FINALTERM EXAMINATION

Fall 2009
ECO401- Economics
Time: 120 min
Marks: 87

Question No: 1 ( Marks: 1 ) - Please choose one

The concave shape of the production possibilities curve for two goods X
and Y illustrates:

► Increasing opportunity cost for both goods.

► Increasing opportunity cost for good X but not for good Y.
► Increasing opportunity cost for good Y but not for good X.
► Constant opportunity cost for both goods.
The shape of a production possibility curve commonly drawn as concave downward to
represent increasing opportunity cost with increased output of a good.

Question No: 2 ( Marks: 1 ) - Please choose one

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

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

► An increase in equilibrium price and quantity of meal.
► A decrease in equilibrium price and quantity of meal.
► An increase in equilibrium price and a decrease in quantity of meal.
A decrease in equilibrium price and quantity. The demand curve shifts to the left
because the town population declines, resulting in lower prices and quantity.

Question No: 3 ( Marks: 1 ) - Please choose one

A demand curve is price elastic when:

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

► Changes in demand are equal to changes in price.
► None of the given options.
► Changes in demand are proportionately smaller than changes in price.
For elastic demand curve, firm does not increase its prices. Because as prices increases,
quantity Demanded decreases much larger. Decrease in quantity demanded is greater than
the increase in prices. So firm will earn less revenue. So TR decreases as price increases.

Question No: 4 ( Marks: 1 ) - Please choose one

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

 ► Use.
► Pleasure.
► Utility.
► Satisfaction.
Utility is a numerical representation of a preference ranking

Question No: 5 ( Marks: 1 ) - Please choose one

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

► Nominal income falls as the price of X falls.

► The absolute price of X falls, but the relative price between X and the
composite good Y stays the same.
► It is always downward sloping for a normal good.
► It represents only those market baskets that are optimal for the
given price ratio and preference pattern and therefore a demand curve can
be plotted from it.
The price consumption curve (PCC) traces out the optimal choice of consumption at
different prices. The PCC can be used to derive the demand curve, which shows the
relationship between price & quantity demanded.

Question No: 6 ( Marks: 1 ) - Please choose one

Marginal profit is equal to:

► Marginal revenue minus marginal cost.
► Marginal revenue plus marginal cost.
► Marginal cost minus marginal revenue.
► Marginal revenue times marginal cost.
marginal profit is the term used to refer to total when marginal cost is subtracted
from marginal revenue.

Question No: 7 ( Marks: 1 ) - Please choose one

The supply curve for a competitive firm is:

► Its entire marginal cost curve.
► The upward-sloping portion of its marginal cost curve.
► Its marginal cost curve above the minimum point of the average variable
cost curve.
► Its marginal cost curve above the minimum point of the average total
cost curve.
A perfectly competitive firm's supply curve is that portion of its marginal
cost curve that lies above the minimum of the average variable cost curve.

Question No: 8 ( Marks: 1 ) - Please choose one

 Second-degree price discrimination is the practice of
charging:

► The reservation price to each customer.

► Different prices for different blocks of the same good or service.
► Different groups of customers different prices for the same products.
► Each customer the maximum price that he or she is willing to pay.
Second degree price discrimination, allows the supplier to set different prices to the
different groups and capture a larger portion of the total market surplus.

Question No: 9 ( Marks: 1 ) - Please choose one

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

► Purely competitive.
► A monopoly.
► Monopolistically competitive.
► Oligopolistic.

Monopolistic competition is also characterized by a large number of buyers and sellers and
absence of entry barriers.

Question No: 10 ( Marks: 1 ) - Please choose one

The market structure in which strategic considerations are most important

is:

► Monopolistic competition.
► Oligopoly.
► Pure competition.
► Pure monopoly.

Question No: 11 ( Marks: 1 ) - Please choose one

The price elasticity of demand for any good must be less than or equal to
zero unless:

► The good is a necessity.

A good for which the "income elasticity of demand" is >0 & <1
► The good is a luxury.
A good for which the "income elasticity of demand" is > 1.

► The good is a Giffen good.

 ► None of the given options.
Goods for which the "quantity demanded" of one good does not depend upon the price
of the other. (i.e. Pencils & cars). The "cross elasticity of demand" will be 0.

Question No: 12 ( Marks: 1 ) - Please choose one

Consumption spending, investment expenditures, government

expenditures and net exports are:

► The components of household income.

► The components of aggregate supply.
► The components of aggregate demand
► The components of government revenue.
AD is the sum of consumption, investment, government spending and net exports (i.e.
exports minus imports), and is inversely related to the aggregate price level through the
wealth, interest rate and international purchasing power effects.

Question No: 13 ( Marks: 1 ) - Please choose one

Classical economics was replaced as the dominant theory of

macroeconomic analysis by:

► Monetarism.
► Rational expectations.
► Keynesian economics.
► Neoclassical economics.

Question No: 14 ( Marks: 1 ) - Please choose one

According to classical economics, the economy will always tend toward

full employment due to:

► Minimum wages.
► Flexible wages and prices.
► Extended periods of unemployment.
► Inequality between saving and investment.

Question No: 15 ( Marks: 1 ) - Please choose one

The real interest rate will increase:

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

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

Question No: 16 ( Marks: 1 ) - Please choose one

A source of fluctuations in investment spending is:

► Changes in government expectations of future output growth.

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

Question No: 17 ( Marks: 1 ) - Please choose one

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

► An increase in official international reserves.

► A positive statistical discrepancy.
► A negative statistical discrepancy.
► A decline in official international reserves.

Question No: 18 ( Marks: 1 ) - Please choose one

M1 component of money supply consists of:

► Paper currency and coins.

► Paper currency, coins and check writing deposits.
► Paper currency, coins, check writing deposits and savings deposits.
► Paper currency, coins, check writing deposits, savings deposits and
certificates of deposits.
M1 includes currency held by the public, plus travelers' checks, demand deposits,
other checkable deposits (including negotiable order of withdrawal (NOW) accounts,
Automatic Transfer Service (ATS) accounts, and credit union share draft accounts).

Question No: 19 ( Marks: 1 ) - Please choose one

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

► Comparative advantage.
► Comparative disadvantage.
► Absolute advantage.
► Absolute disadvantage.
 Absolute advantage.: Capability of one producer to produce a given good using fewer
resources than any other producer. 

Question No: 20 ( Marks: 1 ) - Please choose one

What would result from a depreciation of the pound on the foreign

exchange market?
► An increase in the price of imported computers.
► A fall in the purchasing power of US tourists in London.
► A fall in the price of imported computers.
► An increase in the purchasing power of UK tourists overseas.
A currency is said to depreciate in value if its exchange rate decreases, such as a
decrease in the exchange rate of dollars from 0.5 pounds per dollar to 0.33 pounds
per dollar. Currency depreciation makes exports from the country relatively less
expensive resulting in more exports and usually fewer imports.

Question No: 21 ( Marks: 1 ) - Please choose one

The news on the television reports that the dollar has strengthened relative
to the Japanese yen. This means that:
► The dollar can now purchase more yen.
► The US trade balance with the Japanese economy has improved.
► The yen can now purchase more dollars.
► The dollar has depreciated relative to the yen.

The exchange rate increases (i.e., a unit of your currency is worth more in foreign currency than
previously), the currency is said to have strengthened, appreciated, or increased in
value (revaluation). For example, assume that the exchange rate between the U.S. dollar and the
Japanese yen changed from US$1=104 yen to US$1=110 yen. This would strengthen the value of the
U.S. dollar in that you would receive more yen in exchange for your dollar

Question No: 22 ( Marks: 1 ) - Please choose one

In Keynesian economics, if aggregate expenditures are less than aggregate

output then:

► The price level rises.

► Inventories decrease.
► Employment decreases.
► Aggregate output increases.

Question No: 23 ( Marks: 1 ) - Please choose one

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

► 1.
► 0.
► Infinity.
 ► Less than 1.
In the Keynesian cross model If we draw a graph with expenditure on the vertical axis, we can
see that the Expenditure line should have a slope of (<1),

Question No: 24 ( Marks: 1 ) - Please choose one

Demand is elastic when the elasticity of demand is:

► Greater than 0 but less than 1.
► Greater than 1.
► Less than 0.
► Equal to 1. unit elastic

If Ped > 1, then demand responds more than proportionately to a change in price i.e. demand
is elastic.

Question No: 25 ( Marks: 1 ) - Please choose one

Which of the following statements is TRUE about cartels?

► These are considered as part of monopolistic competition.
► these are organizations of independent firms, producing similar products,
that work together to raise prices and restrict output.
► these are organizations of interdependent firms, producing similar
products, that work together to raise prices and restrict output.
► These are organizations of independent firms, producing different
products, that work together to raise prices and restrict output.

A cartel is a formal (explicit) agreement among firms. Cartels usually occur in an

oligopolistic industry, where there are a small number of sellers and usually involve
homogeneous products.

Question No: 26 ( Marks: 1 ) - Please choose one

After the collusion, oligopolists are able to:

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

Question No: 27 ( Marks: 1 ) - Please choose one

Which of the following statements is TRUE about the difference between

nominal and real Gross Domestic Product (GDP)?
► Real GDP includes only goods; nominal GDP includes goods and
services.
► Real GDP is measured using constant base-year prices; nominal
GDP is measured using current prices.
 ► Real GDP is equal to nominal GDP less the depreciation of the capital
stock.
► Real GDP is equal to nominal GDP multiplied by the CPI.

Nominal GDP: The total market value, measured in current prices,

Real GDP: The total market value, measured in constant prices

Question No: 28 ( Marks: 1 ) - Please choose one

If production remains the same and all prices double, then which of the
following will happen?
► Real GDP and nominal GDP will both remain constant.
► Real GDP will remain constant and nominal GDP will reduce by half.
► Real GDP will remain constant and nominal GDP will double.
► Real GDP will double and nominal GDP will remain constant.

Question No: 29 ( Marks: 1 ) - Please choose one

Assume that there is no government or foreign sector, if the marginal

propensity to consume (MPC) is 0.9, then the value of multiplier will be
equal to:
► 2.
► 5.
► 8.
► 10.
NO IDEA... MAY BE WRONGE QUESTION
Question No: 30 ( Marks: 1 ) - Please choose one

Firm A produces cotton worth Rs. 1000 and sells it to firm B. From this,
firm B makes yarn worth Rs. 1500 and sells to firm C. Firm C manufactures
cloth worth Rs. 2500 and sells to consumers. The value added is:
► 1000+1500+2500 = Rs. 5000
► 1000+500+2500 = Rs. 4000
► 1000+500+1000 = Rs. 2500
► 1000+1500+1000 =Rs. 3500

Question No: 31 ( Marks: 1 ) - Please choose one

Which of the following is a transfer payment?

► Payment made to housewife.
► Pocket allowance to children.
► Maintenance allowance to old parents.
► All of the given options.

Question No: 32 ( Marks: 1 ) - Please choose one

The relationship between hours provided by labor and wage rate is:
► Positive.
► Negative.
► Ambiguous.
► Very strong.

Question No: 33 ( Marks: 1 ) - Please choose one

Market failure occurs when:

► Competitive markets do not achieve equitable outcomes.

► Competitive markets do not achieve efficient outcomes.
► Government takes steps to intervene in markets.
► All of the given happen.

Question No: 34 ( Marks: 1 ) - Please choose one

A graph that depicts the relationship between the total quantity of goods
and services demanded and the price level is known as:
► Aggregate demand curve.
► Average price level.
► Circular flow model.
► GDP curve.

 The aggregate demand curve illustrates the relationship between economic

goods demanded and the price level, assuming all else is held constant (that is, under
aceteris paribus assumption).

Question No: 35 ( Marks: 1 ) - Please choose one

In the short run, the equilibrium price level and the equilibrium level of total
output are determined by the intersection of:
► The aggregate demand, the short-run aggregate supply and the long-run
aggregate supply curves.
► The short-run aggregate supply and the long-run aggregate supply
curves.
► The aggregate demand and the short-run aggregate supply curves.
► The aggregate demand and the long-run aggregate supply curves.

Question No: 36 ( Marks: 1 ) - Please choose one

Changes in aggregate demand can be caused by changes in:

I. Wages.
II. Raw materials costs.
 III. Government spending.
IV. Government regulations that increase the cost of doing
business.
► I, II, III, and IV.
► I and III only.
► I, III, and IV.
► III only.

Question No: 37 ( Marks: 1 ) - Please choose one

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

► Aggregate demand.
► Aggregate supply.
► The government.
► Household income.
Long run aggregate supply (LRAS):  LRAS shows total planned output when both prices and
average wage rates can change – it is a measure of a country’s potential output and the
concept is linked strongly to that of the production possibility frontier

Question No: 38 ( Marks: 1 ) - Please choose one

Which of the following is TRUE?

► 1 − MPS = MPC
► 1 + MPS = MPC
► 1 / MPS = MPC
► 1 × MPS = MPC
(MPS) is the fraction of the additional dollar of disposable income that is
Saved. Thus, MPC = 1 – MPS.

Question No: 39 ( Marks: 1 ) - Please choose one

Consumption
450
B
850

C
800 A

O
800 850 DPI
The above figure shows disposable personal income on the horizontal axis
and consumption per period on the vertical axis. Which of the following is
TRUE at every point on the 45-degree line?
► The value of disposable income equals the sum of personal saving and
consumption.
► The value of disposable income equals consumption.
► The value of disposable income equals personal saving.
► The value of disposable income and consumption equals 1.

Question No: 40 ( Marks: 1 ) - Please choose one

If the government wishes to achieve a fall in unemployment, which of the

following policies should it adopt?
► Reduce the real value of income tax free allowances.
► Reduce government spending on capital projects.
► Raise Value Added Tax (VAT).
► Start public job training programs.

Question No: 41 ( Marks: 1 ) - Please choose one

In the long run, sustained inflation is due to:

► A one-time increase in money growth.
► A continuous increase in the money growth rate.
► A continuous increase in aggregate demand.
► The rising price of oil.
Question No: 42 ( Marks: 1 ) - Please choose one

The situation when a country imports more than it exports is known as:
► A trade deficit.
► A trade surplus.
► An expansion.
► A recession.
A negative balance of trade, i.e. imports exceed exports. opposite of trade
surplus.

Question No: 43 ( Marks: 1 ) - Please choose one

Public investment expenditure for highways, schools, and national defense

is included in which component of GDP?
► Consumption.
► Gross private investment.
► Government purchases.
► Public investment.

Question No: 44 ( Marks: 1 ) - Please choose one

The government has a balanced budget if:

 ► Its total revenues are equal to its total expenditures.
► Its total revenues are less than its total expenditures.
► Its total revenues are greater than its total expenditures.
► The money supply is less than total expenditures.

Question No: 45 ( Marks: 1 ) - Please choose one

In general, personal income taxes:

► Rise automatically during a recession.
► Rise automatically during an expansion. Not sure
► Fall automatically during an expansion.
► Remains same in all phases of economic fluctuations.

Question No: 46 ( Marks: 1 ) - Please choose one

A tax on individual’s income is known as:

► Sales tax.
►. Excise tax
► Corporate income tax.
► Personal income tax.
Personal income tax: A tax on individual income. This is the primary source
of revenue for the federal government, a big source for many state and local governments. In
principle, personal income taxes are progressive, based on a graduated tax scale. However, it's
much more proportional today than it was several decades ago.

Question No: 47 ( Marks: 1 ) - Please choose one

Which of the following is TRUE for banks?

► They deal with money only.
► They deal with shares and assets.
► They not only deal with money but also create money.
► They deal with money but do not create money.

Question No: 48 ( Marks: 1 ) - Please choose one

In a period of boom, credit creation is:

► Small.
► Heavy.
► Unchanged.
► Zero.

Question No: 49 ( Marks: 1 ) - Please choose one

What will be the impact of an increase in taxes?

► It will shift the IS curve to the left and decrease both the interest rate and
the level of income.
 ► It will shift the IS curve to the right and increase both the interest rate and
the level of income.
► It will shift the IS curve to the right and increase the level of income but
decrease the interest rate.
► It will shift the LM curve downward (to the right) and increase the
level of income but decrease the interest rate. Not sure

Question No: 50 ( Marks: 1 ) - Please choose one

To determine whether an economy’s output is growing or shrinking, one

must keep track of:
► Changes in nominal GDP.
► Changes in the growth rate of nominal GDP.
► Changes in the general price level.
► Changes in real GDP.
Economic growth is increase in an economy’s level of production, output or income. We
can talk about production or output in two broad definitional contexts. One, we can
compare real GDP with some other measure of welfare (for e.g., one which adjusts for
externalities, social indicators, the black market, purchasing power parity, income
inequality etc.).
Question No: 51 ( Marks: 1 ) - Please choose one

Suppose the price of rail tickets decreases, what will happen to the demand
for airline travel?
► The demand curve for airline travel shifts left.
► The demand curve for airline travel shifts right.
► The supply curve of airline travel shifts left.
► The supply curve of airline travel shifts right.
The demand curve shifts left. Rail and airline travel are substitutes. If the price of a
substitute declines, then the demand curve for the substitute product shifts to the
left.

Question No: 52 ( Marks: 1 ) - Please choose one

Production possibilities curve will shift upward if there is:

► A reduction in unemployment.
► An increase in the production of capital goods.
► A reduction in discrimination.
► All of the given options.

Question No: 53 ( Marks: 1 ) - Please choose one

Which of the following is NOT included in the perfect information

assumption of perfect competition?
► Consumers know their preferences.
► Consumers know their income levels.
► Consumers know the prices available.
 ► Consumers can anticipate price changes.

Question No: 54 ( Marks: 1 ) - Please choose one

Suppose a monopolist set his output at the level where marginal revenue,
marginal cost and average total cost are equal. In this case, economic
profit will be:
► Negative.
► Positive.
► Zero.
► Indeterminate from the given information.
As profit is maximized at the point where MR = MC,
Depending upon the level of AC at the point where MR=MC, the monopolist might be
earn supernormal profits, breaking even or minimizing short run losses.
Question No: 55 ( Marks: 3 )

Differentiate between the terms flow and stock.

Stocks and those which are flows; these differ in their units of measurement. A stock
variable is measured at one specific time, and represents a quantity existing at that
point in time, which may have been accumulated in the past. A flow variable is
measured over an interval of time. Therefore a flow would be measured per unit of
time.
Stocks and flows have different units and are thus not commensurable – they cannot
be meaningfully compared, equated, added, or subtracted. However, one may
meaningfully take ratios of stocks and flows, or multiply or divide them.

Question No: 56 ( Marks: 5 )

What should be the optimal role of government in an economy according to

the Classical school of thought? Discuss.

Question No: 57 ( Marks: 5 )

Explain the difference between current account and capital account.

Current account :
Current account is one of the two primary components of the balance of payments,
the other being the capital account. It is the sum of the balance of trade (exports
minus imports of goods and services).
Current account = balance of trade + net factor income from abroad + net
unilateral transfers from abroad
Current account deals with international trade in goods and services and with
earnings on investments.

Capital account:
The capital account consists of capital transfers and the acquisition and disposal of
non-produced, non-financial assets. A subdivision of the capital account,
the financial account records transfers of financial capital and non-financial capital.
The official reserves account, which is part of the financial account, is the foreign
currency held by central banks, and is used to pay balance-of-payment deficits.
Each account is further divided into sub-accounts.
Question No: 58 ( Marks: 10 )

P
Elastic portion

P1
Inelastic portion

Q
Q1

(A) The above demand curve has two distinct segments which have
different elasticities that join to form a corner or kink. Why the firms are
reluctant to change the price in these two segments?
(B) What are the major advantages that an oligopoly offers for public
interests?
(Marks: 5+5)

Question No: 59 ( Marks: 10 )

The items of balance sheet of State Bank of Pakistan are given as follows:
Forex reserves = Rs. 500
Notes and coins = Rs. 800
Credit to government = Rs. 200
Government and commercial bank deposits = Rs. 300
Credit to private sector = Rs. 700
Liquidity paper = Rs. 300
Prepare the balance sheet in its proper format of asset and liabilities side.
Also calculate total assets and total liabilities.

Solution: (this question solved by kash again)

Assets Liabilities
Forex reserves = Rs. 500 Government and commercial bank deposits
  = Rs. 300
 
Credit to government = Rs. 200 Notes and coins = Rs. 800
   
Credit to private sector = Rs. 700  
Liquidity paper = Rs. 300
 
 Total= RS 1400 Total= RS 1400