..............ECONOMICS..............

2020-05-03T16:53:00.001+05:30

INTRODUCTION TO MACROECONOMICS AND THE DIFFERENT SCHOOLS OF THOUGHT

1 A study of how increases in the minimum wage rate will affect the national unemployment rate is an example of

A. descriptive economics. B. normative economics. C. macroeconomics. D. microeconomics.

2 Aggregate supply is the total amount

A. of goods and services produced in an economy. B. produced by the government.

C. of products produced by a given industry. D. of labour supplied by all households.

3 The total demand for goods and services in an economy is known as

A. aggregate demand. B. national demand. C. gross national product. D. economy-wide demand.

4 Deflation is

A. an increase in the overall level of economic activity. B. an increase in the overall pricelevel.

C. a decrease in the overall level of economic activity. D. a decrease in the overall price level.

5 A recession is

A. a period of declining prices. B. a period during which aggregate output declines.

C. a period of declining unemployment. D. a period of falling trade volumes.

6 Involuntary unemployment means that

A. people are not willing to workat the going wage rate.

B. at the going wage rate, there are people who want to work but cannot find work .

C. there are some people who will not work at the going wage rate.

D. there is excess demand in the labour market.

7 A cut in the income tax rate designed to encourage household consumption is an example of

A. expansionary demand-side policy. B. contractionary demand-side policy.

C. expansionary supply-side policy. D. contractionary supply-side policy.

8 A cut in the tax rate designed to reduce the cost of capital and hence encourage business investment is an example of

A. expansionary demand-side policy. B. contractionary demand-side policy.

C. expansionary supply-side policy. D. contractionary supply-side policy.

9 Macroeconomics is the branch of economics that deals with

A. the economy as a whole. B. imperfectly competitive markets.

C. only the long run adjustments to equilibrium in the economy.

D. the functioning of individual industries and the behaviour of individual decision-making units- business firms and households.

10 A group of modern economists who believe that price and wage rigidities do not provide the only rationale for macroeconomic policy activism are called:

A. New-Keynesians. B. Keynesians. C. Monetarists. D. The Classical school.

11 Macroeconomic theory that emphasised the theories of Keynes and de-emphasised the Classical theory developed as theresult of the failure of

A. economic theory to explain the simultaneous increases in inflation and unemployment during the 1970s. B. fine tuning during the 1960s. C. the economy to grow at a rapid rate during the 1950s.

D. the Classical model to explain the prolonged existence of high unemployment during the Great Depression .

12 Keynes believed falling wages were not a solution to persistent unemployment because

A. falling wages demoralised workers.

B. this would reduce the purchasing power of labourers as consumers. This in turn wouldbleaken firms’ prospects of selling more goods, hence inducing them to cut their investment (and hence labour) demand.

C. the unemployment was causedby frictional and structural factors.

D. wages would fall more than required to clear the labour market.

13 The practice of using fiscal and monetary policy to stabilise the economy is known as

A. fine tuning of demand B. monetarism C. laissez faire economics D. supply side economics

14 According to Classical models, the level of employment is determined primarily by

A. interest rates. B. the level of prices. C. the level of aggregate supply in the economy

D. the level of aggregate demandfor goods and services.

15 According to Keynes, the level of employment is determined by

A. interest rates. B. the level of prices. C. the level of aggregate supply in the economy

D. the level of aggregate demandfor goods and services.

16 According to the Classical model, unemployment

A. could not persist because wages would fall to eliminate the excess supply of labour.

B. could persist for long periods of time because wages are not flexible.

C. could be eliminated only through government intervention. D. could never exist.

17 To get the economy out of a slump, Keynes believed that the government should

A. increase both taxes and government spending. B. increase taxes and/or decrease government spending. C. cut both taxes and government spending.

D. decrease taxes and/or increase government spending .

18 Aggregate demand refers to the total demand for all domestically produced goods and services in an economy generated from

A. the household and government sectors. B. the household sector.

C. all sectors except the rest of the world. D. all sectors including the rest ofthe world.

19 Government policies that focus on increasing production rather than demand are called:

A. fiscal policies. B. monetary policies. C. incomes policies. D. supply-side policies.

20 Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demandedare

A. market prices. B. sticky prices. C. fixed prices. D. regulatory prices.

21 The economists who emphasised wage-flexibility as a solution for unemployment were

A. Monetarists. B. New-Keynesians. C. Classical economists. D. Keynesians.

22 According to the Classical economists, the economy

A. requires fine tuning to reach full employment. B. should not be left to market forces.

C. will never be at full employment. D. is self correcting.

23 Monetarism became popular because it was able to, unlike Classical or Keynesian economics, explain

A. stagflation in the late 1970s. B. demand-pull inflation in the 1960s.

C. low growth rates in the 1950s.

D. the prolonged existence of high unemployment during the Great Depression.

24 Keynes’ explanation for low firm investment during the GreatDepression was

A. low savings, which placed a constraint on investment

B. high real borrowing rates, which discouraged firm borrowing

C. high savings, which left consumers with less money to spend on goods and serviced produced by firms D. A permanent change in Europe’s corporate ownership structures.

25 Rapid increases in the price level during periods of recession or high unemployment are known as

A. slump. B. stagnation . C. stagflation. D. inflation.

26 The hypothesis that people know the 'true model' of the economy and that they use this model and all available information to form their expectations of the future is the

A. rational-expectations hypothesis. B. active-expectations hypothesis. C. static-expectations hypothesis. D. adaptive-expectations hypothesis.

27 Neo-Classical theories were an attempt to explain

A. how unemployment could have persisted for so long duringthe Great Depression.

B. the stagflation of the 1970s.

C. why policy changes that are perceived as permanent have more of an impact on a person's behaviour than policy changes that are viewed as temporary.

D. the increase in the growth rate of real output in the 1950s.

28 A group of modern economists who believe that markets clear very rapidly and that expanding the money supply will always increase prices rather than employment are the

A. New-Keynesians. B. Keynesians. C. Monetarists. D. The Classical school.

29 Say’s law states that:

A. Supply creates its own demand. B. Demand creates its own supply.

C. There is no such things as a free lunch

D. Macroeconomic policy activism is essential to ensure full-employment.

30 The AS curve and AD curve in a realistic Keynesian world are:

A. AS: fully horizontal; AD: downward sloping

B. AS: horizontal only till the full capacity level; AD: downward sloping

C. AS: vertical; AD: upward sloping

D. AS: horizontal; AD: vertical

MACROECONOMIC DATA AND VARIABLES, NATIONAL INCOME ACCOUNTING AND EQUILIBRIUM IN A KEYNESIAN ECONOMY

Questions 1-3 are based on the following information about an economy:

Consumer price index (2002) = 132

Consumer price index (2001) = 110

Nominal GDP (2002) = $60bn

Nominal GDP (2001) = $50bn

Population (2002) = 7mn

Population (2001) = 6mn

Net factor income from abroad (2002) = +$3bn

Net factor income from abroad (2001) = -$2bn

1. By how much has real GDP grown from 2001 to 2002?

A. -10% B. 12.5% C. 20% D. 0%

2. By how much has per capita nominal GNP changed from 2001to 2002?

A. -10% B. 12.5 C. 20% D. 0%

3. Based on the above information, we can say that:

A. Poverty has fallen in the country B. Per capita real GDP is falling

C. Income inequality has worsened D. Real growth in the informal sector is 0%

4. In the circular flow of income, Keynesian equilibrium obtains when

A. All the individual sectors are in equilibrium: S=I, T=G, M=X

B. The aggregate injections equal aggregate withdrawals S+T+M = I+G+X

C. There is no inflation or unemployment

D. The interest rate and exchange rate are at their market clearing levels

5. Under conditions of Keynesian equilibrium:

A. aggregate demand equals aggregate supply B. aggregate demand equals national income

C. both A and B D. none of the above

6. Which of the following is a determinant of consumption

A. expectations about future prices B. level of indebtedness of consumers

C. the price level D. all of the above

7. Which is the most volatile component of aggregate demand

A. Net exports B. consumption C. investment D. government spending

8. Which of the following is not an obvious or direct determinant of a country’s imports

A. real exchange rate B. income C. tariff rates D. interest rate

9. When consumption is 650, income is 750; when consumption is 620, income is 700. Assuming there is no government, I=100, net exports are 10, what is the level of equilibrium income?

A. 500 B. 625 C. 775 D. 850

10. Which of the following is not true?

A. Starting from no growth, a positive output growth rate would be associated with even higher rates of investment (the accelerator effect)

B. Higher investment causes a multiplied increase in income

C. Such increases in income would continue to induce higherinvestment, which in turn wouldcontinue to cause multiplied increases in output.

D. All of the above.

11. In the equation C = a + bY, which describes the aggregate consumption function, 'a' standsfor

A . the amount of consumption when income is zero. B. the marginal propensity to consume.

C. the amount of consumption when income is Maximum. D. the average consumption level.

12. Total consumption divided by total income gives us:

A. the average propensity to consume . B. the marginal propensity to save.

C. the marginal propensity of expenditure. D. the marginal propensity to consume.

13 Disposable income is the part of households' income left after the deduction of

A. pension contributions. B. income tax and social security payments. C. income tax. D. savings.

14. As the MPS increases, the multiplier will

A. increase. B. either increase or decrease depending on the size of the change in investment.

C. remain constant. D. decrease.

15. In macroeconomics, equilibrium is defined as that point at which

A. planned aggregate expenditure equals aggregate output . B. planned aggregate expenditure equals consumption. C. aggregate output equals consumption minus investment. D. saving equals consumption.

16. The ratio of the change in the equilibrium level of output to a change in some autonomous component of aggregate demand is the

A. elasticity coefficient. B. multiplier .

C. marginal propensity of the autonomous variable. D. automatic stabiliser.

17. Assuming there are no taxes (and no foreign sector), if the MPC is .8, the multiplier is

A. 2.5. B. 8. C. 5 D. 2.

18. Assuming the net income tax rate is 25% (and there is no foreign sector), if the MPC is 0.8, the multiplier is

A. 2.5. B. 8. C. 5. D. 2.

19. Assuming there is no foreign sector, if the multiplier is 3, and the net income tax rate is 20%, the MPC is

A. ¾ B. 4/5 C. 5/6 D. 6/7

20. Assume there is no government or foreign sector. If the MPC is .75, a Rs.20 billion decrease in planned investment will cause aggregate output to decrease by

A. Rs. 80 billion. B. Rs. 20 billion. C. Rs. 26.67 billion. D. Rs. 15 billion.

21. According to the 'paradox of thrift,' increased efforts to save will cause

A. an increase in income and an increase in overall saving.

B. a decrease in income and an overall decrease in saving.

C. a decrease in income but an increase in saving.

D. an increase in income but no overall change in saving.

22. If injections are less than withdrawals at the full-employment level of nationalincome, there is

A. an inflationary gap. B. equilibrium. C. a deflationary gap. D. hyperinflation.

23. The accelerator theory of investment says that induced investment is determined by

A. the rate of change of national income. B. expectations.

C. the level of national income. D. the level of aggregate demand.

24. The diagram that shows the money received and paid out by each sector of the economy is the

A. income-price diagram. B. income-expenditures diagram.

C. circular flow diagram. D. aggregate demand-aggregate supply diagram.

UNEMPLOYMENT

1. If both the no. of unemployed people and the size of the labour force increase by 10,000, then

A. the unemployment rate will remain the same. B. the unemployment rate will increase.

C. the unemployment rate will decrease. D. we cannot tell.

2. Which of the following could be a reason for the problem of “lack of jobs” being overestimated:

A. the existence of disguised unemployment B. people are underemployment

C. people holding only one job (as opposed to multiple jobs) D. the existence of child labour

3. Which of the following is not a cost of voluntary unemployment?

A. potential output of the economy is greater than actual output B. government loses tax revenue

C. firms lose (potential) revenues due to operating below capacity

D. mental stress undergone by the unemployed persons

4. “Because higher wages are less likely to induce people who are structurally or physically unable to participate on the labour force. On the other hand people already on the labour force are more likely to respond to higher wages by accepting jobs.”

The above statement is an answer to which question?

A. Why is the AJ curve more elastic than the LF curve B. Why is the LF curve not totally vertical

C. Why is the AJ curve not completely vertical

D. Why is it difficult to completely remove the horizontal distance between the AJ and LF curves

5. Which of the following would constitute sound government policy if you subscribed to the Monetarist view on unemployment?

A. increase aggregate demand through monetary or fiscal policy

B. reduce the obstacles to downward wage rigidity (like unions, unemployment benefits, minimum wage legislations etc.)

C. Reduce the marginal income tax rate (to increase the incentive to work) D. All of the the above

6. The persistence of a phenomenon, such as unemployment, even when its causes have been removed is called

A. The paradox of thrift. B. hysteresis. C. structural unemployment. D. ceteris paribus.

7. Cyclical unemployment is the

A. portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of job sin certain industries.

B. unemployment that results when people become discouraged about their chances of finding a job so they stop looking for work.

C. portion of unemployment thatis due to seasonal factors.

D. unemployment that occurs during recessions and depressions.

8. The natural rate of unemployment is generally thought of as the

A. ratio of the frictional unemployment rate to the cyclical unemployment rate.

B. sum of frictional unemployment and cyclical unemployment.

C. sum of frictional unemployment and structural unemployment.

D. sum of structural unemployment and cyclical unemployment.

9. One of the tenets of the Classical view of the labour market is that the wage adjustments that are necessary to clear the labour market occur

A. slowly. B. instantly. C. very infrequently. D. very quickly.

10. According to Keynesian economists, those who are not working

A. have given up looking for a job, but would accept a job at the current wage if one were offered to them.

B. are too productive to be hired at the current wage. C. have chosen not to work at the market wage.

D. are unable to find a job at the current wage rate.

INFLATION

11. The index used most often to measure inflation is the

A. consumer price index. B. wholesale price index. C. student price index. D. producer price index.

12. If you were the owner of a cycle manufacturing firm, would you be particularly worried if wage inflation were higher than price inflation?

A. No. Because you would still be able to sell your goods at the higher price.

B. Yes. Because the cost of your input is growing faster than the revenue obtained from your output

C. Yes. Because both price and wage inflation are bad.

D. No. Because any loss to the firm will be offset by the gain to the workers.

13. Which of the following is not a major cost of inflation:

A. Resource wastage: as people spend time and money to guard against the “purchasing power erosion” effects of inflation, while firms suffer menu costs (i.e. the costs of frequently issuing “revised” price lists).

B. Uncertainty: firms defer investment when inflation is high and volatile as the latter complicates predicting future cash flows.

C. Worsened income inequality: inflation is a regressive tax on the people that does not take into account the taxpayers’ “ability to pay”. As such, there is a redistribution of wealth from the poor to the rich.

D. Money printing costs: inflation requires more currency notes to be printed and this raises the government’s printing costs.

14. In the long run, the Phillips curve will be vertical at the natural rate of unemployment if

A. the long-run supply curve is horizontal at the natural rate of inflation.

B. the long-run aggregate demand curve is vertical at potential GDP.

C. the long-run aggregate demand curve is horizontal at the natural rate of inflation.

D. the long-run aggregate supply curve is vertical at potential GDP.

15. According to the monetarists, the measured unemployment rate can

A. be reduced below the natural rate only in the short run, and not without inflation.

B. be reduced below the natural rate only in the long run, and only if the price level is constant.

C. be reduced below the natural rate only in the short run, and only if the price level is constant.

D. be reduced below the natural rate only in the long run, and not without inflation.

16. If the prices of all inputs seem to be rising, can you be absolutely sure that it is cost-push inflation?

A. No, because cost-push inflation is caused by an increase in the cost of only one input.

B. Yes, because that is exactly the definition of cost-push inflation.

C. No, because such a situation can also be caused by particular demand pressures inthe economy.

D. Yes, because this is exactly what happens in stagflation.

17. The quantity theory of money implies that, provided velocity of money is constant, a given percentage change in the money supply will cause

A. an equal percentage change in nominal GDP. B. a larger percentage change in nominal GDP.

C. an equal percentage change in real GDP. D. a smaller percentage change in nominal GDP.

18. If input prices adjusted very slowly to output prices, the Phillips curve would be

A.downward sloping. B.vertical or nearly vertical. C.upward sloping. D.horizontal or nearly horizontal.

19. If inflationary expectations increase, the short-run Phillips curve will

A. become vertical. B. become upward sloping. C. shift to the right. D. shift to the left.

BALANCE OF PAYMENTS

20. The record of a country's transactions in goods, services, and assets with the rest of the world is its _____________; while the difference between a country's merchandise exports and its merchandise imports is the ____________.

A. current account; trade balance. B. capital account; balance of payments.

C. balance of trade; capital account. D. balance of payments; balance of trade.

21. Assuming there is no government intervention in the foreign exchange market, which of the following statements must clearly be FALSE, given that?

A. If the capital account is in surplus, then the current account is likely to be in deficit.

B. If the current account is in deficit, then the capital account is likely to be in surplus.

C. If the current account is in balance, the capital account is also likely to be in balance.

D. None of the above.

22. Which of the following statements is necessarily TRUE?

A. A country runs a current account deficit if it imports more goods and services than it exports.

B. The sum of the current and capital accounts must be zero.

C. If both the current and capital accounts are in surplus, the exchange rate must appreciate.

D. None of the above.

23. All currencies other than the domestic currency of a given country are referred to as

A. reserve currencies. B. near monies. C. foreign exchange. D. hard currency.

24. Exchange rates that are determined by the unregulated forces of supply and demand are

A.floating exchange rate. B.pegged exchange rates. C.fixed exchange rates. D.managed exchange rates.

25. The fall (rise) in value of one currency relative to another is

A. a floating (fixing) of the currency. B. an appreciation (depreciation) of a currency.

C. a depreciation (appreciation) of a currency. D. a strengthening (weakening) of a currency.

27. If purchasing power parity prevails absolutely in a two country world, the real exchange rate between the two countries should be:

A. 1. B. constantly changing. C. relatively stable, but not constant D. none of the above

28. The interest parity equation implies that there is a general tendency for:

A. exchange rates to be insensitive to the differential rates of interest between countries.

B. the currencies of relatively low-interest countries to appreciate.

C. the currencies of relatively high-interest countries to appreciate.

D. the currencies of relatively low-interest countries to depreciate.

Note that currencies with low rates of interest also typically have low inflation rates. This follows from the Fischer equation which maintains that the nominal interest rate = real interest rate + expected inflation.

29. Which of the following is (are) correct statement(s) about the current account deficit?

A. A current account deficit is bad, if it is being caused by excessive consumer spending

B. A current account deficit is bad, if it is fuelled by high fiscal deficits

C. A current account deficit is good, if it is caused by the excess of productive domestic investment over domestic savings

D. All of the above

30. The J-curve effect refers to the observation that

A. GDP usually decreases before it increases after a currency depreciation.

B. GDP usually decreases before it increases after a currency appreciation.

C. the trade balance usually gets worse before it improves after a currency appreciation.

D. the trade balance usually gets worse before it improves after a currency depreciation.

31. If Japan exports more direct investment capital abroad than expected, then the yen will tend to

A. appreciate. B. fluctuate more than if exports were lower. C. depreciate. D. not be affected.

32. Today is Tuesday morning. If currency dealers expect the value of the dollar to fall by 10% on Wednesday, then, ceteris paribus, what will happen by the end of today to the Rs./dollar exchange rate? It will:

A. Rise by more than 10%. B. Rise by exactly 10%. C. Fall by less than 10%. D. Remain constant.

Hint: Use your common sense. Think of “yourself” as a currency trader and then answer the question, based on your future expectation and the incentive it creates.

GROWTH

33. According to traditional thinking on the subject, which of the following would not generate economic growth in an economy?

A. an increase in the size of the labour force. B. an increase in the productivity of capital.

C. a move to more capital intensive production methods

D. discovery of a major mineral resource in the country

34. When referring to economic growth, we normally refer to:

A. growth in actual real per capita output B. growth in potential real per capita output

C. growth in actual nominal per capita output D. growth in potential real per capita output

35. A variable whose value is determined by the model of which it is a part is termed ___________.

A. endogenous B. exogenous C. dependent D. independent

36. An example of capital deepening, given an increasing L, would be:

A. K increases so as to maintain a constant K/L B. K increases so much that K/L increases

C. K remains constant so that L/K increases D. K falls, so as to reduce K/L

37. The neo-classical growth model says that:

A. poor countries should catch-up(or converge to) with richer countries

B. higher savings (or rates of capital accumulation) cannot raise a country’s steady state growth rate

C. the steady state growth rate of real output depends on the sum of the (exogenous) growth rates in population and technical progress. D. All of the above.

RELATIONSHIPS BETWEEN THE BIG FOUR

38. The length of a business cycle would be measured from

A. peak to trough. B. trough to peak. C. peak to peak. D. the slump to the expansion.

39. If the economy is in the expansionary phase of the business cycle, aggregate demand is likely to be ______ , unemployment is likely to be ______ , inflation is likely to be ______ , and the current account of the balance of payments is likely to be moving towards ______.

A. rising; falling; rising; deficit B. static; low; rising; deficit

C. falling; falling; falling; surplus D. falling; rising; falling; surplus

40. If the economy is at the peak of the business cycle, aggregate demand is likely to be ______ , unemployment is likely to be ______ , inflation is likely to be ______ , and the current account of the balance of payments is likely to be moving towards ______.

A. rising; falling; rising; deficit B. static; low; rising; deficit

C. falling; falling; falling; surplus D. falling; rising; falling; surplus

41. If the economy is approaching the trough phase of the business cycle, aggregate demand is likely to be ______ , unemployment is likely to be ______ , inflation is likely to be ______, and the current account of the balance of payments is likely to be moving towards ______.

A. rising; falling; rising; deficit B. static; low; rising; deficit

C. falling; falling; falling; surplus D. falling; rising; falling; surplus

42. Which of the following is not true regarding the effects of growth on the balance of payments and vice versa?

A. Generally, growth raises incomes which will translate into higher consumption and higher imports, causing the current account of the BOPs to deteriorate.

B. If growth is “export-led”, it will boost the current account surplus of the BOPs.

C. If the current account deficit reflects an underlying private sector resource deficit, it is likely to be bad for future growth.

D. If the current account reflects rising imports of military equipment by the government, it might not be beneficial for economic growth.

43. A country has high inflation and is running a current account deficit. What should it do in the context of the Salter-Swan diagram?

A. Reduce government spending and revalue the exchange rate

B. Increase government spending and devalue the exchange rate

C. Reduce the money supply and devalue the exchange rate

D. Increase government spending and revalue the exchange rate

FISCAL POLICY AND TAXATION, MONEY AND MONETARY POLICY, IS-LM APPROACH

1. A government’s attempt to reduce its defence expenditure is an example of (i) , while a government effort to raise interest rates is an example of (ii) .

(i) (ii)

A. monetary policy. fiscal policy.

B fiscal policy monetary policy.

C incomes policy. incomes policy.

D supply-side policy supply-side policy..

2. According to the Laffer curve, as tax rates increase, tax revenues

A. decrease continuously. B. initially decrease and then increase.

C. rise continuously. D. initially increase and then decrease.

3. The government imposes a new income tax legislation under which every male taxpayermust pay 15% of his income as taxes, while every female taxpayer must pay 20% of her income as taxes. Such tax legislation violates which equity principle?

A. Both horizontal equity & vertical equity B. Vertical equity only C. Horizontal equity only D. Neither

4. A 15% VAT is a(n):

A. Proportional income tax. B. Fixed excise duty. C. Ad valorem indirect tax. D. None of the above.

5. Tax incidence is the

A. ultimate distribution of a tax's burden . B. measure of the impact the tax has on employment and output. C. behaviour of shifting the tax toanother party. D. structure of the tax.

6. You know that all taxes are distortionary. Under what conditions will this knowledge lead you to oppose the imposition of every single tax in the economy?

A. If you live in a 1 st best world B. If you live in a 2 nd best world

C. If the tax rates on some of the items are prohibitively high D. Either of the above

7. The automatic stabilisation function of fiscal policy ensures that government expenditures ______ (i) ______ and government revenues _____ (ii) _____ during recessions.

(i) (ii)

A. decrease decrease

B. decrease increase

C. increase decrease

D. increase increase

8. Let us say assume the Pakistani government is facing a fiscal deficit. Which of the following would not constitute a possible method of financing this deficit?

A. printing rupees (borrowing from the central bank) B. selling dollars in the foreign exchange market

C. imposing new taxes or raising existing tax rates D.Borrowing from an international financial institution

9. Which of the following is not a correct argument against a fiscal policy expansion – say a tax cut –aimed at lifting aggregate demand?

A. The expansion might become pro-cyclical ex-post, given the lag time required to change fiscal policy.

B. Fiscal policy works with a lag, thus a tax cut introduced today would not have an expansionary effect on aggregate demand till many months later.

C. The fiscal expansion would increase distortion in the economy.

D. Lower taxes would increase the government’s borrowing requirement, which in turn would cause interest rates to rise, which in turn would i) cause the exchange rate to appreciate, which in turn would cause the current account to move into deficit, and ii) crowd out private investment.

10. The increase in base money divided by the corresponding induced increase in commercial bank deposits is the

A. bank's line of credit. B. reserve ratio. C. current ratio. D. money multiplier.

11. If the RBI wished to pursue a 'tight' monetary policy, it would

A. lower the required reserve ratio and the statutory liquidity ratio. B. lower interest rates .

C. buy government securities on the open market. D. sell government securities on the open market.

12. An item designated as money that is intrinsically worthless could be

A. a currency note. B. a silver coin. C. a barter item. D. any tradable commodity.

13. A checking deposit (or current account) held at a commercial bank is considered __________ of that bank.

A. an asset. B. net worth. C. a liability. D. capital.

14. Which of the following activities is one of the responsibilities of the RBI

A. Monitoring the financial health of banks and non-bank financial insitutions .

B. Auditing the various agencies and departments of the government.

C. Issuing bonds on international capital markets to finance the fiscal deficit.

D. Loaning money to other countries

15. A bank has excess liquidity reserves to lend but is unable to find a willing borrower. This will__________ the size of the money multiplier.

A. reduce B. increase C. have no effect on D. double

16. The quantity of money demanded increases with income. Thus if income increases, the opportunity cost of holding money must go up in order to reduce money demand and re-establish equilibrium in the money market. This relation is captured by:

A. an upward sloping LM curve. B. a downward sloping L curve.

C. a downward sloping IS curve. D. the circular flow of money in the economy.

17. When economists speak of the 'demand for money,' which of the following questions are they asking?

A. How much cash do you wish you could have? B. How much wealth would you like?

C. How much income would you like to earn?

D. What proportion of your financial assets do you want to hold in non-interest bearing forms?

18. Which of the following will not cause money supply to expand, given a fully floating exchange rate regime and a fixed supply of dollars in the market

A. The central bank buying foreign currency in the foreign exchange market

B. redemption of central bank liquidity paper C. build-up of commercial banks’ deposits held with the central bank D. decrease in the central bank discount rate

19. Which of the following events will lead to a decrease in the demand for money?

A. An increase in the level of aggregate output. B. A decrease in the supply of money.

C. A decrease in the interest rate. D. A decrease in the price level.

20. Which of the following is neither a determinant of the slope of the IS curve nor a determinant of the slope of the LM curve?

A. the sensitivity of interest rates to investment B. the sensitivity of money demand to income

C. the sensitivity of money demand to interest rates D. the sensitivity of income to investment

21. Given a Keynesian world, a cut in taxes coupled with a lower reserve ratio for banks would have what effect on equilibrium income and interest rate?

A. Both income and the interest rate will remain unchanged

B. income will come down, but the interest rate will go up

C. income will go up, but the effect on the interest rate cannot be predicted

D. interest rates will go down, but the effect on income cannot be predicted

22. If the government increases its spending, but this causes prices to rise, what will “eventually” happen to the equilibrium income and interest rate?

A. Both income and the interest rate will remain unchanged

B. income will come down, but the interest rate will go up

C. income will go up, but the effect on the interest rate cannot be predicted

D. interest rates will go down, but the effect on income cannot be predicted

23. If the income elasticity of money demand and the Keynesian multiplier, both increase in an economy (ceteris paribus), how will the relative effectiveness of monetary and fiscal policy change?

A. Fiscal policy will become relatively more effective than monetary policy

B. Fiscal policy will become relatively less effective than monetary policy

C. The relative effectiveness of fiscal and monetary policy will remain unchanged

D. Both fiscal and monetary policy will become more effective.

24. The intersection of the IS and LM curves captures:

A. the equilibrium of the demand and supply sides of the economy

B. the equivalence of monetary and fiscal policy C. joint equilibrium in the goods and money markets

D. all of the above

1. Disposable Income is obtained by subtracting _____________taxes from personal income:

A. Indirect Taxes B. Direct Taxes C. Subsidies D. None

2. Per capita income is obtained by dividing National Income by:

A. Total labor Force in the Country B. Unemployed Youth in the Country

C. Total population of that country. D. None

3. The investment demand curve shows the relationship between the levels of:

A. Investment and Consumption B. Consumption and Interest Rate

C. Investment and Interest Rate D. None

4. The situation in which the imports are greater than exports is termed as:

A. Trade Surplus B. Trade Deficit C. Budget Surplus D. None

5. Fiscal policy is the government programme with respect to it’s:

A. Steel Mill Privatization B. Unemployment Reduction C. Expenditure and Tax revenue D. None

6. Imports for any economy are considered as:

A. Injections B. Leakages C. Brain Drain D. None

7. The accelerator is a related concept which formalizes the investment response to:

A. Consumption B. Interest rate C. Output D. None

8. According to Keynes macroeconomic equilibrium is attained when:

A. S = I. B. AD= AS C. Inflation Exists in Economy. D.None

9. There are __________________methods of measuring GDP:

A. Four B. Three C. Five D. None

10. Intermediate goods are meant for:

A. Direct use by the consumers B. further processing

C. The term do not exist D. None

1. Fiscal policy refers to:

A. The actions of the central bank in controlling the money supply.

B. The spending and taxing policies used by the government to influence the economy.

C. The government's regulation of financial intermediaries. D. None of the given options.

2. Disposable income is:

A. Total income plus transfer payments B. Total income minus saving.

C. Total income plus net taxes. D. Total income minus net taxes.

3. The deficit tends to decrease when:

A. GDP decreases slightly. B. GDP decreases rapidly. C. GDP increases. D. GDP remains unchanged.

4. Money or paper currency serves at least ______________ functions:

A. Four B. Three C. Five D. Seven

5. The economic logic behind granting central banks independence from government in the conduct of monetary policy is:

A. To eliminate seignior age. B. To allow open market operations.

C. To enhance the credibility of monetary policy. D. None of the above.

6. An expansionary fiscal policy can:

A. Raise the national debt. B. Decrease the national debt C. Have no effect on national debt. D. None

7. Which is high powered money?

A. M1 B. M2 C. M3 D. None

9. The rate at which central bank lends to commercial banks is known as:

A. Reserve rate. B. Discount rate. C. Open market operation. D. None.

10. Identify the three motives of money demand:

A. Accumulative, speculative, precautionary B. Speculative, transaction, precautionary

C. Precautionary special, transaction D. None

1. If, in a fully employed, closed economy, the supply of money and the velocity of circulation of money both increase, then in the short-run.

a. Unemployment of factors will result b. Real national output will expand

c. The volume of transactions will lincrease d. The average level of prices will rise

2. An increase in the rate of inflation which is not accompanied by any change in the volume of consumer goods sold will automatically increase the:

a. Revenue from Value Added Tax b. Level of company profits

c. Level of unemployment d. Average level of wages

4. The investment demand curve shows the relationship between the levels of:

a. Investment and Consumption

b. Consumption and Interest Rate

c. Investment and Interest Rate

d. None

5. According to Classical models, the level of employment is determined primarily by:

a. The level of aggregate demand for goods and services

b. Prices and wages. c. Government taxation. d. Government spending.

6. Which of the following is not an important variable in growth accounting calculations?

a. Productivity growth b. Money supply growth c. Labor growth d. Capital growth

7. The per-worker production function relates:

a. Output per worker to capital per worker. b. Output per worker to production per worker.

c. Output per worker to factors of production per worker

d. Production per worker to the size of the work force.

8. In a steady-state economy:

a. Net investment equals depreciation rate. b. Per capita capital stock grows at the rate of labour growth.

c. Per capita capital stock remains constant. d. Net investment equals the consumption.

9. The war in Iraq sent oil prices spiraling upwards, resulting in an increase in the overall price level. This is an example of which type of inflation?

a. Cost-pull b. Cost-push c. Demand-pull d. Demand-push

10. The IMF is an agency charged with providing:

a. Technical assistance to stock market and financial market problems.

b. Loans for post-World War II reconstruction.

c. Short‑term credit for international balance of payments deficits.

d. Bonds denominated in U.S. dollars as a loan to LDCs.

11. In a portfolio investment:

a. Investors are directly involved in managing the operations.

b. As in direct investment, investors export goods and services abroad.

c. Investors transfer the technology to local investors.

d. Investors have no control overoperations.

12. Inflation:

a. Reduces both the purchasing power of the dollar and one's real income

b. reduces the purchasing power of the dollar and increases one's real income

c. Reduces the purchasing power of the dollar but may have no impact on one's real income

d. Increases the purchasing power of the dollar and reduces one's real income

13. One of the tenets of the classical view of the labour market is that the wage adjustments that are necessary to clear the labour market occur:

a. Slowly. b. Quickly. c. Very infrequently. d. Instantly.

14. Those that hold the classical view of the labour market are likely to believe that:

a. Monetary, but not fiscal policy will have an effect on output and employment.

b. Both monetary and fiscal policy will have an effect on output and employment.

c. Fiscal, but not monetary policy will have an effect on output and employment.

d. Neither monetary nor fiscal policy will have an effect on output and employment.

15. Potential GDP is the level of aggregate output:

a. That can be produced if structural unemployment is zero.

b. That can be produced at a zero unemployment rate.

c. That can be sustained in the long run, if the inflation rate is zero.

d. That can be sustained in the long run without inflation.

16. Which school of economic thought suggested that one possible cause of inflation was a 'push' from the cost side?

a. New classical economists. b. Monetarists. c. Marxists. d. Keynesians.

17. An unspoken agreement between workers and firms that the firm will not cut wages is known as:

a. An explicit contract. b. An implicit or social contract.

c. Employment-at-will. d. A relative-wage contract.

18. To offset the downswing in the business cycle, the government announces a major increase in public expenditure.

a. Technological Unemployment

b. Demand Deficient Unemployment

c. Real Wage Unemployment

d. Regional Unemployment

19. The government puts pressure on trade unions to make pay claims which are below the increase in productivity over the past year.

a. Frictional Unemployment

b. Technological Unemployment

c. Structural Unemployment

d. Real Wage Unemployment

20. In which case is total expenditure in an economy not equal to total income?

a. If total saving is larger than total investment

b. If net exports are not zero

c. If inventory investment is negative

d. None of the above--they are always equal

2020-05-03T16:48:00.001+05:30

MULTIPLE CHOICE QUESTIONS - ECONOMICS

ECO1

Question 1. Which of the following statements about factors of production is false?

a) The term 'factors of production' is another term for resources.

b) The factor of production termed labour means human resources.

c) The factor or production termed land means natural resources.

d) The factor of production termed capital means the money which the owners of firms need in order to set their firms up.

Question 2. Which of the following statements about the use of resources is not one of the key questions in economics?

a) How are resources used? b) Where are resources used?

c) For what are resources used? d) For whom are resources used?

Question 3. Which of the following statements about producers is false?

a) Households produce many goods and services for themselves

b) People set up some producers who do not aim to make profits.

c) All the goods and services consumed in any country are produced by its own producers.

d) Governments arrange the production of some goods and services.

Question 4. Which of the following statements is true?

a) Despite the problem of scarcity, people do not always want producers to use the most efficient production methods.

b) The problem of scarcity would disappear if the world's population grew to ensure more labour was available.

c) A producer who uses no more resources than it needs must display productive efficiency.

d) The world's economies were as integrated 50 years ago as they are today

Question 5. What is meant by intermediate goods and services?

a) The same as capital goods, such as plant, buildings, vehicles and machinery.

b) Products which one firm buys off another and then uses up in its own products.

c) All inputs bought by firms, including labour and raw materials.

d) Imports.

Question 6. What is meant by the term final goods and services?

a) The same as the term intermediate goods and services.

b) The same as the term consumer goods and services.

c) All goods and services except those traded second hand.

d) Goods and services which are finished as far as the economy is concerned.

Question 7. Which of the following statements is false?

a) Purchases of capital goods are called investment

b) GDP equals the total value of wages received by households.

c) In a simple economy with just households and firms, the value of investment equals the value of saving.

d) In a simple economy with just households and firms, the value of investment plus consumers' expenditure equals GDP.

Question 8. Which of the following statements is false?

a) GDP measures the value of all the goods and services produced in the economy.

b) GDP stands for gross domestic product.

c) GDP excludes intermediate goods and services.

d) GDP equals wages plus trading profits.

Question 9. Which of the following statements is true?

a) Microeconomics is concerned chiefly with the economy as a whole.

b) Macroeconomics is concerned chiefly with individual markets.

c) Governments have no influence over market prices.

d) When economists study the price in a market, their chief aims are to understand why the price is what it is and why it may change.

Question 10. Which of the following statements is false?

a) An economic model is a theory based on key variables and expressed in formal terms.

b) An economic model is tested by seeing how accurate its predictions are.

c) Testing economic models is rarely tricky.

d) The words 'ceteris paribus' mean other things remaining the same.

Correct answer:

1.D 2.B 3.C 4.A 5.B 6.D 7.B 8.A 9.D 10.C

EXPLANATION

1. Only statement d is a false statement about factors of production. The term capital is one which people use in a variety of ways, and it is true that firms might often say they need to raise capital in order to set their firms up or expand them. But as a factor of production, capital always means the capital goods such as plant, buildings, vehicles, and machinery which producers use in producing goods and services.

2. Only statement b is not one of the key questions in economics. It is not a key question, because as far as the problem of scarcity is concerned, it does not matter where resources are used to produce goods and services. Admittedly, some people are deeply concerned by this question: for example people who are unemployed in one country might prefer resources to be used there rather than in another, to give them the chance of a job. But from a scarcity point of view, it does not matter where the resources are used.

3. Only statement c is a false statement about producers: this is because some of the goods and services which people in any economy consume are produced by producers in other countries and imported. The only economy of which it could be said that there are no imports from outside is the global economy.

4. Only statement a is true. People may not want producers to use the most efficient methods if, for example, these involve unacceptable damage to the environment, or cruelty to animals. Statement b is false because a rise in population will lead to yet more wants as well as more resources. Statement c is false because a producer who uses no more resources than necessary will still be inefficient if the resources are more valuable than others which might have been used instead. Statement d is false because economies were far less integrated 50 years ago.

5. Only statement b is true. Statement a is false because capital goods are not used up in production, even though they are used. Statement c is false because labour is not an intermediate good or service, which has to be bought from another producer. Statement d is false because not all imports are used up in production - for example if you as a consumer buy an imported book over the internet, this book is not used up in production by any firms or other producers in your country.

6. Only statement d is true. Statement a is false because final goods do not include intermediate goods and services. Statement b is false because final goods include capital goods as well as consumer goods and services. Statement c is false because it would include intermediate goods and services.

7. Only statement b is false. GDP does not equal wages alone, but rather equals wages plus trading profits.

8. Only statement a is false. This is because GDP covers only final goods and services, and excludes intermediate goods and services.

9. Only statement d is true. Note that statement a explains macroeconomics and statement b explains microeconomics.

10. Only statement c is false. Testing economic models is often very tricky, partly because economists can rarely conduct experiments and partly because it is often hard to isolate the effects of any particular event.

ECO2

Question 1. Which of the following is not required for a country to be producing at a point on its production possibility frontier?

a) Full employment of labour. b) All producers using the latest technology.

c) Stable prices. d) All producers having productive efficiency.

Question 2. Which of the following statements is true?

a) The production possibility frontier is steeper at the right end than the left because some resources are better suited to making some products than others.

b) The production possibility frontier is straight because some resources are better suited to making some products than others.

c) The production possibility frontier is steeper at the left end than the right because some resources are better suited to making some products than others.

d) The production possibility passes the point which represents total wants in the economy.

Question 3. Which of the following will not shift a country's production possibility frontier?

a) A fall in unemployment. b) An increase in the age at which people retire.

c) The introduction of improved technology. d) Purchases of new capital by firms.

Question 4. Which of the following types of economy describes the economy of the UK?

a) A command economy. b) A market economy. c) A mixed economy. d) A planned economy.

Question 5. All the following government policies are likely to increase the quantity of some products that are produced. But with one policy, this effect is a side-effect rather than the aim. Which policy is that?

a) A policy intended to improve efficiency. b) The introduction of subsidies on some products.

c) A policy intended to reduce unemployment.

d) The introduction of taxes on the rich and transfers to the poor.

Question 6. Which of the following policies would increase production by taking it to a point closer to the production possibility frontier, but would not shift the frontier?

a) A policy that encouraged firms to buy more industrial plant.

b) A policy that encouraged firms to develop and introduce improved technology.

c) A policy that encouraged firms to buy more machinery.

d) A policy that encouraged firms to adopt better technologies that are already available.

Question 7. Suppose a country is currently producing at a point on its production possibility frontier, and undertakes no trade with other countries. Then trade is opened up. Which of the following would not occur as a direct result?

a) Its production possibility frontier would shift.

b) Its production would shift to another point on its production possibility frontier.

c) The pattern of products that the country produced would differ from the pattern that its consumers consumed.

d) Consumers would be able to consume at a point outside the production possibility frontier.

Question 8. Which of the following policies is not classed as a stabilization policy?

a) A policy aimed at reducing unemployment.

b) A policy aimed at reducing the number of people in poverty.

c) A policy aimed at reducing the rate of inflation.

d) A policy aimed at shifting the production possibility frontier outwards.

Question 9. Which of the following statements is a positive statement?

a) Bankers' bonuses should be taxed.

b) The eurozone ought to allow member countries in difficulty to stop using the euro and use currencies of their own instead.

c) One of the largest industries in the

is the financial services industry.

d) The UK government ought to split up some of the largest

banks to promote more competition in the banking industry.

Question 10. Suppose you buy Economics by David King. What is the opportunity cost of your purchase?

a) The money you paid for the book.

b) Whatever you would have spent the money on if you had not bought the book.

c) The cost of producing the book.

d) The time you spend studying the book.

ANSWERS

1.C 2.A 3.A 4.C 5.D 6.D 7.A 8. B 9.C 10.B

EXPLANATION

1. Only c gives a condition that is not required for a country to be on its production possibility frontier. For example, the economy in Figure 2.2 on page 22 could be at point y, producing 35,000 bricks and 70,000 loaves each day. It could be there if prices were stable, or rising at 5% a year, or even 5% a day, or even if prices were falling. But it could not be there unless there was full employment of labour, full productive efficiency, and the use of the latest technology by all producers.

2. Only statement a is true. The frontier is flat at the left end because if a country initially produced only the product on the vertical axis, and then shifted some resources into the product on the horizontal axis, if would initially take resources little suited to the former and well suited to the latter, so output of the former would fall little while output of the latter would rise greatly. Total wants are at a point way outside the frontier.

3. Only statement a concerns an event that will not shift the frontier. If there is a fall in unemployment, then a country will move from a point inside the frontier to one closer to it.

4. Only statement c describes the situation in the UK, where the

government seeks to influence the use of resources rather than leave their use to market forces, as applies in a market economy, or to control their use, as applies in a command or planned economy.

5. Only policy d does not intend to increase the output of some products, so that any increase is a side-effect. This side-effect is likely to arise, because the products which the poor consume more when the transfers are introduced may differ from the products which the rich consume less when the taxes are introduced.

6. Only statement d concerns a policy that would not shift the production possibility frontier. That is because if firms are not using the best available technology, then production is inside the frontier, because the economy is producing less than it is currently possible for it to produce. Each other policy would allow the economy in future to produce more than it is possible for it to produce at present.

7. Only statement a concerns an effect that would not occur as a direct result of trade. Trade does not of itself shift the frontier because it does not of itself give a country any more resources or allow the country to use its resources more productively. But trade is likely to encourage the country to shift its pattern of production to products which it is relatively good at making. Also, by promoting exports and imports, trade leads to the pattern of products which is consumed differing from the pattern which is produced. Finally, trade does allow consumption to be at a point outside the production possibility frontier. Production, of course, is as always constrained to be at a point on or inside the frontier, which is why the frontier gets its name.

8. Only statement b concerns a policy which is not a stabilization policy. Instead, this is a redistribution policy.

9. Only statement c is a positive statement which concerns a fact; incidentally, the fact is true, but this does not affect whether the statement is a positive one. The other statements are all normative statements about what the person making the statements believes should happen.

10. Statement b gives the correct answer because it relates to the best alternative you went without in order to buy the book.

ECO3

Question 1. The supply and demand model applies when three of the following four conditions are met. Which condition is not required?

a) There must be many buyers. b) There must be many sellers.

c) The buyers and sellers must trade an identical item. d) The item traded must be a product.

Question 2. Which of the following predictions is not made by the supply and demand model?

a) If there is excess demand, the price will rise.

b) If there is excess supply, the price will fall.

c) If there is no excess demand or excess supply, the market will be in equilibrium.

d) A market which is out of equilibrium will always move rapidly to the equilibrium,

Question 3. Suppose there is excess supply in a market and the price decreases. Which of the following combinations of events will occur?

a) There will be a fall in quantity supplied and a rise in quantity demanded.

b) There will be a fall in quantity supplied and a rise in demand.

c) There will be a fall in supply and a rise in quantity demanded.

d) There will be a fall in supply and a rise in demand.

Question 4. Suppose there is a decrease in supply in a market where the supply curve slopes upwards and the demand curve slopes downwards. Which of the following would not occur?

a) An excess supply. b) A fall in price. c) A fall in supply. d) A fall in the equilibrium level of expenditure.

Question 5. Suppose a market is in equilibrium, and then the demand increases. Which of the following would be shown on a graph that illustrated the effects?

a) An excess demand at the initial equilibrium price.

b) An excess demand at the new equilibrium price.

c) An excess supply at the initial equilibrium price.

d) An excess supply at the new equilibrium price.

Question 6. Suppose there is an increase in demand in a market where the supply curve slopes upwards and the demand curve slopes downwards. Which of the following might not occur?

a) An excess supply. b) A fall in price.

c) A rise in the quantity traded. d) A fall in the equilibrium level of expenditure.

Question 7. Which of the following might not lead to an increase in the demand for a product that can be stored?

a) A fall in the price of a complement. b) A rise in consumer incomes.

c) An increase in the number of buyers. d) An expected rise in price.

Question 8. Which of the following might not lead to a decrease in the demand for a type of labour?

a) A decrease in the number of firms using the labour.

b) An increase in the productivity of the labour.

c) A fall in the price of a substitute input.

d) A decrease in the demand for the produce or products which the labour is used to produce.

Question 9

Which of the following would not lead to a decrease in the supply of a product that can be stored?

a) An increase in the demand for a joint product.

b) A rise in the price of another input.

c) A decrease in the number of firms supplying the product.

d) An expected rise in the price of the product.

Question 10

Which of the following could not lead to an increase in price combined with an increase in the quantity traded?

a) An increase in demand combined with unchanged supply.

b) An increase in demand combined with a decrease in supply.

c) A decrease in demand combined with an increase in supply.

d) An increase in demand combined with an increase in supply.

Correct answer:

1.D 2.D 3.A 4.C 5.A 6.D 7.B 8.B 9.A 10.C

EXPLANATION

1. Condition d is not required. The item traded could be labour, which is used in many examples in the chapter. It could also be something different, such as a currency, or shares in a large company.

2. Prediction d is not made by the model. The model argues that a price which is away from equilibrium will move towards equilibrium, but the exact reasons and speed of movement will vary between markets, so the model makes no general claim about the speed of change.

3. The combination given in a will occur. This would be shown in a diagram by a move up the supply curve and a move down the demand curve. Note that the supply and demand curves will not shift, so there is no change in supply or demand, merely a change in the quantities supplied and demanded.

4. The event in statement c would not occur. The excess supply will lead to a fall in price, and this will lead to a fall in the quantity supplied: but this is shown by a move along the supply curve. The supply curve itself does not shift, so there is no change in supply.

5. Statement a shows what would be shown on a graph. Statement b is incorrect because there will be no excess demand, or indeed an excess supply, at the new equilibrium price. Statements c and d are incorrect because there will be no excess supply.

6. The event in statement d might not occur. If the fall in price is modest and the increase in quantity traded is substantial, then spending will increase.

7. Event b, a rise in consumer incomes might not lead to an increase in demand. Instead, if the product is inferior, there could be a decrease in demand.

8. Event b, an increase in the productivity of the labour, might not lead to firms wanting less. The increase in the productivity of the input would allow firms to reduce the price of their output, and if there was then a large increase in the quantity demanded, firms might actually want more labour than before.

9. Event a, an increase in the demand for a joint product, would not lead to firms supplying less of the product concerned in the question. Instead, they would want to supply more of the joint product whose demand has increased, and as result would supply more of the product concerned in the question.

10. The event in c could not lead to an increase in price because the supply curve shifts right and the demand curve shifts left.

ECO4

Question 1

A student club wants to raise just enough income to cover its costs. Its income comes partly from membership fees and partly from selling tickets for its nightly discos. Attendance at the discos currently leads to overcrowding of the club's room. The demand for membership is price inelastic and the demand for discos is price elastic. To reduce the crowding without changing its total income, what should the club do?

a) Raise both the disco ticket price and the membership fee.

b) Lower both the disco ticket price and the membership fee.

c) Raise the disco ticket price but lower the membership fee.

d) Lower the disco ticket price but raise the membership fee.

Question 2

Suppose the price of a product increases from Rs.12 to Rs.20 and the quantity demanded falls from 55 a week to 45. What is the PED?

a) 0.4 b) -0.4 c) 2.5 d) -2.5

Question 3

Suppose a demand curve runs from the price axis to the quantity axis in a straight line. Whereabouts will PED=-1.0?

a) Where the curve meets the price axis.

b) Everywhere along the curve.

c) At the mid-point of the curve.

d) Nowhere along the curve.

Question 4

A consumer product has a PED of -0.12. Which of the following factors would not help to explain this?

a) There are few substitutes available.

b) Any substitutes there are have higher prices.

c) The product accounts for a small percentage of consumer expenditure.

d) The product is a normal good.

Question 5

Which of the following statements is true?

a) When an economy grows, firms would prefer to be making inferior goods rather than making normal goods.

b) If a firm notices that the price of a substitute for its product has fallen, it would prefer the CED between the products to be far from zero rather than close to zero.

c) If a firm notices that the price of a complement for its product has risen, it would prefer the CED between the products to be far from zero rather than close to zero.

d) If a firm's costs increase and it has to increase the price of its output, it would prefer demand to be price inelastic rather than price elastic.

Question 6

Suppose incomes double over a period of years. Which sorts of product will experience the biggest increases in price?

a) Those with a PES close to 0.0 and an IED well above 0.0.

b) Those with a PES close to 0.0 and an IED well below 0.0

c) Those with a PES well above 1.0 and an IED well above 0.0

d) Those with a PES well above 1.0 and an IED well below 0.0

Question 7

Suppose the price of a product increases from Rs.50 to Rs.70 and the quantity supplied rises from 40 a day to 80. What is the PES?

a) 0.5 b) -0.5 c) 2.0 d) -2.0

Question 8

Which of the following statements is false?

a) PES is infinity all along any horizontal supply curve.

b) PES is 1.0 all along any supply curve which passes through the origin.

c) PED is zero all along any vertical demand curve.

d) PED is -1.0 along any demand curve where spending would be the same at each price.

Question 9

A consumer product has a PES of 0.1. Which of the following factors would not help to explain this?

a) The producers are close to full capacity.

b) One or more of the key intermediate products needed to make the product are themselves items with an inelastic supply.

c) Consumers need very little time to respond fully to price changes.

d) One type of labour used by the producers may be in inelastic supply

Question 10

Which of the following statements is false?

a) Price elasticity of demand is negative for most products.

b) Price elasticity of supply is positive for most products.

c) Income elasticity of demand is positive for normal goods.

d) Cross elasticity of demand is positive between complements.

Correct answer: 1.A 2.B 3.C 4.D 5.D 6.A 7.C 8.D 9.C 10.D

EXPLANATION

1. To reduce the overcrowding, the club must raise the ticket price for its discos. As disco demand is elastic, its revenue from discos will then fall, so it needs to raise its revenue from membership fees. As membership demand is inelastic, it should raise the fee, and then the revenue from membership fees will rise. So a is the correct answer.

2. The correct answer is b. The change in quantity is -10 and the average quantity is 50, so the percentage change is 100(-10/50)100 or -20. The change in price is Rs.8 and the average price is Rs.16, so the percentage change is 100(8/16) or 50. So the PED is -20/50 or -0.4.

3. The correct answer is c. PED varies all along any sloping straight line demand curve. Above the mid-point, demand is elastic, so the PED is below -1.0; and below the mid-point demand is inelastic, so the PED is between -1.0 and 0.0. So the PED equals -1.0 at the mid-point.

4. Factor d would not help to explain this. A normal good is one where demand decreases if incomes increase, but this says nothing about the PED.

5. d is true because if demand is inelastic, then the rise in price will lead to only a small fall in the quantity sold and to a higher total revenue, whereas if demand is elastic, then the rise in price will lead to a large fall in the quantity sold and to a fall in revenue. Note that a is false because, when incomes grow, demand for normal goods increases but demand for inferior goods decreases. b and c are false because, if the price of a substitute falls or the price of a complement rises, then firms would like as little effect on the demand for their products a possible.

6. The effect on price depends in part on how much demand increases: the further the IED is above 0.0, the more demand will increase. The effect on price also depends on the PES. The more inelastic is the supply, that is the closer the PES is to 0.0, the more the effect will be. So the combination in a is the correct one.

7. The change in quantity is 40 and the average quantity is 60, so the percentage change is 100(40/60)100 or 67. The change in price is £20 and the average price is £60, so the percentage change is 100(20/60) or 33. So the PES is 67/33 or 2.0 (answer c).

8. Statement d is false. For PES to be 1.0 all along a supply curve, the curve must not only pass through the origin: it must also be straight.

9. Only factor c would not help to explain the low PES. This factor concerns the time consumers need to react to price changes, and that affects the PED of a product, not its PES.

10. Statement d is false. If the price of a product increases, then people will demand a lower quantity of it and, in turn, a lower quantity of any complements they consume with it. So a positive change in the price of one of the complements leads to a negative change in the quantity demanded of the other complements. So a CED between complements is always negative

ECO5

Question 1

Which of the following is not an argument against government intervention in a market?

a) If the government reduces output below the free market level, consumer surplus will fall.

b) If the government reduces output below the free market level, producer surplus will fall.

c) If the government raises output above the free market level, consumers will get no benefit from the extra units of output.

d) If the government raises output above the free market level, some units of output will cost more to produce than the value placed on them by consumers.

Question 2

Which of the following statements about a price ceiling is false?

a) The number of buyers who gain from the ceiling is smaller than the original number of buyers.

b) The ceiling creates an excess demand.

c) The ceiling generates losers as well as gainers.

d) To have any effect, the price ceiling must be set at a higher level than the original market price.

Question 3

Assuming that everyone is law-abiding, which of the following would not reduce the quantity traded in a market?

a) The imposition of an effective price ceiling.

b) The removal of an effective price floor.

c) The imposition of a supply-side quantity control.

d) The imposition of a demand-side quantity control.

Question 4

Suppose the government introduces a specific tax of £5 a unit on a product which has sloping supply and demand curves. Which of the following statements about the resulting curve S+tax is true?

a) The gap between S+tax and S will be higher at high quantities than at low quantities.

b) The gap between S+tax and S will be higher at low quantities than at high quantities.

c) The gap between S+tax and S will be £5 at each quantity.

d) The gap between S+tax and S will be whatever is needed to show that the equilibrium price for consumers increases by £5.

Question 5

On a graph showing the effects of an ad valorem tax, where do we find the price received by producers?

a) At the point on S below the point where S+tax intersects D.

b) At the point where S intersects D.

c) At the point where S+tax intersects D.

d) At the initial price minus the amount of the tax.

Question 6

Which of the following statements about the incidence of a specific tax is false?

a) The incidence which falls on consumers plus the incidence which falls on producers equals the amount of the tax.

b) The incidence falls more heavily on producers than consumers if the demand curve is flatter than the supply curve.

c) The incidence falls more heavily on consumers than producers if the supply curve is flatter than the demand curve.

d) The incidence always falls wholly on consumers.

Question 7

Under which of the following circumstances would the incidence of a specific tax fall wholly on consumers?

a) Demand is perfectly elastic.

b) Supply is perfectly elastic

c) Both demand and supply have unit elasticity.

d) Under all circumstances.

Question 8

Suppose the CAP has imposed a tariff on the import of a certain foodstuff from outside the EU, and suppose that EU consumers always pay a price equal to the rest of the world price plus the tariff. Which of the following events would not lead to a higher price for EU consumers?

a) A rise in the supply of the foodstuff by EU producers.

b) An increase in the tariff.

c) A rise in the demand for the foodstuff by non-EU consumers.

d) A fall in the supply of the foodstuff by non-EU producers.

Question 9

Suppose the CAP reduces the tariff on imports of a certain foodstuff from outside the EU. Which of the following statements is false?

a) The quantity consumed in the EU would increase.

b) The quantity of imports into the EU would increase.

c) The incomes of EU farmers would increase.

d) The incomes of non-EU farmers would increase.

Question 10

Suppose the government introduces a prohibition on the supply or purchase of some substance. Assuming that some suppliers and some users ignore the law, which of the following could not occur?

a) The price might rise.

b) The price might stay the same.

c) The price might fall.

d) There would be no price because the market would disappear underground.

Correct answer: 1.C 2.D 3.B 4.C 5.A 6.D 7.B 8.A 9.C 10.D

EXPLANATION

1. c is not an argument against intervention. Consumers would get some benefit from extra units of output at any output level between the free market level and the level where the demand curve intersects the price axis.

2. Statement d is false. To have any effect, the ceiling must be set at a lower level than the original price.

3. The event in statement b would not reduce the quantity traded. A price floor, like a price ceiling, reduces the quantity traded, so its removal would increase the quantity traded.

4. Statement c is true. The curve S+tax is parallel to S with a specific tax, and is above S by the amount of the tax.

5. Statement a gives the correct place. Notice that this point is therefore important, even though there is no intersection here. We also look at the same point on a graph concerned with a specific tax.

6. Statement d is false. Unless either the supply or demand curve is horizontal or vertical, the tax always raises the consumer price by less than the amount of the tax, so that the consumers do not bear the full incidence, and instead producers bear some of the incidence because the price they receive after the tax has been paid is less than the price they received initially.

7. The incidence falls wholly on consumers if supply is perfectly elastic, as in b. In a, where demand is perfectly elastic, the incidence falls wholly on producers. In c, where both demand and supply have unit elasticity, the incidence is shared, but falls more on consumers than producers.

8. Only event a will not raise the price paid by EU consumers, because a rise in the supply by EU producers will simply lead to some imports being replaced by more food produced inside the EU. Event b, an increase in the tariff raises the price directly; and events c and d lead to a higher price in the rest of the world and so in turn to a higher price for EU consumers.

9. Statement c is false. This is because at the lower price which is now paid in the EU, EU farmers would be willing to sell a lower quantity, as shown by their supply curve. So with a lower output sold at a lower price, their incomes would fall.

10. The outcome in statement d could not occur. This is because the fact that the market goes underground does not mean there is no price in the market. The events in statements a, b and c could all occur: the actual effect on price depends on whether the prohibition shifts the demand curve by less than the supply curve, or by the same amount, or by more.

ECO6

Question 1

Which of the following statements about the market demand curve for a product is false?

a) The market demand curve represents the individual demand curves of all consumers added together.

b) The market demand curve may shift if there is a change in the behaviour of some households which consume the product.

c) The market demand curve may shift if there is change in the price of the product.

d) The market demand curve may shift if there is a change in the number of consumers who buy the product.

Question 2

Which of the following does the principle of diminishing marginal utility say about what happens when a consumer consumes more of a product?

a) The consumer's total utility will be unaffected.

b) The consumer's total utility will diminish.

c) The consumer's marginal utility will diminish.

d) The consumer's marginal utility will become negative

Question 3

A consumer finds that for product A, the price is Rs.5 and the consumer's marginal utility is 100 utils, while for product B, the price is Rs.10 and the consumer's marginal utility is 160 utils. Which of the following statements is true?

a) The consumer is maximizing utility from A and B.

b) The consumer would gain more utility from A and B by consuming more A and less B.

c) The consumer would gain more utility from A and B by consuming less A and more B.

d) The consumer could only gain more utility from A and B by consuming more of both products.

Question 4

Which of the following factors does not help to explain why most indifference curves between consumer products slope down to the right and are curved rather than straight?

a) The principle of diminishing marginal utility.

b) The fact that both products concerned are regarded as desirable.

c) The fact that most pairs of products are not perfect substitutes.

d) The fact that the further an indifference curve is from the origin, the more total utility it represents.

Question 5

Which of the following factors does not affect the slope and position of a consumer's budget line between two products, A and B?

a) The shape and position of the consumer's indifference curves.

b) The price of A. c) The price of B. d) The consumer's income.

Question 6

A consumer plots an indifference map between two products A and B, and marks in points to show the combinations of A and B that the consumer would buy if the price of A changed but the price of B remained the same. The consumer then plots a line through these points. Which of the following is this curve called?

a) A budget line. b) A demand curve. c) A price consumption curve. d) An indifference curve.

Question 7

A consumer plots an indifference map between two products A and B, and marks in points to show the combinations of A and B that the consumer would buy if the prices of A and B remained the same but the consumer's income increased. Which of the following statements about this line is false?

a) The line is called an income consumption curve.

b) The line will always slope upwards to the right if both products are normal goods.

c) The line will slope backwards or downwards at income levels where one product is an inferior good. d) The line may not pass through the origin.

Question 8

Suppose a consumer faces a rise in the price of product A while the consumer's income remains unchanged. Which of the following statements about the income effect is false?

a) There is no income effect because the consumer's income is unchanged.

b) Between them the income and substitution effects cover the entire change in the quantity that the consumer demands.

c) If the product is normal, the income effect works in the same direction as the substitution effect.

d) If the product is inferior, the income effect works in the opposite direction to the substitution effect.

Question 9

Suppose we draw an indifference map diagram to explore the hours of work a worker will choose to do. Which of the following will not apply to this diagram?

a) The indifference curves slope downwards to the right because both income and leisure are desirable.

b) The curves get flatter to the right because both income and leisure have diminishing marginal utility.

c) The indifference curves furthest from the original represent the highest total utility.

d) An increase in the wage rate shifts the earnings leisure line, with the new line being parallel to the initial line.

Question 10

Which of the following statements about labour supply curves at high wages is true?

a) The supply curves of individuals may slope backwards, and also the market supply curve for any given type of labour may well slope backwards.

b) The supply curves of individuals may slope backwards, but the market supply curve for any given type of labour is most unlikely to slope backwards.

c) The supply curves of individuals are most unlikely to slope backwards, but the market supply curve for any given type of labour may well slope backwards.

d) The supply curves of individuals are most unlikely to slope backwards, and the market supply curve for any given type of labour is also most unlikely to slope backwards.

ANSWERS: 1.C 2.C 3.B 4.D 5.A 6.C 7.D 8.A 9.D 10.

EXPLANATION

1. Statement c is false. If the price of the product changes, then individual consumers move to different points on their demand curves, but their demand curves stay put and so does the market demand curve.

2. As its name implies, the principle makes the statement given at c.

3. The consumer could gain more utility by consuming more A and less B, as in b. For example, if the consumer consumed half a unit less of B, the consumer's total utility would fall by 80 utils, but the Rs.5 saved would allow the consumer to buy one more unit of A and gain 100 utils.

4. Factor d does not help to explain the shape of indifference curves. Admittedly this factor arises from factor b which does help to explain it: because if one product was considered undesirable, the curves would not slope down to the right at all.

5. Factor a has no effect on the budget line. The shape and position of the consumer's indifference curves depend entirely on the consumer's preference or tastes.

6. Answer c is correct: this is the price consumption curve. From it, however, the consumer could derive the consumer's individual demand curve for A. But this demand curve would be drawn on a graph with the quantity of A on one axis and the price of A on the other, whereas the indifference map has the quantity of A on one axis and the quantity of B on the other.

7. Statement d is false. The line must pass through the origin, because if the consumer's income fell to zero, the consumer could not buy any A or any B. The line must also slope upwards as it leaves the origin and at low income levels both products must be normal goods. The line will slope backwards or downwards at higher income levels if one product becomes an inferior good.

8. Statement a is false. The income effect concerns the way in which a change in price alters a consumer's decisions by altering the consumer's purchasing power.

9. Statement d does not apply. If the wage rate increases, the earning leisure line pivots about the end on the leisure axis.

10. Statement b is true. Individual labour supply curves may slope backwards at high wages, because people may then respond to wage rises by working a little less and taking more leisure. But the market supply curve for any type of labour is unlikely to slope backwards, because ever higher wages are likely to attract ever increasing numbers of workers to that type of labour.

ECO7

Question 1

Which of the following statements about profit maximization is true?

a) It is something that all firms actually do.

b) It is something which economists believe that all firms actually do.

c) It is what economists believe is the most common aim of firms.

d) It means that no firms ever make losses.

Question 2

Which of these statements about

firms in 2009 is false? (Note: you do not need to learn these facts to understand any later material, but hopefully you will find them interesting.)

a) More than 99% of firms have fewer than 50 employees.

b) Less than 1% of firms have 250 or more employees.

c) Between them, firms with fewer than 50 employees account for under 50% of the total turnover (that is total sales) of all firms.

d) Between them, firms with 250 or more employees account for under 50% of the total turnover of all firms.

Question 3

Which of the following statements about firms is false?

a) All firms must pay corporation tax on their profits.

b) Both sole proprietorships and partnerships have unlimited liability.

c) All companies have limited liability.

d) Internal finance arises when a company finances new assets by using past profits.

Question 4

Which of the following statements about the principal-agent problem is false?

a) It is the risk that a principal who hires or employs an agent to perform a task may find that the task is done poorly.

b) It is least likely to arise in cases where there is asymmetric information.

c) It may be reduced in the case of a company if its directors are given bonuses that relate to the company's profits.

d) It may be reduced in the case of a company if its directors fear their company may be subject to competition for corporate control.

Question 5

Which of the following statements about types of market or industry is false?

a) There are many firms in both perfect competition and monopolistic competition.

b) Costs must be kept as low as possible in both monopolistic competition and monopoly.

c) There may be homogeneous products in both perfect competition and oligopoly.

d) There are barriers to entry in both oligopoly and monopoly.

Question 6

Which of the following statements about barriers to entry is false?

a) They help to make a market contestable.

b) They may include a fear of sunk costs.

c) They may include a lack of know-how.

d) They may include the well-known brand names of existing firms.

Question 7

Which of the following statements about firms in different types of market is false?

a) A perfect competitor has no influence over the price of its product.

b) A monopolistic competitor may engage in non-price competition.

c) An oligopolist may monitor the prices and products of all the other firms in its market.

d) A monopolist must be a large firm.

Question 8

Suppose you give up a job and use some savings to buy a small bus which you drive on a remote rural route. Which of the following costs of your firm is an explicit cost?

a) The depreciation on the bus.

b) The wage of the job you gave up.

c) The fuel you buy for the bus.

d) The interest you earned on your savings before you used them to buy the bus

Question 9

To see whether a firm is making an economic profit, which of he following should be deducted from its revenue?

a) Its explicit costs only.

b) Its explicit costs plus depreciation.

c) Its implicit costs only.

d) Its explicit costs and its implicit costs.

Question 10

Which of the following statements is false?

a) A five-firm concentration ratio assesses firms' sizes with reference to the number of employees, and shows the percentage of total employment in an industry accounted for by the five firms with the most employees.

b) The firms in an industry with a high concentration ratio may, nevertheless, find themselves in a highly competitive environment.

c) Economic profits in a contestable market attract new entrants.

d) In deciding whether to produce inputs or buy them, firms take account of transactions costs.

Correct answer: 1.C 2D 3.A 4.B 5.B 6.A 7.D 8.C 9.D 10.A

EXPLANATION

1. Statement c is true. There are other economic theories which use other assumptions about firms' aims. And the fact that a firm seeks to make as much profit as possible does not mean that it will never make a loss.

2. Statement d is false. Firms with 250 or more employees accounted for 51% of all turnover in 2009.

3. Statement a is false. Only companies have to pay corporation tax on their profits.

4. Statement b is false. The principal-agent problem is most likely to occur in cases where there is asymmetric information of the form where the agent has more information than the principal.

5. Statement b is false. A firm needs to keep costs as low as possible only if there are no barriers to entry, and while this applies to monopolistic competition, it does not also apply to monopoly.

6. Statement a is false. Barriers to entry are factors which reduce the extent to which a market is contestable, because they make it hard for new firms to enter the market and compete with existing firms.

7. Statement d is false. A monopolist may actually be a very small firm. For example, there may be only one bus firm operating on a remote rural route, and this firm may be owned by one person who owns and drives one small bus and has no employees

8. Only c, the fuel for the bus, is an explicit cost, which is a cost where you actually pay out money.

9. Statement d is correct - all costs must be deducted. Note that the procedure in c would indicate the firm's accounting profit.

10. Statement a is false. Concentration ratios refer to firms' outputs, not the number of their employees. If you suggested b, note that firms in an industry with a high concentration ratio may nevertheless face stiff competition from foreign firms.

ECO8

Question 1

Which of the following statements about short-run and long-run costs is false?

a) A firm might quote its short-run costs as the costs of producing different output levels over a period of a month.

b) A firm might quote its long-run costs as the costs of producing different output levels over a period of an hour.

c) A firm might quote both its short-run costs and its long-run costs as the costs of producing different output levels over a period of a week.

d) Short-run costs are always lower than long-run costs.

Question 2

Which of the following statements about a profit-maximizing firm is false?

a) It might set its daily output at a higher level in the short run than in the long run.

b) It might set its daily output at a lower level in the short run than in the long run.

c) If it had a daily output of zero in the short run, it would be sure to have a total cost of zero.

d) If it had a daily output of zero in the long run, it would be sure to have a total cost of zero.

Question 3

Which of the following statements about a fixed input is true?

a) Its price is fixed.

b) The quantity of it that a firm can use in the long run is fixed.

c) The quantity of it that a firm can use in the short run is fixed.

d) The quantity of output that the firm can produce with it is fixed.

Question 4

In the short-run, which of the following always gets smaller as output increases?

a) Average fixed cost.

b) Average variable cost.

c) Short-run average cost.

d) Short-run marginal cost.

Question 5

Which of the following statements about graphs of short-run cost curves is false?

a) The AFC at each output equals the gap between the SAC and AVC curves at that output.

b) The SMC curve lies above the MVC curve.

c) The MVC curve intersects the lowest point on the AVC curve.

d) The SMC curve intersects the lowest point on the SAC curve.

Question 6

Which of the following is the correct definition of the law of diminishing returns?

a) If extra units of one variable input are added to a fixed amount of all other inputs, then sooner or later the marginal returns will get smaller.

b) If extra units of one variable input are added to a fixed amount of all other inputs, then the marginal returns will always get smaller.

c) If extra units of all variable inputs are added to a fixed amount of all fixed inputs, then the marginal returns will always get smaller.

d) If extra units of all variable inputs are added to a fixed amount of all fixed inputs, then sooner or later the marginal returns will get smaller.

Question 7

Which of the following statements about economies of scale is false?

a) A firm may have economies of scale, even if it does not have increasing returns to scale.

b) A firm may initially have economies of scale and later have diseconomies of scale.

c) An industry where economies of scale are exhausted at an output that is low relative to the industry output may have many small firms.

d) Throughout the output range where a firm enjoys economies of scale, its long-run marginal cost curve, LMC, will slope downwards.

Question 8

Which of the following statements about a firm's average cost curves is false?

a) Its SAC curve will stay put if the price of an input that is fixed in the short run increases.

b) Its SAC curve will shift upwards it the price of an input that is variable in the short run increases.

c) Its SAC curve will generally lie above its LAC curve.

d) Its LAC curve will shift upwards if new firms enter its industry and there are external diseconomies of scale.

Question 9

An isoquant relates the quantity of inputs a firm uses to the quantity of output it can produce. In drawing an isoquant, which of the following assumptions about the firm is made?

a) It is a profit-maximizing firm.

b) It is a technically efficient firm.

c) It is an economically efficient firm.

d) It has at least one fixed input.

Question 10

Suppose a profit-maximizing firm faces a rise in the wage rate it pays. Which of the following would definitely stay the same?

a) Its choice of production method.

b) The expansion path on which it ends up.

c) Its isocost lines.

d) Its production function.

Correct answer: 1.D 2.C 3.C 4.A 5.B 6.A 7.D 8.A 9.B 10.

EXPLANATION

1. Statement d is false. Short-run costs are the costs to a firm of producing different output levels up until some future date, before which it will not have time to vary the quantity it uses of every input, and after which it will have had time to vary the quantity it uses of every input. Short-run costs will not be lower than long-run costs, because there is nothing a firm can do in the short run that it cannot do in the long run. To see why statements a, b, and c are true, suppose a firm needs two years to vary the quantity of it uses of every input, so the short-run for this firm lasts two years. This firm might well quote the short-run and long-run costs of producing any output level per hour, per day, per week, or per month over the next two years, and these would be its short-run costs, or after those two years, and these would be its long-run costs.

2. Statement c is false. A firm which reduces its output to zero will ideally want no inputs, but in the short run it will face costs for any inputs whose quantity it cannot vary in the short run and so cannot reduce to zero.

4. a is correct. Average fixed cost is defined as total fixed cost divided by output. In the short run, the quantity of fixed inputs is fixed, so their total cost divided by output decreases as output increases.

5. Statement b is false, because the SMC and MVC curves actually coincide. To see why, remember that MVC shows the change in a firm's total variable cost if its output changes by one unit, while SMC shows the change in its short-run total cost if its output changes by one unit. Now, in the short-run, if a firm changes its output by one unit, it can change the quantity of the variable inputs it uses but not the quantity of the fixed inputs, so the change in its total cost equals the change in the cost of its variable inputs.

6. Statement a is the correct definition of the law. Statement b is false because the returns may initially increase, for example in cases where extra workers can initially exploit the possibilities of teamwork. Statement c is false, partly because the returns may initially increase, and partly because the law of diminishing marginal returns refers to adding extra amounts of a single variable input. Statement d is false because the law of diminishing marginal returns refers to adding extra amounts of a single variable input, but although statement d is a false definition of the law, and so an incorrect answer to this question, it is in fact a true statement.

7. Statement d is false. Throughout the output range where any firm enjoys economies of scale, its long-run average cost curve, LAC, will slope downwards; but its LMC curve will start to slope upwards in this range, even while LAC slopes downwards, if at higher outputs the firm has constant costs or diseconomies of scale.

8. Statement a is false. A rise in the price of a fixed input increases a firm's total costs, even though it cannot alter the quantity of this input that it uses in the short run. As its total cost for each output level increases, the average cost of each output level increases, so its SAC curve shifts upwards.

9. Statement b is correct. Any point on an isoquant shows a combination of two inputs that the firm might use. The quantity of output on that isoquant is the quantity of output that will be produced if the firm produces that output in a technically efficient way.

10. Statement d is correct. The production function is its set of isoquants which shows how much it could produce with each combination of inputs if it was technically efficient, and the relationship between quantities of inputs and output is not affected by input prices.

ECO9

Question 1

Which of the following statements about the market supply curve for a product is false?

a) The market supply curve represents the individual supply curves of all firms which produce the product added together.

b) The market supply curve may shift if there is a change in the behaviour of some firms which produce the product.

c) The market supply curve may shift if there is change in the price of the product.

d) The market supply curve may shift if there is a change in the number of firms which supply the product.

Question 2

Which of the following statements about a firm which is a price-taker is false?

a) The firm will sell its product at the going market price.

b) The demand curve faced by the firm is downward sloping.

c) The demand curve faced by the firm is horizontal even though the market demand curve is downward sloping.

d) The firm would sell nothing if it set a higher price than the market price.

Question 3

On a graph for a perfect competitor, which of the following curves coincide?

a) The demand curve, average revenue curve, and marginal revenue curve.

b) The demand curve and the average revenue curve, but not the marginal revenue curve.

c) The demand curve and marginal revenue curve, but not the average revenue curve.

d) The average revenue curve and the marginal revenue curve, but not the demand curve.

Question 4

A profit-maximizing perfect competitor is setting an output of 100 per day. Which of the following statements is false?

a) Its marginal revenue and marginal cost curves must intersect at an output of 100 per day.

b) If it increased its output to 101, then its revenue would rise by less than its costs.

c) If it decreased its output to 99, then its revenue would fall by more than its costs.

d) It must be earning the highest total revenue that it could earn.

Question 5

A profit-maximizing perfect competitor is setting an output of 100 per day and is making a profit. Which of the following statements is false?

a) Its profit per unit of output will equal the gap between its AR curve and its SAC curve at an output of 100 a day.

b) Its average fixed cost for each unit of output will equal the gap between its SAC and AVC curves at an output of 100 a day.

c) Its total revenue will equal its AR at an output of 100 a day multiplied by 100.

d) Its total cost will equal its AVC at an output of 100 a day multiplied by 100.

Question 6

A perfect competitor finds that the best it can do if it produces any output is to produce a daily output of 100 units which it will sell at the market price or AR of £10, but even then it would then make a loss. Under what circumstances would it definitely make a smaller loss if it shut down and produced nothing?

a) If, at an output of 100 a day, its AVC would be above £10.

b) If, at an output of 100 a day, its AFC would be above £10.

c) If, at an output of 100 a day, its SAC would be above £10.

d) If, at an output of 100 a day, its SMC would be above £10.

Question 7

Which part of a perfect competitor's short-run marginal cost curve, SMC, is also its short-run supply curve, SS?

a) The whole of the SMC curve.

b) The whole of the upward sloping part of the SMC curve

c) The part of the SMC curve above its intersection with the AVC curve.

d) The part of the SMC curve above its intersection with the SAC curve.

Question 8

A profit-maximizing perfect competitor is in short-run equilibrium with an output of 100 per day. Which of the following events would not cause it to alter its output in the short-run?

a) A change in the demand for the product it makes.

b) A change in the number of other firms in its industry.

c) A change in the price of a fixed input.

d) A change in the price of a variable input.

Question 9

A profit-maximizing perfect competitor faces a price of £10 and is in long-run equilibrium with an output of 100 per day. At an output of 100, which of the following will have a value of £10?

a) Only its LMC.

b) Only its LMC and its LAC.

c) Only its LMC and its SMC.

d) Its LMC, LAC, SMC and SAC.

Question 10

When would a perfectly competitive industry have a long-run supply curve that slopes downwards?

a) If the industry has constant costs.

b) If the industry has decreasing costs.

c) If the industry has increasing costs.

d) Never.

ANSWERS: 1.C 2.B 3.A 4.D 5.D 6.A 7.C 8.C 9.D 10.B

EXPLANATION

1. Statement c is false. If the price of the product changes, then individual producers move to different points on their supply curves, but their supply curves stay put and so does the market supply curve.

2. Statement b is false. A price-taker faces a demand curve which is horizontal at the market price; this curve shows that the firm would sell nothing at all if it set a higher price, and would be swamped with orders if it set a lower price.

3. Statement a is correct. The text shows a firm facing a market price of £440, so its demand curve is horizontal at this price, and so also are its AR and MR curves.

4. Statement d is false. The firm could readily raise its revenue by selling more than 100 a day at the current market price. It will not do so because the extra revenue it would get would be less than the extra costs that it would incur, so its profit would fall.

5. Statement d is false. To find its total cost, we must multiply its SAC at an output of 100 a day by 100.

6. Statement a is correct. If its AVC is over £10, then AVC is above AR, so its revenue would not even cover its variable costs; so its loss would be even greater than its fixed costs. If it instead shut down, it would have no revenue and no variable costs, so its loss would only equal its fixed costs.

7. Statement c identifies the SS curve.

8. Event c would not cause the firm to alter its output. The firm will set its output where its MR curve intersects its SMC curve. With event c, neither of these curves shifts: the firm will simply make less profit or start to make a loss. With events a and b, its MR curve shifts. With event d, its SMC curve shifts; in turn its SS shifts and so does the market supply curve, so that the price changes and the firm's MR curve also shifts.

9. Statement d is correct. This firm faces an AR and an MR of £10. As it is in long-run equilibrium, its LMC must equal MR, so LMC equals £10. Also, the firm must be breaking even - otherwise firms would be entering or leaving its industry, so it would not be in long-run equilibrium - so LAC must equal AR which is £10. Moreover, a firm which is in long-run equilibrium must also be in short-run equilibrium, with SMC equal to MR, so SMC also equals £10. And as the firm is breaking even, SAC must also equal AR which is £10.

10. Statement b is correct. If the industry has decreasing costs, then the cost curves of the firms in it shift downwards as the industry expands. This means the lowest point on each firm's LAC shifts down, so the lowest price at which firms can break even falls. And this is the price the industry will have in the long-run. So the industry price gets lower as industry output expands.

ECO 10

Question 1

Which of the following statements about price-takers is false?

a) They include monopolistic competitors and monopolists.

b) They can always raise their prices and still retain some customers.

c) They may set different prices in the short run and in the long run.

d) We do not analyse them using diagrams with supply and demand curves.

Question 2

On a graph for a monopolist or monopolistic competitor, which of the following curves coincide?

a) The demand and average revenue curves only.

b) The demand and marginal revenue curves only.

c) The average revenue and marginal revenue curves only.

d) The demand, average revenue and marginal revenue curves.

Question 3

A profit-maximizing monopolist sets an output of 100 per day and a price of £10. Which of the following statements is true?

a) The firm's SMC and MR curves intersect at an output of 100, and the point on its demand curve at this output is at £10.

b) The firm's SMC and MR curves intersect at an output of 100, and the point on its MR curve at this output is at £10.

c) The firm's SMC and AR curves intersect at an output of 100, and the point on its MR curve at this output is at £10.

d) The firm's SMC and AR curves intersect at an output of 100, and the point on its AR curve at this output is at £10.

this output is at £10.|" type='hidden'>

Question 4

A profit-maximizing monopolist finds that if it remains open, the best output is 50 a week, but at this output it would make a loss. Under what circumstances should it shut down?

a) If AR at this output is below SAC.

b) If AR at this output is below AVC.

c) If MR at this output is below SAC.

d) If MR at this output is below AVC.

Question 5

Which of the following statements about a profit-maximizing monopolist is false?

a) This firm might respond to a fall in demand by reducing its output and reducing its price.

b) This firm might respond to a fall in demand by reducing its output and increasing its price.

c) This firm would respond to a fall in the price of a fixed input by increasing its output and reducing its price.

d) This firm would respond to a fall in the price of a variable input by increasing its output and reducing its price.

Question 6

Suppose a monopolist discriminates between different groups of customer. Which of the following statements is false?

a) The best strategy for the monopolist is to set the highest prices for the types of customer with the least elastic demand.

b) Some customers will face a higher price than they would if the firm did not adopt price discrimination.

c) By having a relatively low price for some groups of customers, the monopolist is sure to make less profit than it would without price discrimination.

d) The monopolist might be able to make more profit by instead discriminating between different individual customers.

Question 7

Suppose a profit-maximizing monopolist faces no threats from possible new entrants to its industry. Which of the following statements about the firm's long-run equilibrium is false?

a) The firm may make a profit indefinitely.

b) The firm's SMC curve and its LMC curve will both intersect its MR curve at its chosen output.

c) The firm's SAC curve will intersect its LAC curve at its chosen output.

d) If the firm suddenly started to worry about the prospect of new entrants, it might decide to reduce its price.

Question 8

Which of the following statements about a monopolistic competitor is false?

a) It faces a downward sloping demand curve.

b) Its demand curve, and those for its competitors, may all be in different positions.

c) It will produce at the output where its MR and SMC curves intersect, provided it would make either a profit or a loss that was less than its total fixed cost.

d) It supply curve is part of its marginal cost curve.

Question 9

Which of the following statements about the long-run equilibrium of a profit-maximizing monopolistic competitor is false?

a) The firm will just break even.

b) The firm's SMC curve and its LMC curve will just touch each other at its chosen output.

c) The firm's SAC curve and its LAC curve will just touch each other at its chosen output.

d) The firms AR curve and its SAC curve will just touch each other at its chosen output.

Question 10

A student alleges that there are four differences between monopolistic competitors and monopolists, as follows. Which of these alleged differences is false?

a) There are many firms in monopolistic competition and only one in monopoly.

b) The monopolist may make a profit in the long run whereas the monopolistic competitor will not.

c) Price discrimination is less common with monopolists than with monopolistic competitors.

d) A monopolist would never react to the imposition of a tax on its product by reducing its price, but a monopolistic competitor might.

ANSWERS: 1. B 2.A 3.A 4.B 5.C 6.C 7.C 8.D 9.B 10. C

1.Statement b is false. A monopolist or monopolistic competitor may well be able to raise its price some way without losing all its customers, but there would no doubt come a time when its price was so high that it would lose them all. At this price, the demand and average revenue curve it faces meets the price axis. Regarding c, note that while the diagrams we use for these firms have demand curves, they do not include supply curves.

2. a is correct. The demand and average revenue curves coincide. The MR curve starts at the same point on the vertical axis, but is otherwise below them.

3. Statement a is true. The intersection of SMC and MR is always best, unless it results in a loss that exceeds the firm's total fixed costs, in which case it is better to shut down and produce nothing. To find the price a price-setter must set, we always look at the point on its demand curve at the output it wishes to sell

4. Statement b is correct. If AR is less than AVC, then each unit of output has a revenue below its variable cost. In turn, total revenue is less than total variable cost, so the firm's loss would equal the gap between its total revenue and its total variable cost plus its total fixed cost. If the firm instead shut down and produced nothing, it would have a zero total revenue, and it would buy no variable inputs and so have a zero total variable cost. So its loss would only equal its total fixed cost.

5. Statement c is false. A change in the price of a fixed input has no effect on a firm's SMC or MR curves and so has no effect on the best output for it to produce. Note that statement b is true; if a monopolist faces a sufficiently curved demand curve, then its best response in the event of a fall in demand might be to combine a reduction in output with an increase in price.

6. Statement c is false. Provided some groups of customers are known to have less elastic demand than others, a profit-maximizing monopolist can always make more profit with discrimination than without.

7. Statement c is false. The SAC and LAC curves will touch at this output, but not intersect. Instead, the SAC curve will be above the LAC curve at both lower outputs and higher outputs.

8. Statement d is false. Like a monopolist, a monopolistic competitor faces a downward-sloping demand curve which can change over time in terms of both its slope and the point where it meets the price axis. As a result, it might at different times find it best to set the same price but have different outputs, and because there is no single best output at each price, we cannot derive a supply curve for it.

9. Statement b is false. Its SMC and LMC curves will not touch each other at its chosen output, although they will both intersect its MR curve at its chosen output

10. Statement c is false. Price discrimination is more associated with monopoly; a monopolist competitor which discriminated against any group might lose many of the customers concerned, perhaps all, to competitors.

ECO11

Question 1

Which of the following statements about industries that are oligopolies is false?

a) Firms in these industries may attempt to cooperate.

b) Firms in these industries are interdependent.

c) The fact that there is more than one firm in an oligopoly means that there are no barriers to entry.

d) An oligopoly with two firms is called a duopoly.

Question 2

Which of the following statements about duopolists in the Cournot model of oligopoly is false?

a) Each firm makes an assumption about how much the other will produce, and sets its own output at the level which will maximize its profit if the other firm behaves as assumed.

b) Each firm has a reaction curve showing its chosen output for different outputs that the other might set.

c) The equilibrium is where the reaction curves intersect.

d) If the duopolists produce homogeneous products, then the equilibrium price will be the same as if the industry had a monopoly.

Question 3

Which of the following statements about duopolists in the Bertrand model of oligopoly is false?

a) The model assumes one firm is a price leader.

b) Each firm makes an assumption about the price that the other will set, and sets its own price at the level which will maximize its profit if the other firm behaves as assumed.

c) Each firm has a reaction curve showings its chosen price for different prices that the other might set.

d) If the duopolists produce homogeneous products, then the equilibrium price will be the same as would arise if the industry was in perfect competition.

Question 4

For which of the following does the kinked-demand curve theory not offer an explanation

a) Why an oligopolist's price is what it is.

b) Why an oligopolist might find that its sales fell greatly if it raised its price.

c) Why an oligopolist might find that its sales increased little if it cut its price.

d) Why an oligopolist might not change its price, even if the prices of variable inputs changed.

Question 5

What is the definition of a Nash equilibrium?

a) A situation where each player adopts their dominant strategy.

b) A situation where each player adopts the best strategy for them, given the strategy adopted by the other.

c) A situation where the combined payoffs of the players is the maximum possible.

d) The outcome that will arise in a game.

Question 6 What is the key feature of a prisoners' dilemma game?

a) A game where neither player has a dominant strategy.

b) A game where each player would have a better payoff if each adopted their non-dominant strategy rather than their dominant strategy.

c) A game where there is no Nash equilibrium.

d) A game which applies only to prisoners.

Question 7 Which of the following circumstances makes it harder for oligopolists to start engaging in cooperation without agreement?

a) If their industry has very few firms.

b) If entry to their industry is particularly hard.

c) If the firms produce strongly differentiated products.

d) If demand and input prices are fairly stable.

Question 8 Which of the following statements about cheating on agreements is false?

a) Each firm may benefit if it alone cheats.

b) If two firms repeat their game a known number of times, then threats of punishment will not deter cheating.

c) If two firms repeat their game an unknown number of times, then threats of punishment may deter cheating.

d) With a tit-for-tat strategy, if one firm cheats in one period, the other firm refuses to cooperate indefinitely.

Question 9 Which of the following statements about price leadership is false?

a) Price leadership is a form of tacit collusion.

b) With dominant price leadership, the leader in an industry is the biggest firm.

c) With barometric price leadership, the leader may change even if the relative size of each firm stays the same.

d) Price leadership breaks down if input prices or demand conditions change.

Question 10 Which of the following outcomes could not occur in a game with two layers who each have two available strategies?

a) A game where only one player has a dominant strategy.

b) A game where neither player has a dominant strategy.

c) A game where one player has two dominant strategies.

d) A game where the combined payoff for the two players is the same with every possible combination of strategies.

Correct answer: 1.C 2.D 3.A 4.A 5.B 6.B 7.C 8.D 9.D 10.

EXPLANATION

1. Statement c is false. The fact that there are few firms in an oligopoly implies that there are barriers to entry.

2. Statement d is false. The price will be below the price that would arise if the industry had a monopoly, but above the price that would arise if it instead had perfect competition.

4. Statement a is correct; the kinked-demand curve theory does not explain why a firm has its current price.

5. Statement b is the definition of a Nash equilibrium.

6. Statement b is the key feature of a prisoners' dilemma.

7. Statement c is correct. The more different are the firms' products, the less likely the firms are to have already a history of already changing their prices and outputs at similar times, and this makes it harder to start cooperating without agreement.

8. Statement d is false. With a tit-for-tat strategy, if one firm cheats in one period, then the other firm will cheat in the next, but the second firm will stop cheating immediately if the first firm stops cheating.

9. Statement d is false. With price leadership, the leader reacts to the changes to maximize its own profit, and the other firms follow its lead.

10. Outcome c could not occur. To see this, suppose a player has two strategies, X and Y. If X is a dominant strategy, then the player is better off adopting strategy X than strategy Y, irrespective of what the opponent does. The player cannot also be better of playing Y than X, no matter what the opponent does, so if X is a dominant strategy, then Y cannot also be one.

ECO12

Question 1

Suppose a country uses its resources in a Pareto-efficient way. Which of the following statements is true?

a) There might be inefficiency in production.

b) There might be inefficiency in consumption.

c) It might be possible to make one person better off without making another person worse off.

d) There might be considerable inequality of income among the country's citizens.

Question 2

Which of the following statements is the correct definition of market failure?

a) It means that a market economy will fail to secure economic efficiency.

b) It means that a market economy will fail to secure Pareto-efficiency.

c) It means that a market economy will fail to secure productive efficiency.

d) It means that a market economy will fail to secure technical efficiency.

Question 3

Suppose a firm is economically efficient. The firm uses two inputs, capital and labour, for which it has the marginal products MPK and MPL and for which it faces the prices PK and PL. Which of the following statements is false?

a) The firm must be producing its output at the lowest possible cost.

b) The firm must be technically efficient.

c) The firm must use its resources in a way which means that its MPK/MPL equals PK/PL.

d) All firms which use the same types of capital and labour must face the same prices for them.

Question 4

Which of the following statements about productive efficiency is true?

X It means that an economy is producing at a point on its production possibility frontier.

Y It will arise if all firms face the same prices for any inputs that are used by more than one firm, and if all firms are economically efficient.

a) Both X and Y b) X only c) Y only d) Neither X nor Y

Question 5

Which of the following statements about consumption inefficiency is true?

X It could arise even if an economy is producing at a point on its production possibility frontier.

Y It could arise even if all consumers face the same prices for each product.

a) Both X and Y b) X only c) Y only d) Neither X nor Y

Question 6

Suppose the firms in a perfectly competitive industry merge to form a monopoly. Which of the following would not occur?

a) A rise in total consumer plus producer surplus. b) A rise in producer surplus.

c) A deadweight loss. d) A fall in consumer surplus.

Question 7

Suppose a profit-making unregulated natural monopoly is brought under the control of regulator who requires it in future to follow a marginal cost pricing rule. Which of the following statements is false?

a) The monopoly would move from making a profit to making a loss.

b) The monopoly would reduce its output.

c) The monopoly would now set its output where its MC curve intersects its AR curve.

d) The monopolist's price would now equal its marginal cost.

Question 8

Suppose the regulator in question 7 now tells the natural monopoly to follow an average cost pricing rule rather than a marginal cost pricing rule. Which of the following statements is true?

a) The monopoly would move from making a loss to making a profit.

b) The monopoly would increase its output.

c) The monopoly would now set its output where its AC curve intersects its AR curve.

d) The monopoly's price would be below its marginal cost.

Question 9

Suppose at various times, the regulator of a natural monopoly switches its rules as shown in the following four statements. Which switch might not result in the firm making a lower loss or more profit?

a) A switch from a marginal cost pricing rule to a two-part tariff.

b) A switch from an average cost pricing rule to rate of return regulation.

c) A switch from rate of return regulation to revenue cap regulation.

d) A switch from revenue cap regulation to price cap regulation.

Question 10

Which of the following statements about competition policy is false?

a) One function of the

's Office of Fair Trading is to try and help consumers.

b) The Competition Commission may consider firms with large shares of a local market as well as firms with large shares of the

market.

c) The European Commission is allowed to control state aid to firms in the EU.

d) Deregulation means ending regulation.

Correct answer: 1.D 2.B 3.D 4.A 5.A 6.A 7.B 8.C 9.C 10.D

EXPLANATION

1. Statement d is true: there could be considerable inequality. Statements a, b and c are false: if the use of resources is Pareto-efficient, then there can be no inefficiency in production or consumption, and it is not possible to make one person better off without making another person worse off.

2. Statement b is the correct definition. Note, though, that this failure could arise because of a failure to secure either production efficiency or consumption efficiency, and a failure to secure production efficiency could arise because of a failure to secure economic efficiency and technical efficiency.

3. Statement d is false. This condition is required for productive efficiency in the economy as a whole, but it is not required for economic efficiency by individual firms. Statement a is true because this is the definition of economic efficiency. Statements b and c are true, because a firm which fails to meet either of these conditions will not be economically efficient.

4. Answer a is correct. Regarding statement X, note that productive efficiency means that an economy cannot produce more of one product without producing less of another. This applies to all points on its production possibility frontier, but not to any points inside the frontier; indeed, at any point inside the frontier, the country would be able to produce more of all products.

5. Answer a is correct. Even if an economy is producing at a point on its production possibility frontier, there might be consumption inefficiency, because it might be possible to move to another point on the frontier and use the changed pattern of products produced to make at least one consumer better off without making another worse off. And even if all consumers face the same prices, there would be consumption inefficiency if some consumers were irrational.

6. Statement a is correct because the total surplus would not increase. Although the producer surplus would increase, because the monopolist would raise the price and secure more profit, the total of consumer plus producer surplus would fall by the deadweight loss from the monopoly.

7. Statement b is false. The monopoly would initially set its output where its MR curve intersects its MC curve. Its price would be found on the point on its AR curve above this intersection, so its price would exceed both MR and MC. With a marginal cost pricing rule, it must set its price so that it equals MC, so its price would fall, and in turn its output would rise.

8. Statement c is true, and as a result the firm will break even rather than make a loss, but it will not make a profit. Its output would fall and its price would be above marginal cost, which is what it would have equalled before the switch in rule.

9. The switch in statement c might not lead to a higher profit: instead, the firm would simply be told to move from setting prices that allow a certain level of profit to setting prices that are linked to rises in the retail prices index, and this might lead to higher or lower profits. In contrast, statement a refers to a move which would reduce the loss of a firm following a marginal cost pricing rule, statement b refers to a move that would take a firm from a position where it had to break even to a position where it was allowed a profit, and statement d refers to a move that allows larger price rises than before.

10. Statement d is false. Deregulation means reducing regulation.

ECO13

Question 1

A drunken passenger on a train sets off the alarm for no good reason, and the train comes to a halt. There is then a long delay before it sets off again. This delights a small boy who enjoys the kerfuffle, but it irritates the other passengers and holds up a freight train behind. Which of the following externalities from consumption has the passenger not created?

a) An external benefit to consumers. b) An external cost to consumers.

c) An external benefit to producers. d) An external cost to producers.

Question 2

Suppose both the production and the consumption of a product generate externalities. At which of the following outputs would output be at the Pareto-efficient level.

a) Where marginal private cost equals marginal private benefit.

b) Where marginal private cost equals marginal social benefit.

c) Where marginal social cost equals marginal private benefit.

d) Where marginal social cost equals marginal social benefit.

Question 3

Suppose a large city has several power stations which all emit CO2. The government wants to reduce CO2 emissions, but knows that it will cost some power stations more than others to reduce their emissions. In order to secure the most reduction from the stations which would find it cheapest to cut back, which of the following policies would be best?

a) A regulation limiting how much CO2 a power station can emit per megawatt of electricity generated.

b) A tax on electricity. c) A tax on emissions of CO2.

d) Giving power stations the property right to emit CO2, and relying on people affected to bribe them to cut back.

Question 4

Return to the city in the last question. Suppose the government wishes to reduce CO2 emissions but does not want to measure them. Which of the following policies would be best?

a) A regulation limiting how much CO2 a power station can emit per megawatt of electricity generated.

b) A tax on electricity.

c) A tax on emissions of CO2.

d) Giving power stations the property right to emit CO2, and relying on people affected to bribe them to cut back.

Question 5

Which of the following statements is true?

a) When Wimbledon's Centre Court has the legal maximum number of 15,000 spectators, watching a match there is non-rival because so many people are watching it.

b) A tennis racket is non-rival, because one person can use it today while another can use it tomorrow.

c) All motorways are excludable, because people could be charged tolls for using them.

d) National Health Service hospitals are non-excludable, because patients are not charged for using them.

Question 6

Which of the following statements is true?

1. A common resource is rival and non-excludable.

2. A public good is non-rival and non-excludable.

a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2

Question 7

Consider a fishing ground. Which of the following statements is false?

a) The fish may be driven to extinction.

b) The efficient yield may be more than the maximum sustainable yield.

c) More boats may fish in it than are needed for the maximum sustainable yield.

d) Fewer boats may fish in it than are needed for the maximum sustainable yield.

Question 8

Which of the following problems may be caused by asymmetric information?

1. It may lead to an adverse selection of used cars being offered for sale.

2. It may lead to an adverse selection of borrowers applying for loans at a bank.

3. It may lead to an adverse selection of drivers applying for comprehensive car insurance.

a) 1 and 2 and 3 b) 1 and 2 only c) 1 and 3 only d) 2 and 3 only

Question 9

Which of the following statements is false?

a) Investing in pension schemes may be regarded as a merit good because many people underestimate the need to save for retirement.

b) Controlled substances may be seen as demerit goods because people may become addicted to them, despite the damage to their health.

c) If healthcare was provided by private suppliers, and people financed it by taking out private insurance, then unhealthy people might end up facing the highest premiums.

d) It is fair for students to meet the full cost of higher education, because they get all the benefits.

Question 10

Which of the following statements is false?

a) The median voter theorem states that competing parties select their policies on any issue to meet the preferences of the median voter on that issue.

b) It is rational for voters to be ignorant.

c) Bureaucrats may push for government spending at levels above the efficient level.

d) Rent-seekers may push for government spending at levels below the efficient level

Correct answer: 1.C 2.D 3.C 4.B 5.C 6.A 7.B 8.A 9.D 10.D

EXPLANATION

1. C is correct: there are no producers who now need to use fewer inputs than before to produce their current output. But some producers, notably those running the freight train, face extra costs because they need to employ more hours of labour to get the train to its destination.

2. D is the correct answer. This is because the efficient level is where the total extra benefit from an extra unit, that is the marginal private benefit plus the marginal external benefit, just equals the total extra cost from the extra unit, that is the marginal private cost plus the marginal external cost.

3. Policy c would be best. Policies a and b would not discriminate between power stations where the cost of reducing pollution would be high and those where it would be low. Policy d would not work here, because it would be hard for individuals to know how much they were affected by each station, and hard to coordinate any actions they took.

4. Policy b is best. All the others would require some measurement of CO2 emissions.

5. C is true: a product is excludable if it is technically possible to exclude people, and this applies to all motorways. It also applies to National Health Service hospitals, so it is false to say they are non-excludable, simply because the government chooses not to charge people. Regarding a, if Wimbledon's Centre court is full, watching the match is rival because no-one else can come and watch it at the same time as the 15,000 people who are there. Regarding b, the tennis racket is rival, because when one person is using it, no one else can use it at the same time.

6. A is correct because both definitions are true.

7. Statement b is false. The efficient yield is always less than the maximum sustainable yield.

8. A is correct: all three types of problem may arise. People whose cars are lemons are most likely to offers them for sale, people who are risky borrowers may try to borrow the most, and people who are careless drivers may want the most cover.

9. Statement d is false, because other people also benefit from living in a society where many people have been educated to a high level.

10. Statement d is false: rent-seekers, like bureaucrats, are likely to push for excessive government spending.

ECO14

Question 1

Which of the following statements about the market demand curve for labour in a competitive labour market is false?

a) The market demand curve represents the individual demand curves of all firms which hire this type of labour added together.

b) The market demand curve may shift if there is a change in the behaviour of some firms which hire this type of labour.

c) The market demand curve may shift if there is change in the wage rate for this type of labour.

d) The market demand curve may shift if there is a change in the number of firms which hire this type of labour.

Question 2

Which of these two assumptions must be made if a firm's demand curve for a given type of labour is to be the same as its MRP curve for that labour?

X No matter what the wage rate is, and no matter how many workers the firm hires, it will always use the same quantity of other inputs.

Y No matter what the wage rate is, other firms will always hire the same number of workers.

a) Both X and Y. b) X only. c) Y only. d) Neither X nor Y.

Question 3

Which of the following statements about a firm's demand for labour is false?

a) Its demand for labour is a derived demand.

b) Its demand for labour depends on the marginal revenue product of the labour concerned.

c) If the prices of other inputs that are used along with the labour increase, the firm would be sure to demand less labour.

d) If labour became more productive, the firm would be sure to demand less labour.

Question 4

Two workers, X and Y, are roofers working on the same wage for the same firm. X earns more economic rent than Y. Which of the following statements is false?

a) X has lower transfer earnings than Y.

b) Because Y is earning some economic rent, the firm which hires Y could reduce the wage and Y would continue to work for that firm.

c) If the wage for roofers generally fell enough to persuade Y to take up another occupation, X might continue to be a roofer.

d) If we add up X's economic rent and transfer earnings, we would get the same figure we would get if we add up Y's economic rent and transfer earnings.

Question 5

Which type of workers is most likely to enjoy substantial economic rent?

a) Those with high wages which compensate them for unpleasant aspects of their jobs.

b) Those with high wages which result from them possessing the innate ability to develop some skill to a very high level

c) Those with low wages which can be paid because their jobs have other very pleasant aspects.

d) Those with low wages which result from no need to have a period of training.

Question 6

Suppose one type of labour is hired by only one employer. Which of the following statements is false?

a) The employer is called a monopsonist.

b) The employer faces an upward sloping supply curve for labour, which is also the average cost of labour, ACL.

c) The employer hires more labour so long as the MP of that labour exceeds the marginal cost of that labour, MCL.

d) The wage paid equals the MP of the labour hired.

Question 7

Which of the following statements about minimum wages is false?

a) In a competitive labour market, a minimum wage creates a kinked supply curve.

b) In a competitive labour market where a minimum wage has already increased the wage, a rise in the minimum wage always reduces the quantity of labour that is demanded.

c) In a monopsonistic labour market, a minimum wage creates a two-part MCL curve.

d) In a monopsonistic labour market where a minimum wage has alreadt increased the wage, a rise in the minimum wage always reduces the quantity of labour that is demanded.

Question 8

Which of the following statements about trade unions is false?

a) They have many roles in addition to negotiating wages.

b) If they negotiate a higher wage in a competitive labour market, they will result in employers wanting to hire less labour.

c) If they negotiate a higher wage with a monopsonistic employer, they will always make the employer want less labour.

d) They may attempt to alter the demand curve for labour.

Question 9

Which of the following statements about efficiency wages is false?

a) Efficiency wages are paid only to discourage shirking.

b) Efficiency wages discourage shirking because they create an excess supply of labour, so a shirking worker who was dismissed might face a lengthy period of unemployment.

c) The no shirking constraint curve shows the number of non-shirkers who could be hired at each wage.

d) The efficiency wage is above the market wage.

Question 10

Which of the following statements about discrimination in labour markets is false?

a) It is always illegal for employers in the

to discriminate on race or gender.

b) Employers are most likely to discriminate against applicants from particular groups if the wage is held above the market wage, for example because of a minimum wage law.

c) It is irrational for a profit-maximizing firm to pay different wages to different genders for the same work, unless they or their clients believe one gender performs better than the other.

d) Females earn less on average than males, partly because within each occupation, males hold a disproportionate share of the better paid jobs, and partly because women tend more often to work in low paid occupations.

Correct answer: 1.C 2.A 3.D 4.B 5.B 6.D 7.D 8.C 9.A 10.A

EXPLANATION

1. Statement c is false. If the wage rate changes, then individual firms move to different points on their demand curves, but their demand curves stay put and so does the market demand curve.

2. Statement a is correct: both assumptions are needed. Unless both these assumptions are made, the firm's MRP curve will actually shift whenever the wage rate changes. For example, if a fall in the wage causes the firm to use more of other inputs, then the MP of labour will increase and this will shift its MRP curve upwards. Also, if a fall in the wage rate causes other firms to hire more labour and so produce more output, then the price of the output will fall, and this will shift the firm's MRP curve downwards.

3. Statement d is false. Suppose new technology arrives which increases the productivity of all workers in the industry. This will increase the MP of labour for each firm. But it will also increase the output of the industry, so the price of the output will fall, and in turn the MR that each firm gets from selling an extra unit of output will fall. If the rise in MP is smaller than the fall in MR, then the firm's MRP from the labour will decrease and in turn its demand for labour will indeed decrease. But this is not the only possible outcome, because if the rise in MP is greater than the fall in MR, then the firm's MRP from labour will increase, and in turn its demand for labour will actually increase.

4. Statement b is false. If the firm reduced Y's wage, Y would no doubt move to another firm.

5. Statement b is correct. It might need a big drop in the wage before these people gave up that occupation and moved to one where their innate ability was not needed. In contrast, workers in parts a, c and d might all switch occupation even if there was only a small fall in the wage.

6. Statement d is false. Although the monopsonist hires labour at the point where its MRP curve intersects its MCL curve, the wage paid is found from the point on ACL below this intersection.

7. Statement d is false. If the minimum wage is raised up to the point where the firm's MRP curve intersects its initial ACL curve, the firm will actually hire more workers as well as paying a higher wage.

8. Statement c is false. If a union can raise the wage up to the point where the firm's MRP curve intersects its initial ACL curve, the firm will actually hire more workers as well as paying a higher wage.

9. Statement a is false. For employers may also pay efficiency wages to secure more applicants for vacancies and so have a wider selection of people from whom they can choose. Also in some countries, employers pay efficiency wages to enable workers to afford a nutritionally adequate diet.

10. Statement a is false. Discrimination is occasionally legal. For example, race and gender discrimination is legal for acting and modelling. Race discrimination is legal for serving food or drink, if necessary to authenticity. And gender discrimination is legal for jobs where an employee might otherwise have a close or physical contact with someone of the opposite sex.

ECO15

Question 1

Which of the following decisions would a carpet maker not analyse using marginal product analysis?

a) Whether to buy a new loom during the next three months.

b) How much labour to hire over the next three months.

c) How much wool to buy over the next three months.

d) Whether to hire an extra warehouse for the next three months.

Question 2

Which of the following statements about people who rent out land for animals to graze on is true?

a) The whole income of these people is economic rent because land as a whole is in perfectly inelastic supply.

b) The whole income of these people is transfer earnings, because if the rent was any lower they would not bother to rent out their land.

c) The income of these people is divided between economic rent and transfer earnings, and some people have higher transfer earnings and lower economic rent than others.

d) The income of these people is divided between economic rent and transfer earnings, and the proportion of this income which is economic rent is the same for all of them.

Question 3

Suppose the discount rate is 10% per year. Which of the following statements is true?

a) The future value of £1,000 in three years' time is £1,300.

b) The present value of £1,300 in three years' time is £1,000.

c) The future value of £1,331 in three years' time is £1,000.

d) The present value of £1,331 in three years' time is £1,000.

Question 4

Suppose a firm is considering the purchase of a machine. The machine costs £10,000 and has an expected stream of future returns which, at the current risk-free interest rate, have a present value of £10,500. Which of the following statements is false?

a) The future returns are the extra revenue the firm will get from owning the machine.

b) The net present value of the machine is £500.

c) The firm might not buy the machine now simply because of the risk involved.

d) If the firm does not buy the machine now, but redoes the calculations in three months, it might find the net present value has increased.

Question 5

Which of the following statements about investment appraisal is false?

a) If prices rise at a rate faster than the nominal interest rate, then real interest is negative.

b) If the risk-free interest rate rises, the projects whose net present values are most affected are those with short lives.

c) The internal rate of return on a project is the discount rate which would make its net present value zero.

d) The internal rate of return on a project is a percentage measure of its expected returns.

Question 6

Suppose someone owns a mineral resource and suppose the interest rate is currently 5%. Under which of the following circumstances would the owner definitely prefer to extract it now rather than in one year's time?

a) If the expected price next year exceeds the extraction cost by any amount.

b) If the expected price next year exceeds the extraction cost but by less than 5%.

c) If the expected price next year exceeds the extraction cost but by exactly 5%.

d) If the expected price next year exceeds the extraction cost but by more than 5%.

Question 7

Suppose the interest rate is 5%. Which of the following statements would explain why the owners of a mineral resource will extract some this year but not all?

a) They expect the price next year, minus the extraction cost, to equal the figure for this year.

b) They expect the price next year, minus the extraction cost, to exceed the figure for this year by less than 5%.

c) They expect the price next year, minus the extraction cost, to exceed the figure for this year by exactly 5%.

d) They expect the price next year, minus the extraction cost, to exceed the figure for this year by more than 5%.

Question 8

Which of the following statements about the future price of a mineral resource is false?

a) The owners expect the price minus extraction costs to rise each year at the same rate as the rate of interest.

b) The owners expect the price to rise over time until it reaches the choke price.

c) The owners expect the choke price to be reached when the mineral resource is exhausted.

d) In practice, the price may not rise steadily over time, but it will always rise.

Question 9

Which of the following should someone not allow for when assessing the costs of continuing full-time education beyond the school leaving age?

a) The income foregone while undertaking the education.

b) The value of any extra enjoyment obtained from education beyond that which would be obtained from working.

c) The fact that undertaking further education signals to employers that they are hard-working ad ambitious.

d) Any scholarships or grants.

Question 10

What does

evidence suggest about the returns from taking an economics degree?

a) It raises earnings more than most degrees.

b) It raises earnings by about the average amount for all degrees.

c) It raises earnings by less than most degrees.

d) It has no significant effect on earnings.

ANSWERS: 1. A 2.C 3.D 4.A 5.B 6.B 7.C 8.D 9.C 10.A

EXPLANATION

1.Statement a is correct because the firm would not use marginal product analysis to decide whether to buy a new loom. The loom could have a life of many years, and the analysis would need to look ahead over that lengthy period.

2. the income of the land owners is divided between economic rent and transfer earnings. People who would not let out their land for grazing unless the rent was nearly as high as it is have high transfer earnings and low economic rent. People who would let out their land for grazing for a rent that is well below the market rent have high economic rent and low transfer earnings.

3. The present value of £1,331 in three years' time is £1331/(1+0.10)3 which is £1331/(1.1)3 or £1331/1.331, that is £1,000.

4. The returns are the extra revenue minus any extra expenditure on inputs such as labour and intermediate products. With statement d, note that the firm might find the net present value has risen if it redoes the calculations in three months: for example, the cost of the machine may fall, or its expected returns may increase because of an increase in the demand for the product which it will make, or the risk-free interest may decrease, and so raise the present values of the same returns.

5. The net present values of projects with long lives are most sensitive to changes in the discount rate. This is because the present value of distant returns may be extremely low if the discount rate is high.

6.To see this, suppose the price minus the extraction costs is currently £1,000 a tonne. Then, if the mineral is extracted now, the revenue minus the extraction cost of £1,000 could be lent at 5% to be worth £1,050 in one year's time. Suppose instead the mineral is extracted next year, and the price minus the extraction cost is less than 5% above the present value of £1,000; say it is 3% higher at £1,030. Then the owner would get only £1,030 next year by extracting the mineral next year. It would be better to extract it now, with the possibility of having £1,050 next year.

7. because in this situation the owners will be indifferent between leaving the mineral in the ground now and extracting it. If a or b applied, and the expected price minus the extraction was less than 5% above this year's figure, it would be best to extract all the mineral now. If d applied, and the expected price minus the extraction was more than 5% above this year's figure, it would be best to extract no mineral now.

8. At the start of each year, the owners expect the price to rise. But it may fall for many reasons. For example, new deposits may be found, the interest rate may rise, and demand for the mineral may fall.

9.c gives the factor which should not be allowed. Signalling to employers is a benefit of education, not part of its cost.

ECO16

Question 1

When statisticians discuss the distribution of income, which of the following figures do they look at?

a) The incomes of different individuals.

b) The incomes of different households.

c) The incomes each household would need to maintain its present living standard if it comprised just one adult.

d) The incomes each household would need to maintain its present living standard if it comprised just a married or cohabiting couple.

Question 2

Which of the following definitions of a household's income is false?

a) Its original income is its income from earnings, investments and pensions other than State Pensions.

b) Its gross income adds in transfers from the government.

c) Its disposable income deducts taxes paid directly to the government.

d) Its post-tax income deducts other taxes and adds in the value of government services received free of charge.

Question 3

Which of the following statements about income inequality is false?

a) Gross incomes are less unequal than original incomes.

b) Final incomes are less unequal than disposable incomes.

c) A curve which plots a cumulative percentage of income against a cumulative percentage of households is called a Lorenz curve.

d) If we compare the distribution of two incomes, the one with the lower Gini coefficient is the more unequal.

Question 4

Which of the following might help to make the distribution of original incomes more unequal?

a) A rise in the State Pension.

b) A ceiling on the number of hours that people were allowed to work each week.

c) A policy to encourage more low income households to buy shares in companies.

d) An effective policy to reduce bankers' bonuses.

Question 5

Which of the following might help to make original incomes less unequal?

a) People living longer.

b) A rise in the demand for unskilled labour.

c) Lower occupational pensions in many jobs.

d) A rise in unemployment.

Question 6

Many rich people support government policies for redistribution. Which of the following would not help to explain why they do so?

a) Rich people may be altruistic.

b) Rich people may fear that one day in the future they may be poor themselves.

c) Rich people may feel redistribution should be left to voluntary donations

d) Rich people regard redistribution as a public good.

Question 7

Which of the following statements is false?

a) Utilitarians believe the government should aim to maximize total utility.

b) Followers of Rawls believe the government should aim to make the person with the lowest original income as well off as possible.

c) With each tax, the higher the rate, the larger the revenue.

d) A government which pursued complete equality of final incomes might leave everyone on very low incomes.

Question 8

Which of the following statements about approaches to poverty is false?

a) On every approach, a doubling of the incomes of all households would reduce the number of people in poverty.

b) A problem with the absolute approach to poverty is deciding what items to put on the list.

c) A problem with the relative approach to poverty is deciding what percentage of average incomes to use.

d) A problem with hybrid approaches to poverty is deciding exactly what to include.

Question 9

Suppose a

newspaper headline reads 'government figures show that more children are in poverty than was the case ten years ago'. What can we be sure of from this?

a) More children are in households which find it harder to survive than was the case ten years ago.

b) Many children are in households whose incomes are lower than they were ten years ago.

c) The incomes of poorer families have risen less over the last ten years than the incomes of average families.

d) The very poorest households are poorer than they were ten years ago.

Question 10

Which of the following does not cause problems for the government in its efforts to reduce poverty?

a) The fact that means-tested transfers may create an unemployment trap.

b) The fact that housing is covered by separate benefits.

c) The fact that some people may become benefit-reliant.

d) The fact that some people do not claim benefits to which they are entitled.

Correct answer: 1.D 2.D 3.D 4.A 5. B 6.C 7.C 8.A 9.C 10.B

EXPLANATION

2.Statement d is false. The household's post-tax income does deduct other taxes, but it does not include the value of government services; the income which includes the value of these is the household's final income.

3.The more unequal is a distribution, the higher is the Gini coefficient.

4.People might respond to this policy by saving less for retirement, and so have lower original incomes in retirement.

5.Statement b is correct. This would raise the wages of unskilled people, and as their wags are relatively low, this would make original incomes less unequal.

7.Statement c is false. It is likely that each tax has a Laffer curve, showing that as the rate approaches 100%, its yield approaches zero because fewer and fewer people would both to undertake whatever was being taxed.

8. On the relative approach, a doubling of everyone's income would not help the relative position of poor households at all, so this approach would say that the number of households in poverty is the same as before.

figures define poverty as having an income under 60% of the median household, so the number of children in poverty will rise if the incomes of poor families rise less than the incomes of average families. But even if the number of children in poverty rises, the incomes of their households may actually have increased.

10.Statement b does not make things more difficult for the government. In fact, housing is treated separately so that more help can be concentrated on people in areas where housing is relatively expensive, to try and raise their living standards to the same level as people in areas where housing is relatively cheap.

ECO18

Question 1

Suppose that, over time, the share of manufacturing industry in a country's GDP falls. Which of the following statements is true?

1. The quantity of the goods and services produced by manufacturing industry must be falling.

2. The value of the goods and services produced by manufacturing industry must be falling.

a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2

Question 2

Which of the following statements is true?

1. Total welfare is affected by many factors including economic welfare.

2. Economic welfare refers to living standards.

a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2

Question 3

Suppose that over the course of a decade an economy had a stable population and real GNDI increased by 20%. However, an economist estimates that economic welfare increased by less than 20%. Which of the following would not be a factor that could help to explain this?

a) Household production (excluding owner-occupied property) increased by less than 20%.

b) Output by the underground economy increased by less than 20%.

c) Leisure time increased by less than 20%.

d) Prices increased by more than 20%.

Correct answer: 1. D 2.A 3.D

EXPLANATION

1.Statement d is correct. If the share of manufacturing industry in GDP falls, all we can deduce is that its value added accounts for a smaller proportion of total value added. It is quite possible that the quantity of goods and services produced by manufacturing industry has increased, and quite possible that the value added by manufacturing industry has increased.

2.Statement a is correct as both of the statements in the question are true.

3. Statement d is correct, because rising prices would not explain why living standards increased by less than the increase in real GNDI. It is true that prices increased, but this increase has already been allowed for, because it is figures for real GNDI, not nominal GNDI, that increased by 20%

ECO19

Question 1

Which of the following must always be equal?

a) Actual saving and actual investment in a two-sector economy

b) Planned saving and planned investment in a two-sector economy

c) Actual saving and actual investment in a four-sector economy

d) Planned saving and planned investment in a four-sector economy

Question 2

Which of the following statements is correct in the case of a four-sector economy?

a) G equals all planned government spending.

b) I equals planned spending on new capital goods.

c) T equals all planned receipts from taxes.

d) C is less than disposable income minus planned saving.

Question 3

Suppose that one month, injections in a four-sector economy are greater than withdrawals. Which of the following statements is false?

a) Planned spending will be greater than output.

b) Actual investment will be less than planned investment.

c) Planned investment must exceed planned saving.

d) Output is likely to be increased.

Question 4

Suppose we draw the consumption function for a two-sector economy, with disposable income, YDIS, on the horizontal axis and planned consumption, C, on the vertical axis. Suppose we also add a 45° line through the origin, and find that the consumption function intersects this at a YDIS equal to £1,000 billion a year. Which of the following statements is false?

a) The slope of the consumption function at any level of YDIS shows the value of MPCDIS at that level of YDIS.

b) If YDIS in the economy was £1,000 billion a year, planned consumer spending would also equal £1,000 billion a year.

c) If YDIS in the economy was less than £1,000 billion a year, planned saving would be negative.

d) The consumption function must be a straight line.

Question 5

Which of the following factors might cause a country's consumption function to shift upwards?

a) A fall in share prices.

b) A fall in interest rates.

c) Expectations that the economy will soon go into a recession.

d) Households deciding to be thriftier.

Question 6

Consider a two-sector economy. Output has settled in equilibrium at the level where the injections line, J, intersects the withdrawals line, W. Which of the following statements is false?

a) An increase in autonomous consumption will shift W downwards.

b) An increase in induced consumption would make the W line flatter.

c) An increase in injections will shift the J line upwards.

d) If either line shifts upwards, the equilibrium level of output will increase.

Question 7

In a four-sector economy, which of the following is assumed always to increase when GDP increases?

a) I b) G c) M d) X

Question 8

In a four-sector economy, which of the following would not cause a change in MPEy?

a) An increase in exports.

b) An increase in the fraction of their income which people spend on imports.

c) An increase in tax rates.

d) An increase in thriftiness by households.

Question 9

Suppose the government increases the tax on tobacco products, and suppose the demand for these products is inelastic. How should this be analyzed on the multiplier model? Which of the following statements is true?

a) The planned expenditure line will shift upwards, because people will pay more in the shops on tobacco products.

b) The planned expenditure line will shift downwards, because people will buy fewer cigarettes, so their spending on tobacco after allowing for the tax will be lower.

c) The withdrawals line will end up shifting downwards, because the rise in the tax will cause people to save less.

d) The injections line will shift downwards, because this includes all government spending net of taxes.

Question 10

Which of the following statements about multipliers is false?

a) The multiplier in a four-sector economy equals 1/(1-MPEY).

b) The multiplier in a four sector economy equals 1/(MPSY).

c) The size of the multiplier increases if the W line becomes flatter.

d) The balanced budget multiplier means that if the government increases its taxes and purchases by the same amount, output might still increase.

Correct answer: 1.A. 2.D 3.C 4.D 5.B 6.D 7.C 8.A 9.B 10.B

EXPLANATION

1.Statement a is correct. Statement b is incorrect because planned saving and planned investment may not equal actual saving and actual investment. Statements c and d are incorrect because there are other components of injections and withdrawals in a four-sector economy.

2.Statement d is correct: C is regarded as consumer spending at factor cost, so to find it we must also deduct taxes on expenditure net of subsidies. Note that a is false because G only covers planned government purchases: it excludes transfers and subsidies; b is false because I also includes planned increases in stocks or inventories; and c is false because T concerns taxes net of transfers and subsidies.

3.Statement c is false. Even if I is less than S, injections, that is I+G+X, could exceed withdrawals, that is S+T+M, provided G+X was sufficiently higher than T+M.

4.Statement d is false. The consumption function need not be straight; typically, economists expect it to flatten slightly towards the right, because they expect the marginal propensity to consume to get smaller when incomes increase.

5.Statement b is correct. If interest rates fall, households might decide saving was less rewarding and so save less and consume more. Households might also be more willing to borrow to finance some of their purchases.

6. Statement d is false. It is true that if J shifts upwards, then the equilibrium output will increase; but if W shifts upwards, the equilibrium output will decrease.

7.Statement c is correct. The model assumes imports increase when output and incomes increase.

8.Statement a is correct: a change in exports would not alter induced expenditure, but would simply shift the planned spending line and the injections line upwards parallel to the original lines.

9.Statement b is correct. Planned expenditure, E, equals C+I+G+XM where C is consumers' expenditure at factor cost, that is after deducting taxes on expenditure. So while people may pay more in the shops, which is a rise in spending at market prices, they will actually buy fewer cigarettes and so spend less after allowing for the tax.

10.Statement b is false. This formula applies only in a two-sector economy.

ECO20

Question 1

Which of the following statements is false?

a) People can undertake exchange without using money.

b) The only function of money is to be a medium of exchange.

c) One problem with coins that included valuable metals was that rulers might replace them with debased coins and so cause inflation.

d) From 1719-1931 it was generally possible to exchange Bank of England notes for gold at a stable rate.

Question 2

Which of the following would cause a bank to lose reserves?

a) One of the bank’s depositors makes an internet payment to another of its depositors.

b) One of the bank's depositors pays out a cheque to another of its depositors.

c) One of the bank's depositors pays out a cheque to a depositor of another bank.

d) The bank raises the interest rate it pays on deposits.

Question 3

Which of the following statements about money creation by banks is false?

a) A bank creates money when it writes a higher number against the deposit of a depositor who wants an advance.

b) A bank creates money when it buys securities.

c) Unless the authorities intervened, there is no limit to how much money banks would be willing to create.

d) The increase in deposits that can occur when banks get £1 million extra reserves is greater than £1 million.

Question 4

Suppose banks desire a ratio of reserves to deposits, r, of 4%. And suppose the public desire a ratio of cash to deposits, d, of 2%. Which of the following is correct?

1. The bank deposit multiplier is 25.

2. The money multiplier is 17.

a) Both 1 and 2. b) 1 only. c) 2 only. d) Neither 1 nor 2.

Question 5

Which of the following statements about the liabilities of

commercial banks is false?

a) Sight deposits can be withdrawn on demand without penalty.

b) No deposits can be bought and sold.

c) With repos, people who pay money to a bank are given securities rather than a normal type of deposit.

d) Capital includes money put up by the banks' shareholders and money from past profits.

Question 6

Which of the following statements about the assets of commercial banks in the UK bank is false?

a) A bank's reserves are all held as cash in its branches.

b) Market loans include between one bank and another

c) Securities include bills, bonds, and equities.

d) Over half the assets are denominated in currencies other than sterling.

Question 7

Which of the following statements is false?

a) Financial intermediaries offer risk transformation and maturity transformation.

b) The Bank of England may act as a lender of last resort.

c) A bank can increase its capital adequacy ratio by switching some funds from advances to buying more company shares.

d) A bank can increase its capital adequacy ratio by selling some company shares and lending the proceeds as mortgages.

Question 8

Which of the following would not shift the money demand curve to the right?

a) A move which means that all workers who were in the past paid weekly will in future be paid monthly.

b) A rise in incomes. c) A rise in wealth. d) A fall in the interest rate.

Question 9

Which of the following methods of intervention in the money market has not been used in the

since the 1980s?

a) Monetary base control.

b) Interest rate control.

c) A change in the regulations about banks' reserve ratios.

d) Monetary base control.

Question 10

Suppose the Bank of England reduces Bank Rate. Which of the following statements is false?

a) The Bank will be able to ensure that the money market ends up with whatever interest rate and money stock it wishes.

b) The money supply curve will shift right.

c) The interest rate on market loans within the

will decrease.

d) Banks will be willing to lend to riskier customers than previously.

Question 11

Which of the following statements about the IS curve is false?

a) It shows that the lower is the interest rate, the higher is the equilibrium level of output.

b) The more responsive planned spending is to changes in the interest rate, the more interest elastic is the IS curve.

c) A fall in the interest rate will shift IS to the right.

d) An increase in exports will shift IS to the right.

Question 12

Which of the following statements about the LM curve is false?

a) An increase in the demand for money will shift LM right.

b) An increase in the supply of money curve will shift LM right.

c) It shows that the higher is the level of output, the higher is the equilibrium rate of interest.

d) The more interest elastic is the demand for money, the more interest elastic is the LM curve.

Question 13

Suppose that at present an economy is at some distance from the equilibrium position where the IS and LM curves intersect, and is on neither the IS curve nor the LM curve. Which of the following most accurately states what will happen?

a) The economy will move rapidly to the equilibrium.

b) The economy will move rapidly to the point on the LM curve that applies to the current level of output, and then move slowly along the LM curve to the equilibrium.

c) The economy will move rapidly to the point on the IS curve that applies to the current rate of interest, and then move slowly along the IS curve to the equilibrium.

d) The economy will move slowly to the new equilibrium, and will not be on either the IS curve or the LM curve until it reaches this equilibrium.

Question 14

Suppose there is an initial increase in planned investment of £100 billion a year, and suppose the multiplier is four. Which of the following statements is false?

a) By ignoring the fact that a rise in output will lead to higher interest rates, the multiplier model will predict that the planned expenditure line will end up £100 billion a year higher than it started.

b) By ignoring the fact that a rise in output will lead to higher interest rates, the multiplier model will predict a rise in output of £400 billion a year.

c) By allowing for the fact that a rise in output will lead to higher interest rates, the IS-LM model will predict a rise in output of less than £400 billion a year.

d) The IS curve will shift to the right by less than £400 billion a year.

Question 15

Which of the following statements is false?

a) If spending is very responsive to changes in interest rates, and the demand for money is interest inelastic, then monetary policy tends to be more powerful than fiscal policy.

b) If spending is not very responsive to changes in interest rates, and the demand for money is interest elastic, then fiscal policy tends to be more powerful than monetary policy.

c) It might sometimes make sense for a government to combine an expansionary monetary policy with an expansionary fiscal policy.

d) It would never make sense for a government to combine an expansionary monetary policy with a contractionary fiscal policy.

Correct answer: 1.B 2.C 3.C 4.A 5.B 6.A 7.C 8.D 9.A 10.C 11.A 12.A 13.C 14.D

EXPLANATION

4. Note that r is 4% or 4/100 which is 0.04, while d is 2 or 2/100 which is 0.02. The bank deposit multiplier is 1/r which is 1/0.04 or 25. The money multiplier is (1+d)/(r+d) which is 1.02/0.06 or 17.

5.Statement b is false. Certificates of Deposit (CDs) can be bought and sold.

6.As well as cash in its branches, a bank holds some reserves in its deposit at the Bank of England.

7.Statement c is false. In capital adequacy calculations, non-government securities and advances have the same weight, so there would be no change in the total of the bank's risk-weighted assets.

8.Statement d is correct. The effect on the quantity of money demanded of a change in the interest rate is shown by a move along the money demand curve, not by a shift of the curve.

10.Statement a is false. By changing Bank Rate, the Bank of England can shift the money supply curve, and then the money market will end up at a different point on the money demand curve. If the Bank wants a certain interest rate, say 4%, then it must shift the money supply curve so that it intersects the money demand curve at 4%, and then the Bank must accept whatever money stock will be demanded at 4%. If, instead, the Bank wants a certain money stock, say £2,000 billion, then it must shift the money supply curve until it intersects the money demand curve at a money stock of £2,000 billion, and then the Bank must accept the interest rate that is needed to ensure that people demand to hold £2,000 billion worth of money. In short, it can control the interest rate or the money stock, but not both simultaneously.

11.Statement c is false. A fall in the interest rate takes the economy to a lower point on the IS curve but does not shift it

12.Statement a is false. An increase in the demand for money means that at each level of output, interest rates will be higher, and this results in a leftwards shift in LM.

13.Statement b is correct. If the economy is off the LM curve, then the money market is not in equilibrium at the current output; but in this case, the interest rate will change quickly to bring the money market to equilibrium, so the economy will quickly go to the point on the LM curve at the current output. In contrast, if the economy is off the IS curve, then output is not in equilibrium at the current interest rate; but in this case, output can change only slowly, so it will take time for the economy to reach the IS curve.

14.Statement d is false. The IS curve will shift right by £400 billion a year.

15.Statement d is false. Suppose the government wants to promote investment, so it wants a lower rate of interest. But suppose it also does not want the equilibrium level of output to change. Then it might well pursue this policy combination, shifting LM to the right and IS to the left, so that they intersect at the same output but at a lower interest rate.

ECO21

Question 1. Which of the following is a shortcoming of the simple multiplier model that the AS-AD model overcomes?

1. The multiplier model ignores the fact that a rise in planned spending which causes a rise in output will also lead to a rise in incomes and the demand for money, and so in turn lead to a rise in the interest rate.

2. The multiplier model ignores the fact that a rise in injections leads to a rise in prices which will cause people to reduce their spending plans.

a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2

Question 2. Which of the following arguments for a sloping AD curve is unconvincing?

a) A rise in the price level in a country will tend to lead to a fall in the real value of exports and a rise in the real value of imports.

b) A rise in the price level in a country will lead to lower real spending because it will lead to lower real wealth.

c) A rise in the price level in a country will reduce the real value of firms' profits, causing them to reduce planned investment.

d) A rise in the price level in a country will lead to lower real spending because it will lead to a higher interest rate.

Question 3

Which of the following will not cause a country's AD curve to shift left?

a) A reduction in government transfers. b) An increase in VAT

c) A reduction in exports. d) An increase in the price level.

Question 4

Which of the following would lead to an upwards movement along a country's aggregate demand for labour curve, ADL?

a) Prices and nominal wages both increase by 10%.

b) Prices rise by 10% while nominal wages increase by 5%.

c) Prices rise by 5% while nominal wages increase by 10%.

d) The real wage falls.

Question 5

Suppose the real wage in a country is at the equilibrium level, but there is some natural unemployment. Which of the following does not help to explain this natural unemployment?

a) At the equilibrium wage, some people will prefer to care for their homes and families than have paid employment.

b) At the equilibrium wage, some people who recently returned to the labour force after caring for young children will be unemployed while they wait for what they feel is the right job.

c) At the equilibrium wage, some people may be unemployed because the demand for their skills has fallen and there are no suitable jobs available.

d) At the equilibrium wage, some new graduates will be unemployed while they wait for what they feel is the right job.

Question 6. Suppose that a country is in short-run equilibrium at the point where its aggregate demand curve intersects its aggregate supply curve. Then aggregate demand falls. Which of the following does not help to explain why output may then move to a lower short-run equilibrium level?

a) Nominal wages may be sticky downwards.

b) Prices may be sticky upwards.

c) Individual producers may mistakenly believe that they alone have faced a fall in demand, and so may demand less labour.

d) Individual workers may mistakenly believe that while nominal wages have fallen, the price level has not.

Question 7

Which of the following statements about a country's long-run aggregate supply curve, LAS, is true?

a) It is vertical throughout its length at the output which would be produced if there were no unemployment.

b) It is vertical throughout its length at the output which would be produced if there were only natural unemployment.

c) It slopes forwards at low price levels and is then vertical.

d) It slopes forwards at all price levels.

Question 8

Suppose an economy is in short-run and long-run equilibrium where its AD, SAS, and LAS curves intersect. Then there is a demand shock and AD shifts to the right. Which of the following statements is false?

a) In the short run unemployment will exceed the natural level.

b) In the long run unemployment will equal the natural level.

c) In the short run the price level will increase.

d) In the long run, the price level will equal the original level.

Question 9

Suppose an economy is in short-run and long-run equilibrium where its AD, SAS and LAS curves intersect. Then there is an improvement in technology which leads to a higher demand for labour, so increasing the level of natural employment and the level of potential output. Which of the following statements about the new long-run equilibrium position is false?

a) The new LAS curve will be to the right of the original LAS.

b) The price level will be lower than it started.

c) The real wage will be higher than it started.

d) The new SAS curve will be to the left of the original SAS.

Question 10

Suppose an economy is in short-run and long-run equilibrium where its AD, SAS and LAS curves intersect. Then there is an increase in the price of imported inputs. Which of the following statements about the new long-run equilibrium position is false?

a) The new AD curve will be to the left of the original AD.

b) The new SAS curve will be to the left of the original SAS.

c) The new LAS curve will be to the left of the original LAS.

d) The new aggregate demand for labour curve will be to the left of the original curve.

Correct answer:

1.A 2.C 3.D 4.C 5.A 6.B 7.B 8.D 9.D 10.A

EXPLANATION

1.Note that the rise in interest rates will reduce planned consumer and investment spending. The rise in prices will have various effects on planned spending that are explored in section 21.2

2. Statement c is correct because it is unconvincing: it is not clear that a rise in the price level will reduce real profits: they might even increase if, for example, prices rose more quickly than nominal wages.

3. Statement d is correct because an increase in the price level will not lead to a shift in the AD curve. Instead, it will simply shift the country to a higher point on its AD curve.

4. Only in this case is there an increase in the real wage, which is given by an index of nominal wages divided by the GDP deflator.

5. because this does not help to explain natural unemployment. Natural unemployment refers to people who are in the labour force and yet who are unemployed, but carers are not considered to be part of the labour force.

6. because it does not help explain why output may fall. If demand decreases, there is no pressure for prices to rise, and therefore any upward stickiness in prices would be irrelevant. (Of course, if prices were sticky downwards, then firms might respond to a fall in demand solely by producing less, causing output to fall.)

7. In the long run, the labour market settles in equilibrium with the only unemployment being natural unemployment, so output is at the level which the remaining people in the labour force, that is those in natural unemployment, will produce, and LAS is vertical at this output.

8. In the short run, the shift in AD takes the economy up its SAS curve to a point where the price level exceeds the original level. The increase in prices leads to a lower real wage, and this will shift the short-run aggregate supply curve to the left, raising the price level still further. The price level ends up where the new AD curve intersects the LAS curve.

9. LAS shifts right to intersect AD at a lower price level than the initial level. In the long-run, SAS must shift right to intersect AD at the same lower price level. It is true that the real wage will increase, and it may seem that this will shift SAS to the left; but remember that new technology means firms want to hire more workers, and it is their increased demand for labour that pushes up the real wage. In short, they want to hire more workers and supply more output, despite the higher real wage.

10. Aggregate demand will not be affected. But the higher prices of imported inputs will make production less profitable, so that the demand for labour falls, in turn reducing the level of natural employment and the level of potential output so that LAS shifts left. And in the long run SAS will be to the left of the original intersecting AD at the same price level as the new LAS intersects it.

ECO22

Question 1

Which of the following groups of people are not regarded as economically inactive?

a) People who want a job but do not have one.

b) Family or home carers.

c) Students with no employment.

d) Discouraged workers.

Question 2

Which of the following statements is false as far as the

is concerned?

a) The unemployment rate for people aged 50+ is lower than the rate for people aged 16-24.

b) The unemployment rate tends to vary across ethnic groups.

c) The unemployment rate for males is lower than the rate for females.

d) The unemployment rate for people in the East of England is lower than the rate for people in the North East of England.

Question 3

If all the following events occurred in 2013, which one would put upward pressure on the rate of natural unemployment in the

in 2013?

a) A cut in the benefits available to unemployed people.

b) An increase in the school leaving age to 17.

c) An increased in consumer demand for meals out.

d) Much tighter regulations for the

financial services industry.

Question 4

Which of the following will not cause the level of unemployment to settle above the level where the aggregate supply curve of labour intersects the aggregate demand curve for labour?

a) Efficiency wages. b) Successful trade union action to force up wages.

c) Hysteresis. d) A minimum wage law.

Question 5

What is the main reason that led classical economists to believe that the government need not respond to a demand shock which led to unemployment?

a) Demand shocks are always very small.

b) Real wages are highly flexible.

c) Governments always act too late.

d) Economies never displayed demand-deficient unemployment.

Question 6

According to the idea of the neutrality of money, or the classical dichotomy, which of the following statements describes the long-run effect of a rise in the money stock?

a) It has no effect.

b) It affects variables expressed in nominal terms, notably prices, but not variables expressed in real terms, notably output and unemployment.

c) It affects variables expressed in real terms, notably output and unemployment, but not variables expressed in nominal terms, notably prices.

d) It affects variables expressed in nominal terms and variables expressed in real terms, notably prices, output and unemployment.

Question 7

According to the quantity theory of money, what long-run effect will a 10% rise in the money stock have on the price level?

a) No effect.

b) The price level will rise, but by less than 10%.

c) The price level will rise by 10%.

d) The price level will rise by more than 10%

Question 8

Keynes suggested several reasons why the government should not rely on flexible real wages to remove demand-deficient unemployment. Which of the following was not one of these reasons?

a) Workers would resist cuts in nominal wages which reduced their wages relative to those paid in other occupations.

b) Trade unions would resist cuts in nominal wages.

c) Even if nominal wages fell, there might then be falls in prices, and this could lead to a further fall in demand in the economy if people deferred some purchases until they felt prices would fall no further.

d) Any efforts by the government to increase demand in the economy would lead to higher real wages and so increase unemployment.

Question 9

Faced with a choice between fiscal and monetary policy to try and increase aggregate demand, Keynes believed that fiscal policy would have more effect. Which of the following was not one of his key reasons for holding this belief?

a) Fiscal expansion was highly effective because of the balanced budget multiplier.

b) Monetary expansion might have little effect because the demand for money is interest elastic.

c) If interest rates fell, consumer spending might not rise much, because it depends chiefly on incomes, not on interest rates.

d) If interest rates fell, investment spending might not rise much, because it depends substantially on firms' 'animal spirits'.

Question 10

Faced with a choice between fiscal and monetary policy to try and increase aggregate demand, monetarists believed that monetary policy would have more effect. Which of the following was not one of their key reasons for holding this belief?

a) A tax cut which consumers thought would be only temporary might have very little effect on their spending.

b) Monetary expansion might have considerable effect because the demand for money is interest elastic.

c) If interest rates fell, consumer spending might rise greatly.

d) If interest rates fell, investment spending might rise greatly.

Correct answer: 1.A 2.C 3.D 4.C 5. B 6.B 7.C 8.D 9.A 10.B

EXPLANATION

1.people who want a job and do not have one are unemployed, but they are regarded as economically active because they are in the labour force.

2. The rate is lower for females.

3. There is then a risk that this UK sector would contract, with much business being taken over by institutions abroad, so leading to unemployment of many people with skills that may not be greatly needed elsewhere in the

4. Hysteresis means the aggregate supply of labour curve may actually be to the left of where it would otherwise be, but the market will settle where the actual curve intersects the demand curve.

5.Flexible real wages mean that if demand-deficient unemployment appears, then real wages will quickly fall enough to remove it.

6.It arises because flexible real wages ensure that in the long run employment is at its natural level and output is at its potential level, so that changes in the money stock have no

7. The theory is based on the fact that, by definition, MV must equal PY, along with an assumption that V is constant and Y in the long run will be at its potential level, so a change in M of any percent leads to an equal percentage change in P.

8.Statement d was not one of Keynes's reasons. On the contrary, he argued that a rise in demand might put upward pressure on prices and so reduce the real wage, leading to employers wishing to hire more workers.

9. Keynes argued that fiscal expansion would be particularly effective if higher government spending was financed by borrowing. The balanced budget multiplier applies when higher government spending is instead financed by higher taxes.

10.On the contrary, they believed the demand for money was interest inelastic, so that a rightward shift in the supply curve for money would greatly reduce interest rates and in turn greatly stimulate consumer spending and investment.

ECO23

Question 1. Which of the following statements are true?

1. For cost increases to lead to sustained inflation, there must be persistent rises in costs followed by persistent government efforts to return output to its potential level.

2. For cost increases to lead to sustained inflation, there must be persistent rises in costs coupled with wage flexibility that always returns the labour market to equilibrium.

3. For demand increases to lead to sustained inflation, there must be persistent increases in demand followed by persistent government efforts to return output to its potential level.

4. For demand increases to lead to sustained inflation, there must be persistent increases in demand coupled with wage flexibility that always returns the labour market to equilibrium.

a) 1 and 3 only b) 1 and 4 only c) 2 and 3 only d) 2 and 4 only

Question 2

Which of the following statements about the

is false?

a) Phillips's original curve concerned increases in nominal wages, not increases in the price level.

b) Phillips's observations suggested that his curve was generally stable between 1861 and 1957.

c) Phillips curves are generally concerned with increases in the price level, not increases in nominal wages.

d) Phillips curves have generally been fairly stable since 1957.

Question 3

Suppose inflation over the next year is expected to be 5%, and assume there are no supply shocks. What rate of inflation will the short-run Phillips curve show at the natural rate of unemployment?

a) 0% b) Between 0% and 5% c) 5% d) Over 5%

Question 4

Which of the following explains why the long-run Phillips curve is drawn as a vertical line?

a) Because in the long run, government policies will ensure that unemployment is at its natural rate.

b) Because in the long run, the labour market will settle so that unemployment is at its natural rate.

c) Because of the quantity theory of money.

d) Because its true shape is unknown.

Question 5

Which of the following might shift the short-run Phillips curve to the left?

a) A rise in the expected rate of inflation.

b) A natural disaster which temporarily disrupts production.

c) A rise in the benefits paid to unemployed people.

d) An increase in the labour force.

Question 6

Which of the following would shift the long-run Phillips curve to the left?

a) A change in the expected rate of inflation.

b) A natural disaster which temporarily disrupts production.

c) Improved technology which increases labour demand.

d) A rise in the price of imported inputs.

Question 7

Which of the following views is not characteristic of the monetarist approach to policies regarding unemployment and inflation?

a) To secure generally stable prices, governments should aim to keep the money stock stable over time.

b) Government efforts to reduce unemployment have lags, so when they take effect, it may be too late.

c) Government efforts to hold unemployment below the natural rate will lead to accelerating inflation if people form adaptive expectations about the inflation rate.

d) If the unemployment rate exceeds the natural rate, wage flexibility will return the rate to the natural rate quite quickly.

Question 8 . Which of the following statements about rational expectations is false?

a) They assume that people take account of all information.

b) They assume that, on average, people's forecasts are correct.

c) They imply that expected changes in demand have no effects on unemployment or the price level.

d) They imply that unexpected changes in demand have long-lasting effects on both unemployment and the price level.

Question 9

Suppose the labour market is away from equilibrium, with unemployment above the natural rate. The new Keynesian view of inflation and unemployment offers several reasons why the labour market can stay away from equilibrium for long periods. Which of the following is not one of these reasons?

a) Efficiency wages may hold wages below the equilibrium level.

b) Workers may resist wage cuts which reduce their wages below those paid to other workers in the same occupation.

c) Prices may be sticky downwards in some markets because consumers prefer stable prices.

d) Prices may be sticky downwards in some markets because consumers may judge quality by price.

Question 10

Suppose a government instructs its central bank to operate a Taylor rule, and that the government sets a credible inflation target. Which of the following statements is false?

a) The central bank will make its interest rate decisions solely by considering whether actual inflation goes above or below the target.

b) The central bank will decrease the interest rate if there is a demand shock which reduces aggregate demand.

c) The central bank will increase the interest rate if there is a supply shock which permanently reduces aggregate supply.

d) The central bank may not increase the interest rate if there is a supply shock which temporarily reduces aggregate supply.

Answer:

1. B ( because statements 1 and 4 are true. Regarding 2, note that cost increases initially lead to a rise in the price level and some unemployment; if wages then fell to return the labour market to equilibrium, there would be a downward move in the price level, not persistent inflation. Regarding 3, note that demand increases initially lead to a rise in the price level and output rising above its potential level; if the government wished to return output to its potential level, it would have to reduce demand, and there would then be a downward move in the price level, not persistent inflation.)

2.D (The curve shifted away from the origin between 1966 and 1980, and since 1987 it has either shifted erratically back since then or (as explained on page 536) perhaps become almost horizontal. )

3. c) 5% ( In the absence of supply shocks, the short-run Phillips curve always shows the expected rate of inflation at the natural rate of unemployment.)

4.B ( In the long run unemployment will be at the natural rate, while the inflation rate could be anything, depending chiefly on the rate of growth of the money stock and the rate of growth of real output.)

5.D (The increase in the labour force will increase the supply of labour and so lead to more people in employment, but with the larger labour force, there will also be more people unemployed, so the natural rate of unemployment could rise, fall or stay the same. If it fell, the long-run Phillips curve would shift left, taking the short-run curve right with it. In contrast, all the other events will shift the curve away from the origin.)

6.C (an increase in labour demand will increase the employment level where the labour market is in equilibrium, and lead to less natural unemployment, so that the natural rate of unemployment falls. In contrast, a change in the expected rate of inflation and a natural disaster which disrupts production temporarily do not shift the long-run Phillips curve. A rise in imported input prices will shift it, but it will shift it to the right, not to the left.)

7.A (Statement a is not part of the monetarist view. They argue that to keep prices generally stable, the money stock should increase by k% a year where k is the average annual percentage by which real output grows over time. )

8.D (because although expected changes in demand have no effect on unemployment, they do affect the price level. )

9.A (Statement a is not one of the reasons for believing the labour market may take a long time to reach equilibrium; instead, efficiency wages cause a problem because it is believed that they may hold the wage rate above the equilibrium level, not below it.)

10.A ( The central bank will be asked also to consider whether output is below or above its potential level.)

ECO24

Question 1

Which of the following statements is false?

a) Trend GDP shows what the path of potential GDP would be if it grew steadily.

b) A trough occurs at the end of a period of contraction.

c) Trend GDP may be below potential GDP in some quarters and above in others.

d) Trend GDP may be below actual GDP in some quarters and above in others.

Question 2

When is a country said to move into a recession?

a) If actual output falls below the potential level of output.

b) If actual output falls below the trend level of output.

c) If actual output falls.

d) If actual output falls for two consecutive quarters of a year.

Question 3

Which of the following statements about classical economists in the 19th century is false?

a) They used the term trade cycles, not business cycles.

b) They knew cycles existed because of fluctuations in measured real GDP.

c) They believed the typical cycle lasted between seven and eleven years.

d) They suggested that one cause of cycles was the activity of sunspots on the sun.

Question 4

On which of the following do Keynesians and monetarists agree?

a) The most important cause of demand shocks is changes in the money stock.

b) The demand for money is interest elastic.

c) Output departs at times from potential output because of demand shocks.

d) When there is a recessionary gap, flexible wages will return the labour market to equilibrium fairly quickly.

Question 5

Which of the following statements about the accelerator model of cycles is false?

a) The model believes firms have an optimum ratio of capital to output.

b) The model suggests that cycles could be damped or anti-damped rather than regular.

c) To get repeated cycles, the model needs repeated shocks to investment.

d) The model assumes that firms expect their output in the next period to be the same as it was it the previous period.

Question 6. In this question, ignore new classical economists who propose real business cycle theory. Which of the following statements is false?

a) On the new Keynesian view, a single unexpected demand shock could take output below the potential level .

b) On the new Keynesian view, it needs repeated unexpected demand shocks to take output below the pote ntial level for long periods.

c) On the new classical view, it needs an unexpected demand shock to take output below the potential level.

d) On the new classical view, it needs repeated unexpected demand shocks to take output below the potential level for long periods.

Question 7

Which of the following is not part of the real business cycle explanation of business cycles?

a) Wage flexibility keeps output close to its potential level.

b) Output fluctuates because of fluctuations in aggregate supply.

c) Aggregate supply fluctuates because of fluctuations in the demand for labour.

d) Labour demand might fall if technology increases faster than expected.

Question 8. Which of the following statements about real business cycle theory is false?

a) It believes the supply of labour is inelastic.

b) It requires a run of positive or negative technology shocks to explain why peaks and troughs may last for protracted periods.

c) It believes that unemployment is a result of people's choices and need not concern the government.

d) Few economists regard it as offering the main explanation of business cycles.

Question 9. Which of the following statement about the automatic stabilizer created by government taxes and spending is false?

a) The stabilizer arises because if an economy moves into a recessionary gap, tax revenues fall and transfers rise, while if it moves into an inflationary gap, tax revenues rise and transfers fall.

b) The stabilizer means that if the government balances its budget when output is at its potential level, then it will have a deficit in a recessionary gap and a surplus in an inflationary gap.

c) If output moves away from its potential level, the stabilizer ensures that it will eventually return to it.

d) The stabilizer would be stronger if the government imposed higher taxes on people with high incomes and paid higher transfers to the unemployed.

Question 10

What are the implications of the automatic stabilizer created by government taxes and spending on the effects of shocks in long-run aggregate supply?.

a) It makes output changes smaller than they would otherwise be, but prices changes larger than they would otherwise be.

b) It makes output changes the same as they would otherwise be, but prices changes larger than they would otherwise be.

c) It makes both output changes and price changes smaller than they would otherwise be.

d) It makes output changes the same as they would otherwise be, but prices changes smaller than they would otherwise be.

Answer:

1. a) 2.D 3.B 4.C (Regarding statement a, Keynesians believe other causes of shocks are more important. Regarding statement b, monetarists believe the demand for money is interest inelastic. Regarding statement d Keynesians believe wages are not very flexible.)

5.C 6.B (Owing to an assumption of sticky wages, new Keynesians believe that a single shock could lead to output being below the potential level for a long period. ) 7.D (Statement d is not part of real business cycle theory. The theory assumes that improvements in technology increase the demand for labour.) 8.A ( The theory assumes that labour supply is elastic.)

9.C ( The stabilizer does not return output to its potential level; it merely ensures that output moves less far away from its potential level than it would do if there were no stabilizer.)

10. B ( To see this, suppose for example that LAS shifts left, so that GDP falls and the price level rises. Then the automatic stabilizer reacts to the fall in GDP by increasing demand, so AD shifts right. This has no effect on GDP, which stays at the level given by the new LAS curve, but it increases the price level even more. )

ECO25

Question 1

Which of the following statements is false?

a) Even if a country acquired no extra resources, its output could grow.

b) Even if a country had no technological progress, its total factor productivity could increase.

c) Even if a country's workforce stayed the same, there could be an increase in human capital.

d) If a country's GDP per head rose by 3% a year, it would take about 33 years for its output GDP per head to double.

Question 2

Suppose GDP was constant over a period of years and yet living standards increased. Which of the following might not be a reason for this?

a) There might be an increase in household production.

b) There might be an increase in production by the underground economy.

c) There might be an increase in exports.

d) There might be an increase in leisure.

Question 3

Which of the following statements is false?

a) Growth is no help in efforts to ease relative poverty.

b) Over a period of time when economic welfare increased, total welfare could decrease.

c) If a country decides to invest in more capital this year, then living standards may initially fall and yet in time be higher than they would otherwise have been.

d) Growth has reduced drudgery.

Question 4

In the basic neoclassical growth model, where does equilibrium occur?

a) Where investment per worker equals saving per worker.

b) Where investment per worker equals depreciation per worker.

c) Where investment per worker equals capital per worker.

d) Where capital per worker equals output per worker.

Question 5

Suppose the proportion of the population in the workforce increases while everything else stays the same. According to the neoclassical growth model, which of the following statements is false?

a) Initially, output per worker will fall.

b) Eventually, output per head of population will be higher than it started.

c) There will be sustained economic growth. d) There will be capital widening.

Question 6

According to the neoclassical growth model, which of the following statements is false?

a) If the population continually grows, while everything else stays the same, then living standards will be lower than they would be if the population was constant.

b) If people save and invest a higher proportion of their incomes, while everything else stays the same, then there will be sustained growth.

c) If people save and invest a higher proportion of their incomes, while everything else stays the same, living standards could fall.

d) A new technology which makes workers more productive, while everything else stays the same, may not lead to sustained growth.

Question 7

In the past 50 years, the world's population has more than doubled. Which of the following has also occurred?

1. Most people have been left on subsistence incomes, as predicted by Matlhus.

2. The prices of most natural resources have risen greatly in relation to average wages.

a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2

Question 8

There are many reasons why a poor country may fail to catch up with a rich neighbour. Which of the following is not one of these reasons?

a) The poor country may have more rapid population growth.

b) The rich country may have more human capital.

c) The poor country may have a higher saving ratio.

d) The rich country may be more open to the world economy.

Question 9

Which of the following statements is true?

1. If output per head is proportional to the number of ideas had in the past, then a constant rate of growth requires ever rising numbers of new ideas each year.

2. World population growth is a potential source of new ideas.

a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2

Question 10

Which of the following statements about y=Ak growth models is false?

a) They assume the production function shifts upwards whenever the stock of physical capital increases.

b) They suggest that if the level of investment is higher than depreciation, then there could be sustained growth.

c) They are called endogenous growth theories.

d) They argue that increasing the saving ratio will have only a temporary effect on output per worker.

Answer:

1. d) (Statement d is false, because the rule of 72 shows that it would take about 24 years. Regarding a, note that output can grow even without having any extra resources, if there is an increase in total factor productivity; regarding b, note that total factor productivity can increase, even without technological progress if, for example, there is better management; and regarding c note that human capital concerns education, training and work experience, which can all improve even if the number of workers stays the same.)

2.C ( If GDP, that is a country's output of goods and services, is constant and a larger share is sold abroad as exports, then a smaller share is available to benefit the country's own citizens. )

3. a) ( If there is no growth, helping people below the poverty line means reducing the living standards of those above, which voters as a whole may well oppose. If there is growth, helping those below the poverty line could be achieved by allowing the living standards of the poor to rise faster than the living standards of the rich, which voters as a whole may accept.)

4. b) (When investment per worker equals depreciation per worker, the capital available to each worker is constant.)

5. c) (Output per worker will eventually be constant at the same level as it was to begin with.)

6.b) (If people save and invest a higher proportion of their incomes, while everything else stays the same, then the economy will end up with more capital per worker and higher living standards, but it would take some other factor, notably sustained technological growth, to secure further sustained increased in living standards. )

7. d) (Regarding statement 1, most people have higher living standards. Regarding 2, many resource prices simply fell, once inflation is allowed for.)

8. c) (Statement c does not help to explain why a poor country may fail to catch up a rich country. Other things being equal, a country with a high saving and investment ratio will enjoy a higher output per worker than a country with a lower ratio.)

9.a) (Regarding 1, for sustained growth of 2% per year, there would have to be 2% more ideas each year than in the previous year. Regarding 2, ideas are non-rival, so more people should have more ideas which can be used by everyone)

10.d) (Unlike the neoclassical growth model, y=Ak models argue that high saving ratios will lead to sustained higher growth rates.)

ECO26

Question 1. Suppose that aggregate demand has recently increased. This has taken output above the potential level and it has also increased the price level. The government is keen to avoid any further increases in the price level. Which of the following options should it avoid?

a) Simply wait for the labour market to return output to the potential level.

b) Apply a contractionary fiscal policy.

c) Announce a credible zero target for inflation.

d) Apply a supply-side policy to shift LAS to the right?

Question 2. Which of the following is not a problem with discretionary policies?

a) Governments might use them in a way which leads to political business cycles.

b) Discretionary fiscal policies may act too late.

c) Discretionary monetary policies lose any power that a rules policy has to hold inflationary expectations down.

d) They need to be announced in advance.

Question 3. Suppose that growth and unemployment were at satisfactory levels. What target would be the focus of the Bank of England's monetary policy?

a) The interest rate. b) The rate of growth of the money stock.

c) The current inflation rate. d) The expected inflation rate in two years' time.

Question 4. Suppose a central bank is concerned about inflation and wishes to raise interest rates. Which of the following instruments would it be inappropriate to use?

a) Interest rate control. b) Open market operations.

c) Quantitative easing. d) Reserve ratio controls.

Question 5. Suppose the Bank of England wishes to restrain inflation, so it increases Bank Rate. Which of the following events will not be part of the monetary policy transmission process?

a) The increased Bank Rate will increase the value of sterling.

b) The increased Bank Rate will increase people's wealth.

c) The increased Bank Rate will lead to increases in other nominal interest rates.

d) The increased Bank Rate will reduce the incomes people expect to have in future.

Question 6. To secure equity over time, which principle of government finance is generally recommended?

a) To finance all government spending by loans. b) To finance all government spending by taxes.

c) To finance government capital spending by loans and government current spending by taxes.

d) To finance government capital spending by taxes and government current spending by loans.

Question 7. Which of the following statements is false?

a) An increase in government spending financed by loans can crowd out other spending in the economy.

b) A structural deficit is the government would have if it adopted its current policies and output was at the potential level.

c) The last and current

governments have favoured trying to ensure that, each year, total government borrowing equals total net government investment.

d) A cyclically adjusted deficit is the same as a structural deficit.

Question 8. Suppose the government of a country has a high level of debt. Which of the following statements about this debt is false?

a) If all the debt was in the form of bonds owned by the country's own citizens, then the debt would not be a burden to the country's taxpayers.

b) If all the debt was in the form of bonds owned by the country's own citizens, then the debt would not be a burden to the country's citizens.

c) A high debt might make lenders worry if the government could repay its loans and so raise the interest rate people wanted when they lent to it.

d) A high debt would make it difficult for the government to respond to any future downturns in its economy with expansionary fiscal policy.

Question 9. Which of the following policies would not be used by a government which wished to increase the quantity of labour that will be hired?

a) A reduction in income tax rates. b) An increase in firms' non-labour costs.

c) A reduction in the benefits paid to unemployed people.

d) An increase in help for unemployed people to retrain.

Question 10. Which of the following policies would not be used by a government which wished to increase the output per labour hour?

a) Increase the school leaving age. b) Discouraging firms from investing in new capital.

c) Make government departments more efficient. d) Promoting competition.

ANSWERS

1. a) (Employment is currently above the natural level, and left to its own the labour market will check this by a rise in real wages which will shift SAS to the left and further increase the price level.)

2.D. 3.D 4.C 5.B (wealth will not increase. Instead, higher interest rates on loans will reduce the demand for securities and - by raising the cost of mortgages - reduce the demand for homes, so there may be falls in security prices and house prices. )

6.C 7.C 8.A ( the debt is a burden to taxpayers because they must pay taxes to cover the interest and repayments. But, regarding statement b, if all the debt was in the form of bonds held by the country's own citizens, then all the interest and repayments financed by the country's taxpayers would go to those of its citizens who owned the bonds, so the country's citizens as a whole would neither gain nor lose when the taxes were raised and the interest and repayments were paid. ) 9.B (an increase in firms' non-labour costs would not be used because this would encourage them to hire fewer workers. ) 10. B ( a government would not discourage investment in new capital. Instead it would encourage investment, on the grounds that the more capital each worker has, the more each worker can produce.)

ECO-27

Question 1. Suppose Countries A and B use only labour as an input and produce only cloth and wheat. In A, a worker in a day could produce 2 units of cloth or 4 units of wheat. In B, a worker in a day could produce 3 units of cloth or 9 units of wheat. At present the countries do not trade. Which of the following statements is false?

a) Country A has a comparative advantage in cloth.

b) Country B has a comparative advantage in wheat.

c) Country A has an absolute advantage in cloth.

d) Country B has an absolute advantage in wheat.

Question 2. Return to the countries in question 1. Suppose trade opens up. Which of the following statements is true?

a) Country A will export cloth to B, and import wheat from B, and each country will be able to consume more of both products than before.

b) Country A will export wheat to B, and import cloth from B, and each country will be able to consume more of both products than before.

c) Country A will export cloth to B, and import wheat from B, but only country B will gain from the trade.

d) Country A will export wheat to B, and import cloth from B, but only country B will gain from the trade.

Question 3. Suppose Countries C and D use only labour as an input and produce only tables and tents. In A, a worker in a week could produce 4 tables or 2 tents. In B, a worker in a week could produce 6 tables. Initially the countries do not trade, and then trade opens up. Under which circumstances will country C export tables?

a) Under no circumstances.

b) If a worker in country D could produce fewer than 3 tents a week.

c) If a worker in country D could produce 3 tents a week.

d) If a worker in country D could produce more than 3 tents a week.

Question 4. Suppose two countries E and F use many inputs. Country E exports tractors and imports televisions. Assuming there are no economies of scale, which of the following statements is true?

a) If the countries did not trade, then E would have a lower opportunity cost for tractors.

b) Even though there is trade, E has a lower opportunity cost for tractors.

c) E is sure to produce no televisions while F is sure to produce no tractors.

d) Neither country can consume at a point outside its production possibility frontier.

Question 5. Which of the following statements is false?

a) Two countries may benefit from trade, even if their production possibility frontiers have identical shapes, if preferences differ in the two countries.

b) Two countries may benefit from trade, even if their production possibility frontiers have identical shapes, if industries have substantial economies of scale.

c) When two countries benefit from the opening up of trade, all citizens in each country will benefit.

d) Differences in the degree of human capital offer one reason why two countries may have production possibility frontiers that differ in shape.

Question 6. Suppose a small country imposes a tariff on a good. Which of the following statements is false?

a) Consumer surplus from the good will decrease.

b) Producer surplus from the good will decrease.

c) The quantity imported will fall.

d) The deadweight loss will be less than the total fall in surplus.

Question 7. Suppose a large country imposes a tariff on a good. Which of the following statements is false?

a) The total consumer plus producer surplus decreases.

b) The price for consumers rises from the pre-tariff situation by the amount of the tariff.

c) If other countries do not retaliate, the country may be better off.

d) If other countries do not retaliate, the country may be worse off.

Question 8. Which of the following arguments for trade barriers offers potential benefits to consumers?

a) To soften the fall of declining industries.

b) To protect industries from competition from low wage countries.

c) To protect industries from dumping.

d) To nurture infant industries by protecting them from cheaper imports.

Question 9. Two large countries currently impose tariffs against each other. Each country would be better off with free trade. Which of the following statements are true?

1. Each country might think 'if the other country maintains its tariff, we will be better off maintaining our tariff.'

2. Each country may think 'if the other country unilaterally abolishes its tariff, we may be better off maintaining our tariff. a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2

Question 10. Which of the following statements is false?

a) Over 150 countries belong to the World Trade Organisation.

b) If a country joins a customs union, it may do less trade with non-members than it did previously.

c) A single market requires the removal of barriers to the movement of labour.

d) Members of a free trade area agree to have uniform tariffs on imports from non-members.

Answers

1. c 2 .a 3.d 4.a 5.c 6.b 7.b 8.d 9.a 10.d

ECO28

Question 1

Which of the following statements about the

balance of payments accounts is false?

a) The current balance shows the balance for the trade in goods and services combined.

b) If a foreign citizen places some money in a deposit in the

, the accounts regard this as a credit.

c) If the government's reserves of foreign currencies increase, then there is a minus sign by this item.

d) Allowing for errors and omissions the accounts always balance.

Question 2

Suppose that one year a country had a balance of trade deficit. Suppose also that the balance for wages, investment income and current transfers was zero. Then which of the following statements is false?

a) Borrowing from abroad must have been equal to the trade deficit.

b) Either investment must have exceeded saving, or government spending exceeded taxes (net of transfers and subsidies), or both.

c) The country's debt to foreign countries must have grown as a percentage of GDP.

d) There must have been a surplus on the capital and financing account.

Question 3. Which of the following statements is true?

1. The supply curve for sterling on the foreign exchange markets must slope upwards to the right.

2. The demand curve for sterling on the foreign exchange markets must slope downwards to the right.

a) Both 1 and 2 b) 1 only c) 2 only d) Neither 1 nor 2

Question 4. Which of the following would cause sterling to depreciate against the US dollar, other things being equal?

a) A fall in incomes in the

. b) News which suggests that prospects for

firms are improving. c) A rise in interest rates in the

. d) An expected rise in the value of sterling.

Question 5. Which of the following exchange rate regimes best describes the situation for both sterling and the euro?

a) A fixed exchange rate regime. b) An adjustable peg exchange rate regime.

c) A managed float routine. d) A floating exchange rate regime.

Question 6. Which of the following statements is false?

a) The law of one price says that the prices which producers in different countries set for a particular product will be the same if the prices are expressed in the same currency using the current exchange rate.

b) Purchasing power parity is a theory which says that says the total prices of any basket of products which apply in two different countries will be the same if the prices are expressed in the same currency using the current exchange rate.

c) Interest rate parity is a theory that the interest rates on similar assets in two countries will be the same.

d) The real exchange rate between two countries is the rate at which a particular basket of products produced in one country can be traded with a similar basket produced in another.

Question 7. Suppose a country has a floating exchange rate and no capital controls. It also has a recessionary gap. It tackles this with an expansionary monetary policy. In the final equilibrium people expect its exchange rate to stay at its new value. Which of the following statements is false?

a) The interest rate will initially fall but must in the end return to its initial value.

b) Consumer spending and investment will initially increase, but must in the end return to their initial values.

c) Money demand must end up higher that it was initially.

d) The exchange rate must end up at its initial value.

Question 8. Suppose a country has a floating exchange rate and no capital controls. It also has a recessionary gap. It tackles this with an expansionary fiscal policy. In the final equilibrium people expect its exchange rate to stay at its new value. Which of the following statements is false?

a) There will be an initial increase in demand, probably government purchases and consumer spending.

b) As demand increases, incomes and money demand start to increase, causing a rise in the interest rate and, in turn, in the exchange rate.

c) The interest rate must end up at its initial value, so money demand must return to its original level. d) Output will end up higher than it was initially.

Question 9. Which of the following statements is false?

a) If the government wants an expansionary policy in which only consumer spending and government purchases increase, it should combine a fiscal expansion with a monetary expansion.

b) In the event of a demand shock, fiscal policy is powerless to offset the change in demand.

c) In the event of a demand shock, monetary policy can be used to offset the change in demand.

d) With either fiscal or monetary policy expansion, the exchange rate initially overshoots its new equilibrium value.

Question 10. There are several reasons why the

government would be cautious about joining the euro. Which of the following is not one of these reasons?

a) The eurozone and the

might not have well synchronized output gaps over time.

b) Interest rate changes are thought to affect consumer spending less in the

than in the eurozone.

c) The

might have to lend or give more money to eurozone countries which run into difficulty.

d) An oil price shock might affect the

and the eurozone differently.

Correct answer:

1. a) The current balance shows the balance for the trade in goods and services combined.

2. c) The country's debt to foreign countries must have grown as a percentage of GDP.

3. c) 2 only

4. a) A fall in incomes in the

5. d) A floating exchange rate regime.

6. c) Interest rate parity is a theory that the interest rates on similar assets in two countries will be the same. (Feedback: Statement c is false. The interest rates must be different if the exchange rate between the countries' currencies is expected to change. More specifically, the interest rate in the country whose currency is expected to depreciate must be sufficiently higher to ensure that the total returns, allowing for interest and expected changes in the exchange rate, will be equal.)

7. d) The exchange rate must end up at its initial value. (Feedback: To see why, note that a must be true: if people expect no further change in the exchange rate, then interest rates in this country must be the same as elsewhere. And if interest rates are the same as elsewhere, the monetary policy will have no effect on consumer spending or investment, as stated in b; these components of spending will initially rise but later fall back. Now if there has been monetary expansion, with a rightward shift in the money supply curve, and the interest rate ends up at its initial value, then there must also have been a rise in the demand for money, as stated in c, which must be caused by a rise in output and so in incomes. For output to rise, the exchange rate must end up lower than it was initially, in contradiction of d, leading to an increase in exports and a fall in imports. )

8. d) Output will end up higher than it was initially. (Feedback: Statement d is false. To see why, note that government purchases and consumer spending will initially increase, as in a, causing an initial rise in output that increases the demand for money, so raising the interest rate and the exchange rate, as in b, which will reduce exports and increase imports. However, if people expect no further change in the exchange rate, then interest rates in this country must be the same as elsewhere, so the demand for money must return to its initial level, as in c, which means output and incomes must return to their initial level, in contradiction of d. Output falls because the rise in the exchange rate raises imports and cuts exports enough to offset any rise in consumer spending or government purchases.)

9. b) In the event of a demand shock, fiscal policy is powerless to offset the change in demand. (Feedback: If the government is quick, the effects of the fiscal policy may be to change consumer spending and government purchases enough to prevent demand changing after all.)

10. b) Interest rate changes are thought to affect consumer spending less in the

than in the eurozone. (Feedback:The UK has a relatively high proportion of households that are owner-occupiers with variable interest rate mortgages, and this means that consumer spending tends to react more to interest rate changes in the

than in the eurozone. )

..sk..

2020-05-03T16:36:00.001+05:30

Economics For UPSC IAS Prelims Exam
Economics Objective Solved papers

1. Prebisch-Singer thesis enunciates which of the following?

1. International trade has been operating as a mechanism of international inequalities and has, therefore, retarded the development of less developed countries.

2. The strategy of import substitution as a means to achieve self-sufficiency in industrial production, has led to ma! allocation of resources and a very bad effect on industrial productivity.

Select the correct answer by using the code given below

(a) l only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

Ans. (a)

2. If the supply of a commodity is very inelastic in the exporting country and demand for the same is fairly elastic in the importing country, the imposition of tariff will have which one of the following?

(a) A very large protective effect

(b) No protective effect at all

(d) A very small protective effect

Ans. (a)

3. If an Indian exporter exports to Bangladesh Rs. 50,000 worth of goods payable in three months, the balance of payment for India will show which one of the following?

(a) Current account credit goes up and capital account debit also goes up by Rs. 50,000 each

(b) Current account credit goes down and capital account debit goes up by Rs. 50,000 each

(d) Current account credit goes up and capital account debit goes down by Rs. 50,000 each

Ans. (d)

4. Devaluation makes Balance of Payments worse in the short-run and then improves it in the long-run. What is this phenomenon known as?

(a) Marshall -Lerner condition

(b) J-curve effect

(d) Backwash effect

Ans. (b)

5. Which one of the following is considered as non-debt creating foreign investment inflow?

(a) External assistance

(b) Foreign direct investment

(d) Commercial borrowings

Ans. (b)

6. Exchange rates are kept same in all the parts of market by using which one of the following?

(a) SDRs

(b) Arbitrage

(d) Speculation

Ans. (b)

7. An over-valued currency in the foreign exchange market

will have which one of the following impacts in

India

(a) Make imports costlier and exports cheaper

(b) Will ha4e no effect on cost of imports

(d) Make imports cheaper and exports costlier

Ans. (d)

8. The inflationary impact of the inflow of foreign capital in

India

is neutralized by the Reserve Bank of India by which

one of the following methods?

(a) Permitting outflow of foreign exchange

(b) Sale of securities in the open market

(d) Permitting depreciation of Indian rupee in the foreign exchange market

Ans. (b)

9. Which one of the following is the correct sequence in the process of economic integration between different countries?

(a) Common market—Free trade area—Custom union— Economic union

(b) Free trade area—Custom union—Common market— Economic union

(d) Common market—Free trade area—Economic union— Custom union

Ans. (b)

10. Under Gold Standard, how can a surplus in a country’s balance of payments be eliminated?

(a) By inflow of gold and a rise in general price level

(b) By outflow of gold and a rise in general price level

(d) By outflow of gold and a fall in general price level

Ans. {d)

11. Which one of the following governs the theory which brings parity with respect to convertibility of currency into gold content?

(a) Mint parity of exchange

(b) Special Drawing Rights

(d) Multiple exchange rate

Ans. (a)

12. In order to reduce the balance of payment deficits of the member countries, which one of the following schemes was introduced by the World Bank in 1980?

(a) Buffer stock loans

(b) Supplementary loans

(d) Gold loans

Ans. (c)

13. Special Drawing Rights (SDRs) introduced by the IMF are in which form?

(a) Gold

(b) Both silver and gold

(d) Book-keeping entry only

Ans. (d)

14. Which one of the following does not constitute a part of the jurisdiction of WTO?

(a) Trade related tariff and non-tariff barriers

(b) Trade related intellectual property rights

(d) Regional trade agreements

Ans. (d)

15. Assertion (A) A balance of payments deficit is always and every where a monetary phenomenon.

Reason (R): A balance of payments deficit cannot be corrected through changes in money supply

Codes:

(a) Both A and R are individually true and R is the correct explanation of A

(b) Both A and R are individually true but R is not the correct explanation of A

(d) A is false but R is true

Ans. (c)

16. Which one of the following is not a component of foreign aid of a country?

(a) Bilateral grant

(b) Multilateral grant

(d) Commercial borrowing

Ans. (d)

17. What is the assumption that economic growth will percolate down to all sectors, known as?

(a) Dispersal theory

(b) Trickle down theory

(d) Decentralized growth theory

Ans. (b)

18. In plan models, which type of model is generally used to check consistency among various sectors?

(a) Harrod -Domar model

(b) Input-output model

(d) Solow model

Ans (b)

19. Consider the following A dual economy implies

1. the existence of domestic and export markets.

2. modern industry and commercial agriculture co-existing with subsistence farming and traditional handicrafts.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(d) Neither 1 nor 2

Ans. (b)

20. Theory of linkages is most appropriate for which kind of development models?

(a) Balanced growth models

(b) Unbalanced growth models

(d) One sector growth models

Ans. (b)

21. With which one of the following is backward bending supply curve usually associated.

(a) Land

(b) Labour

(d) Organisation

Ans. (b)

22. Which one of the following is the correct expression for the actual rate of growth (g)?

(a) g = s/c

(b) g = s x c

(d) g =

Where s = the ratio of saving to income

c = actual incremental capital- output ratio

Ans. (a)

23. Inverted-U hypothesis of Kuznets is associated with movement of which one of the following?

(a) Consumption inequality

(b) Wealth inequality

(d) Tax inequality

Ans. (c)

24. Match List-I with List-II and select the correct answer by using the code given below the lists:

List-I List -II

(Model) (Proposition)

A. Marxist model of economic development 1.Give importance to

non-economic variables

B. Harrod-Domar growth model 2. Flexible capital-output ratio is assumed

C. Solow’s growth model 3. Productive capacity is equal to

aggregate demand

D. Kaldor’s growth model 4. Structural Mal –adjustment in a

growing economy

Code:

A B C D

(a) 4 2 3 1

(b) 1 3 2 4

(d) 1 2 3 4

Ans. (c)

25. Which one of the following is a component of disequilibrium mentioned often in the context of trade and development?

(a) Revenue gap

(b) Savings-investment gap

(d) Expenditure gap

Ans. (b)

26. The Feldman – Mahalanobis growth model, which one of the following strategies is followed?

(a) Emphasize the consumer goods first and then the investment goods

(b) Emphasize the investment goods first and consumer goods later

(d) Put emphasis on foreign trade only

Ans. (c)

27. Consider the following sectors:

1. Electrical Equipments

2. Service Sector

3. Food Processing Industries

4. Metallurgical Industries

Which one of the following is the correct sequence in ascending order in terms of their share in attracting FDI inflows in India?

(a) 4-3-2-1

(b) 1-2-3-4

(d) 1-2-4-3

Ans. (a)

28. What is the major underlying assumption of efficiency wage models?

(a) Labour productivity depends on level of nutrition

(b) Labour productivity is independent of number of labourers -

(d) Capital and labour productivities are equal

Ans. (b)

29. How is ‘Path dependency defined as?

(a) A condition of the past affecting the past situation

(b) A comparatively fast path of progress of economy

(d) A slow path of progress of the economy

Ans. (c)

30. What are the sufficient conditions for operation of stage theories of growth?

1. Well-integrated commodity and money markets.

2. Highly developed transport facilities

3. Well-trained workforce and an efficient bureaucracy

4. Existence of a federal structure.

Select the correct answer by using the codes given below

(a) 1, 2, and 4

(b) 2, 3, and 4

Ans. (d)

31. What is the correct sequence of the Marxian stage theory of growth?

1. Slavery

2. Primitive Communism

3. Socialism

4. Communism

5. Feudalism

6. Capitalism

Select the correct answer by using the codes given below

(a) 1—2—3—4—5—6

(b) 2—1—5—6—3—4

(d) 2—1—5–6—4—3

Ans. (b)

32. Capital fundamentalism refers to which one of the following?

(a) Capital structure of a country

(b) Accelerated capital accumulation for development

(d) Growth of capital expenditure

Ans. (b)

33. To make meaningful international comparisons of income and living standards, which one of the following is most appropriate?

(a) A measure of purchasing power parity

(b) A measure of per capita income

(d) An index of infrastructure development

Ans. (a)

34. If the Paasche’s index is 196 and Fishers’ index is 210, what is the value of the Laspeyre’ index?

(a) 220

(b) 215

(d) 230

Ans. (c)

35. consider the following statements

The coefficient of correlation.

1. is not affected by a change of origin and scale.

2. lies between —a and + ct

3. is a relative measure of linear association between two or more variables.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 and 3

(d)1, 2 and 3

Ans. (c)

36. In a certain distribution, the following results were obtained

X = 45, Median = 48, Coefficient of skew ness = — 0.3.

What is the value of standard deviation?

(a) 20

(b) 25

(d) 30

Ans. (d)

37. The first quartile derived from set of observations is 27 and its quartile deviation is 17. What is its third quartile?

(a) 59

(b) 61

(d) 57

Ans (b)

38. What is a cumulative percentage curve called?

(a) Frequency density curve

(b) Ogive curve

(d) Frequency polygon

Ans. (b)

39. Assertion (A) : Fisher’s index number is an ideal one.

Reason (R) : In the Fisher’s index number, the upward bias of Laspeyre’s index and downward bias of Paasche’s index are balanced to a great extent.

Codes:

(a) Both A and Rare individually true and R is the correct explanation of A

(b) Both A and R are individually true but R is not the correct explanation of A

(d) A is false but R is true -

Ans. (c)

40. Match List-I with List-II and select the correct answer using the code given below the lists:

List –I List-II

(Type of Unemployment) (Associated Fact)

A. Frictional Unemployment 1.Non-availability of job

B. Structural Unemployment 2. Marginal productivity is zero

C. Seasonal Unemployment 3. Use of obsolete technology for production

D. Disguised Unemployment 4. Population pressure on land

Code:

A B C D

(a) 4 2 1 3

(b) 1 3 4 2

(d) 1 2 4 3

Ans. (b)

41. According to the 60th Round of NSSO Survey on Employment and Unemployment, unemployment rate on current daily status basis (number of person days per 1000 person days) was highest for which one of the following categories?

(a) Rural male

(b) Rural female

(d) Urban female

Ans. (a)

42. Which one of the following committees was set up to review the concept of poverty line?

(a) S. Chakravarty Committee

(b) D.T, Lakdawala Committee

(d) R.C. Dust Committee

Ans. (b)

43. Which one of the following countries has the highest life expectancy at birth?

(a) Pakistan

(b) India

(d) Sri Lanka

Ans. (d)

44. According to Census-2001 data, what is the urban population as percentage of total population of India?

(a) 23.3%

(b) 25.7%

(d) 28.9%

Ans. (c)

45. Which category of the target groups is not included in the SHG bank linkage programme for micro-finance to agriculture?

(a) Unemployed non-agricultural labourers

(b) Agricultural and non-agricultural labourers

(d) Artisans and craftsmen

Ans. (a)

46. Consider the following components of money supply in India

1. Currency in circulation.

2. Banker’s deposits with the RBI

3. Other deposits with the RBI

4. Demand deposits of banks

Which of the above are the components of Reserve Money?

(a) l and 3

(b) l, 2 and 3.

(d) 2, 3 and 4

Ans. (B)

47. Consider the following statements for Indian Millennium Deposits (IMDs) scheme.

1. The scheme was launched by the Reserve Bank of India.

2. It was intended for NRIs and resident Indians both.

3. The tenure of IMDs was 5 years.

Which of the statements given above is/are correct?

(a) 3 only

(b) 2 only

(d) 2 and 3

Ans. (a)

48. Consider the following statements in respect of the Tenth Plan

1. This plan has specific monitorable targets in respect of poverty.

2. Decline in incremental capital-output ratio is to be achieved through creating new capacities.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(d) Neither 1 nor 2

Ans. (a)

49. In which of the following y was the highest growth of general index of industrial production in India registered?

(a) 2001-02

(b) 2002-03

(d) 2004-05

Ans. (d)

50. Growth rate in NNP at factor cost (at constant prices) has been highest during which Five-Year Plan?

(a) Ninth Plan

(b) Eighth Plan

(d) Fifth Plan

Ans. (b)

…………………………………………………….

Solved Question Papers of Micro Economics
Multiple Choice Questions for Economics

1. Assertion (A): An oligopolist faces demand curve which has a kink at the level of the prevailing price.

Reason (R): The segment of the demand curve above the prevailing price level or kink is highly inelastic and the segment of the demand curve below the prevailing price level is elastic.

Codes:

(a) Both A and R are individually true and. R is the correct explanation of A

(b) Both A and It are individually true but R is not the correct explanation of A

(d) A is false but R is true

Ans. (c)

2. Consider the following statements relating to marginal rate of technical substitution (MRTS).

1. The MRTS in case of an isoquant measures the rate at which one input is substituted for the other.

2. The M of input X for input Y at a point on an isoquant is equal to the positive slope of the isoquant at that point.

3. The MRTS equals to the ratio of the marginal product of input V to the marginal product of input X.

Which of the statements given above are correct?

(a) 1 and 2

(b) 2 and 3

(d) 1, 2 and 3

9. Which one of the following statements is not correct?

(a) Normal goods have a positive income elasticity of demand

(b) Inferior goods have a negative income elasticity of demand

(d) Luxury goods have an income elasticity of demand that is equal to one

Ans. (d)

10. A firm has certain initial equilibrium price, when demand function QD = 50 — 3P and supply function is 20 + 3P. If the firm’s demand function is shifted to C = 68 — 3P, what is the initial equilibrium price and the new equilibrium price, respectively?

(a) 5 and 6

(b) 5 and 8

(d) 8 and 5

Ans. (b)

11.Cournot model assumes which of the following?

1. There are two firms operating in the market.

2. The firms face a kinked demand curve.

3. Each firm acts on the assumption that their competitors

will not react to her decision to change output.

Select the correct answer by using the code given below

(a)

(b) 2 and 3

(d)1, 2 and 3

Ans. (c)

12. Which one of the following statements is correct?

The Sweezy mode of oligopoly assumes that price elasticity of demand

(a) is higher for a price increase than for a price decrease

(b) is lower for a price increase than for a price decrease

(d) cannot change for a price decrease

Ans. (a)

13. Which one of the following statements is correct?

(a) Demand for factors of production is an independent demand

(b) Demand for factors of production is a derived demand

(d) Demand for factors of production is same as the demand for commodities

Ans. (b)

14. What is the principle which is applied to redress the imbalance between distribution and welfare, known as?

(a) Principle of taxation

(b) Compensation principle

(d) Principle of supply

Ans. (b)

15. The inconsistency of which one of the following criteria is labelled as Scitovsky Paradox?

(a) Little Criterion

(b) Pareto Criterion

(d) Kaldor Flicks Criterion

Ans. (d)

16. consider the following statements

The distribution of two commodities between two individuals is Pareto optimal if

1. one individual cannot be made better off without making the other worse off.

2. the individuals are on their consumption contract curve.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(d) Neither 1 nor 2

Ans. (c)

17. What is maximizing the level of satisfaction with the given level of inputs and technology, called?

(a) Technical efficiency

(b) Allocative efficiency

(d) X- efficiency

Ans. (d)

18. Which one of the following statements is correct? An increase in money supply in Keynesian framework results in

(a) a higher level of income and a higher rate of interest

(b) a lower level of income and a lower rate of interest

(d) a lower level of income and a higher rate of interest

Ans. (c)

19. Which one of the following statements is correct?

A fall in the money supply results in the

(a) rightward shift in the IS curve

(b) rightward shift in the LM curve

(d) leftward shift in the LM curve only

Ans. (d)

20. Which one of the following statements is correct?

The IS function indicates the

(a) locus of the money market equilibrium

(b) locus of the commodity market equilibrium

(d) locus of both money and labour market equilibrium

Ans. (b)

21. Which one of the following statements is correct? According to Keynes, fresh investment would be possible only if

(a) the marginal efficiency of capital exceeds the rate of interest

(b) the marginal efficiency of capital is less than the rate of interest

(d) the marginal efficiency of capital is negative

Ans. (a)

22. Which one of the following statements is correct?

Autonomous investment is

(a) functionally related to interest rate

(b) functionally related to both income and interest rate

(d) independent of income and interest rate

Ans. (d)

23. Consider the following statements

1. The MPC is higher in a poor country and lower in a rich country.

2. Higher the MPC, higher will be the value of multiplier.

3. Lower the M lower will be the value of multiplier.

Which of the statements given above are correct?

(a) 1 and 2

(b) 1 and 3

(d) 1 2 and 3

Ans. (a)

24. Match List-I with List-II and select the correct answer by using the code given below the lists

List – I List -II

(Economist) (Concept)

A. A. C. Pigou 1. Liquidity Preference

B. J.M. Key 2. Real Balance Effect

C. J.R. Hicks-A.H. Hansen 3. Ratchet Effect

D. J.S. Duesenberry 4. IS-LM Analysis

Code:

A B C D

(b) 2 only

(d) 3 and 4

Ans. (c)

31. Consider the following statements

1. The equilibrium between the aggregate demand and aggregate supply may take place at a point of less-than-full employment in an economy.

2. The .size of deficient demand is inversely proportional to the deflationary gap.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2only

(d) Neither 1 nor 2

Ans. (a)

32. Assertion (A) : Gross National Product will always be more than the Gross Domestic Product.

Reason (R): To get Gross National Product, not factor income from abroad is added to Gross Domestic product

Codes:

(a) Both A and R are individually true and R is the correct explanation of A

(b) Both A and R are individually true but R is not the correct explanation of A

(d) A is false but R is true

Ans. (d)

33. what is the empirically fitted relationship between the rate of change of money wages and rate of unemployment, known as?

(a) Baumal’s Hypothesis

(b) Keynesian Model

(d) Phillip’s Curve

Ans. (d)

34. In the simplified version of Friedman’s quantity theory of money, velocity of circulation of money depends on which of the following?

(a) Rate of interest and rate of price change

(b) Rate of interest and rate of change of income

(d) Rate of change of price and rate of: change of investment

Ans. (b)

35. Consider the following assets

1. Cash held by public

2. Equity shares of banks

3. Deposits of banks

4. RBI bonds

Which of the above assets are considered as part of money supply?

(a) 1 and 2

(b) 1 and 3

(d) 1, 3 and 4

Ans. (b)

36. which one of the following is stated by the quantity theory of money?

(a) An increase in the nominal money supply causes a proportional increase in the price level

(b) An increase in the real money supply causes a proportional increase in the price level

(d) An increase in the real money supply causes a proportional increase in real GNP

Ans. (a)

37. Consider the following statements

1. Bond price and interest rate are positively related.

2. Bond price and interest rate are negatively related.

3. Credit creation varies directly with Cash Reserve Ratio (CER).

4. Credit creation varies inversely with Cash Reserve Ratio (CRR).

Which of the statements given above are correct?

(a) 1 and 2

(b) 1 and 4

(d) 2 and 4

Ans. (d)

38. Suppose, due to an open market purchase of government securities, reserves in the commercial banks increase by Rs. 1,000. If the reserve ratio is 20 percent, what will be the increase in money supply?

(a) Its. 5,000

(b) Rs. 4,000

(d) Rs. 1,000

Ans. (c)

39. Which one of the following is not a component of demand-pull inflation?

(a) An increase in government expenditure with no change in tax rate

(b) A downward shift h savings function

(d) An upward shift of investment function

Ans. (c)

40. Assertion (A) Indirect taxes promote inequality in the distribution of income.

Reason (R): Poor bear more burden of indirect taxes.

Codes:

(a) Both A and Rare individually true and R is the correct explanation of A

(b) Both A and R are individually true but R is not the correct explanation of A

(d) A is false but R is true

Ans. (a)

41. which one of the following statements is correct?

According to Peacock and Wiseman, public expenditure grows

(a) steadily over a period of time

(b) at a. constant rate in relation to GNP

(d) at a lower rate in relation to GNP

Ans. (c)

42. As compared to traditional budgeting, in case of Performance and Programme Budgeting System (PPBS), which one of the following statements is correct?

(a) It stresses on outcome only

(b) It stresses on expenditure allocation only

(d) It stresses less on outcome and more on expenditure allocation

Ans. (c)

43. Which one of the following statements is coned?

Zero-base budgeting implies that

(a) it emphasizes physical targets rather than financial targets

(b) spending on all programmes is re-examined and justified each year rather than following add-on every year

(d) it focuses on centralization of expenditure

Ans. (b)

44. Which one of the following statements is correct?

The revenue from the imposition of an advolarem tax and that of a unit tax in a perfectly competitive market which results in the same price rise, are

(a) more for advolarem tax

(b) more for unit tax

(d) zero for both the taxes

Ans. (c)

45. in which one of the following groups of taxes, do impact and incidence of tax coincide?

(a) Income tax and corporation tax

(b) Income tax and excise duties

(d) Excise duties and sales tax

Ans. (a)

46. The concept of optional taxation, based on whatever criteria, has to. cover decision-making at which of the following levels?

1. The aggregate amount of taxations and its division between direct and indirect taxations.

2. The composition and rate schedules of direct and indirect taxes.

3. The composition and revenue schedules of indirect taxes.

4. The composition and revenue schedules of direct taxes.

Select the correct answer by using the code given below:

(a) 1 and 4

(b) 1 and 3

(d) 2, 3 and 4

Ans. (c)

47. According to Cohn Clark, what is taxable capacity?

(a) 20 percent of National income

(b) 25 percent of National Income

(d) 35 percent of National Income

Ans. (b)

48. Which one of the following is not the Canon of taxation as stated by Adam Smith?

(a) Canon of equality

(b) Canon of certainty

(d) Canon of productivity

Ans. (d)

49. Which curve shows that how much of its import commodity is required by a nation in exchange for various quantities of its export commodity?

(a) Offer curve

(b) indifference curve

(d) Production possibility curve

Ans. (a)

50. Which of the following is/are correct in respect of opportunity cost theory?

1. A straight line production possibility curve indicates constant opportunity cost.

2; The production possibility curve under increasing cost would be concave to the origin.

Select the correct answer by using the code given below:

(a) l only

(b) 2 only

(d) Neither 1 nor 2

Ans. (c)

……………………………………………

Solved paper UPSC 2008 Prelims Economics

2. Consider the following statements:

A. The number of firms is large both under perfect competition and monopolistic competition.

B. There is freedom of entry and exit in both perfect competition and monopolistic competition.

C. In both perfect competition and monopolistic competition, every firm is a price taker and quantity adjuster.

Which of the statements given above are correct?

(a) A, B and C

(b) B and C

(d) A and B

Ans. (d)

3. Match List I (Market Type) with List-II (Implication) and select the correct answer using the codes given below the lists:

List-I List-II

(Market Type) (Implication)

A. Perfect competition 1. Collusion of firms

B. Monopoly 2. Excess capacity

C. Monopolistic competition 3. Uniform price

D. Oligopoly 4. Blocked entry

Code:

A B C D

(a) 2 4 3 1

(b) 3 1 2 4

(d) 3 4 2 1

Ans. (d)

4. In the Kinked Demand Curve Model, suppose MC curve shifts upward in the discontinuous range of MR curve.

Which one of the following is correct? At equilibrium,

(a) price rises but quantity remains the same

(b) price and quantity both remain the same

(d) price and quantity both rise

Ans. (b)

5. Consider the following statements:

Short run profit is maximum under perfect competition when

A. second order condition is satisfied.

B. MC curve cuts MR curve from below.

C. MC curve cuts MR curve from above.

Which of the statements given above is/are correct?

(a) A and C

(b) A and B

(d) B only

Ans. (b)

6. Which of the following is not a necessary condition of perfect competition?

(a) Large number of firms in the industry producing homogeneous products

(b) Free entry and free exit of firms

(d) Absence of artificial restrictions by the government

Ans. (c)

7. Consider the following statements:

A. The shape of a unitary elastic demand curve is a rectangular hyperbola.

B. The shape of a perfectly elastic demand curve is a rectangular hyperbola.

C. Perfectly inelastic demand curve is parallel to the price axis.

D. Perfectly elastic demand curve is parallel to the quantity axis.

Which of the statements given above are correct?

(a) A and B

(b) A, C and D

(d) B and D

Ans (b)

8. Which one of the following statements is correct?

A straight line demand curve (cutting both the axis) is elastic

(a) throughout the length of the demand curve

(b) at the mid-point

(d) above the mid-point towards the price axis

Ans. (d)

9. Under perfect competition, supply curve is identified as which one of the following?

(a) Rising portion of marginal cost curve

(b) Rising portion of average total cost curve

(d) Portion of marginal cost above the average variable cost curve

Ans. (d)

10. Which one of the following is the correct sequence of magnitude of minima in ascending order in marginal cost (MC) curve, average cost (AC) curve and average variable cost (AVC) curve?

(a) MC, AVC, AC

(b) AVC, AC, MC

(d) AC, MC, AVC

Ans. (a)

11. Consider the following statements:

A. The vertical distance from average cost (AC) curve to average variable cost (%&VC) curve is average fixed cost (AEC).

B. AVC curve, AC curve and marginal cost (MC) curve are ‘U shaped.

C. AFC curve is horizontal to ‘X’ axis.

Which of the statements given above are correct?

(a) 1 and 2

(b) 2 and 3

(d) 1, 2 and 3

Ans. (a)

12. Short-run marginal cost of a firm does not contain any element of which of the following?

(a) Costs of raw materials

(b) Salaries of the managerial staff

(d) Cost of fuel for operating machines engaged in production.

Ans. (c)

13. Suppose a fisherman has a fishing net and a boat. He alone hunts fish in sea for which he has to pay no license fee etc. Fish, caught by him, will have which one of the following?

(a) Zero economic cost of production as he makes no out-of-pocket payment to anybody and is working of his own

(b) Negative economic cost of production because he enjoys fishing and has to make no payment

(c) Positive cost of production due to his sacrificing the opportunity of working elsewhere and renting out fishing net and boat etc

(d) Infinite cost of production

Ans. (a)

14. Income consumption line of the ‘Consumer Theory’ is analogous in ‘Production Theory’ to which one of the following?

(a) Expansion path

(b) Isoquant line

(d) Isocost line

Ans. (a)

15. Which of the following is not correct in respect of Cobb-Douglas production function?

(a) It was originally based on the empirical study of US manufacturing industry.

(b) It is a linearly homogeneous production function, taking into account two factors, labour and capital, for the entire output of the manufacturing industry.

(c) It tells us that output depends upon labour and capital, and that part of output which cannot be explained by labour and capital, is attributed to the residual.

(d) It is based on the assumption of operation of law of diminishing returns.

Ans. (d)

16. Which one of the following statements is correct? If the elasticity of substitution between two factors X and Y be zero, then it implies that for a given change in outputs,

(a) X and Y will always change by the same proportion

(b)Y changes but X remains the same

(d) X and Y both change necessarily by different proportion

Ans. (a)

17. Consider the following statements:

According to the law of variable proportions; total product is maximum when

A. marginal product becomes zero.

B. marginal product curve cuts average product curve from above.

C. slope of marginal product curve is zero.

D. tangent of the total product curve is parallel to the horizontal axis.

Which of the statements given above are correct?

(a) A and D

(b) C and D

(d) B and C

Ans. (c)

18. Assertion (A): The monopolist never operates on the portion of the demand curve which is inelastic. Reason (R) When elasticity of demand is less than unity MR is negative.

Ans (a)

19. Assertion (A): The Revealed Preference Hypothesis excludes the study of Giffin Paradox

Reason (R) Revealed Preference Hypothesis considers only negative income elasticity of demand whereas Giffin Paradox relates to positive elasticity of demand.

Ans. (c)

20. Assertion (A): Indifference curve for perfect substitute goods is a downward sloping straight line. Reason (R): For perfect substitute goods, MRS is falling.

Ans. (a)

21. Assertion (A): There is no excess capacity under monopolistic competition in the long run. Reason (R): The demand curve under monopolistic competition is downward sloping.

Ans. (d)

22. Assertion (A): M curve lies below the VMP curve under imperfect competition.

Reason (R): Under imperfect competition MR < P.

Ans. (a)

23. Which of the following statements about Pareto Optimum are correct?

A. It changes with changes in the distribution of income.

B. At the Pareto Optimum, MRS in consumption = MRT in production.

C. It is not unique.

D. It is obtained under imperfect competition.

Select the correct answer using the codes given below:

(a) A and B

(b) A, B and C

(d) B and C

Ans. (b)

24. Match List- I (Economist) with List -II (Concept) and select the correct answer using the codes given below the lists:

List- I List -II

(Economist) (Concept)

A. Pareto 1. Compensation Principle

B. Hicks-Kaldor 2. Social Welfare Function

C. Bergson 3. Social Optimum

D. Scitovsky 4. Double Criterion Compensation

Code:

A B C D

(a) 3 1 2 4

(b) 2 4 3 1

(d) 2 1 3 4

Ans. (a)

25. Which one of the following statements is correct?

In a production process with two factors, land and labour, if the marginal productivity of land is negative, then it is in

(a) the stage I for land and stage II for labour

(b) the stage II for land and labour

(d) the stage I for labour and stage III for land

Ans. (b)

26. Which one of the following statements is correct?

The Engel Curve for Giffen goods is

(a) positively sloped

In the context of the figure above which of the following statements is/are correct?

A. Investment is autonomous.

B. Saving is autonomous.

C. Investment is dependent on income.

D Saving is dependent on income.

Select the correct answer using the codes given below:

(a) B and C

(b) A and D

(d) A only

Ans. (b)

35. consider the following consumption saving functions:

A. C = 200+0.8Y

B. S = 200+0.2Y

C. C = 150+0.8Y

D. S = -150+0.2Y

Which of the above are consistent pairs of functions?

(a) A and B

(b) A and D

(d) C and D

Ans. (d)

36. There are 2 assets A and B in which one can invest his savings of Rs. 1,000/. Assume that there is no risk and interest rate is 10%.

Asset A gives a return of Rs. 100/- in perpetuity

Asset B gives Rs. 200/. at the end of year 1 and Rs. 900/- at-the end of the year 2.

Which one of the following statements is correct?

(a) Present value of A and B are the same.

(b) Present value of B is higher than that of A.

(d) Information is inadequate to determine the present value of A and B

Ans. (c)

37. Which one of the following statements is correct?

Value of output and value-added can be distinguished if we know

(a) the value of intermediate inputs

(b) the value of net indirect taxes

(d) the value of consumption of fixed capital

Ans. (a)

38. Given:

% Change in nominal GNP = 1.8

% change in population = 0.5

% change in price level = 1.3

What is the approximate percentage change in real per -capita GNP?

(a) Zero

(b) 0.5

(d) 1.3

Ans. (a)

39. Match List- I (Concept) with List -II (Economist) and select the correct answer using the codes given below the lists:

List I List II

(Concept) (Economist)

A. Liquidity trap 1. M. Friedman

B. Demonstration effect 2. A.C. Pigou

C. Permanent income hypothesis 3. J. Duesenberry

D. Wealth effect 4. J.M. Keynes

Code:

A B C D

(d) PV = MT

Ans. (a)

47. If Y is the total money income of the community M is the money supply and P is the price level, than how is Vy (The income velocity of money) defined as?

(a) Vy = M/Y

(b) Vy = Y/M

(d) Vy = PY/M

Ans. (d)

48. When shall an increase in money supply have a small effect on nominal Gross Domestic Product?

(a) If the velocity is decreasing

(b) If the velocity is unchanged

(d) If the Government spending is also increasing

Ans. (d)

49. There are a number of banks in a market. The initial total primary deposit is Rs. 1,000. Every bank is required to maintain a 10% reserve legally The transactions are completely made through cheque and no transaction is made in cash. W1{at will be the total credit creation in the market?

(a) Rs. 1,000

(b) Rs 5,000

(d) None of these

Ans. (c)

50. Which one of the following is a source of non-tax revenue for governments?

(a) Import duty on cars

(b) Octroi at cheek points on roads.

(d) Excise duty or beverages

Ans. (c)

Economics Objective Solved Questions for exams
1. The Laffer Curve explain the relationship between which of the following?
(a) Tax rates and tax revenue
(b) Tax rates and employment
(c) Tax rates and income
(d) Tax rates and government expenditure
Ans. (a)

2. What does an increase in the ratio of revenue deficit to gross fiscal deficit indicate?
(a) An increase in investment
(b) An increase in the utilization of borrowed funds for revenue purposes
(c) An increase in the utilization of borrowed funds for imports
(d) An increase in the utilization of borrowed funds for lending
Ans. (b)

3. If in a year, the gross fiscal deficit of government is Its. 3,00,000 crores, revenue deficit is Rs. 1,50,000 crores and interest payments are Rs. 80,000 crores, which is the primary deficit of the government in the year?
(a) Rs. 23,000 crores
(b) Rs. 45,000 crores
(c) Rs 70,000 crores
(d) Rs. 2, 20,000 crores
Ans. (d)

4. Which of the following may not be considered as a merit of the opportunity cost theory over the Ricardian theory of comparative cost?
(a) It takes into account two or more factors of production instead of labour theory of value
(b) It takes into account the possibilities of trade under all the laws of production, instead of constant costs only as in the Ricardian theory
(c) The theory provides a theoretical framework for general equilibrium approach
(d) The theory considers the welfare point of view neglected by the Ricardian theory
Ans. (b)

5. Which one of the following statements is correct?
The Heckscher-Ohlin theory states that the most important cause of trade is the difference in:
(a) preferences
(b) technology
(c) magnitude
(d) factor endowments
Ans. (d)

6. Which one of the following statements is correct? The Leontief Paradox makes
(a) a critical analysis of Haberler theory of opportunity cost
(b) an empirical study of factor-price equalization theory of Samuelson
(c) an empirical testing of Mills theory of reciprocal demand
(d) an empirical testing of Heckscher-Ohlin theory of international trade
Ans. (d)

7. What is the theory that opening a country to world markets gives an opportunity to utilize unemployed and underemployed resources known as?
(a) Ricardian theory
(b) Heckscher-Ohlin theory
(c) Vent-for surplus theory
(d) Strategic trade theory
Ans. (c)

8. Which of the following are the basic components of typical IMP stabilization programme?
A. Liberalization of foreign exchange.
B. Devaluation of the official exchange rate.
C. A comprehensive anti-inflation programme.
D. General opening-up of the economy to international commerce including foreign
investment.
Select the correct answer using the code given below:
(a) A and C
(b) B and D
(c) A, C and D
(d) A, B, C and D
Ans. (d)

9. Which one of the following best characterizes the Bretton Woods System of exchange rates?
(a) Adjustable fixed exchange rates
(b) Fixed e rates
(c) Adjustable pegged exchange rates
(d) Pegged, exchange rates
Ans. (b)

10. Which of the following is the highest form of economic integration among different nations?
(a) Custom Union
(b) Free Trade Area
(c) Economic Union
(d) Common Market
Ans. (c)

11. Which one of the following explains balance-of-payment adjustment mechanism under the gold standard?
(a) Devaluation
(b) Flexible exchange rates
(c) Income-adjustment mechanism
(d) Price-specie flow mechanism
Ans. (d)

12. Which one of the following statements is not correct?
(a) The distinction between expenditure switching and expen4iture changing was propounded by FL U. Johnson
(b) The Absorption Approach to BOP was developed by Sydney Alexander
(c) The Elasticity Approach to BOP was associated with Stolper – Samuelson
(d) Stability condition in the foreign exchange market is known as Marshall – Lerne condition
Ans. (c)

13. In the Balance-of-Payment Account, the transfer payments are included in which one of the following?
(a) Current account
(b) Service account
(c) Capital account
(d) Official reserves account
Ans. (a)

14. Which of the following is not a non-tariff barrier?
(a) Voluntary export restraint
(b) Health and product standards
(c) Environmental protection laws
(d) Ad-valorem duties
Ans. (d)

15. Which one of the following statements is correct?
The production possibility curve under increasing
opportunity cost is
(a) concave to the origin
(b) convex to the origin
(c) a straight line parallel to the x – axis
(d) a straight line parallel to the y – axis
Ans. (a)

16. Match List -I (Terms of Trade) with List- II (Explanation) and select the correct answer using the codes given below the lists:
List-I List-II
(Terms of Trade) (Explanation)
A. Gross barter terms of trade 1.The ratio between the quantity of a country’s
imports and exports
B. Income terms of trade 2. (Index of export prices)
x (export quantity)
Index of import prices

C. Single factoral terms of trade 3. Obtained by multiplying the commodity terms of
trade by an index of productivity
changes in domestic export industries
4. The ratio of a country’s export price index to its
import price index
Code:
A B C
(a) 3 4 1
(b) 1 2 3
(c) 3 2 1
(d) 1 4 3
Ans. (b)

17. Under which one of the following fundamental assumptions, Solow was able to show that steady state growth was possible and stable?
(a) Flexible JVL ratio
(b) Flexible S/Y ratio
(c) Constant growth-rate of population
(d) Constant rate of technical change
Ans. (a)

18. Match List -I (Concept) with List -II (Explanation) and select the correct answer using the codes given below the lists:
List-I List- II
(Concept) (Explanation)

A. Vicious circle of poverty 1. Massive increase in investment to initiate economic
development in LDC’s
B. Balanced growth 2. A stagnant low level of investment
C. Big push 3. Simultaneous investment in all inter-related industries
Code:
A B C
(a) 2 3 1
(b) 1 2 3
(c) 2 1 3
(d) 1 3 2
Ans. (a)

19. Who among the following developed the Wage-Goods model?
(a) M. Dobb
(b) A. K. Sen
(c) Vakil and Brahmananda
(d) P C. Mahalanobis
Ans. (c)

20. Using Harrod-Domar growth equation. What is the rate of growth of a closed economy with C/Y = 3/4and AK / ÀY = 3 where, C = consumption, Y =output, K =

capital?
(a) 8.66%
(b) 8.50%
(c) 8.33%
(d) 7.50%
Ans. (c)

21. Match List -I (Economist) with List– II (Concept/Theory) and select the correct answer using the codes given below the lists:

List- I List-II
(Economist) (Concept/Theory)
A. Ragner Nurkse 1. Backwash effects
B. Paul N. Rosenstein Rodan 2. Theory of balanced growth
C. Gunnar Myrdal 3. The big push theory
D. A.O. Hirschman 4. Theory of unbalanced growth
Code:
A B C D
(a) 2 1 3 4
(b) 4 3 1 2
(c) 2 3 1 4
(d) 4 1 3 2
Ans. (c)

22. Match List I (Property of -a Plan) with List II (Model Used) and select the correct answer using the codes given below the lists:
List -I List -II
(Property of a Plan) (Model used)
A. Feasibility 1. Input-output model
B. Consistency 2. Linear programming
C. Optimality 3. Harrod- Domar type
Codes:
A B C
(a) 1 2 3
(b) 3 1 2
(c) 2 3 1
(d) 1 3 2
Ans. (b)

23. What is the technical progress that increases the productivity of labour (L) proportionately more than the productivity of capital (K) and results in an increase in L/K at constant relative factor prices, called?
(a) Labour saving technical progress
(b) Natural technical progress
(c) Wage saving technical progress
(d) Capital-saving technical progress
Ans. (d)

24. Match List I with List I and select the correct answer using the codes given below the lists:
List-I List -II
A. Aggregate Growth Model 1. Western models as applied to the
situation of developing countries
B. Multi-sector Growth Model 2. Analysis of growth in terms of inter-
dependence of sectors
C. Harrod-Domar Growth Model 3. Deals with the entire economy by
examining a set of important macro
variables
D. The False Paradigm Model 4. For a specific growth-rate and a given
capital output ratio, the required rate of
domestic investment is determined
Codes:
A B C D
(a) 4 2 3 1
(b) 3 1 2 4
(c) 3 2 4 1
(d) 4 3 1 2
Ans. (c)

25. Consider the following statements:
Lewis’ model of development with unlimited supplies of labour will fail to work to the full extent if:
A. there is no disguised unemployment in the traditional sector.
B. modem sector wages do not remain constant up to the point that surplus labour is exhausted.
C. investment in the modern sector is labour-saving.
Which of the statements given above is/are correct?
(a) A only
(b) A and B
(c) B and C
(d) A, B and C
Ans. (c)

26. Which one of the following models explains the paradox pertaining to the rural-urban migration in the context of rising urban employment?
(a) Lewis model
(b) Todano model
(c) Solow model
(d) Mahalanobis model
Ans. (b)

27. The Mahalanobis model was developed for which of the following plans?
(a) First Five Year Plan
(b) Second Five Year Plan
(c) Third Five Year Plan
(d) Fourth Five Year Plan
Ans. (b)

28- What is the correct sequence of the following approaches to development in terms of their chronological emergence?
A. Basic needs approach.
B Per capita income approach.
C. Human development index approach.
Select the correct answer using the codes given below:
(a) A, B, C
(b) B, A, C
(c) B, C, A
(d) A, C, B
Ans. (b)

29. On which of the following grounds is increasing inequality justified in initial stages of development?
(a) It puts greater incomes in the hands of those who have greater average propensity to consume
(b) It puts greater incomes in the hands of those who have greater average propensity to save
(c) It puts greater incomes in the hands of those who have greater marginal propensity to consume
(d) It puts greater incomes in the hands of those who have greater marginal propensity to save
Ans. (a)

30. Which of the following is meant by growth in the context of growth and development?
(a) Growth of gross national product in money terms
(b) Growth of per capita income in money terms
(c) Growth of gross national product in real terms
(d) Growth of per capita income in real terms
Ans. (c)

31. What is the ratio between the price of a country’s export goods and price of its import goods known as?
(a) Single factoral terms of trade
(b) Double factoral terms of trade
(c) Net barter terms of trade
(d) Income terms of trade
Ans. (c)

32. The two gaps in a two-gap model refer to which of the following?
A. Revenue expenditure gap
B. Saving investment gap
Select the correct answer using the codes given below:
(a) A only
(b) B only
(c) Both A and B
(d) Neither A nor B
Ans. (b)

33. Which of the following is not a characteristic of indicative planning?
(a) The government sets targets for all sectors of the economy including those dominated by private enterprises
(b) The emphasis is on consistency of the targets with each other
(c) Given the consistency of targets with each other, the government directs the private enterprises to attain those targets
(d) The government provides the right incentives to the private sector to attain the targets
Ans. (b)

34. If median and mode of a set of observations are 20.6 and 26 respectively, then what is the value of mean of the observation?
(a) 16
(b) 17.9
(c) 18.4
(d) 19
Ans. (b)

35. Lorenz curve enables one to study which of the following?
(a) Averages
(b) Dispersion
(c) Correlation
(d) Index numbers
Ans. (b)

36. Which one of the following is correct for a normal distribution?
(a) Standard deviation > Mean deviation> Quartile deviation
(b) Quartile deviation > Mean deviation > Standard deviation
(c) Mean deviation> Standard deviation > Quartile deviation
(d) Quartile deviation > Mean deviation > Standard deviation
Ans. (a)

37. Coefficient of correlation is independent of which of the following?
(a) Change of origin only
(b) Change of scale only
(c) Change of origin and scale
(d) None of the above
Ans. (c)

38. The Command Area Development Programme (CADP) has been renamed as which one of the following?
(a) Command Area Development and Water Management Programme
(b) Command Area Development and Forest Conservation Programme
(c) Command Area Development and Pollution Control Programme
(d) None of the above
Ans. (a)

39. Which one of the following indices satisfies both time reversal and factor reversal tests?
(a) Laspeyre’s index number
(b) Fischer’s index number
(c) Paasche’s index number
(d) Kelly index number
Ans. (b)

40. Which one of the following index numbers is based on geometric mean?
(a) Laspeyre’s index number
(b) Fischer’s index number
(c) Paasche’s index number
(d) Bowley’s index number
Ans. (b)

……………………………………………………..

UPSC Economics MCQ Quiz

1. What does infant mortality rate refer to?
(a) The ratio of number of children who die before their fifth birthday out of every 1000 live births
(b) The ratio of number of children who die before their first birthday out of every 100 live births
(c) The ratio of number of children who die before their fifth birthday out of every 100 live births
(d) The ratio of number of children who die before their first birthday out of everyl000 live births
Ans. (d)

2. Which among the following is not a committed expenditure of the Government of India?
(a) Interest payments
(b) Pay and allowances
(c) Transfers to States and Union Territories
(d) Loans and advances to States and Union Territories
Ans. (d)

3. Consider the following statements:
A. Annual Survey of Industries (ASI) extends to the entire country
B. ASI covers all factories registered under Sections 2m (i) and 2m (ii) of the Factories Act 1948.
Which of the statements given above is/are correct?
(a) A only (b) B only (c) Both A and B (d) Neither A nor B
Ans. (b)

4. Who was the Chairman of the committee appointed in 2006 for setting out a roadmap towards fuller capital account convertibility?
(a) S.S. Tarapore
(c) C. Rangarajan
(d) M. Narasimham
(d) O.P. Sodhani
Ans. (a)

5. In which of the following years, was the trade balance favorable to India?
(a) 1970-71 and 1974-75
(b) 1972-73 and 1976-77
(c) 1972-73 and 1975-76
(d) 1971-72 and 1976-77
Ans. (b)

6. Consider the following statements:
A. The Fifth Economic Census was conducted by CSO in the year 2007.
B. Intelligent Character Recognition (ICR) technology is being used for detailed processing of the data collected in the Fifth Economic Census.
Which of the statements given above is/are correct?
(a) A only (b) B only (c) Both A and B (d) Neither A nor B
Ans. (b)

7. During which of the following years, average growth/rate (at constant prices) of agriculture and allied sectors negative?
(a) 2002-03
(b) 2003-04
(c) 2005-06
(d) 2006-07
Ans. (a)

8. Which of the following are the goals of Santa Shiksha Abhiyan (SSA)?
A. All children of 6-14 years age in school/EGS (Education Guarantee Scheme) Centre/bridge course by the year 2015.
B. Bridge all gender and social category gaps at primary stage by the year 2007 and at elementary education level by the year 2010.
C. Universal retention by the year 2020.
Select the correct answer using the codes given below:
(a) A and B (b) B and C (c) A and C (d) A, B and C
Ans. (a)

9. Consider the following:
A. Kennedy Round of negotiations.
B. Uruguay Round of negotiations.
C. Tokyo Round of negotiations.
Which is the correct chronological sequence of the
above?
(a) A, B, C
(b) C, A, B
(c) A, C, B
(d) B, A, C
Ans. (a)

10. Why is demographic dividend likely to be manifested in India in future?
(a) Population in the age group between 8-15 years is likely to increase
(b) Population of children below 7 years is likely to increase
(c) Population in the age group of 15-64 years is likely to increase
(d) Population in the age group above 65 years is likely to increase
Ans. (c)

11. Which one of the following is not the target stipulated in the Tenth Five-Year Plan?
(a) Creating 50 million job opportunities
(b) Reduction in poverty ratio from 26 percent to 21 percent
(c) Reducing gender gaps in literacy and wages rates by 50 percent
(d) Doubling per capita income in 8 years
Ans. (d)

12. Consider the following items which are assigned weight in calculating wholesale price index in India
1. Primary articles
2. Fuel, power light and lubricants
3. Food products
4. Chemicals and chemical products
Which one of the following is the correct order of the above items in descending order in terms of their weight in the price index?
(a) 1-2-3-4
(b) 1-2-4-3
(c) 4-3-2-1
(d) 1-3-2-4
Ans. (b)

113. Consider the following components of financial saving of the household sector in India
1. Currency
2. Deposits
3. Shares and debentures
4. Insurance funds
Which one of the following is the correct order of the aforesaid items in descending order in terms of their contribution to the financial saving of the household sector in the year 2005-06?
(a) 1-2-3-4
(b) 2-1-3-4
(c) 2-4-1-3
(d) 4-2-l-3
Ans. (b)

14. What is the approximate share of SSIs in gross industrial value added in the Indian economy?
(a) 25% (b) 30% (c) 40% (d) 45%
Ans. (d)

15.Consider the following sectors, contributing to

India

’s real GDP during the year 2005-06:
1. Agriculture and allied activities
2. Industry
3. Construction
4. Community social and personal services
Which one of the following is the correct descending order in respect of their contribution?
(a) 1-4-3-2 .
(b) 1-2-4-3
(c) 3-4-2-1
(d) 3-2-1-4
Ans. (c)

16. The 12th Finance Commission has recommended to bring down the revenue deficit of the centre and states to zero by which year?
(a) 2006- 07
(b) 2007- 08
(c) 2008- 09
(d) 2009 -10
Ans. (c)

17. In which of the following years, the share of FIL (net) flows into Indian economy was the highest?
(a) 1999-2000
(b) 2000-01
(c) 2003-04
(d) 2004-05
Ans. (d)

18. Among different items of import of capital goods to India during the year 2005-06, which one of the following was the highest in the value terms ?
(a) Machine tools
(b) Electronic goods including computer software
(c) Transport equipments
(d) Project goods
Ans. (a)

19. Among the items of export of agricultural and allied products from India during the year 2005-06, which one of the following was the highest in the value
(a) Tea
(b Coffee
(c) Rice
(d) Marine products
Ans. (c)

20. Consider the follow important sources of tax revenue for the Central Government
1. Corporation tax
2. Taxes on income other than corporation tax
3. Union excise duties
4. Service tax
Which one of the following is the correct order of the aforesaid taxes in descending order in terms of their yield as proposed in the Union Budget 2006-07?
(a) 1-2-3-4
(b) 1-3-2-4
(c) 2-3-1-4
(d) 4-2-3-1
Ans. (b)

21. The Twelfth Finance Commission has recommended States’ share in the divisible pool of taxes at what percentage?
(a) 26.5 percent
(b) 28.5 percent
(c) 29.5 percent
(d) 303 percent
Ans. (c)

22. Consider the following statements about the National Agricultural Insurance Scheme (NAIS):
1. The scheme has been implemented from Rabi 1999-2000 season.
2. The scheme is availab1a non-loanee farmers only.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(c Neither 1 nor 2
Ans. (a)

23. In the total deployment of gross bank credit, which one of the following sectors had the maximum share as in March, 2006?
(a) Agriculture and allied activities
(b) Services
(c) Personal loan
(d) Trade
Ans. (a)

24. As per use-based classification, which one of the following sectors had recorded highest growth in the year 2005-06?
(a) Basic goods
(b) Capital goods
(c) Consumer goods
(d) Intermediate goods
Ans. (b)

25. In which one of the following years, the National Food Processing Policy was formulated?
(a) 2003
(b) 2004
(c) 2005
(d) 2006
Ans. (c)

26. Consider the following statements:
Accelerated Irrigation Benefit Programme (AIBP) was modified in the year 2004 to provide
1. the central assistance in the form of 70 percent loan and 30 percent grant for non-special category states.
2. the central assistance in the form of 10 percent loan and 90 percent grant for special category states.
3. the central assistance in the form of conversion of the loan to grant if projects are completed on schedule.
Which of the statements given above is/are correct?
(a) 1 only
(b) 1 and 3
(c) 2 and 3
(d) 1, 2 and 3
Ans. (d)

27. The Command Area Development Programme (CADP) has been renamed as which one of the following?
(a) Command Area Development and Water Management Programme
(b) Command Area Development and Forest Conservation Programme
(c) Command Area Development and Pollution Control Programme
(d) None of the above
Ans. (a)

28. Consider the following statements:
A. The coverage of Integrated Child Development Programme is limited and often the youngest children in the 0-3 year age group get left out of its ambit.
B. According to ICMR, at any given time, 7-15% of Indian children suffer from mental disorder
Which of the statements given above is/are correct?
(a) A only
(b) B only
(c) Both A and B
(d) Neither A nor B
Ans. (b)

29. Which group of infrastructure industry has the highest gap in targets and achievements of production during the year 2006-07?
(a) Fished Steel
(b) Crude Petroleum
(c) Power
(d) Fertilizers
Ans. (a)

30. The National Horticulture Mission (NHM) has aimed at doubling the horticultural production. For this, the target year is
(a) 2010
(b) 2011
(c) 2012
(d) 2015
Ans. (c)

31 Consider the following agreements:
A. ISLFTA. (India -Sri Lanka Free Trade Agreement).
B. SAFTA (South Asia Free Trade Area).
C. CECA (Comprehensive Economic Co-operation Agreement between India and Singapore).
D. SAPTA (South Asia Preferential Trade Area).
Which one of the following is the correct chronological sequence of the above agreements?
(a) A, C, B, D
(b) D, A, B, C
(c) B, A, D, C
(d) A, B, C, D
Ans. (a)

32. Which region of India has the lowest Thermal Plant Load Factor (PLF) for thermal power generation in the year 2006-207?
(a) Northern
(b) Western
(c) North-Eastern
(d) Southern
Ans. (c)

33. Consider the following statements:
A. Varsha Bima, the rainfall insurance scheme, is managed by the Agricultural Insurance Company of India Ltd. (ATCIL).
B. The scheme was introduced during the 2007 south-west monsoon period.
Which of the statements given above is/are correct?
(a) A only
(b) B only
(c) Both A and B
(d) Neither A nor B
Ans. (a)

34. Thx on Banking Cash Transactions (withdrawals) over a certain threshold in a single day w introduced in the Union Budget of which year?
(a) 2002-03
(b) 2004-05
(c) 2005-06
(d) 2006-07
Ans. (c)

35. Who among the following has suggested migration to accrual accounting system from cash based accounting system in India?
(a) I.V. Reddy
(b) R.H. Patil
(c) D.N. Ghosh
(d) C. Rangarajan
Ans. (c)

36. In which of the following years was the tax revenue as a percentage of GDP the lowest?
(a) 2002-03
(b) 2003-04
(c) 2004-05
(d) 2005-06
Ans. (a)

37. Which one of the following is the proportion of rain-fed agriculture to the net sown area in India?
(a) 40%
(b) 50%
(c) 60%
(d) 72%
Ans. (a)

38. Consider the following statements about industrial relations on the basis of Economic Survey:
A. There was a constant decline in the number of strikes and lockouts during 2000-OS in

India

.
B. The maximum number of strikes and lockouts in the year 2006 were experienced by Kerala, followed by Tamil Nadu and West Bengal.
Which of the statements given above is/are correct?
(a) A only
(b) B only
(c) Both A and B
(d) Neither A nor B
Ans. (a)

39. What is a strategy which makes an all-out effort to provide the masses of people in India access to basic facilities such as health, education, clean drinking water, etc., termed as?
(a) Inclusive growth strategy
(b) Exclusive growth strategy
(c) Rapid growth strategy
(d) Balanced growth strategy
Ans. (a)

40. Which of the following sectors has the largest percentage share in India’s total exports for the period April 2006 October 2007?
(a) Chemicals and related goods
(b) Engineering goods
(c) Gems and jewellery
(d) Textiles including readymade garments
Ans. (b)

41. It Which sector has attracted highest FDI inflows during the period from August 1991 to September2006 (in % share)?
(a) Services sector
(b) Electrical equipments
(c) Telecommunications
(d) Transportation industry
Ans. (b)

42. Which one of the following statements is correct?
(a) External Debt / GDP ratio has declined consistently after the year 2003
(b) External Debt / GDP ratio has fluctuated after the year 2003
(c) External Debt/GOP ratio has increased after the year 2003
(d) External Debt/GDP ratio has remained constant after the year 2003
Ans (a)

43. NSSO regularly collects rural retail prices on monthly basis from selected markets for compilation of Consumer Price Index Number. Which one of the following is the correct pair of samples collected for the purpose?
(a) 403 villages and 39 urban centers
(b) 503 villages and 49 urban centers
(c) 603 villages and 59 urban centers
(d) 703 villages and 69 urban centers
Ans. (c)

44. Which one of the following is not proposed in the approach paper to the 11th Five Year Plan as important new social interventions?
(a) Provide freedom and resources to select institutions so that they attain global standards by the year 2011-12.
(b) Grant old age pension to the widows, handicapped and deserted and separated women.
(c) Ensure adequate representation of women in• elected bodies, State Legislatures, and the Parliament.
(d) Provide emergency obstetrics care facilities within 2 hours travel from every habitat.
Ans. (d)

45. Which of th€ following statements pertaining to the strategy to raise agricultural output during the 11th Five Year Plan, are correct?
A. Double the rate of growth of irrigated area.
B. Improve water management, rain water harvesting and watershed development.
C. Provide easy access to credit at affordable rates.
Select the correct answer using the codes given below:
(a) A and B
(b) B and C
(c) A and C
(d) A, B and C
Ans. (a)

46.. With one area of infrastructure is not included in Bharat Nirman Scheme (2005-09)?
(a) Irrigation
(b) Rural roads
(c) Rural health
(d) Rural housing
Ans. (c)

47. Which of the following is/are not monitorable target(s) for the 11th Five Year Plan?
A. Accelerate growth rate of GDP to 10% by the end of the plan and then maintain it in the 12th Five Year Plan.
B. Double per capita income by 201647.
C. Create 20 million new work opportunities.
Select the correct answer using the codes given below:
(a) A only
(b) B only
(c) C only
(d) B and C
Ans. (c)

……………………………………

INTRODUCTION..PPT IN VIDEO

2019-07-30T16:50:00.000+05:30

2018-08-31T23:17:00.001+05:30

a video on Demand function .....

2018-08-31T23:07:00.001+05:30


Economics Word search

ECONOMICS

          We know, all too well, that we must pay for what we buy,

whether it be automobiles, clothing, movie tickets,

or roller coaster rides.

Buying as many products and services as we can with

our limited incomes

is an economical thing to do.

          Economics is an important part of everyone’s life.

It is the way in which human and natural resources are

used

by a nation to produce goods and services.

Economics can be things you buy (products)

or things someone does for you

to save time and effort (services).

Whatever it is, something of value is

given up or exchanged for something

else of value that we want and

think that we have to have.

Giving up something you want or

need in order to get something else is called opportunity cost.

Products and services are, however, limited.

That means they are scarce.

The amount of these available to the public is called supply.

          Maybe you are thinking of buying a new car,

so you postpone buying a newly released CD in order

to save money for the car.

 This is an important point.

Human wants and needs are unlimited.

Most of us don’t have nearly as much money

as we would like.

When it comes to two items you want,

you may need to make a choice.

Because of this, we have to decide what

we really want and feel that

we have to have in order to satisfy our most important needs.

When we are hungry, we want food; sick,

we want medical care;

excitement, we could choose a number of things.

The desire of customers for a particular item is called demand.

          Economics is involved in every purchase that we make.

We receive money for working.  This money is called income.

 We can only spend our money once and then it’s gone.

 Because of this, we must decide what is most

important to us and

make that choice. When we do this, we are prioritizing

(choosing what is most important) needs and wants

and allocating

(setting money aside to pay for certain things)

resources to satisfy them.

Remember:  Economics is a process of making decisions to satisfy

unlimited human wants and needs with limited resources.

Important Economic Terms:

ALLOCATING	CHOICE	COST
DEMAND	ECONOMICAL	ECONOMY
GOODS	INCOME	MOST
NATURAL	NEEDS	OPPORTUNITY
PRIORITIZING	PRODUCTS	RESOURCES
SCARCITY	SERVICE	SUPPLY
WANTS

Economics Word search

Find the economics terms in puzzle below.


ALLOCATING	CHOICE	COST
DEMAND	ECONOMICAL	ECONOMY
GOODS	INCOME	MOST
NATURAL	NEEDS	OPPORTUNITY
PRIORITIZING	PRODUCTS	RESOURCES
SCARCITY	SERVICE	SUPPLY
WANTS

2018-08-31T23:04:00.003+05:30

A note on ..............Demand for money

•Demand for money balance is liquidity preference.

•Whether to hold cash or put it in savings bank so as to earn interest.

•People desire to hold money balance from two motives —

•1. The Transaction Motive

•2. The Speculative Motive

Transaction motive

•Holding money for transactions

•Transaction demand for money in an economy, Mt can be written as

v.Mt = T

Where, v is velocity of circulation of money

• T is the total value of transaction in the economy.

Velocity

• the rate at which money circulates

•definition: the number of times the average rupee changes hands in a given time period

•example: In 2010,

•Rs.500 crores in transactions

•money supply = Rs.100 crores

•The average Rupee is used in five transactions in 2010

•So, velocity = 5

•speculative motive

•Demand for money for speculation is speculative motive.

•Speculative demand for money can be written as

•Mͩs = rmax - r/ rmin - r r = market rate of interest

As r decreases from r max to r min, the value of Mͩs increases from 0 to infinite.

Liquidity trap

•It’s a situation where the speculative money demand function is infinitely elastic.

Thus, Demand for Money = Transaction demand for money + Speculative demand for money

2018-08-31T22:59:00.005+05:30

A note on..........NATIONAL INCOME & RELATED AGGREGATES

GNP & GDP

•GNP=GDP+NFIA (NFIA is Net Factor Income from Abroad=factor income received from abroad -fact income paid abroad)

GDP=GNP-NFIA

•GNP &GDP are calculated at Market Price (MP)& Factor Cost (FC)

•The difference between MP&FC is Net Indirect Tax (NIT) i.e.,

•MP = FC + NIT

•FC = MP – NIT (NIT is added to MP & deducted in FC)

•NIT = Indirect Tax - Subsidies

•Tax on goods & services are Indirect Tax. Subsidies are provided by the Govt.

Therefore,

•GNPmp = GDPmp + NFIA

GDPmp = GNPmp – NFIA OR GNPmp = GNPfc + NIT GDPmp = GDPfc + NIT

GDPfc = GNPfc – NFIA

•GNPfc = GDPfc + NFIA

•GDPfc = GDPmp – NIT

•GNPfc = GNPmp - NIT

NNP & NDP

•NNP = GNP – D (D=depreciation)

•NDP = GDP – D

•NNPfc = NNPmp – NIT

•NNPfc is the National Income

NNPmp = NNPfc + NIT

PERSONAL INCOME

•The part of National Income received by households is PI

•PI = NI – Undistributed profits – Net interest payment made by households – Corporate tax + Transfer payments.

•A part of profit not distributed among factors of production is UP.

•Tax on the profit of firms is Corporate tax.

TRANSFER PAYMENTS

•Unilateral payments without any quid-pro quo.

•(quid-pro-quo means “expecting anything in return”)

•For example – Pensions, scholarships, etc.

TPs are Current Transfer & Capital Transfer.

•Current Transfer are the transfer for current consumption. e.g., pensions, scholarships, etc.

Capital Transfer are the transfer for Capital formation. e.g., financial assistance for infrastructure

PERSONAL DISPOSABLE INCOME

•PDI = PI – Personal Taxes – Non-Tax payments.

NATIONAL DISPOSABLE INCOME

•NDI = NNPmp + Other Current transfers from the rest of the world

NDI gives an idea of the maximum amount of goods & services the domestic economy has at its disposal.

•Gifts & aids are example for Current transfers from the rest of the world.

2018-08-31T22:58:00.000+05:30

A note on ........INCOME DETERMINATION

1. What is MPC (marginal propensity to consume) ? How is it related to MPS(marginal propensity to save)?

MPC refers to ratio of change in consumption to change in income.

MPC=ΔC/ΔY

Relationship between MPC & MPS

1.MPC + MPS = 1

2.MPC = 1 – MPS

3.MPS = 1 – MPC

2. Difference between Ex-ante & Ex-post investment

Ex-ante investment	Ex-post investment
planned	Actual
Hypothetical or assumed	real
Planned on the basis of future expectations	Result of various economic activities

3. what is effective demand ? How will you determine the autonomous expenditure multiplier when price of goods and rate of interest are given ?

If the elasticity of supply is infinite, then the output will be solely determined by aggregate demand at this price in the economy. This is called Effective Demand.

The equilibrium level of output and aggregate demand is derived by solving the equation,

Y = AD, Y = A + cY A is autonomous expenditure

Y – cY = A, Y( 1 – c ) = A c is MPC

Y = A / 1 – c

The value of Y depends on the parameters A and C.

4. Match the column B and C with A

A	B	C
APC	ΔC / ΔY	1-APC
APS	C / Y	1-MPC
MPC	S /Y	1-APS
MPS	ΔS / ΔY	1-MPS

Paradox of Thrift

If all the people of the economy increase the proportion of income they save ( i.e, if the MPS of the economy increases) the total value of savings in the economy will not increase – it will either decline or remain unchanged. This result is known as Paradox of Thrift. (draw diagram)

* AGGREGATE DEMAND (AD)

The total demand of goods and services in the economy at a particular price level id AD.

AD consists of Consumption, Investment and Government spending. i.e.,

AD = C+I+G C=Ĉ+cY I = Ī Ā=Ĉ+Ī

Or AD = Ā + cY

* AGGREGATE SUPPLY

AS is the total supply of goods and services in the economy at a particular price level.

2018-08-31T22:55:00.003+05:30

A note on...... Money & Banking

Barter system - Exchange of goods for goods & Services for services.

Defects of Barter system

1.Double coincidence of wants –need to have mutually exchangeable goods.

2.Indivisibility of commodities

3.Lack of common measure of value

4.Lack of proper store of value.

Money: definition

Money is the stock of assets that can be readily used to make transactions.

Primary functions- 1.Medium of exchange -we use it to buy stuff

•2.Measure of value – goods & services

Secondary functions- 1.Standard of deferred payment – future payment

•2.Store of value

•3.Transfer of value- transfers purchasing power from the present to the future

CONTINGENT FUNCTION- 1.Basis of credit 2.Distribution of National Income

3.Medium of compensation 4.Liquidity– money is the most liquid of all assets

Classification of money

1.Legal tender money – money which has legal sanction

2.Full bodied money (standard money) – face value is equal to its intrinsic value (value of metal)

3.Fiat money – legal tender money having no intrinsic value. e.g. currency notes and coins

Indian Monetary System

•Meaning – the monetary standard and monetary set up of a country.

•The type of standard money used in the country is its monetary standard .

•The apex monetary authority of our country is RBI.

The system of currency issue

•The system of note issue in India is The Minimum Reserve System( MRS)

•RBI issues currency notes above Rupee 1.

RESERVE BANK OF INDIA ( RBI ) -

RBI is the Central Bank of our country

FUNCTIONS OF RBI

1. Note issue – RBI issues currency notes & coins

2. Banker, Agent & Adviser to the Govt.

3. Custodian of foreign exchange reserves

4. Bankers’ Bank – RBI controls & regulates the commercial banks through its Monetary Policy

5.Lender of the last resort – RBI helps the commercial banks in times of crisis.

6.Controller of credit & money supply – through its Monetary Policy RBI controls the volume of credit.

7. Publisher of reports – periodical reports on banking & other monetary matters.

Commercial Banks

•Accept deposits from the public

•Lending money

•Borrowing rate – the rate of interest offered by the bank to deposit holders

•Lending rate – the rate of interest levied for lending money

•The difference between lending & borrowing rate is called “spread”, and is the profit appropriated by the banks.

Deposits - 1. savings deposits / demand deposits— chequeable deposits having low interest rate.

•2. Time deposits / fixed deposits / term deposits— Have a fixed period to maturity

Having high interest rate

Money Supply -

Legal definitions of Money - Money Supply is a stock variable.

Money Supply is the total stock of money in circulation at a particular point of time.

Measures of Money Supply by RBI

•1. M1= CU + DD CU is currency held by the public.

DD is demand deposits held by the commercial banks.

•2. M2= M1 + Savings deposits with Post Office savings bank

•3. M3= M1 + Net time deposits of Commercial Banks

•4. M4= M3 + Total deposits with Post Office savings organizations

Narrow & Broad Money - M1 and M2 are known as Narrow Money

M3 and M4 are known as Broad Money

•M1 is the most liquid asset

•M4 is the least liquid asset

AGGREGATE MONETARY RESOURCE (AMR)

M3 is the most commonly used measure of money supply and it is the AMR.

MONEY CREATION BY THE BANKING SYSTEM

•1. The Currency Deposit Ratio (cdr)

cdr =CU/DD

it reflects people’s preference for liquidity.

2. The Reserve Deposit Ratio (rdr)

rdr = R/DD

It is the proportion of the total deposits commercial banks keep as reserves.

Rdr has two instruments

•1. Cash Reserve Ratio (CRR) – The fraction of commercial banks deposits kept in RBI is CRR.

•2. Statutory Liquidity Ratio (SLR) – Commercial banks have to keep a given fraction of their total deposits n the form of specified liquid assets.

BANK RATE

•To control the value of rdr RBI uses another instrument called Bank Rate,

•It is the rate at which RBI lend money to the commercial banks.

•A high BR makes borrowing costly for commercial banks.

HIGH POWERED MONEY (H)

•The total liability of the Monetary authority of the country, RBI, is called the H or Monetary Base.

•H = CU + R R is the reserves

Demand for money

•Demand for money balance is liquidity preference.

•Whether to hold cash or put it in savings bank so as to earn interest.

•People desire to hold money balance from two motives —

•1. The Transaction Motive

•2. The Speculative Motive

Transaction motive

•Holding money for transactions

•Transaction demand for money in an economy,

MT can be written as

v.M = T

Where, v is velocity of circulation of money

• T is the total value of transaction in the economy.

Velocity

•basic concept: the rate at which money circulates

•definition: the number of times the average rupee changes hands in a given time period

•example: In 2010,

•Rs.500 crores in transactions

•money supply = Rs.100 crores

•The average Rupee is used in five transactions in 2010

•So, velocity = 5.

2016-11-08T17:46:00.000+05:30

Chapter- 3 Aggregate Demand

1. What does aggregate demand express?

The quantity of goods and services demanded in an economy
The quantity of goods and services produced in an economy
The quantity of goods produced in an economy
The quantity of services demanded in an economy

2. What is the aggregate demand curve most similar to?

A demand schedule
The demand curve for a firm
A demand system
The supply curve for a firm

3. Which of the following sources of purchases is not included in aggregate demand?

Businesses
Consumers
Foreigners
Government

4. What is the horizontal axis of the aggregate demand curve?

Interest rate
Price level
Inputs
Output or income

5. What is the vertical axis of the aggregate demand curve?

Price level
Income
Output
Interest rate

6. When the price level is high, what is aggregate demand?

High
Low
Unchanged
Need more information

7. When the price level is low, what is aggregate demand?

High
Low
Unchanged
Need more information

8. What is the general slope of the aggregate demand curve?

Horizontal
Vertical
Upwards
Downwards

9. What is the general equation for aggregate demand?

Y = C(Y - T) + I(r) + G + NX(e)
Y = C(Y - T) + I(r) + G
Y = C(Y - T) + I(r) + NX(e)
Y = C(Y - T) + G + NX(e)

10. The term C(Y - T) means that consumption is dependant upon what?

Income
Disposable income
Taxes
Output

11. The term I(r) means that investment is dependent upon what?

Real income
Disposable income
Real interest rate
Real exchange rate

12. The term NX(e) means that net exports are dependent upon what?

Nominal interest rate
Real interest rate
Nominal exchange rate
Real exchange rate

13. What does the real exchange rate represent?

The rate at which the goods from one country can be traded for the goods of another country
The rate at which the goods from one country can be purchased from another country
The rate at which the goods from one country can be traded for goods of that country
The rate at which the goods from one country can be purchased in another country

14. What economic number can be derived from output?

Standard of living
National income
GDP per capita
Nominal GDP

15. What area of aggregate demand would movie tickets fall under?

Net exports
Investment
Consumption
Government spending

16. What are of aggregate demand would social security fall under?

Net exports
Investment
Consumption
Government spending

17. What are of aggregate demand would raw materials shipped to Asia fall under?

Net exports
Investment
Consumption
Government spending

18. What are of aggregate demand would new housing fall under?

Net exports
Investment
Consumption
Government spending

19. Which of the following would not be considered consumption under aggregate demand?

Books
Movie tickets
New houses
Food

20. Which of the following would not be considered investment under aggregate demand?

Education
Machinery
Factories
Used housing

21. Which of the following types of economic activity are not represented in aggregate demand?

Aid from foreigners
Aid to foreigners
Government transfers
Consumption spending

22. Which model of aggregate demand is based upon exchange rates?

Laffer model
Mundell-Fleming model
Keynes model
Pigou model

23. Which of the aggregate demand models is based on investment spending?

Laffer model
Mundell-Fleming model
Keynes model
Pigou model

24. Which of the aggregate demand models is based on consumption spending?

Laffer model
Mundell-Fleming model
Keynes model
Pigou model

25. Which of the following is not a model of aggregate demand?

Laffer model
Mundell-Fleming model
Keynes model
Pigou model

26. What is the effect of a decrease in the price level on wealth?

It decreases wealth
It increases wealth
It has not effect on wealth
It has an indeterminate effect on wealth

27. When consumers feel or become wealthier, what is the effect on consumption spending?

It increases consumption spending
It decreases consumption spending
It has no effect on consumption spending
It has an indeterminate effect on consumption spending

28. What is the effect of a high price level on interest rates?

Interest rates tend to be low
Interest rates tend to be high
There is no relationship between the price level and interest rates
Need more information

29. Which of the following is not related to the interest rate?

The price of output
The price of consumption
The price of loans
The price of investment

30. What happens when the domestic interest rate is lower than foreign interest rates?

Foreign investment shift domestically
Domestic investment shifts abroad
Domestic investment is unchanged
Foreign investment is unchanged

31. When the real exchange rate decreases, what happens to net exports?

Net exports are unaffected
Net exports fall
Net exports rise
Net exports fall sometimes and rise other times

32. What is the horizontal axis of the IS-LM model?

Interest rate
Growth rate
Exchange rate
Income and output

33. What is the vertical axis of the IS-LM model?

Interest rate
Exchange rate
Income and output
Growth rate

34. Which market does the IS curve reflect?

The money market
The market for goods and services
The market for exports
The market for imports

35. Which market does the LM curve reflect?

The market for goods and services
The money market
The market for imports
The markets for exports

36. Which direction does the IS curve slope?

Horizontal
Vertical
Upward
Downward

37. Which direction does the LM curve slope?

Upward
Downward
Horizontal
Vertical

38. Why is the LM curve upward sloping?

Because higher income leads to lower money demand which leads to lower interest rates
Because higher income leads to higher money demand which leads to higher interest rates
Because lower income leads to higher money demand which leads to higher interest rates
Because lower income leads to lower money demand which leads to higher interest rates

39. Why is the IS curve downward sloping?

Because as the interest rate rises, investment increases, thus increasing output
Because as the interest rate rises, investment decreases, thus increasing output
Because as the interest rate falls, investment increases, thus increasing output
Because as the interest rate falls, investment decreases, thus increasing output

40. What is an example of an exogenous change in the IS-LM model?

Changes in output
Changes in the money supply
Changes in the interest rate
Changes in tastes

41. When the price level increases, which direction does the LM curve shift?

Inward
Outward
Upward
None of the above

42. What happens when the aggregate demand curve shifts left?

Output increases at all price levels
Output decreases at all price levels
Input increases at all price levels
Input decreases at all price levels

43. What happens when the aggregate demand curve shifts right?

Input increases at all price levels
Input decreases at all price levels
Output increases at all price levels
Output decreases at all price levels

44. When disposable income falls, what happens to the aggregate demand curve?

It shifts left
It shifts right
It is inverted
It does not change

45. When happens to the aggregate demand curve when the savings rate increases?

It shifts left
It shifts right
It is inverted
It does not shift

46. What happens to the aggregate demand curve when government spending increases?

It shifts left
It shifts right
It does not shift
It is inverted

47. What happens to the aggregate demand curve when the real exchange rate rises?

It is inverted
It does not shift
It shifts left
It shifts right

48. What happens to the aggregate demand curve when the marginal propensity to consume increases?

It is inverted
It does not shift
It shifts left
It shifts right

49. What other curve is required to complete the AS-AD model?

Aggregate supply
Aggregate demand
IS
LM

50. What information can be obtained from the AS-AD model of the economy?

Equilibrium in the foreign market for goods and services
Equilibrium in the domestic market for goods and services
Changes in the domestic market for goods only
Changes in the foreign market for goods only
ANSWERS
1.A
2.B
3.C
4.D
5.A
6.B
7.A
8.D
9.A
10.B
11.C
12.D
13.A
14.B
15.C
16.D 17.A 18.B 19.C 20.D 21.A 22.B 23.C 24.D 25.A 26.B 27.A
28.B 29.A 30.B 31.C 32.D 33.A 34.B 35.B 36.D 37.A 38.B 39.C
40.D 41.A 42.B 43.C 44.A 45.A 46.B 47.C 48.D 49.A 50.B

2016-11-08T14:44:00.003+05:30

Chapter 2 - Macro

Question 1

The convergence hypothesis states:

a) Countries with lower levels of GDP per capita will grow faster on average than those with higher levels until they catch up to the leaders.

b) Countries converge to the same steady-state GDP per capita through the elimination of inefficient production.

c) Modern economic growth eliminates countries comparative advantages as they become more like each other.

d) None of the above.

Question 2

The convergence hypothesis is confirmed by data from advanced economies but cannot be confirmed by data that mixes rich with poor countries. This is because:

a) ...the business cycles of advanced economies converged during the first third of the twentieth century.

b) ...prices in developing countries are sticky in the long-run whereas prices in advanced economies are flexible in the long-run.

c) ...the simple Solow model does not consider complementary inputs such as infrastructure and human capital.

d) ...there are significant barriers preventing international factor mobility.

Question 3

Which of the following is not an implication of externalities to human capital?

a) Basic education should be made compulsory.

b) Human capital should be paid better in poor countries.

c) Educational subsidies are economically justifiable.

d) Human capital would not necessarily be subject to decreasing returns in the aggregate.

Question 4

What is the social trade-off involved in patent protection?

a) A longer patent period means that less knowledge will be available for use.

b) The higher the cost of a patent application, the fewer patent applications will be made.

c) Increasing the cost of new knowledge through patent licensing will decrease the demand to use new knowledge.

d) Less than full-exploitation of new knowledge by potential users is the cost of increasing the incentive for inventors to produce new knowledge.

Question 5

The explanation offered in this chapter for why poor nations appear caught in a poverty trap is that...

a) ...patents restrict access to new technologies to those nations that can afford the fees.

b) ...low human capital endowments lead to low rates of diffusion of technological innovations.

c) ...multinational corporations do not reinvest their profits from poor nations in the poor nations.

d) ...all of the above.

Question 6

In an economy where capital were not subject to decreasing marginal returns, which of the following statements would NOT be true?

a) An increase in the rate of saving (s) could lead to an increase in the rate of growth of output.

b) Policies that would only lead to a one-time increase in the level of output could lead to a permanent increase in the rate of output growth.

c) The economy would not converge to a unique steady state capital to effective labour ratio.

d) The golden rule rate of saving would be zero.

Question 7

The presumption that costly new knowledge would be undersupplied by private markets is based on two essential characteristics of new knowledge: it is (A) ______ and (B) _______.

a) A: non-rivalrous
B: non-excludable

b) A: non-rivalrous
B: excludable

c) A: rivalrous
B: non-excludable

d) A: rivalrous
B: excludable

Question 8

Long-term waves of economic activity are associated with…

a) …cycles of economic expansion and contraction.

"Inflation is generally procyclical" means…

answer:

b) …"the rate of inflation tends to rise in periods of high economic growth and fall in periods of low economic growth".

Feedback:

Note that according to the Burns-Mitchell diagram for price inflation, it actually lags the peak of the business cycle by a quarter. Note choice "c" confuses the price level with the rate of change of the price level (i.e. inflation). Deflation in the modern world does not generally occur after the peak of the business cycle, rather a slowing down of the rate of inflation can be expected

.....FROM WHERE OUR NOTES AND COINS ARE COMING.....

2016-11-05T22:42:00.003+05:30

Four printing presses print and supply banknotes.
These are at Dewas in Madhya Pradesh,
Nasik in Maharashtra,
Mysore in Karnataka, and
Salboni in West Bengal.
The presses in Madhya Pradesh and Maharashtra are owned by the Security Printing and Minting Corporation of India (SPMCIL), a wholly owned company of the Government of India.
The presses in Karnataka and West Bengal are owned by the Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), a wholly owned subsidiary of the Reserve Bank.
Coins are minted by the Government of India.
The Reserve Bank is the agent of the Government for distribution, issue and handling of coins.
Four mints are in operation: Mumbai in Maharashtra, Noida in Uttar Pradesh, Kolkata, and Hyderabad.

Coins in circulation: 50 paise, 1, 2, 5 and 10 Rupee

Notes in circulation: Rs. 5, 10, 20, 50,100, 500 and 1000

Bank notes are legal tender at any place in India for payment without limit.

AS PER THE INDIAN COINAGE ACT

Rupee coin (1 and above) can be used to pay /settle any sum.
Paise 50 coin can be used to pay /settle any sum not exceeding Ten Rupees.

hai...its been for a while...i will keep in touch

2016-11-05T22:21:00.003+05:30

hope all of u had a nice time with my blog...i will continue to post simple and relevant materials... see u all soon...

TEST PAPER III

2014-04-03T19:53:00.000+05:30

KNOW YOUR ECONOMICS

1. The subject matter of price theory is
A) Behaviour of industry’s decision making
B) Economic behaviour of the entire country
C) Economic behaviour of individual decision making units
D) Behaviour of all decisionmaking units taken together
2. The Engel curve shows
A) The amount of a commodity that the consumer would purchase per unit of
time at various levels of total income
B) The amount of a commoditythat the consumer would sell at a given level
of income
C) The amount of consumer durables that the consumer would purchase per
unit of time at various levels of total income
D) The amount of consumer non durables that the consumer would purchase
per unit of time at variouslevels of income
3. Hicksian substitution effect refers to
A) The change in the quantity demanded of a commodity resulting from a
change in its price, while holding real income constant by keeping the
consumer on the same indifference curve before and after the price change
B) The change in the quantity supplied of a commodity resulting from a
change in its price, while holding real income constant by keeping the
consumer on the same indifference curve
C) The change in the quantity demanded of a commodity from a change in its
price, while holding absolute income constant by keeping the consumer on
the same indifference curve before and after price change
D) The change in the quantity demanded of a commodity resulting from a
change in its price, while holding income constant by keeping the consumer
on the same indifference curve beforeand after the price change
4. Transitivity assumption in RevealedPreference theorem states that
A) If the consumer is observed to prefer basket A to B, then this consumer will
never prefer B to A
B) The consumer can be induced to purchase any basket of goods
C) If A is preferred to B, and B to C, then A is preferred to C
D) A consumer’s preferences can be inferred
5. The Learning Curve is
A) Positively sloped
B) Negatively sloped and convex to the origin
C) Right angled
D) A horizontal straight line parallel to X axis
6. A market structure which satisfies three conditions of Pareto Optimality
A) Monopolistic Competition B) Perfect Competition
C) Oligopoly D) Monopoly
7. The approach of Revealed Preference Theorem is
A) Psychological
B) Introspective
C) Behaviorist
D) Deductive
8. If specific sales tax is imposed on monopolist output
A) Will maintain the initial equilibrium position and price will not change in
the short run
B) Greater the tax burden to the consumer if market supply is less elastic
C) Shifts the Marginal Cost curve to the left leading to smaller equilibrium
quantity
D) Will not affect the Marginal Cost curve of monopolist
9. A rational consumer will operate in the stage where
A) There is an increase in the productivity of fixed and variable factors
B) Productivity of variable factor diminishes with positive marginal product
C) The quantity of variable factor is more than the quantity of fixed factor
D) There is increasing average returns to the factors of production
10. At higher wage rate, the supply curve of labour is
A) Always positively sloped
B) Forward bending because substitution effect is stronger than income effect
C) Backward bending because substitution effect is weaker than income effect
D) Both substitution effect and income effect are equally stronger
11. The long run supply curve of a constant cost industry is
A) Downward sloping B) Vertical
C) Positively sloped D) Perfectly elastic
12. By joining the points of producer equilibrium we get
A) Expansion Path B) Ridge lines
C) Producer Indifference Curves D) Iso Cost Line
13. From the industries listed below, which is the best available example for perfect
competition?
A) Tea industry B) Telephone industry
C) Food grains D) Automobile industry
14. Marginal Cost always refers to A) Cost of adding one unit
B) Gain in reducing one unit
C) Change in total cost due toaddition or deletion of one unit
D) Increment in cost
15. Cobb Douglas production function is homogenous function of degree
A) Zero B) One
C) Greater than one D) Less than one
2
16. A producer of two commodities X and Y using two factors L and K reaches
general equilibrium of production whenever
A) MRTSLKin the production of X is equal to the MRTS LKin the production
of Y
B) MRTS LKin the production of X is less than MRTS LKin the production of
Y
C) MRTS LKin the production of X is greater than MRTS LKin the production
of Y
D) None of these
17. The concept of ‘full cost’ includes
A) Business cost and opportunity cost
B) Opportunity cost and marketing cost
C) Opportunity cost and normal profit
D) Business cost, opportunity cost and normal profit
18. A curve representing different combinations of two inputs that produce the same
level of output is called A) Indifference Curve
B) Isoquant
C) Budget Line
D) Iso Cost Curve
19. Quasi Rent is
A) Equal to the firm’s total profit
B) Greater than the firm’s total profit
C) Less than the firm’s total profit
D) Can not be compared with the firm’s total profit
20. Social Welfare Function shows
A) The various combinations of marginalutilities of two social groups that
give the society the same level of satisfaction or welfare
B) The various combinations of utilities of two individuals that give the
society the same level of satisfaction or welfare
C) The various combinations of sacrifice of all individuals that give the society
an improved level of social welfare
D) None of the above
21. Macro economics does not study
A) Interrelationships between macro variables
B) Performance of the entire economy
C) Determination of the levels of aggregate economic activities
D) Price and output determination of a commodity
22. In macro economic framework, Aggregate Supply refers to
A) Total value of goods producedand supplied in an economy
B) Total value of goods and services supplied in an economy
C) Total value of goods and services produced and supplied in an economy
D) Total value of goods produced in an economy
3
23. According to Permanent Income Hypothesis
A) There exists a non proportional relationship between consumption and
permanent income
B) Transitory income is positive for lower income households
C) Consumer behaviour is based on the theory of inter temporal choice
D) Average Propensity to Consume and Marginal Propensity to Consume are
equal for all levels ofdisposable income
24. Given a neo classical aggregate supply schedule, a decrease in autonomous
investment leads to
A) A fall in output, while price level remains the same
B) A fall in both price and level of output
C) An increase in price and level of output
D) A fall in price, but no effect on level of output
25. Static Multiplier assumes
A) That the change in investment and the resulting change in income are
simultaneous
B) That the change in savings and the resulting change in consumption are
simultaneous
C) That the change in investment and the resulting change in consumption are
simultaneous
D) That the technology remains constant
26. Who among the following is a neo Keynesian?
A) Lucas B) Sargent C) Muth D) Mankiw
27. Among the following, which is the best definition of national income?
A) National Income is the money value of all final goods and services
produced in a country during a period of one year
B) National Income is the money value of all final goods produced in a
country during a period of one year
C) National Income is the value of all final goods produced in a country during
a period of one year
D) National Income is the outcome ofall production activities of a nation
valued in terms of money
28. The ratio of the investment to the change in the national income is called
A) Accelerator B) Multiplier
C) Marginal Propensity to Consume D) Marginal Propensity to Invest
29. Nash Equilibrium is one
A) Which every player can improve their pay off given the strategy of the
other players
B) Which some players can improve their pay off given the strategy of the
other players
C) Which none of the players can improve their pay off
D) Which none of the players can improvetheir pay off given the strategy of
the other players.
4
30. The following can be considered asan objective of monetary policy
A) Achieve monetary stability
B) Avoid conflicts between the internal and externalinterests of the economy
C) Control government expenditure
D) Create conditions for an efficient utilization of labourand other productive
resources as far as possible
31. GNP deflator is defined as
A) Ratio of nominal GNP in a yearto the real GNP of that year
B) Ratio of GNP in a year to the GDP of that year
C) Ratio of nominal GNP in a year to the nominal GDP of that year
D) Ratio of GNP to the nominal GDP of that year
32. Export surplus is desirable when there is
A) Excess demand B) No demand
C) Deficient demand D) All of the above
33. Money whose intrinsic value is equal to its face value is called
A) Token money B) High Valued money
C) Representative money D) Full Bodied money
34. According to monetary approach to balance of payments, all payment deficits are
the result of
A) Disequilibrium in the balance of payments
B) Floating exchange rate system
C) Excess supply of money in the home country
D) Speculation
35. If C = 100 + 0.75Y, where C = Consumption and Y = Income, then multiplier is
A) 0.6 B) 0.4 C) 2 D) 4
36. If an individual is to receive Rs1100 in oneyear and the market rate of interest is
10 per cent, its present value is
A) 800 B) 900 C) 1100 D) 1000
37. The name of the economist with whom the Real Balance Effect is associated
A) Patinkin B) Keynes C) Arrow D) Friedman
38. Aggregate demand in a two sector model refers to
A) C + I + Y B) C + I
C) C D) C + I – Y +X – M
39. Laffer Curve analysis mainly deals with……………..economics
A) Demand B) Supply
C) Fiscal D) Monetary
40. “Ratchet Effect” is associated to
A) James Duesenberry B) J M Keynes
C) Milton Friedman D) Arrow and Modigilani
5
41. The derivative of a constant is
A) 1 B) 0
C) Negative D) Logarithm of that constant
42. The relationship among price elasticity ofdemand, average revenue and marginal
revenue is
A) Average revenue/(average revenue - marginal revenue)
B) Marginal revenue/(marginal revenue - average revenue)
C) Average revenue/(marginal revenue - average revenue)
D) Average revenue - marginal revenue/average revenue
43. If P = a - bq represents the demand equation, then marginal revenue is A) a – 2bq B) a – bq
C) aq – bq2
D) a + 2bq
44. If the utility function U = F(x), the utility is maximum when
A) du/dx = 0 B) d
2
u/dx
2
>0
C) du/dx = 0 and d
2
u/dx
2
<0 D) d
2
u/dx
2
< 0
45. Which of the following is a property of transpose of a matrix?
A) Transpose of the sum of matrices is the difference of the transposes of the
individual matrices
B) Transpose of transpose of a matrix is the original matrix
C) Transpose of a product of matrices is the product of the transpose of the
matrices
D) Transposes of the matrices are not comparable
46. A matrix which has same elements inthe arrangement on both sides of the
diagonal running from north west to south east is called……………….
A) Diagonal Matrix B) Identity Matrix
C) Symmetric Matrix D) Triangular Matrix
47. Definite integral is defined as
A) The value of the integral at the upper limit less its value at the lower limit
B) The value of the integral at the upperlimit plus its value at the lower limit
C) The value of the integral at the lower limit less its value at the upper limit
D) The value of the integral at the upper limit multiplied by its value at the
upper limit
48. Who is more associated with the development of inputoutput analysis?
A) Leontiff B) Danzing
C) Walras D) Pareto
49. In the case of a small sample, the sample size will be
A) Equal to 30 B) Less than 20
C) Less than 29 D) Depends on population
6
50. When population under investigation is infinite, we should use A) Sample method
B) Census method
C) Either sample or census method
D) None of these
51. Sampling errors are present only in
A) Complete enumeration survey
B) Sample survey
C) Both census and sample surveys
D) Neither sample or census survey
52. Geographical classification means, classification of data according to
A) Time B) Location
C) Attributes D) Class intervals
53. The geometric mean of two numbers 8 and 18 is
A) 12 B) 13 C) 15 D) 11.07
54. The correlation coefficient r = 0, implies
A) Perfect positive correlation
B) Perfect negative correlation
C) No correlation
D) Insignificant correlation
55. If the regression coefficients are 0.9 and 0.4, the value of the correlation coefficient
is
A) 0.36 B) 0.60 C) 0.81 D) 0.16
56. A bag contains 30 balls numbered from 1 to 30. One ball is drawn at random.
Find the probability that the number of the ball drawn will be a multiple of 5 or
seven
A) 1/3 B) 1/5 C) 1/6 D) 1/2
57. Dr Ambedkar’s contributions to Indian Economic Thought is remarkably found in
A) The problem of the rupee B) Economics of caste
C) Ancient Indian trade D) Deciding foreign exchange rate
58. The growth rate of the Indian economy during 2009-10, according to the Economic
Survey 2009-10
A) 5.3 per cent B) 6.7 per cent
C) 7.8 per cent D) 9.1 per cent
59. In India, M3 is otherwise stated as
A) Reserve money B) Narrow money
C) Broad money D) Plastic money
7
60. The Prime Minister’s Employment Generation Programme (PMEGP), has been
launched by merging Rural Employment Generation Programme
and………………
A) National Programme of Mid day meals
B) Swarnjayanti Gram Swarozger Yojana
C) Swarna Jayanti Shahari Rozgar Yojana
D) Prime Minister’s Rozgar Yojana
61. National Rural Employment Guarantee Scheme (NREGS) was launched in the
year
A) 2005 B) 2006 C) 2007 D) 2008
62. According to Population Census of India (2001), how many females are there for
every 1000 males in Kerala?
A) 1056 B) 1057 C) 1058 D) 1059
63. Total number of Revenue Villages in Kerala in 2009
A) 1452 B) 999 C) 991 D) 1642
64. Which Article of the Indian Constitution empowers the appointment of Finance
Commissions?
A) 280 B) 180 C) 279 D) 179
65. The significance of 73
rd
Constitution Amendment (1993)
A) Enactment relating to social welfare
B) Enactment relating to panchayats
C) Enactment relating to anti corruption
D) Enactment relating to women empowerment
66. “Current Daily Status” is a concept used in measuring
A) Daily average stock of money supply
B) Daily average stock of Foreign Exchange Reserves
C) Rate of inflation
D) Employment and unemployment
67. The main objective of Bharat Nirman (2005) programme is
A) Developing skill oriented youth
B) Providing basic amenities in rural areas
C) Providing sanitation facilities in rural and urban areas
D) Encouraging the birth of girl child
68. The Unorganised Worker’s Social Security Act was passed in the year
A) 2008 B) 2009
C) 2007 D) 2006
69. The basic principles of decentralisation of power in Kerala State was framed by
A) Kerala Panchayat Raj Act B) Sen Committee
C) ADB guidelines D) World Bank guidelines
8
70. The Head Quarters of Small Industries Development Bank of India is located at
A) Mumbai B) New Delhi
C) Lucknow D) Chennai
71. The time period of the 11
th
Five Year Plan
A) 2009-14 B) 2008-13 C) 2006-11 D) 2007-12
72. In India, Five Year Plans are approved by the
A) Planning Commission
B) Parliament
C) National Development Council
D) President of India
73. According to the neo classical model, the rate of economic growth depends on
A) Capital Stock
B) Capital Stock and Labour Supply
C) Capital Stock, Labour Supply and Technological Progress
D) Technological progress
74. The new growth theory assumes technology as
A) Endogenous B) Exogenous
C) Constant D) Neutral
75. One of the major contributions of ArthurLewis to the theoryof economic growth
is
A) The concept of full employment
B) The concept of employment
C) The concept of frictional unemployment
D) The concept of disguised unemployment
76. The “Critical Minimum Effort” theory of development was advanced by
A) Nurkse B) Nelson
C) Leibenstein D) Kaldor
77. Ricardian analysis of rent is based on the following principle
A) Law of diminishing returns B) Comparative cost advantage
C) Fertility of the land D) Law of increasing returns
78. Which committee looked into the problem of tax evasion and suggested measures
(1971)
A) Tyagi Committee B) Boothalingam Committee
C) Jha Committee D) Wanchoo Committee
79. The statement “A country is poor because it is poor” is associated with the name of
A) Nrukse B) Hicks C) Smith D) Myrdal
80. Stockholm Conference on Human Environment was held in the year
A) 1987 B) 1972 C) 1992 D) 1991
9
81. The environmental Kuznets Curve Hypothesis proposes that
A) There is an inverted U shape relation between quality of environment and
per capita income
B) There is a linear relation between quality of environment and per capita
income
C) There is a negative relation between quality of environment and per capita
income
D) There is a L shape relation between quality of environment and per capita
income
82. Among the following, which term is more associated to environmental issues?
A) Public utilities B) Shadow price
C) Gross profit D) Market price
83. Among the following, which is the best example for international public good?
A) Western Ghats B) River Nile
C) Silent Valley D) Biological Diversity
84. Among the following, which agency is moreassociated to environmental issues?
A) UNO B) UNCTAD C) UNDP D) ADB
85. National Environment Policy was declared in the year
A) 2005 B) 2004 C) 2006 D) 2007
86. According to Harrod, the equilibrium between G and Gwis
A) Stable B) Knife edge
C) Under employment D) Fluctuating
87. According to Kaldor, when savings out of profit is less than savings out of wages
A) Prices will increase B) Cumulative fall in prices
C) Increase in consumption D) Increase in production
88. The person behind the concept “Industrial Reserve Army”
A) Adam Smith B) David Ricardo
C) Malthus D) Karl Marx
89. The rate of exchange can be defined as
A) The rate at which the currency of one country is converted into US Dollars
B) The rate at which Indian rupee is converted into any other currency
C) The rate at which one currency is converted into another currency
D) The rate declared by the Reserve Bankof India for the conversion of Indian
rupee into US Dollars
90. Under fixed exchange system, the rate of exchange is determined by
A) New York Stock Exchange B) Central Bank of a country
C) Planning Commission D) Ministry of Finance
10
91. The account which shows all transactions to trade in goods, services and unilateral
transfers is called
A) Capital Account B) Current Account
C) Revenue Account D) None of these
92. Find odd man out
A) Value of shipping services B) Value of marine products exported
C) Value of tea exported D) Value of pepper exported
93. If the value of the currency increases interms of some other foreign currency by
the market mechanism, it is called
A) Devaluation B) Appreciation
C) Depreciation D) Dumping
94. Foreign Direct Investment (FDI) comes under A) Current Account
B) Official Reserve Account
C) Capital Account
D) Revenue Account
95. Among the following which is the best advantage of international trade?
A) Benefit of price stability
B) Benefit of demand and supply equilibrium for commodities
C) Benefit of achieving equilibrium in foreign exchange reserves
D) Benefit of specialization
96. Ricardian Theory of Comparative Advantage suggests that trade between two
countries is desirable
A) If one has absolute advantage inthe production of both the commodities
and the other absolute disadvantage in production of both the commodities
B) If one has absolute advantage in the production of at least one commodity
and the other absolute disadvantage in production of both the commodities
C) If one has absolute advantage inthe production of both the commodities
and the other absolute disadvantage in production of at least one
commodity
D) If one has comparative advantage in the production of both the
commodities, with out considering the status of the other country
97. Terms of Trade can be defined as
A) Quantity of domestic goods that mustbe given in exchange for one unit of
imported goods
B) Quantity of goods to be exported tobalance the deficit in the foreign
exchange reserves with respect to a country
C) Quantity of goods to be imported in exchange of one unit of exported goods
D) Ratio between goods exported and goods imported in a given year
11
98. Forward market refers to
A) Foreign exchange deals for sale and purchases of foreign currency at some
future date
B) Foreign exchange deals for sale of foreign currency at some future date
C) Foreign exchange deals for purchase of foreign currency at some future
date
D) Foreign exchange deals for sale and purchase for foreign currency at spot
99. Remittances of the nationals working aboard come under
A) Current Account B) Capital Account
C) Official Reserve Account D) Balance of Trade Account
100. Net Factor Income from abroad is defined as
A) Total income from abroad – factor income
B) Factor income from abroad – factor income
C) Factor income from abroad – personal income
D) Total income from abroad – personal income
101. World Trade Organisation (WTO) came into force on
A) 1-1-1995 B) 1-1-1994 C) 1-1-1996 D) 1-1-1991
102. Doha Agreement is associated to
A) Industry B) Agriculture C) Trade D) Banking
103. Which agency is more associated to world trade?
A) ADB B) UNCTAD C) UNO D) EEC
104. “The Third World War will start from………………….”(Paul Roberts)
A) Struggle for food
B) Struggle for water
C) Struggle for gender empowerment
D) Struggle for sanitation facilities
105. Who is more associated tooptimality in allocations?
A) Wicksell B) Pareto
C) Tiebout D) Bowen
106. Who advocated expenditure taxation?
A) Adam Smith
B) Raja J Chelliah
C) Indirect Tax Enquiry Committee
D) Nicholas Kaldor
107. Which of the following is a local tax?
A) Turnover tax B) Advertisement tax
C) Sales tax D) Capital gains tax
12
108. A standard framework introduced in 1969 for disbursing plan assistance to the
States
A) Kelkar Formula B) Gadgil Formula
C) Population area ratio D) Density area ratio
109. Treasury bills are instruments in
A) Capital market B) Money market
C) Goods market D) Foreign Exchange market
110. Value Added Tax (VAT) is
A) Tax on total value of the goods sold
B) Tax on the value added by the last seller
C) Tax on the value added by all the intermediaries
D) None of the above
111. Pick odd man out
A) Fiscal Deficit B) Revenue Deficit
C) Budget Deficit D) Deficit Financing
112. Expenditure that does not create any asset is called
A) Revenue Expenditure B) Capital Expenditure
C) Plan Expenditure D) Non Plan Expenditure
113. Property of persons who die without heirs is called
A) Forfeiture B) Special assessment
C) Escheats D) Gifts
114. Who was the Chairman of the Tax Reform Committee, 1991?
A) Rangarajan B) Talwar
C) Raja Chelliah D) Narashimham
115. Expenditure tax was abolished in India in the year
A) 1962 B) 1963
C) 1964 D) 1965
116. Excess of fiscal deficit over interest payments is
A) Monetised deficit B) Budget deficit
C) Primary deficit D) Secondary deficit
117. Penalty imposed by the court for breaking of contract is called
A) Escheats B) Forfeiture
C) Fine D) None of these
13
118. Among the following, which is the best explanation for disinvestment? A) Selling of shares
B) Selling of shares of government in the public enterprises
C) Selling of shares of government in the public enterprises to the private
companies
D) Selling of shares of government inthe public enterprises to the Multi
National Companies
119. Spill over effects refer to
A) Direct effects which flow fromthe production to the other parties
B) Economic effects due to externalities
C) Economic effects which flow from the production or use of the good to
final users only
D) Effects which flow from the production or use of the good to final users
only
120. Who coined the term “Merit goods”?
A) Dalton B) Musgrave
C) Marshall D) Lerner
………………….
14

TEST PAPER II

2014-04-03T19:51:00.002+05:30

.........KNOW YOUR ECONOMICS......

1. Continuous substitutability of capital and labour is shown by
A) Smooth convex isoquant B) Kinked isoquant
C) Linear isoquant D) None of these
2. Input output analysis was put forward by
A) Leon Walras B) Keynes
C) Wassiley Leontief D) Marshall
3. If the income elasticity of demand is greater than 1, the commodity is
A) Luxury B) Inferior
C) Non related good D) Necessity
4. Cross elasticity of a complementary good is
A) Positive B) Negative
C) Zero D) None of these
5. Slope of total product curve measures
A) Marginal product B) Total product
C) Average product D) MRTS
6. The short run average variable cost has a flat stretch which reflects the fact
that firms build into their plants some ----------------- which allows flexibility
in their operation.
A) Excess capacity B) Marginal capacity
C) Reserve capacity D) None of these
7. The demand curve becomes the marginal revenue curve of the monopolist under
A) First degree price discrimination
B) Second degree price discrimination
C) Third degree price discrimination
D) None of the above
8. The Theory of Monopolistic Competition is authored by
A) Joan Robinson B) E.Chamberlin
C) Augustin Cournot D) Sweezy
9. The upper section of a kinked demand curve has a --------------- price
elasticity than the lower part.
A) Higher B) Lower
C) Equal D) None of these
10. All of the following are true about a monopolist except
A) Average and marginal revenue are not the same
B) Marginal revenue is greater than price
C) Marginal revenue is zero if price elasticity of demand equals one.
D) Marginal revenue decreases with increases in output
2
11. The Lerner Index equals
A) (P-MC)/P B) P/(MC-P)
C) (MC-P)/MC D) MC/(MC-P)
12. Negative network externality in which a consumer wishes to own an expensive or
unique good
A) Snob effect B) Bandwagon effect
C) Ratchet effect D) None of these
13. When the price lines are parallel it implies
A) The same commodity prices, but different amounts of money expenditure
B) Different commodity prices, but same amount of money expenditure
C) Same commodity prices and same amount of money expenditure
D) Different amounts of commodity prices and different amounts of money
expenditure.
14. The Prisoner’s Dilemma illustrates
A) The lack of co-operation among firms in a competitive market
B) The lack of co-operation among firms in a monopolistic market
C) The lack of co-operation between a monopoly and its customers
D) Why in an oligopoly market, co-operation is difficult to achieve even when
it is mutually beneficial.
15. Which of the following is not true about revealed preference curve?
A) It was pioneered by American economist Paul Samuelson
B) It establishes the law of demand without indifference curves
C) It proves the existence of indifference curves
D) It is based on cardinal measurement of utility
16. When negative income effect is greater than substitution effect, it is the
case of which one of the following?
A) Giffen good B) Inferior good
C) Normal good D) Luxury good
17. A firm has a certain initial equilibrium price when demand function
Q(D)=100  4P and supply function is 30+3P. If the firm’s demand
function is shifted to 170  4P, what is the initial equilibrium price
and new equilibrium price?
A) 10 and 20 B) 20 and 10
C) 5 and 15 D) 7 and 17
18. Which one of the following is a necessary condition for barometric price
leadership?
A) Must be a large firm
B) Must have control over a large portion of the market
C) Must have good knowledge about the prevailing market conditions
D) Must be a low cost firm
3
19. The Engel curve for a giffen good is
A) Negatively sloped B) Positively sloped
C) Vertical D) Horizontal
20. The locus of general equilibrium points of exchange in a two individual
two commodity economy is called
A) The consumption contract curve
B) The production contract curve
C) The social welfare function
D) The transformation curve
21. By leading to a higher nominal interest rate, inflation leads to lower
money balances and hence people are required to go to banks
more frequently. This cost is termed as
A) Shoe leather cost B) Menu cost
C) Tax cost D) None of these
22. Macroeconomic impact of one firm’s price adjustment on the demand for
all firm’s products is called
A) Aggregate supply externality
B) Aggregate demand externality
C) Aggregate income externality
D) None of these
23. According to quantity theory of money equation, an increase in------------causes
inflation.
A) Money supply B) Money demand
C) Rate of interest D) None of these
24. The horizontal parallel section of the Keynesian speculative demand for
money indicates that
A) There is no speculative demand for money
B) There is small but limited demand for money
C) Monetary policy ineffective
D) Monetary policy becomes effective
25. When investment is negatively related to the rate of interest,
equilibrium output in the goods market
A) Is unrelated to the rate of interest
B) Is inversely related to the rate of interest
C) Is positively related to the rate of interest
D) falls as the rate of interest decreases
26. The slope of IS curve -------------- when investment spending becomes
less interest sensitive
A) Increases B) Decreases
C) Remains unchanged D) None of these
4
27. A rapid and decisive reduction in growth rate of money supply aimed at
reducing the rate of inflation is called
A) Cold turkey B) Gradualism
C) Reflation D) None of these
28. Okun’s law states that output falls by 2.5% for each percentage point
increase in
A) Inflation B) Unemployment
C) Productivity D) Investment
29. The proposition that changes in the government budget deficit caused
entirely by changes in tax collections have no effect on the economy
is known as
A) Seignorage B) Ricardian equivalence
C) Purchasing power parity D) Fiscal accommodation
30. Tendency of inflation and nominal interest rate to move together is called
A) Pigou effect B) Fisher effect
C) Keynes effect D) Real balance effect
31. Relative Income Hypothesis was propounded by
A) James Duessenberry B) Keynes
C) Milton Friedman D) Modiglani
32. When marginal propensity to consume is 0.5, the value of multiplier is
A) 1 B) 5 C) 10 D) 2
33. Rational Expectations Hypothesis was propounded by
A) Lucas B) Smith
C) Marx D) Schumpeter
34. GDP at factor cost equals
A) GNP at market price+ indirect taxes- subsidies
B) GNP at market price + Direct taxes
C) GDP at market price-indirect taxes+ subsidies
D) None of the above
35. Efficiency wage model is a feature of
A) New keynesian school B) Monetarism
C) New Classical school D) Supply side economics
36. Unemployment in Keynes model is caused by
A) Demand deficiency B) Supply deficiency
C) Demand sufficiency D) Supply sufficiency
37. National Income is
A) Per capita at factor cost B) NDP at factor cost
C) GDP at market price D) GNP at market price
5
38. Which of the variables shift the classical aggregate demand curve?
A) An increase in government spending
B) Decrease in taxes
C) An increase in autonomous investment expenditure
D) An increase in the money stock
39. An increase in marginal propensity to import
A) Has no effect on the multiplier
B) Increases the value of the multiplier
C) Decreases the value of the multiplier
D) None of the above
40. In a two sector model, consumption is 40+0.90Y and investment is 50,
equilibrium output is
A) 900 B) 500 C) 400 D) 90
41. The characteristic feature(s) of a good estimator
A) Best B) Linear
C) Unbiased D) All of these
42. Probability is associated with
A) Certain events B) Uncertain events
C) Impossible events D) None of these
43. Suppose in a binomial distribution, n=number of trials, p=probability of
success and q=probability of failure, the mean of binomial distribution is
A) npq B) np C) pq D) nq
44. The coefficient of skewness of normal distribution is
A) 3 B) Less than 3
C) More than 3 D) 0
45. The level of significance is the probability of
A) Type 1 error B) Type 2 error
C) Power of a test D) None of these
46. The percentage of total variation explained by explanatory variable is
A) f B) z C) t D) R
2
47. t test is used for
A) Small sample B) Large sample
C) Both D) None of these
48. The algebraic sum of the deviations of various values from the ------------- = 0
A) Co-efficient of variation B) Arithmetic mean
C) Variance D) None of these
6
49. When the observed and expected frequencies completely coincide, χ
2
will be
A) Less than 1 B) Greater than 1
C) Zero D) One
50. The method of making research inference from general to particular is
A) Deductive B) Inductive
C) Both D) None of these
51. The y intercept of a line is a point when
A) y is 0 B) y is negative
C) x is 0 D) x is negative
52. Mode can be obtained by
A) 3Mean-2Median B) 1Mean-2Median
C) 3Median-3Mean D) 3Median-2Mean
53. When 2 coins are tossed, what is the probability of getting two tails?
A) 1/4 B) 1/2 C) 4/2 D) 1
54. Derivative of log x is
A) 1 B) 0 C) 1/5 D) 1/x
55. If the marginal revenue is 25 and the elasticity of demand with respect to
price is 2,find the average revenue.
A) 25 B) 50 C) 12.5 D) 27
56. ------------------------ of a matrix is the sum of the elements of the leading
diagonal.
A) Transpose of a matrix B) Trace of a matrix
C) Order of a matrix D) None of these
57. As per economic survey 2011-12, agriculture including allied
activities accounted for --------- of GDP in 2010-11, at 2004-05
prices.
A) 13.9% B) 12.5% C) 15.3% D) 14.5%
58. According to Census of India 2011, the literacy rate of India is
A) 65.73% B) 64.83% C) 74.04% D) 75.05%
59. As per the Human Development Report 2011, the HDI rank of India is
A) 123 B) 134 C) 157 D) 127
60. R.N. Malhotra committee gave reccomendations in the field of
A) Agricultural sector B) Sick industries
C) Insurance sector D) Banking sector
61. NABARD was established on the recommendations of
A) Public Accounts Committee B) Shivaraman Committee
C) Narasimhan Committee D) None of these
7
62. The Competition Commission of India became operational with effect from the
year
A) 2009 B) 2008 C) 2010 D) 2007
63. The States which do not have RRB’s
A) Goa and Sikkim B) Assam and Kerala
C) Bihar and Rajasthan D) Mizoram and Manipur
64. According to 2011 census ,which is the most populous State in India?
A) Maharashtra B) Bihar
C) Uttar Pradesh D) West Bengal
65. The Grey revolution is associated with
A) Oil seeds B) Fertilizers
C) Petroleum D) Meat\Tomato
66. The share of industry in total employment in India increased from 16.2% in
1999-2000 to ----------- % in 2009-10.
A) 28.5% B) 25.6% C) 19.4% D) 21.9%
67. As per Indian Economic Survey 2011-12, fiscal deficit as a percentage of GDP
was ---------- in 2009-10.
A) 5.6% B) 6.5% C) 4.5% D) 3.5%
68. The per capita income of Kerala during 2008-09 at current prices is
A) Rs 59716 B) Rs 80366
C) Rs 47900 D) Rs 67916
69. The primary sector’s contribution to SDP of Kerala at factor cost during
2008-09 at current prices
A) 15.99% B) 20.80% C) 24.31% D) 33.45%
70. The sex ratio (females per 1000 males) in Kerala according to 2011 Census of
India is
A) 1032 B) 1058 C) 1084 D) 1056
71. ---------------- is a self employment scheme meant for uplifting the most
backward and segregated women in Kerala belonging to ST community.
A) SURAKSHA B) SARANYA
C) SURABHI D) SUKANYA
72. District-wise analysis of Kerala’s literacy rate according to 2011 census shows
that ---------------------- district has the lowest literacy rate.
A) Palakkad B) Pathanamthitta
C) Wayanad D) Idukki
73. The author of the book Problems of Capital Formation in UDCs.
A) Rosenstein Rodan B) Arthur Lewis
C) Ricardo D) Ragner Nurkse
8
74. According to Hick’s classification of technical progress, given constant
capital output ratio, technical progress is said to be------------------ if it
raises the marginal product of labour in greater proportion than
marginal product of capital.
A) Capital saving B) Labour saving
C) Neutral D) None of the above
75. According to Rostow, in which stage growth becomes a normal condition
of the society?
A) The pre take off stage B) The take off stage
C) Drive to Maturity D) The Age of High Mass Consumption
76. According to Joan Robinson, which type of golden age has a situation where
a steady rate of accumulation of capital takes place below full employment?
A) A Leaden Golden age B) A Bastard Golden age
C) A Restrained Golden Age D) A Limping Golden Age
77. The Gender Empowerment Measure(GEM) was introduced by the
Human Development Report of the year
A) 1995 B) 1990 C) 1985 D) 1975
78. The Optimum population theory was propounded by
A) Thomas Robert Malthus B) Dalton
C) Edwin Cannan D) C.P. Blacker
79. For any component of HDI, individual indices are calculated according to
the formula
A) Actual value-Minimum Value/maximum value-minimum value
B) Maximum value-minimum value/actual value-minimum value
C) Actual value-maximum value/maximum value-minimum value
D) None of the above
80. ‘The problem of population is not of mere size but efficient production
and equitable distribution’ has been remarked by
A) Malthus B) Seligman
C) Smith D) Ricardo
81. Industrial Reserve Army denotes
A) A wing of government which inspects quality of products introduced in
industries
B) The army reserved for the supply of industries
C) The reserve raw materials kept by firms
D) The unemployed population due to the growth of constant capital.
82. Passinetti model is an extension of ------------------ model of distribution
A) Kaldor model B) Harrod model
C) Joan Robinson model D) Solow model
9
83. If the capital -output ratio is 4 and targeted growth rate is 5%,the required
level of savings is
A) 25% B) 15% C) 20% D) 10%
84. Tragedy of commons was first described in his thesis by
A) G. Debru B) D. Kenneth Arrow
C) S.H. Hahn D) Garrett Hardin
85. ------------------ method gives a minimum estimate of the benefits received
from the environment protection programme.
A) Delphi method
B) Costless choice method
C) Preventive expenditure method
D) None of the above
86. Which of the following characteristic is widely regarded as being
an important aspect of sustainable development?
A) Intergenerational equity B) Increasing consumer expenditure
C) Increased level of savings D) None of these
87. ---------------------- is a tax levied on a non market activity that generates
Negative externalities which is intended to correct the market outcome.
A) Specific tax B) Ad velorem tax
C) Carbon tax D) Pigovian tax
88 ----------------------- is a measure of income inequality which is equal to
the portion of the total community income that would have to be
redistributed for there to be perfect equality.
A) Herfindahl index B) Hoover index
C) Solow index D) Pareto index
89. ---------------------- curve shows how much of its import comm odity is required by
a nation in exchange for various quantities of its export commodity
A) Offer curve B) Indifference curve
C) Demand curve D) Production possibility curve
90. A graph showing all the combinations of goods and services that can be produced
if all of society’s resources are used efficiently is
A) Capital consumption curve B) Circular flow diagram
C) Production possibility curve D) Lorenz curve
91. The Leontief paradox presented by Wassiley Leontief in 1951, found that
USA exported -------------- and imported ---------------- in apparent contradiction
with Hekscher-Ohlin theorem.
A) Labour intensive commodities, capital intensive commodities
B) Capital intensive commodities, labour intensive commodities
C) Capital intensive commodities, capital intensive commodities
D) Labour intensive commodities, labour intensive commodities
10
92. A hot money or refugee capital is
A) One which is transferred from one centre to another for greater safety
B) Earned by refugees
C) Deposited by refugees before taking refuge
D) None of these
93. Match the following:
a. Adjustable peg system 1. IMF fixed exchange rate system in
which the exchange rate can be
varied, if there is fundamental
equilibrium.
b. Crawling Peg system 2. Changing the exchange rate little
by little continuously to check
speculation.
c. The wider band 3. Flexible movements within a definite
range.
A) a1, b2, c3 B) a3, c2, b1
C) a2, b3, c1 D) a3, b1, c2
94. If depreciation is to improve the country’s BoP, the Marshall Lerner condition
requires that the sum of elasticities of demand for imports and demand for exports
should be
A) Smaller than unity B) Greater than unity
C) Equal to unity D) Equal to 0
95. Which of the following items is within the total of BoP?
A) The merchandise balances B) The basic balance
C) The current account balance D) All of these
96. The OLI paradigm (ownership advantages, locational considerations and
international gains) as an explanation for FDI has been put forward by
A) Emmanuel B) Dunning
C) Kindle Berger D) Hymer
97. Under fixed exchange rate system, an expansionary monetary policy always leads
to ---------------- in BoP, while a contractionary monetary policy always leads to --------------- in the BoP.
A) Deterioration, improvement B) Improvement, deterioration
C) Deterioration, deterioration D) Improvement, improvement
98. The essence of -------------------- is that the importing country negotiates with its
foreign suppliers on quantitative restrictions on the amount of exports they will
supply to the domestic market.
A) Voluntary Export Restraints B) Import Tariff
C) Export tariff D) None of these
11
99. The neo Chamberlinian models of intra industry trade differ from neo Heksher
Ohlin model in that the goods in question are
A) Vertically differentiated B) Identical
C) Horizontally differentiated D) None of these
100. The Rybczynski theorem states that if the endowment of one of the factors of
production increases, the endowment of the other being constant, the output of the
good using the accumulating factor intensively will ------------------ and the output
of other good will ------------- in absolute terms provided that commodity and
factor prices are kept constant.
A) Increase,decrease B) Increase,increase
C) Decrease,decrease D) Decrease, increase
101. The offer curve of a nation bulges or bends towards the axis which measures its
A) Import commodity B) Export commodity
C) Export or import commodity D) Non traded commodity
102. Increasing opportunity costs to produce more and more units of a commodity are
given by the production possibility curve
A) Convex to the origin B) Concave to the origin
C) Straight line D) None of these
103. The Stopler Samuelson theorem postulates that imposition of a tariff by a nation
causes the real income of the nation’s
A) Scarce factor to fall
B) Abundant factor to rise
C) Scarce and abundant factors to rise
D) Scarce factors to rise
104. Factor intensity Reversal refers to a situation where
A) The same commodity is more labour intensive in one nation than in the
other
B) One commodity is the labour intensive commodity in one nation and the
capital intensive commodity in the other nation.
C) Both commodities are more labour intensive in one nation than in the other
nation.
D) None of the above.
105. The part of public finance which deals with the study of methods and
causes of public borrowings.
A) Public expenditure B) Public debt
C) Public revenue D) None of these
106. -------------------- is established by a government agency or business for the
purpose of reducing debt by repaying or purchasing outstanding loans and
securities held against the entity.
A) Capital levy B) Surplus revenue
C) Sinking fund D) Annuities
12
107. The demand for a commodity is perfectly elastic and supply is inelastic, then the
burden of taxation will be
A) Fully on buyer
B) Is equally shared by buyer and seller
C) Fully on seller
D) More burden on seller and less on buyer
108. According to Arthur Laffer, when rate of tax is 100%, the tax revenue will be
A) 0 B) 25% C) 50% D) 100%
109. VAT is imposed
A) Directly on consumers
B) On final stage of production
C) On first stage of production
D) On all stages between production and final sale
110. Which of the following has made recommendations in respect of centre-state
financial relation in India?
A) Sarkaria Commission B) Kelkar Commission
C) Rekhi Committee D) Chelliah Committee
111. In 2010, the Government of India earned maximum revenue from
A) Excise duties B) Customs duties
C) Income tax D) None of these
112. Which of the following taxes is/are levied by the union and collected and
appropriated by the state?
A) Stamp duties B) Passenger and goods taxes
C) Estate duties D) Taxes on newspapers
113. The issue authority of one rupee currency note is
A) RBI B) State Bank of India
C) Ministry of Finance D) Finance Commission
114. The profit from sale of a house property which is earned by an owner is taxed by
the government.This form of tax is known as
A) Sales tax B) Capital gains tax
C) Wealth tax D) None of these
115. Pump priming means
A) Increase in government expenditure in times of recession to boost
economic activity.
B) Reducing government expenditure to cut fiscal deficit
C) Prioritizing government expenditure towards social sectors.
D) None of the above
13
116. The term ‘vote with their feet ‘was put forward by
A) Tullock B) Charles Tiebout
C) John Stuart Mill D) Robert Allen
117. “As per capita income in an economy rises, the relative size of the public sector
will also grow” was stated by
A) Adolph Wagner B) Wiseman
C) Rostow D) Herbert Simon
118. In cost benefit analysis, the method which solves for the rate of interest which will
make the present value of the net benefit of the project zero is
A) Working capital method B) Internal rate of return method
C) Capital turnover criterion D) None of these
119. ------------------- effect arises from the voter’s keener awareness of social problems
during the period of upheaval
A) Displacement effect B) Concentration effect
C) Inspection effect D) None of these
120. With a regressive tax, as income
A) Increases, the tax rate remains the same
B) Decreases, the tax rate decreases
C) Increases, the tax rate increases
D) Increases, the tax rate decreases
*********************

TEST PAPER 1

2014-04-03T19:49:00.002+05:30

KNOW YOUR ECONOMICS

1. ---------------effect is an example of a network externality in which a consumer
wishes to own an exclusive or unique good
A) Bandwagon B) Snob
C) Veblen D) None of the above
2. The implication of asymmetric information about product quality was first
analysed by
A) Kenneth Lehn B) Michael Spence
C) George Akerlof D) Harvey Leibenstein
3. The difference between positive economics and normative economics is
A) Positive economics describes the positive effects of economic decisions
while normative economics describes both positive and normative effects
of economic decision
B) Positive economics describes the facts of an economy while normative
economics prescribes solutions
C) Positive economics describes demand and supply theories of individual
markets and firms while normative economics describes the total world
economy as a whole
D) Normative economics describes demand and supply theories of individual
markets and firms while positive economics describes the world markets
4. Which of the following has the lowest elasticity of supply?
A) Luxury items B) Necessities
C) Perishable goods D) None of the above
5. For complimentary goods, the cross elasticity of demand will be
A) Zero B) Infinity
C) Positive but less than infinity D) Negative
6. Market period refers to
A) The period in which the producers of the good cannot change the quantity
produced in response to a change in price
B) The period in which the producers of the good can change the quantity
produced in response to a change in price
C) The time it takes for market to attain equilibrium stable
D) The time it takes for consumers to respond to change in the price
7. The difference between total utility derived from the consumption of a certain
amount of a given good and the amount of money actually paid for it is called
A) Marginal utility B) Average utility
C) Producers surplus D) Consumers surplus

2
8. If the price of good X exceeds the price of good Y in consumer equilibrium, it
may be true that
A) The demand for both X and Y has began to decline
B) The marginal utility of X exceeds the marginal utility of Y
C) The marginal utility of X equals the marginal utility of Y
D) The marginal utility of Y exceeds the marginal utility of X
9. Average product is defined as
A) Total cost divided by total units of input
B) Total output divided by total units of input
C) Total cost divided by total output
D) Total output divided by total cost of input
10. Isoquant for two inputs which are used in fixed proportion
A) Convex to the origin B) L- shaped
C) Straight line with negative slope D) Concave to the origin
11. A firm will break even when
A) TR=TC B) MR=MC
C) AR=AC D) P=MC
12. Which of the following curves resembles supply curve under perfect competition
in the short run?
A) AC curve above breakeven point
B) MC curve above shut down point
C) MC curve
D) AVC curve
13. In which of the following models of oligopoly it is assumed that firms believe
their rivals will continue to produce the same output irrespective of the output
produced by the firm
A) Kinked demand curve model B) Cournot’s
C) Price leadership D) Cartel formation
14. Which of the following does not indicate Lerner index of monopoly power?
A) L=P-MC/P B) L=P-MR/P
C) L=e/1 D) L=1/e
15. The Economics of Imperfect Competitionis authored by
A) E.H. Chamberlin B) John Robinson
C) P. Sraffa D) None of the above
16. In a two commodity (X and Y) two individual (A and B) economy, the maximum
social welfare is reached at
A) Any point on the grant utility possibility curve
B) Any point on the social welfare function
C) The point where marginal rate of transformation equals marginal rate of
substitution
D) The point of tangency of grand utility possibility curve with a social
welfare function

3
17. Monopolistic exploitation of labour occurs when
A) Wages equals Marginal Revenue Product
B) Wages are greater than Marginal Revenue Product
C) Wages equals Value of Marginal Product
D) Wages are less than Marginal Revenue Product
18. If Production Possibility Curve is concave to the origin, it shows
A) Increasing opportunity cost of production
B) Decreasing opportunity cost of production
C) Constant opportunity cost of production
D) None of the above
19. According to Karl Marx, organic composition of capital is
A) C+V B) C/(C+V)
C) S/ (C+V) D) S/V
20. A good is ------------- if for any given level of production, the Marginal Cost of
providing it to an additional consumer is zero
A) Non-excludable B) Exclusive
C) Non rival D) Rival
21. Which of the following variable(s) will come under stock variable(s)?
A) Consumer Price Index B) GDP
C) Money supply D) Both A and C
22. Which of the following method(s) is/are used for measuring national income in
India?
A) Output method B) Expenditure method
C) Income method D) All the above
23. The demand for money is
A) Positively related to output and interest rate
B) Negatively related to output and interest rate
C) Negatively related to output and positively related to interest rate
D) Positively related to output and negatively related to interest rate
24. In which of the following situation will an increase in supply have no effect upon
output?
A) LM is steeply sloped and IS is relatively flat
B) LM is vertical and IS is steeply sloped
C) LM is steeply sloped and IS is vertical
D) LM is relatively flat as is IS
25. The user cost of capital is
A) The real interest rate
B) The nominal interest rate
C) The real interest rate plus the rate of depreciation
D) The nominal interest rate plus the rate of depreciation

4
26. An economy which is functioning at the full employment level wishes to maintain
the existing rate of growth. Keynes theory of rate of interest suggest that
government should
A) Decrease the supply of money over time
B) Increase the supply of money over time
C) Leave the supply of money unchanged
D) Encourage households and firms to increase their holdings of idle balances
27. A tax will have an automatic stabilizing effect on the economy if its yield
A) Increases with a fall in income
B) Decreases with a rise in income
C) Decreases with a decrease in income
D) Remains constant as income rises
28. The Keynesian theory of the rate of interest suggest that the monetary authorities
will lose their power to lower interest rates by varying the money supply when
A) Interest rates are rising
B) Interest rates are falling
C) Interest rates are not expected to fall any lower
D) Interest rates are not expected to rise any higher
29. The LM curve becomes vertical at high rates of interest because
A) The speculative demand for money disappears
B) National Income falls as the rate of interest rises
C) The transaction and precautionary demand for money vanishes
D) Investment diminishes as the rate of interest rises
30. Which one of the following is most likely to lead to an increase in the level of
investment?
A) A small rise in the rate of interest
B) An increase in the level of unemployment
C) Improved profit expectation of entrepreneurs
D) A fall in the general level of prices
31. Gross National expenditure less indirect taxes, plus subsidies equals
A) GNP at market prices B) GNP at factor cost
C) National Income D) Personal disposable income
32. Insider- outsider model is a feature of
A) New Keynesian economics B) New Classical economics
C) Post Keynesian economics D) Monetarism
33. In the equation C=Co+cY, Co is
A) The autonomous part of consumption, independent of the level of income, Y
B) The behavioral coefficient
C) The dependent variable
D) A parameter whose value depends on the level of disposable income

5
34. Permanent income hypothesis is associated with
A) Keynes B) Friedman
C) Modigliani D) Duesenbery
35. Stagflation is a period of
A) High inflation and high unemployment
B) Low inflation and low unemployment
C) High inflation and low unemployment
D) Low inflation and high unemployment
36. The Philips Curve shows
A) The inverse relationship between the rate of inflation and the rate of
unemployment
B) A positive relationship between nominal wage and rate of unemployment
C) A positive relationship between rate of inflation and nominal wage
D) The inverse relationship between real and nominal wage
37. According to Life Cycle hypothesis, consumption is related to
A) Current income B) Past peak income
C) Expected life time income D) Price expectation over life time
38. When the MPC is 0.8, the MPS is
A) 0.2 B) 0.02 C) 2 D) 1
39. --------------emphasise the direct role of money in influencing aggregate spending
and are against discretionary policy action
A) Monetarists B) Supply side economists
C) Keynesians D) None of the above
40. In an open economy with flexible exchange rate and perfect capital mobility, an
expansionary monetary policy
A) Causes domestic currency to appreciate
B) Is very effective in affecting output
C) Increases capital flows into the country
D) Is ineffective
41. If Y=3x
2
-2x+1, then the value of dy/dx at x=2 will be equal to
A) 34 B) 10 C) 1 D) 36
42. Which of the following is a positional average?
A) Arithmetic Mean B) Geometric Mean
C) Harmonic Mean D) Mode
43. For a normal curve, which of the following is true?
A) 75% of the observations are contained within 2 standard deviation of the mean
B) 68.27% of the observations are contained at within 3 standard deviation
of the mean
C) 99.73% of the observations are contained at within 3 standard deviation
of the mean
D) None of the above

6
44. If one event is unaffected by the outcome of another event, the two events are said
to be
A) Dependent B) Independent
C) Mutually exclusive D) Both (B) and (C)
45. In a sampling technique, the first element is randomly selected and there after all
other elements are selected based on a predetermined plan, this sampling
technique can be described as
A) Simple random sampling
B) Stratified random sampling C) Systematic sampling
D) Judgement sampling
46. If the null hypothesis is rejected in spite of it being true, then it results in a
A) Type I error B) Type II error
C) Type III error D) Type IV error
47. In a regression line Y=A+BX, if B=0, then the regression line will
A) Pass through the origin B) Be parallel to X axis
C) Be parallel to Y axis D) None of the above
48. For a given correlation coefficient, the coefficient of determination
A) Is always negative
B) Is always positive C) Has the same sign as correlation coefficient
D) Is always higher in magnitude of the coefficient of correlation
49. A square matrix which has one for every element on the principal diagonal from
left to right and zero everywhere is called
A) Identity matrix B) Symmetric matrix
C) Null matrix D) Triangular matrix
50. Which of the following is not true relating to determinants?
A) If two rows or columns are identical, the determinant is equal to one
B) If all the elements of any row or column are zero, the determinant is zero
C) Multiplying the element of any row or column by a constant will cause the
determinant to be multiplied by the constant D) Adding or subtracting any non-zero multiple of one row (or column) from
another row (or column) will haveno effect on the determinant
51. The overall significance of regression is tested using
A) Z test B) F test
C) Chi-square test D) t test

7
52. Multiplication of two matrices requires that
A) The number of columns in first matrix (lead matrix) equals the number of
rows in the second matrix (lag matrix)
B) The number of rows in first matrix (lead matrix) equals the number of
columns in the second matrix (lag matrix)
C) The number of columns in first matrix (lead matrix) equals the number of
columns in the second matrix (lag matrix)
D) The number of rows in first matrix (lead matrix) equals the number of
rows in the second matrix (lag matrix)
53. Ogive is a
A) Frequency polygon B) Cumulative frequency curve
C) Measure of central tendency D) None of the above
54. Graph of variables having linear relation will be
A) Curved B) Hyperbola
C) Straight line D) None of the above
55. The derivative of a constant is equal to
A) 0 B) 1
C) -1 D) A positive number if the constant is
positive
56. Lack of symmetry is
A) Kurtosis B) Skewness
C) Moments D) Mean
57. The Unique Identification Project to give the residents of India a unique
identification number has been renamed as
A) Aadhaar B) Sasam
C) Bharat Nirman D) None of the above
58. The 2010 Nobel Prize for economics was awarded to Peter Diamond, Dale
Mortensen and Christopher Pissarides for the work related to
A) Labour market B) Money market
C) Capital market D) Bond market
59. The period of first five year plan of India
A) 1951-56 B) 1956-61
C) 1953-58 D) 1960-65
60. The law which states that the portion of income spend on food diminishes as
income increases is called
A) Engel’s law B) Gresham’s law
C) Keynes law D) None of the above
61. According to 2001 census, urban- rural population rate in India is
A) 35:65 B) 32:68
C) 28:72 D) 40:60

8
62. National Seed Policy is based on the recommendation of
A) Kelker Committee B) M.V. Rao Committee
C) Y.B.Reddy Committee D) Prof. Abhijit Sen Committee
63. As per Tendulkar Committee report --------------- is the poorest State in India
having 72% of BPL people
A) Bihar B) Chandigarh
C) Madhya Pradesh D) Tamil Nadu
64. World population Day is on
A) July 11 B) June 12
C) September 12 D) December 11
65. India is the --------------largest producer of tea in the world
A) First B) Second
C) Third D) Fourth
66. Blue revolution refers to revolution in
A) Oil seeds B) Fertiliser
C) Egg D) Fish production
67. RBI was established in the year
A) 1935 B) 1940 C) 1930 D) 1945
68. The Committee constituted by RBI for recommendations for consumer service
improvements in banks
A) M.N. Goiporia Committee B) Narasimham Committee
C) Raja Chelliah Committee D) Tendulkar Committee
69. As per Economic Review 2010, the contribution of primary sector to GSDP of
Kerala in the year 2008-2009
A) 16 % B) 25 % C) 30 % D) 35 %
70. Kerala’s literacy rate as per 2001 census is
A) 90.92% B) 82.34% C) 85.29% D) 74.90%
71. The district having the second largest population in Kerala according to 2001
census is
A) Malappuram B) Thiruvananthapuram
C) Ernakulam D) Palakkad
72. The district in Kerala having the lowest per capita income during 2008-2009 is
A) Malappuram B) Thiruvananthapuram
C) Ernakulum D) Palakkad
73. The highest amount of development expenditure of Kerala State during 2009-2010
is on
A) Education B) Health
C) Agriculture and co-operative D) Industry, labour and employment

9
74. The PQLI combines three indicators. They are
A) Infant mortality rate , life expectancy rate and adult literacy rate
B) School enrolment rate, clean environment, and quality of housing
C) Health, education and environment
D) Air pollution rate, water pollution rate and sanitation
75. As economic development proceeds, income inequality tends to follow -------------curve
A) Convex B) Inverted U shaped
C) U shaped D) S shaped
76. The Harrod- Damor growth model suggests that growth is
A) Directly related to saving and inversely related to capital output ratio
B) Directly related to capital output ratio and inversely related to saving
C) Indirectly related to saving and capital output ratio
D) Directly related to saving and capital output ratio
77. The Protestant Ethic and the Sprit of Capitalismis written by
A) Adam Smith B) Max Weber
C) J.Schumpeter D) William Baumol
78. If Gini ratio is equal to zero, income distribution is
A) Perfectly equal B) Perfectly unequal
C) Relatively equal D) Relatively unequal
79. The classical economist who gives importance to effective demand
A) Smith B) J.B.Say
C) Ricardo D) Malthus
80. Dutch disease refers to
A) A boom in a traded good sector leading to a boom in other traded good
sector
B) A boom in a traded good sector leading to a decline in other traded good
sector
C) A recession in a traded good sector leading to a recession in other traded
good sector
D) A recession in a traded good sector leading to a boom in other traded good
sector
81. The full form of UNFPA
A) United Nations Fund for Population Activities
B) United Nations Fertility Planning Association
C) United Nations Family Planning Association
D) United Nations Fund for Poverty Alleviation
82. Census day in India is observed on
A) February 9 B) July 10
C) June 15 D) March 10

10
83. The term Intermediate Technology is firstly introduced by
A) J.R. Hicks B) E.F. Schumacher
C) R.F. Harrod D) A. Lewis
84. Which of the following is an example of tragedy of commons?
A) Over fishing B) Smoking in a public place
C) Excessive rain D) Common use of public toilet
85. The government levying taxes on polluters or charging a surcharge for pesticide
use are
A) Examples of Coase theorem
B) Internalisation of negative spillover effects
C) Marginal abatement cost
D) Examples of a free rider
86. According to Coase theorem, when property rights are well defined and legally
enforceable and transaction costs are not prohibitive
A) Population growth leads to rigid land rights
B) Participants will organize their transaction voluntarily to achieve efficient
outcome
C) Violence, displacement, erosion and poverty are minimized
D) Individual’s overuse of the biosphere is curtailed
87. According to Myrdal, the main cause of regional inequalities is
A) A strong backwash effect
B) A weak spread effect C) A strong backwash effect and a weak spread effect
D) A weak backwash effect and a strong spread effect
88. Wage good strategy has been developed by A) Wagner
B) Mahalanobis
C) Vakil and Brahmananda
D) Rao and Brahmananda
89. The stability condition in the Kaldor model is A) Sp < Sw B) Sp > Sw
C) Sp = Sw D) Sp ≤Sw
90. Dirty float refers to
A) Freely floating exchange rate system
B) Fixed exchange rate system
C) Managed floating exchange rate system
D) Gold standard system
91. Balance of current account includes
A) Balance of Trade
B) Balance of invisibles
C) Balance of unilateral
D) All the above

11
92. SDR is the currency of
A) IBRD B) WTO C) IMF D) ADB
93. According to Schumpeter economic development is
A) Continuous and steady change
B) Sudden and discontinuous change
C) Sudden and continuous change
D) Continuous and expansion of the system
94. Under floating exchange rate system and perfect capital mobility
A) Only fiscal policy is effective
B) Both monetary and fiscal policies are effective
C) Only monetary policy is effective
D) Both monetary and fiscal policies are ineffective
95. Soft loan stands for
A) Loan from international agencies
B) Loan to poor countries
C) Loan with no rate of interest
D) Loan backed by no securities
96. Consider the following statements:
The effect of devaluation is that it
1. Changes the relative price
2. Increases the foreign value of the domestic currency
3. Increases the competitiveness of the domestic exports in the foreign
markets
4. Improves the trade balance provided that domestic demand for import is
highly inelastic.
Of these statements
A) 1,3,and 4 are correct B) 2 and 4 correct C) 1 and 3 are correct D) 2 and 3 are correct
97. When the foreign offer curve has an elasticity equal to unity, the optimum tariff
will be
A) Unity B) Infinity
C) Zero D) Less than unity
98. The Organisation of Petroleum Exporting Countries (OPEC) is a ----------------whose members have agreed to limit output and fix prices A) Duopoly
B) Genaralised system of tariff preferences
C) Cartel
D) Free trade system
99. The terms of trade are defined as
A) The degree of competition existing in international trade
B) The differences between exports and imports
C) The differences in value between exports and imports
D) The rate at which exports exchange for imports

12
100. The extent to which a change in exchange rate leads to changes in import and
export prices is known as
A) J curve effect B) Marshall – Lerner effect
C) Absorption effect D) Pass through effect
101. To be considered a good candidate for an export cartel, a commodity should
A) Be a manufactured good
B) Be a primary product C) Have a high price elasticity of demand
D) Have a low price elasticity of demand
102. Duty or other charges levied on an item on the basis of its value and not on the
basis of its quantity, size or weight is:
A) Ad valorem tariff B) Compound tariff
C) Effective tariff D) None of the above
103. The product cycle theory of trade is essentially a
A) Static, short run trade theory B) Dynamic, long run trade theory
C) Zero sum theory of trade D) Negative sum theory of trade
104. If the international terms of trade settle at a level that is between each country’s
opportunity cost
A) There is no basis for gainful trade for either country
B) Both countries gain from the trade
C) Only one country gains from the trade
D) One country gains and the other country looses from the trade
105. If no imported inputs go into the domestic production of a final product, the
A) Nominal tariff rate on the final product equals the effective rate on the
product
B) Nominal tariff rate on the final product is greater than the effective rate on
the product
C) Nominal tariff rate on the final product is less than the effective rate on the
product
D) None of the above
106. Which of the following is an NBFI?
A) SBI B) LIC of India
C) State co-operative bank D) RRB
107. Agricultural income tax is levied by
A) Central government B) Local bodies
C) State government D) All the above
108. In India the fiscal year is
A) From January 1 to December 31
B) From March 1 to February 28
C) From June 1 to May 31
D) From April 1 to March 31

13
109. Which one of the following is not a canon of taxation propounded by
Adam Smith?
A) Canon of Ability B) Canon of Certainty
C) Canon of Economy D) Canon of Productivity
110. Zero base budgeting was first adopted by
A) France B) England
C) USA D) Germany
111. Which one of the following is a feature of ‘club good?’
A) The exclusion principle is possible
B) It is shared by public
C) It is an intermediate between public good and private good
D) All the above
112. When a specified selective tax per unit of a commodity is imposed the effect on
the amount exchanged will be greater if
A) Demand is elastic, supply is elastic
B) Demand is elastic,supply is inelastic
C) Demand is inelastic, supply is elastic
D) Demand is inelastic, supply is inelastic
113. Taxes which may be shifted from the person upon whom they are originally
imposed, to another person
A) Specific taxes B) Double taxes
C) Proportionate taxes D) Indirect taxes
114. Budget deficit may be defined as
A) Revenue expenditure minus revenue receipts
B) Total expenditure minus total receipts
C) Total expenditure minus total receipts minus capital receipts
D) Fiscal deficit minus interest payments
115. The concept of functional finance was developed by
A) Fisher B) Dalton
C) Bastable D) Lerner
116. Which of the following committees examined and suggested tax reforms?
A) Malhotra Committee B) Narasimham Committee
C) Chelliah Committee D) Rangarajan Committee
117. The Wanchoo Committee (1971) probed into
A) Direct taxes B) Indirect taxes
C) Agricultural holding tax D) Non-tax revenue

14
118. The zero based budgeting approach has been adopted from
A) April 1, 1988 B) April 1, 1987
C) April 1, 1986 D) April 31, 1987
119. The type of note issue system followed in India is
A) Maximum fiduciary system B) Minimum reserve system
C) Proportional Fiduciary system D) Fixed fiduciary system
120. The thirteenth Finance Commission has recommended the vertical share of tax
devolution to the tune of
A) 32 percent B) 30.5 percent
C) 31 percent D) 33.5 percent
***************

LITERACY RATE...KERALA CENSUS 2011

2014-04-03T19:46:00.001+05:30

Literacy Rates by Sex for State and Districts : 2001 and 2011

State/ District Code	State/District	Literacy rate*
		Literacy rate*
		Persons		Males		Females
		2001	2011	2001	2011	2001	2011
1	2	3	4	5	6	7	8
32	Kerala	90.86	93.91	94.24	96.02	87.72	91.98
01	Kasaragod	84.57	89.85	90.36	93.93	79.12	86.13
02	Kannur	92.59	95.41	96.13	97.54	89.40	93.57
03	Wayanad	85.25	89.32	89.77	92.84	80.72	85.94
04	Kozhikode	92.24	95.24	96.11	97.57	88.62	93.16
05	Malappuram	89.61	93.55	93.25	95.78	86.26	91.55
06	Palakkad	84.35	88.49	89.52	92.27	79.56	84.99
07	Thrissur	92.27	95.32	95.11	96.98	89.71	93.85
08	Ernakulam	93.20	95.68	95.81	97.14	90.66	94.27
09	Idukki	88.69	92.20	92.33	94.84	85.02	89.59
10	Kottayam	95.82	96.40	97.34	97.17	94.35	95.67
11	Alappuzha	93.43	96.26	96.27	97.90	90.82	94.80
12	Pathanamthitta	94.84	96.93	96.41	97.70	93.43	96.26
13	Kollam	91.18	93.77	94.43	95.83	88.18	91.95
14	Thiruvananthapuram	89.28	92.66	92.64	94.60	86.14	90.89
* Literacy rate is the percentage of literates to population aged 7 years and above

2011 CENSUS....KERALA

2014-04-03T19:44:00.003+05:30

Table-1
Distrubution of Population, Decadal Growth Rate, Sex-Ratio and Population Density

State/ District Code	State/District	Population 2011			Percentage decadal growth rate of population		Sex- Ratio* (Number of Females per 1000 Males)		Population density per sq. km.


		Persons	Males	Females	1991-01	2001-11	2001	2011	2001	2011
		Persons	Males	Females	1991-01	2001-11	2001	2011	2001	2011
1	2	3	4	5	6	7	8	9	10	11
32	Kerala	3,33,87,677	1,60,21,290	1,73,66,387	+9.43	+4.86	1058	1084	819	859
01	Kasaragod	13,02,600	6,26,617	6,75,983	+12.37	+8.18	1047	1079	604	654
02	Kannur	25,25,637	11,84,012	13,41,625	+6.98	+4.84	1090	1133	812	852
03	Wayanad	8,16,558	4,01,314	4,15,244	+16.14	+4.60	995	1035	366	383
04	Kozhikode	30,89,543	14,73,028	16,16,515	+9.89	+7.31	1057	1097	1228	1318
05	Malappuram	41,10,956	19,61,014	21,49,942	+17.09	+13.39	1066	1096	1021	1158
06	Palakkad	28,10,892	13,60,067	14,50,825	+9.88	+7.39	1066	1067	584	627
07	Thrissur	31,10,327	14,74,665	16,35,662	+8.66	+4.58	1092	1109	981	1026
08	Ernakulam	32,79,860	16,17,602	16,62,258	+9.35	+5.60	1019	1028	1012	1069
09	Idukki	11,07,453	5,51,944	5,55,509	+7.03	-1.93	993	1006	259	254
10	Kottayam	19,79,384	9,70,140	10,09,244	+6.86	+1.32	1025	1040	885	896
11	Alappuzha	21,21,943	10,10,252	11,11,691	+5.39	+0.61	1079	1100	1492	1501
12	Pathanamthitta	11,95,537	5,61,620	6,33,917	+3.84	-3.12	1094	1129	468	453
13	Kollam	26,29,703	12,44,815	13,84,888	+7.38	+1.72	1069	1113	1038	1056
14	Thiruvananthapuram	33,07,284	15,84,200	17,23,084	+9.76	+2.25	1060	1088	1476	1509
*For calculation of sex ratio, others have been considered as males.

2013-11-05T19:34:00.004+05:30

......CONSUMER BEHAVIOUR.....

Question 1

Who said: “The theory of economics must begin with a correct theory of consumption.”

Jeremy Bentham

Stanley Jevons

Adam Smith

Don’t know

Question 2

Who is the father of Utility Theory?

Jeremy Bentham

Stanley Jevons

Adam Smith

Don’t know

Question 3

Consumer theory is based on a theory of:

Income redistribution

Self-interest

The public interest

Don’t know

Question 4

Which of these are critical components of consumer choice?

Don’t know

Question 19

Suppose a drought in Brazil significantly reduces the coffee crop in Brazil? What is likely to happen to the price of coffee and Starbucks and what is likely to happen to the profits for the Starbucks company?

Prices rise because of an increase in costs and profits rise because of an increase in the quantity demanded.

A Command Economy:

Makes all the important decisions about production and distribution.

Owns most of the means of production (land and capital).

Which of these is a major factor of production?

Question 24

An analysis of the capital markets will help us understand:

How to evaluate the profitability of investments

How businesses set wages

How rents are set in real estate markets

Don’t know

2013-11-05T19:26:00.002+05:30

........FACTORS OF PRODUCTION.....

Question 1

A common measure of a nation's productive output is its:

Question 2

Which of these is a key factor of production?

Capital

Consumption

Rent

Don’t know

Question 3

Factor pricing is important because it:

Guides resource allocations

Is a major determinant of your annual income

Helps determine the distribution of income

All of the above

Don’t know

Question 4

The essential feature of land is that:

1. Its quantity is fixed

2. It is completely unresponsive to price.

Both 1 and 2

Don’t know

Question 5

Pure Economic Rent is define as the price paid for the use of land and other natural resources which are:

Completely fixed in demand

Completely fixed in supply

Completely fixed in demand and supply

Don’t know

Question 6

Pure economic rent is:

Different from the rent people pay for their homes or apartments

The same thing as the rent people pay for their homes or apartments

The same thing as the rent people pay for their homes or apartments less any tax credits

Don’t know

Question 7

The rental payment you make to your landlord typically includes compensation for:

The use of capital such as the building structure

Labor, including building maintenance and management;

The use of utility services such as water, electricity, and gas.

2013-04-22T22:15:00.001+05:30

Question 1 Which of the following is not an argument for protectionism? a) To protect infant industries b) To increase the level of imports c) To protect strategic industries d) To improve the balance of payments Question 2 A demand switching policy to improve the trade position could involve: a) Higher interest rates b) Higher income tax c) Tariffs d) Reduced government spending Question 3 Free trade is based on the principle of: a) Comparative advantage b) Comparative scale c) Economies of advantage d) Production possibility advantage Question 4 If a country can produce 10 of product A or 4 of product B the opportunity costof 1B is: a) 0.4A b) 2.5A c) 10A d) 1B Question 5 Tariffs: a) Decrease the domestic price of a product b) Increase government earnings from tax c) Increase the quantity of imports d) Decrease domestic production Question 6 The terms of trade measure: a) The income of one country compared to another b) The GDP of one country compared toanother c) The quantity of exports of one country compared to another d) Export prices compared to import prices Question 7 In a floating exchange rate system: a) The government intervenes to influence the exchange rate b) The exchange rate should adjust to equate the supply and demand of the currency c) The Balance of Payments should always be in surplus d) The Balance of payments will always equal the government budget Question 8 The balance of payments equals: a) The difference between household spending and income b) The difference between government spending and income c) A measure of the economic transactions between UK residents and the rest of the world. d) The difference between inflation andunemployment Question 9 If there was a balance of payments deficit then in a floating exchange rate system: a) The external value of the currency would tend to fall b) The external value of the currency would tend to rise c) The injections from trade are greater than the withdrawals d) Aggregate demand is increasing Question 10 To prevent the external value of the currency from falling, the government might: a) Reduce interest rates b) Sell its own currency c) Buy its own currency with foreign reserves d) Increase its own spending.