No: 46 ( Marks: 1 )
► II, III and IV.                                                     According to Keynes inflation and unemployment are:
Question No: 37 ( Marks: 1 )                                                   ► Opposite side of same coin.
Which of the following statements is TRUE about the agriculture                ► Positively related.
sector in low income countries?                                                ► Having no relation.
► The agricultural sector has been decreasing in size because its         ► None of the given options.
productive workers prefer to migrate to urban areas.
► The agricultural sector is by far the largest producer and the      Question No: 47 ( Marks: 1 )
most productive sector in low-income countries.                            Government budget deficit is equal to:
► Although the agricultural sector is the largest employer, labor‘s      ► Private sector resource deficit + Current account deficit.
productivity in this sector is very low.                                      ► Current account deficit - Private sector resource deficit.
► Private sector resource deficit - Current account deficit.              ► Capital expenditures.
► Current account deficit / Private sector resource deficit.              ► Wages.
Question No: 48 ( Marks: 1 )                                                ► Time.
Money demand decreases when interest rate:                                 Question No: 7 ( Marks: 1 )
► Increases.                                                          If a firm experiences economies of scale, then the:
► Decreases.                                                              ► Long-run average total cost curve is equal to the economies of
► Remains the same.                                                  scope.
► All of the given options.                                               ► Long-run average total cost curve is positively sloped.
► Long-run average total cost curve is horizontal.
Question No: 49 ( Marks: 3 )                                                 ► Long-run average total cost curve is negatively sloped.
What are the assumptions of exogenous growth theory?                       Question No: 8 ( Marks: 1 )
Question No: 50 ( Marks: 3 )                                             When a firm charges each customer the maximum price that the
Differentiate between international trade and international             customer is willing to pay, the firm:
finance.                                                                     ► Engages in a discrete pricing strategy.
Question No: 51 ( Marks: 5 )                                                 ► Charges the average reservation price.
A.What is the importance of current account? How we can                      ► Engages in second-degree price discrimination.
calculate current account deficit?                                           ► Engages in first-degree price discrimination.
B. How we can reduce current account deficit?                              Question No: 9 ( Marks: 1 )
C.                                                                       Which of the following is true in long run equilibrium for a firm
Question No: 52 ( Marks: 5 )                                            in a monopolistic competitive industry?
Consider the following table. Find out the GNP and NNP from                 ► The demand curve is tangent to marginal cost curve.
this information.                                                            ► The demand curve is tangent to average cost curve.
Items                                        Amount (billion                 ► The marginal cost curve is tangent to average cost curve.
rupees)                         ► The demand curve is tangent to marginal revenue curve.
Personal consumption expenditures            458                           Question No: 10 ( Marks: 1 )
Gross domestic private investment            169                         Which one of the following characteristics is common in
Government expenditure on goods and          78                         monopolistic competition and oligopoly?
services                                                                     ► Free entry and exit from the industry.
► Strategic behavior.
Gross domestic public investment             27
► Standardized products.
Net foreign investment                       17                            Question No: 11 ( Marks: 1 )
Depreciation cost                            28                          Value of Marginal Product of Labor (VMPL) is equal to:
► MPPL/ Pi.
► MPPL.
Question No: 53 ( Marks: 5 )                                                 ► Pi.
“People hold money for speculation purposes”. Discuss                        ► MPPL x Pi.
FINALTERM EXAMINATION Spring 2010                               Question No: 12 ( Marks: 1 )
ECO401- Economics (Session - 3) Time: 90 min Marks: 69               According to classical economics, the economy was unlikely to
Question No: 1 ( Marks: 1 )                                             experience:
Land is best described as:                                                  ► Full employment.
► Produced factors of production.                                        ► Flexible wages and prices.
► "Organizational" resources.                                            ► Equality between saving and investment.
► Physical and mental abilities of people.                               ► High rates of unemployment.
► "Naturally" occurring resources.                                     Question No: 13 ( Marks: 1 )
Question No: 2 ( Marks: 1 )                                            Say's Law is a proposition underlying classical economics stating
The price elasticity of demand measures the responsiveness of          that:
quantity demanded to:                                                        ► Supply creates its own demand.
► Quantity demanded.                                                     ► Leakages are greater than injections.
► Quantity supplied.                                                     ► Unemployment is a common condition.
► Price.                                                                 ► Consumption expenditures are a function of disposable income.
► Output.
Question No: 3 ( Marks: 1 )                                           Question No: 14 ( Marks: 1 )
Suppose your local public golf course increases the greens fees for    An assumption of classical economics is:
using the course. If the demand for golf is relatively inelastic, you      ► Prices and wages are inflexible.
would expect:                                                              ► Self-correction takes a long time.
► A decrease in total revenue received by the course.                  ► Supply creates its own demand.
► An increase in total revenue received by the course.                 ► Investment and saving are seldom equal.
► No change in total revenue received by the course.
► An increase in the amount of golf played on the course.           Question No: 15 ( Marks: 1 )
Which of the following will result if there is a decrease in
Question No: 4 ( Marks: 1 )                                             aggregate demand?
As more of a good is consumed, then total utility typically:               ► Expansion; inflation.
► Increases at a decreasing rate.                                       ► Recession; deflation.
► Decreases as long as marginal utility is negative.                    ► Expansion; deflation.
► Decreases as long as marginal utility is positive.                    ► Recession; inflation.
► Is negative as long as marginal utility is decreasing.
Question No: 5 ( Marks: 1 ) - Please choose vu zs one                Question No: 16 ( Marks: 1 )
At any given point on an indifference curve, the absolute value of     Real Gross Domestic Product (GDP) equals:
the slope equals:                                                          ► Nominal GDP minus net exports.
► Unity--otherwise there would be no indifference.                     ► Nominal GDP divided by the GDP deflator.
► The marginal rate of substitution.                                   ► Nominal GDP multiplied by the GDP deflator.
► The consumer‘s marginal utility.                                     ► GDP minus depreciation.
► None of the given options.
Question No: 6 ( Marks: 1 )
Fixed costs are fixed with respect to changes in:
► Output.
Question No: 17 ( Marks: 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.

Question No: 18 ( Marks: 1 )
Which of the following shows the Fisher equation of exchange?
► MT=PV.
► VT=PM.
► MV=PQ.
► MY=VP.

Question No: 19 ( Marks: 1 )
In the Keynesian cross model, the 45-degree line has a slope of:
► 45.
► Infinity.
► 1.
Refer to the above figure, if the real GDP is \$7,000 billion and the
► 0.
implicit price deflator is 1.16, what is the value of nominal GDP?
► \$6,034 billion.
Question No: 20 ( Marks: 1 )                                               ► \$8,120 billion.
The principle economic difference between a competitive and a              ► \$9,120 billion.
non-competitive market is:                                                 ► Cannot be determined from the given information.
► The number of firms in the market.                                Question No: 27 ( Marks: 1 )
► The extent to which any firm can influence the price of the        Let L equal the size of the labor force, E the number of employed
product.                                                               workers, and U the number of unemployed workers. The
► The size of the firms in the market.                              unemployment rate is equal to:
► The annual sales made by the largest firms in the market.             ► (L + E)/L.
► U/L.
Question No: 21 ( Marks: 1 )                                               ► 1 + (E/L).
An individual whose attitude towards risk is known as:                    ► All of the given options.
► Risk averse.
► Risk loving.
Question No: 28 ( Marks: 1 )
► Risk neutral.
The natural rate of unemployment is likely to fall if:
► None of the given options.                                          ► Unemployment benefits increase.
Question No: 22 ( Marks: 1 )                                            ► Income tax increases.
Which of the following best describes the ''Capital widening''?          ► More training is available for the unemployed.
► More capital per unit of labour.                                    ► Geographical immobility increases.
► More capital and more labour but with the same amount of
capital per unit of labour.                                            Question No: 29 ( Marks: 1 )
► Increasing the usage of existing capital.
Which of the following is NOT a determinant of net exports?
► Importing capital from the developed world.                         ► Domestic and foreign incomes.
► Relative price levels.
Question No: 23 ( Marks: 1 )                                              ► Domestic and foreign trade policies.
Suppose there are two producers and two products. Which of the           ► Producers’ expectations about future prices.
following is not TRUE in this situation?
► A producer has an absolute advantage on one product.            Question No: 30 ( Marks: 1 )
► A producer has the comparative advantage on both
Which of the following can happen in a boom period?
products.                                                                 ► Unemployment is likely to fall.
► A producer has the comparative advantage on one product.           ► Prices are likely to fall.
► A producer has an absolute advantage on both products.             ► Demand is likely to fall.
► Imports are likely to grow.
Question No: 24 ( Marks: 1 )
Public education creates:                                              Question No: 31 ( Marks: 1 )
► Asymmetric information.                                           The taxes on alcohol, tobacco, and gasoline are categorized as:
► External costs.                                                      ► Sales tax.
► Internal costs.                                                      ► Excise tax.
► External benefits.                                                   ► Corporate income tax.
► Personal income tax.
Question No: 25 ( Marks: 1 )                                           Question No: 32 ( Marks: 1 )
A graph that depicts the relationship between the total quantity of   The item which serves as a medium of exchange is known as:
goods and services demanded and the price level is known as:              ► Gold.
► Aggregate demand curve.                                             ► Capital.
► Average price level.                                                ► Silver.
► Circular flow model.                                                ► Money.
► GDP curve.
Question No: 33 ( Marks: 1 )
Question No: 26 ( Marks: 1 )                                            A country has a comparative advantage:
► If it can produce a good at a higher opportunity cost than other
nations.
► If it can produce a good at a lower opportunity cost than
other nations.
► If it can produce a good by using less resources than other
nations.
► If it can produce a good that lies outside its production
possibilities curve.                                                      Question No: 43 ( Marks: 1 )
Hysteresis refers to the permanent effects of a:
Question No: 34 ( Marks: 1 )                                                 ► Temporary change.
A tariff is defined as:                                                     ► Structural change.
► A restriction on exports.                                              ► Cyclical change.
► A tax placed on an imported product.                                   ► Political change.
► A limit on the amount of a good or service that can be
exported.                                                                 Question No: 44 ( Marks: 1 )
► A limit on the amount of a good or service that can be              Factor income from abroad like worker remittances, dividends
imported.                                                                 and interest has positive impact on:
► Current account balance.
Question No: 35 ( Marks: 1 )                                                  ► Capital account balance.
Countries that are not among the high income nations of the                   ► Trade balance.
world are categorized as:                                                     ► Unemployment.
► Developed countries.
► Progressed countries.                                                Question No: 45 ( Marks: 1 )
► Developing countries.                                                The growth rate of any country’s real GDP can be:
► High income countries.                                                  ► Negative or positive.
► positive or zero.
Question No: 36 ( Marks: 1 )                                                 ► Negative or zero.
Which of the following is (are) the characteristic(s) of high income        ► Negative or positive or zero.
countries as compared to low income countries?
I. Lower rates of population growth.                                      Question No: 46 ( Marks: 1 )
II. Greater income inequality.                                            Endogenous growth theory is also known as:
III.              A large proportion of the labor force in agriculture.      ► Neo-classical growth theory.
IV.              Higher rates of investment.                                 ► New growth theory.
► I only.                                                               ► Classical growth model.
► I and II.                                                             ► Keynesian growth model.
► II and IV.
► I and IV.                                                          Question No: 47 ( Marks: 1 )
Question No: 37 ( Marks: 1 )                                              Which of the following is not the World Bank’s structural reform
In which of the following conditions, a welfare loss occurs in           policy?
monopoly?                                                                     ► FDI liberalization.
► Where the price is greater than the marginal cost.                     ► Trade liberalization.
► Where the price is greater than the marginal benefit.                  ► Financial liberalization.
► Where the price is greater than the average revenue.                   ► Same monetary policy for all countries.
► Where the price is greater than the marginal revenue.
Question No: 48 ( Marks: 1 )
Question No: 38 ( Marks: 1 )                                              The common characteristics of a developing country is:
If average physical product (APP) is decreasing then which of the           ► High growth rate.
following must be true?                                                      ► High literacy rate.
► Marginal physical product is more than the average physical           ► Skilled labor.
product.                                                                     ► High unemployment rate.
► Marginal physical product is less than the average physical
product.                                                                  Question No: 49 ( Marks: 3 )
► Marginal physical product is decreasing.                           At what point, the equilibrium occurs in the foreign exchange
► Marginal physical product is increasing.                           market?

Question No: 39 ( Marks: 1 )                                              Question No: 50 ( Marks: 3 )
When different prices are charged to customers who purchase               What are the reasons that poor countries remained poor?
different quantities, this is an example of
► Second-degree price discrimination.                                Question No: 51 ( Marks: 5 )
► First-degree price discrimination.                                  If the government increase it’s spending e.g. increases the wages
► Monopoly.                                                          of the government servant, how it will affect on consumption,
► Perfect competition.                                               production and hiring of new employees?
Question No: 52 ( Marks: 5 )
Question No: 40 ( Marks: 1 )                                               Explain the difference between appreciation and depreciation of
Which of the following may cause a decrease in national income?           currency.
► Increase imports.
► Decrease unemployment.                                               Question No: 53 ( Marks: 5 )
► Decreasing exports.                                                  Differentiate among M0, M1 and M2 components of money supply.
► None of the given options.                                                     FINALTERM EXAMINATION Spring 2010
ECO401- Economics (Session - 4)
Question No: 41 ( Marks: 1 )                                              Question No: 1 ( Marks: 1 )
The relationship between interest rate and consumption is:                An increase in supply is shown by:
► Positive.                                                                ► Shifting the supply curve to the left.
► Negative.                                                                ► Shifting the supply curve to the right.
► Zero.                                                                    ► Upward movement along the supply curve.
► Indeterminate.                                                           ► Downward movement along the supply curve.
Question No: 42 ( Marks: 1 )
The principle which states that a change in income causes a               Question No: 2 ( Marks: 1 )
magnified change in investment is termed as the:                           Which of the following will be TRUE if demand is inelastic?
► None of the given.                                                       ► The coefficient of elasticity is greater than one.
► Paradox of thrift.                                                       ► The percentage change in quantity demanded is same as the
► Multiplier effect.                                                   percentage change in the price.
► Accelerator effect.                                                      ► An increase in price will increase total revenue.
► None of the given options.                                            ► Keynesian economics.
► Neoclassical economics.
Question No: 3 ( Marks: 1 )                                               Question No: 13 ( Marks: 1 )
Which of the following is regarded as a general determinant of          Unemployment benefits may increase the unemployment rate
price elasticity of demand?                                            because:
► Nature of the good (luxury versus necessity).                         ► Unemployment benefits reduce the cost of job search.
► Availability of close substitutes.                                    ► Unemployment benefits encourage people to quit their jobs.
► Share of consumer's budget and passage of time.                       ► Unemployment benefits reduce the benefits of additional job
► All of the given options.                                        searching.
► Unemployment benefits enable people to quit searching for
Question No: 4 ( Marks: 1 )                                            work.
Suppose there are only two goods A and B, if more of good A is           Question No: 14 ( Marks: 1 )
always preferred to less, and if less of good B is always preferred     Naima has just finished her school job and is waiting to report to
to more, then:                                                         new job at the beginning of the month. Naima is considered to be:
► Indifference curves slope downwards.                                 ► Cyclically unemployed.
► Indifference curves slope upwards.                                   ► Employed.
► Indifference curves may cross.                                       ► Structurally unemployed.
► Indifference curves could take the form of ellipses.                 ► Frictionally unemployed.
Question No: 5 ( Marks: 1 )                                            Question No: 15 ( Marks: 1 )
If a consumer’s marginal rate of substitution equals 2 eggs for 1      Which of the following is a less important component of the
hamburger then:                                                        balance of payments?
► The consumer‘s indifference curve must be positively sloped.         ► The capital account.
► The consumer‘s indifference curve must be convex with                ► The current account.
respect to the origin of the graph.                                         ► The financial account.
► The ratio of the consumer’s marginal utility of 1 egg to that        ► All three components are equally important.
of 1 hamburger must equal ½.                                           Question#10
► All of the given options.                                          Question No: 16 ( Marks: 1 )
An increase in ''per capita'' national income implies that:
Question No: 6 ( Marks: 1 )                                                 ► Everyone in the nation is enjoying a better standard of living.
Suppose you are a workaholic (like work a lot) and your friend is          ► The population has increased.
a leisure lover. Compared to your friend your indifference curve            ► National income has risen faster than the population has
will be:                                                               risen.
► Flatter.                                                             ► The distribution of income has improved.
► Steeper.                                                           Question No: 17 ( Marks: 1 )
► Identical.                                                       Suppose the government increases spending. Which of the
► None of the given options.                                      following would be part of the crowding out effect?
► Interest rate rises and investment falls.
Question No: 7 ( Marks: 1 )                                                 ► Interest rate rises and velocity of circulation also rises.
In economics, the “long run” is a time period in which:                     ► Higher interest rates encourage the central bank to increase the
► All inputs are variable.                                         money supply.
► All inputs are paid for.                                              ► Interest rate falls and exports rise.
► All outputs are determined.                                         Question No: 18 ( Marks: 1 )
► All loans are repaid.                                             Real Gross National Product (GNP) is best defined as:
► The pound value of all final goods and services produced in
Question No: 8 ( Marks: 1 )                                            the economy during a particular time period and measured in
To find the profit maximizing level of output, a firm finds the       current prices.
output level where:                                                         ► The pound value of all goods produced for final consumption
► Price equals marginal cost.                                     by households in a particular year and measured in constant prices.
► Marginal revenue and average total cost.                             ► The current pound value of all new and used goods produced
► Price equals marginal revenue.                                  and sold in the economy during a particular time period.
► None of the given options.                                           ► The market value of all final goods and services produced by
Question No: 9 ( Marks: 1 )                                            the economy during a given time period, with prices held constant
A perfectly competitive firm maximizes profit by finding the level    relative to some base period.
of production at which:                                                   Question No: 19 ( Marks: 1 )
► Price = Marginal Cost.                                           The news on the television reports that the dollar has
► Price = Average Total Cost.                                     strengthened relative to the Japanese yen. This means that:
► Average Total Cost = Marginal Cost.                                  ► The dollar can now purchase more yen.
► Price < Marginal Cost.                                               ► The US trade balance with the Japanese economy has
Question No: 10 ( Marks: 1 )                                        improved.
In the short run, a firm should shut down when:                            ► The yen can now purchase more dollars.
► Production losses are less than fixed costs.                         ► The dollar has depreciated relative to the yen.
► Only normal profits are earned.
► Production losses exceed fixed costs.                           Question No: 20 ( Marks: 1 )
► Fixed costs are zero.                                           The Marginal Propensity to Save (MPS) is:
Question No: 11 ( Marks: 1 )                                           ► One Minus Marginal Propensity to Consume (MPC).
Loud music from a neighbor's party is:                                   ► Saving divided by consumption.
► A negative externality whether or not you like it.                 ► The slope of the consumption function (or line).
► A positive externality whether or not you like it.                 ► The proportion of disposable income used for consumption.
► A positive externality if you like the music and a negative
externality if you don't.                                              Question No: 21 ( Marks: 1 )
► A negative externality if you like the music and a positive      Which of the following is true about supply curve under
externality if you don't.                                              monopoly?
Question No: 12 ( Marks: 1 )                                            ► It is same as the competitive market supply curve.
Classical economics was replaced as the dominant theory of                ► It is the portion of marginal cost curve where marginal
macroeconomic analysis by:                                             costs exceed the minimum value of average variable costs.
► Monetarism.                                                         ► It is the result of market power and production costs.
► Rational expectations.                                              ► None of the given statements is true.
Question No: 22 ( Marks: 1 )
All of the following conditions lead to the successful operation of a
cartel EXCEPT:
► 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: 23 ( Marks: 1 )
Which of the following is required 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.
Question No: 24 ( Marks: 1 )
Potential Gross Domestic Product (GDP) measures the economy’s
ability to produce goods and services in which of the following
conditions?                                                              Refer to the above figure, suppose that the economy is in long-run
► If labor force is fully employed.                                 equilibrium at point A. Now suppose the stock market crashes,
► If price level is stable.                                         significantly reducing household wealth. What happens in the
► If trade balance is zero.                                         short-run?
► If federal budget is balanced.                                         ► Real GDP remains at Y1 but the price level falls to P3.
► The quantity of real GDP demanded falls resulting in a
Question No: 25 ( Marks: 1 )                                             movement from point A to point F.
Which of the following specifies the maximum amount of a good                ► Real GDP decreases from Y1 to Y3 and the price level falls
that may be imported in a given period of time?                          from P1 to P3.
► Trade restriction.                                                      ► The economy moves to a short-run equilibrium at point D.
► Quota.                                                                Question No: 32 ( Marks: 1 )
► Import restriction.                                                 Which of the following is a cost of rising unemployment?
► Legislative restriction.                                           I. Output foregone.
II.Unemployment compensation that must be paid.
Question No: 26 ( Marks: 1 )                                             III.      Rising inflation that erodes the value of money.
GNP is a good indicator of:                                                   ► I, II, and III.
► The total payment of factor owners.                                      ► I and II.
► The amount of consumption and investment.                                ► I and III.
► The conditions of production and employment.                             ► II and III.
► The amount of incomes available for spending.                          Question No: 33 ( Marks: 1 )
Rising inflation means:
Question No: 27 ( Marks: 1 )                                                  ► That the price level is increasing by a given percentage rate.
The demand for factors of production is derived from:                         ► That the prices of all goods and services increase from year to
► Money market.                                                       year.
► Goods market.                                                            ► That the price level is rising at an increasing rate.
► Stock market.                                                            ► That the price level is rising at a variable rate.
► Financial market.                                                      Question No: 34 ( Marks: 1 )
Economic growth occurs by an outward shift of:
Question No: 28 ( Marks: 1 )                                                  ► The production possibility frontier.
Labor supply curve is backward bending because:                              ► The gross domestic barrier.
► The income effect of higher income dominates the                       ► The marginal consumption frontier.
substitution effect of higher wages.                                          ► The minimum efficient scale.
► The substitution effect of higher income dominates the income     Question No: 35 ( Marks: 1 )
effect of higher wages.                                                   Which of the following is a necessary condition for the high rate
► The income effect of higher income dominates the price effect     of modern economic growth?
of higher wages.                                                              ► Continuous technology progress.
► None of the given options.                                             ► High rate of population growth.
Question No: 29 ( Marks: 1 )                                               ► Development of urban centers.
The discounted value of the net returns that the asset generates             ► Expansion of railways.
over a period of time plus the discounted value of its disposal value
at the end of the period minus the initial purchase cost is known        Question No: 36 ( Marks: 1 )
as:                                                                       The government has a balanced budget if:
► Future value.                                                         ► Its total revenues are equal to its total expenditures.
► Net present value.                                                    ► Its total revenues are less than its total expenditures.
► Discounted value.                                                     ► Its total revenues are greater than its total expenditures.
► Disposal value.                                                       ► The money supply is less than total expenditures.
Question No: 30 ( Marks: 1 )                                               Question No: 37 ( Marks: 1 )
Information products are also known as:                                  Which of the following is the monetary policy tool that involves
► Inferior products.                                                the buying and selling of government bonds?
► Superior products.                                                    ► Moral suasion.
► Internet products.                                                    ► Reserve requirements.
► Expensive products.                                                   ► The discount rate.
► Open market operations.
Question No: 31 ( Marks: 1 )
Question No: 38 ( Marks: 1 )
When the comparative advantage in production of a good does               happen to IS curve?
occur?                                                                        ► IS curve will Shifts rightward.
► When a country can produce that good using fewer resources             ► IS curve will Shifts leftward.
than other countries.                                                         ► IS curve will remain unaffected.
► When a country can produce that good at a greater opportunity          ► IS curve will become vertical.
cost than other countries.
► When a country can produce that good at a lower                     Question No: 48 ( Marks: 1 )
opportunity cost than other countries.                                      The value of world trade has increased ----------over the period of
► When a country has a greater supply of natural resources            1930-2000.
required to produce that good, compared to other countries.                    ► 20 fold
► 10 fold
Question No: 39 ( Marks: 1 )                                                   ► 5 fold
A quota is defined as:                                                        ► 14 fold
► A restriction on exports.                                             Question No: 49 ( Marks: 3 )
► A unit tax imposed on a product.                                     Write down the functions of commercial banks.
► A limit on the quantity of a good that can be exported.               Question No: 50 ( Marks: 3 )
► A limit on the quantity of a good that can be imported.              How the growth rate of output is determined in the exogenous
Question No: 40 ( Marks: 1 )                                               growth model?
Which of the following statements is TRUE about the agriculture           Question No: 51 ( Marks: 5 )
sector in low income countries?                                             Why is taxation necessary? What are the principles of taxation?
► The agricultural sector has been decreasing in size because
its productive workers prefer to migrate to urban areas.                   Question No: 52 ( Marks: 5 )
► The agricultural sector is by far the largest producer and the       Following figure shows the circular flow of goods and income in a
most productive sector in low-income countries.                            two sector economy. Interpret all the points in this figure that how
► Although the agricultural sector is the largest employer, labor‘s   the household sector and business sector work in an economy to
productivity in this sector is very low.                                   produce goods and services.
► The agricultural sector has been increasing in size and in terms
of labor productivity as rural farmers increasingly start to mechanize.    Question No: 53 ( Marks: 5 )
Explain the difference between current account and capital
Question No: 41 ( Marks: 1 )                                               account.
Production possibilities curve will shift downward if there is:
► Immigration of skilled workers into the nation.
► An increase in the size of the working-age population.
► A decrease in the size of the working-age population.
► Increased production of capital goods.

Question No: 42 ( Marks: 1 )
Suppose the total costs of first four units of an output produced
are 10, 20, 30, and 40 respectively. What is the marginal cost of the
fourth unit of output?
► 10.
► 20.
► 30.
► 40.

Question No: 43 ( Marks: 1 )
If marginal revenue is Rs. 15,000 and marginal cost is Rs. 20,000.
The firm should:
► Expand output.
► Expand output until marginal revenue equals zero.                              FINALTERM EXAMINATION Spring 2010
► Reduce output until marginal revenue equals marginal                                  ECO401- Economics (Session - 1)
cost.                                                                                                                   Time: 90 min Marks: 69
Question No: 44 ( Marks: 1 )                                            Question No: 1 ( Marks: 1 )
The average annual income per head for all the inhabitants of the          The budget line is the boundary between:
country is known as:                                                           ► Preferred and non preferred consumption combinations.
► Gross domestic product.                                                 ► Affordable and unaffordable consumption combinations.
► Gross national product.                                                 ► Income and expenditure.
► Net national product.                                                   ► One point on a budget line.
► Per capita income.                                                    Question No: 2 ( Marks: 1 )
Question No: 45 ( Marks: 1 )                                                The supply curve for a competitive firm is:
Gross domestic product deflator can be obtained by dividing                   ► Its entire marginal cost curve.
nominal gross domestic product with:                                           ► The upward-sloping portion of its marginal cost curve.
► Real gross domestic product.                                            ► Its marginal cost curve above the minimum point of the
► Gross national product.                                             average variable cost curve.
► Net national product.                                                   ► Its marginal cost curve above the minimum point of the
► Per capita income.                                                  average total cost curve.
Question No: 46 ( Marks: 1 )                                              Question No: 3 ( Marks: 1 )
The principle which states that a change in income causes a                A price taker is:
magnified change in investment is termed as the:                               ► A firm that accepts different prices from different customers.
► None of the given.                                                      ► A monopolistically competitive firm.
► Paradox of thrift.                                                      ► A firm that cannot influence the market price.
► Multiplier effect.                                                      ► An oligopolistic firm.
► Accelerator effect.                                                   Question No: 4 ( Marks: 1 )
The good produced by a monopoly:
Question No: 47 ( Marks: 1 )                                                   ► Has perfect substitutes.
If central bank increased the money supply, then what will be                  ► Has no substitutes at all.
► Has no close substitutes.                                            Question No: 15 ( Marks: 1 )
► Can be easily duplicated.                                          The Marginal Propensity to Save (MPS) is:
Question No: 5 ( Marks: 1 )                                                 ► One Minus Marginal Propensity to Consume (MPC).
A schedule which shows the various amounts of a product                      ► Saving divided by consumption.
consumers are willing and able to purchase at each price in a                 ► The slope of the consumption function (or line).
series of possible prices during a specified period of time is called:        ► The proportion of disposable income used for consumption.
► Supply schedule.                                                     Question No: 16 ( Marks: 1 )
► Demand schedule.                                                   Which of the following statements is TRUE about cartels?
► Quantity supplied schedule.                                            ► These are organizations of independent firms, producing
► Quantity demanded schedule.                                       similar products, that work together to raise prices and restrict output.
Question No: 6 ( Marks: 1 )                                                 ► These are organizations of interdependent firms, producing
The textbook for your class was not produced in a perfectly             similar products, that work together to raise prices and restrict output.
competitive industry because:                                                 ► These are organizations of independent firms, producing
► There are so few firms in the industry that market shares are     different products, that work together to raise prices and restrict
not small, and firm's decisions have an impact on market price.          output.
► Upper-division microeconomics texts are not all alike.                 ► These are considered as part of monopolistic competition.
► It is not costless to enter or exit the textbook industry.          Question No: 17 ( Marks: 1 )
► All of the given options.                                          Those who hold the classical view of the labour market are likely
Question No: 7 ( Marks: 1 )                                            to believe that:
A reason why some economists basically ignore the short run is               ► Monetary but not fiscal policy will have an effect on output
because they believe that the economy:                                   and employment.
► Has self-correcting mechanisms.                                        ► Fiscal but not monetary policy will have an effect on output
► Can only be graphed with a horizontal curve.                      and employment.
► Never needs correction.                                                ► Both monetary and fiscal policy will have an effect on output
► None of the given options.                                        and employment.
Question No: 8 ( Marks: 1 )                                                 ► Neither monetary nor fiscal policy will have an effect on output
Unlike the classical economists, Keynes believed that the economy       and employment.
could get stuck in the short run for a significant period of time           Question No: 18 ( Marks: 1 )
because of:                                                               Suppose the balance of payment is in deficit in an economy. The
► Insufficient aggregate supply.                                    government of that economy will take all of the following actions
► Insufficient aggregate demand.                                    EXCEPT:
► Quick self correcting mechanism.                                       ► Devalue the currency.
► Government purchases of too many goods and services.                   ► Reduce the interest rates.
► Restrict the consumer spending.
Question No: 9 ( Marks: 1 )                                                   ► Restrict the imports.
Keynesian economics rejected the classical assumption that:                 Question No: 19 ( Marks: 1 )
► Supply creates its own demand.                                       Suppose there are two producers and two products. Which of the
► Prices and wages are inflexible.                                    following is not TRUE in this situation?
► Self-correction takes a long time.                                       ► A producer has an absolute advantage on one product.
► Consumption expenditures depend on disposable income.                    ► A producer has the comparative advantage on both products.
► A producer has the comparative advantage on one product.
Question No: 10 ( Marks: 1 )                                                  ► A producer has an absolute advantage on both products.
The Phillips curve will shift to the right:                                 Question No: 20 ( Marks: 1 )
► If there is a decrease in the expected inflation rate.               Trade can be beneficial in which of the following situations?
► If there is an increase in the expected inflation rate.                  ► Two countries produce the same goods at the same costs.
► If there is a decrease in the natural rate of unemployment.              ► Two countries produce different goods at different costs.
► If there is a favorable supply shock.                                    ► Two countries are isolated.
► Two countries have the same markets.
Question No: 11 ( Marks: 1 )                                                Question No: 21 ( Marks: 1 )
If a Japanese radio priced at 2,000 yen can be purchased for \$10,        GNP is a good indicator of:
the exchange rate is:                                                         ► The total payment of factor owners.
► 200 yen per dollar.                                                    ► The amount of consumption and investment.
► 20 yen per dollar.                                                     ► The conditions of production and employment.
► 20 dollars per yen.                                                    ► The amount of incomes available for spending.
► None of the given options.                                           Question No: 22 ( Marks: 1 )
Question No: 12 ( Marks: 1 )                                           For a study of the long term growth of the economy, we use:
If the prices of all goods and services rise during the year:                ► Real GNP.
► Real GDP may fall.                                                     ► Nominal GNP.
► Nominal GDP must fall.                                                 ► Personal income.
► Nominal GDP may increase.                                              ► Disposable personal income.
► Real GDP must rise.                                                 Question No: 23 ( Marks: 1 )
Question No: 13 ( Marks: 1 )                                           Total national consumption consists of:
Gross domestic product (GDP) is the market value of:                         ► Private consumption.
► All transactions in an economy during one-year period.                 ► Public consumption.
► All goods and services exchanged in an economy during one-             ► Exports.
year period.                                                                  ► Private and public consumption.
► All final goods and services exchanged in an economy during          Question No: 24 ( Marks: 1 )
one-year period.                                                          If there is an increase in consumer’s confidence, ceteris paribus,
► All final goods and services produced in a domestic economy       then which of the following will happen?
during one-year period.                                                       ► Consumption function will shift downward.
Question No: 14 ( Marks: 1 )                                                  ► Consumption function will shift upward.
Which of the following does NOT refer to macroeconomics?                     ► Saving function will shift upward.
► The study of the aggregate level of economic activity.                 ► Consumption function will remain the same.
► The study of the economic behavior of individual decision-           Question No: 25 ( Marks: 1 )
making units such as consumers, resource owners, and business firms.      Information products are also known as:
► The study of the cause of unemployment.                                ► Inferior products.
► The study of the cause of inflation.                                   ► Superior products.
► Internet products.                                                       ► Corporate income tax.
► Expensive products.                                                      ► Personal income tax.
Question No: 26 ( Marks: 1 )                                               Question No: 37 ( Marks: 1 )
Public education creates:                                                  The price of Nokia 3110 cell phone is Rs. 8000. What is the
► Asymmetric information.                                             function of money in this context?
► External costs.                                                          ► A medium of exchange.
► Internal costs.                                                          ► A means of payment.
► External benefits.                                                       ► A unit of account.
Question No: 27 ( Marks: 1 )                                                 ► A measure of quality.
In the long run, the price level is determined by:                           Question No: 38 ( Marks: 1 )
► Aggregate demand.                                                    What will be the impact of an increase in taxes?
► Aggregate supply.                                                        ► It will shift the IS curve to the left and decrease both the
► The government.                                                     interest rate and the level of income.
► Money supply.                                                            ► It will shift the IS curve to the right and increase both the
Question No: 28 ( Marks: 1 )                                             interest rate and the level of income.
In the definition of labor force, economists include:                          ► It will shift the IS curve to the right and increase the level of
► Only people who are working full-time.                              income but decrease the interest rate.
► People who are not working but are actively looking for a job            ► It will shift the LM curve downward (to the right) and increase
and people who are working.                                                the level of income but decrease the interest rate.
► People who are working.                                             Question No: 39 ( Marks: 1 )
► None of the given options.                                           If money supply is fixed by the central bank then in interest rate-
Question No: 29 ( Marks: 1 )                                            money supply space, money supply curve will be:
Rising inflation means:                                                        ► Horizontal.
► That the price level is increasing by a given percentage rate.           ► Vertical.
► That the prices of all goods and services increase from year to          ► Negatively sloped.
year.                                                                           ► Positively sloped.
► That the price level is rising at an increasing rate.                  Question No: 40 ( Marks: 1 )
► That the price level is rising at a variable rate.                   Assume that pen and ink are complements. When the price of
Question No: 30 ( Marks: 1 )                                            pen goes up, the demand curve for ink:
In the long run, sustained inflation is due to:                                ► Shifts to the left.
► A one-time increase in money growth.                                     ► Shifts to the right.
► A continuous increase in the money growth rate.                          ► Remains constant.
► A continuous increase in aggregate demand.                               ► Shifts to the right initially and then returns to its original
► The rising price of oil.                                            position.
Question No: 31 ( Marks: 1 )                                               Question No: 41 ( Marks: 1 )
The decrease in the price of one country’s currency in terms of            Which of the following will happen if the current market price is
other currencies due to the market forces of demand and supply is          set below the market clearing level?
known as:                                                                       ► There will be a surplus to accumulate.
► Revaluation.                                                             ► There will be downward pressure on the current market price.
► Devaluation.                                                             ► There will be upward pressure on the current market price.
► Appreciation.                                                            ► There will be lower production during the next time period.
► Depreciation.                                                          Question No: 42 ( Marks: 1 )
Question No: 32 ( Marks: 1 )                                             What is TRUE about the relationship between average product
Which of the following will happen by a reduction in net exports          (AP) and marginal product (MP)?
all other things being equal?                                                   ► If AP exceeds MP, then AP is falling.
► It will result in a movement up along the aggregate demand               ► If AP is at a maximum, then MP is also at maximum.
curve.                                                                          ► If AP = MP, then total product is at a maximum.
► It will reduce aggregate supply.                                         ► If Total Product is declining, then AP is negative.
► It will reduce aggregate demand.                                       Question No: 43 ( Marks: 1 )
► It will not change aggregate demand or aggregate supply in the       Suppose all inputs are increased by 20% but output increases by
domestic economy.                                                          less than 20% in a production process. This means that the firm
Question No: 33 ( Marks: 1 )                                             experiences:
Endogenous growth model is also known as:                                      ► Decreasing returns to scale.
► AK Model.                                                                ► Constant returns to scale.
► Exogenous growth model.                                                  ► Increasing returns to scale.
► Best growth model.                                                       ► None of the given options.
► All of the given options.
Question No: 34 ( Marks: 1 )                                            Question No: 44 ( Marks: 1 )
Contractionary fiscal policy includes:                                     If firms are not of equal size in oligopoly, then quotas can be
► Increasing taxes and increasing government purchases.               allocated according to the                 of each firm.
► Raising interest rates, increasing taxes, and decreasing transfer         ► Marginal revenue
payments.                                                                        ► Marginal cost
► Increasing taxes and decreasing government expenditures.                  ► Average variable cost
► Raising interest rates, decreasing taxes, and decreasing                  ► Average cost
goverment spending.                                                        Question No: 45 ( Marks: 1 )
Question No: 35 ( Marks: 1 )                                             Optimal mix of resources is decided by
Whi of the following shows the inverted-U shape when plotted on                 ► The price mechanism.
a graph?                                                                         ► Producers.
► Consumption curve.                                                        ► Consumers.
► Supply curve.                                                             ► Government.
► affer curve.                                                           Question No: 46 ( Marks: 1 )
► Investment curve.                                                    When the slope of a demand curve is infinity, elasticity of demand
► Zero elastic.
Question No: 36 ( Marks: 1 )                                                     ► Unit elastic.
A tax on individual’s income is known as:                                        ► Less elastic.
► Sales tax.                                                                  ► More elastic.
► Excise tax.                                                              Question No: 47 ( Marks: 1 )
Assume that there is no government or foreign sector, if the
marginal propensity to save (MPS) is 0.2, then the value of saving
multiplier will be equal to:
► 0.80
► 1.20
► 0.50
► 1.25
Question No: 48 ( Marks: 1 )
If prices are held constant, an increase in money supply will cause
MS/P to:
► Shift to the right.
► Shift to the left.
► Stay as it is.
► None of the given options.
Question No: 49 ( Marks: 3 )
It is said that growth is an important macroeconomic issue. Why?
Discuss.
Question No: 50 ( Marks: 3 )
What are the different borrowing options available to the
government for reducing the fiscal deficit?

Question No: 51 ( Marks: 5 )

What actually the Keynesian paradox of thrift states? In the above
figure, economy is in equilibrium at point E where withdrawls are
equal to leakages. Keeping Keynes’s paradox of thrift arguments in
mind, what will happen to output, consumption and investment level
if people start saving more suddenly.
Question No: 52 ( Marks: 5 )
Differentiate between fixed exchange rate and floating exchange
rate.
Question No: 53 ( Marks: 5 )
Some economists suggest “growth through trade strategy” to
tackle the problem of poverty of under developed countries.
a) What is the basic theme of this strategy?
b) Why this strategy is not so much successful?
c) What is the proposed solution presented to tackle the
drawback of this strategy?
(Marks: 2+1.5+1.5)

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