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ECONOMICS
6 Years
Past Papers
From
Summer 2006
to
Winter 2011
Study for JAIbP

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Macro Economics & Financial System of Pakistan - Stage-I
Q.1 State True or False in the answer column. Give brief reason for your selection at
the space provided below the question. (15)
(Answer)
For a given GDP level High Gini Co-efficient refers to high-income
i.
equality.
The problem for developing countries is that for export of primary
ii.
products, both price and income elasticity of demand is relatively low.
Over-valued exchange rates tend to encourage exports and
iii.
discourage imports.
iv. Money is a factor of production because it is a part of capital.
GDP is satisfactory measure of social well being because it also
v.
depicts the growth pattern of the economy.
Structural unemployment is also called frictional unemployment
vi. because workers are making the transition from their old jobs to the
new jobs they will take on once they are retrained.
Contractionary monetary policy, achieved by selling Government
vii.
securities in the open market, tends to reduce investment.
The Central Bank’s control over supply of money and thus
viii. effectiveness of monetary policy is under mined under a fixed
exchange rate regime.
Sensitive Price Index, a commonly used inflation indicator in
Pakistan records the changes in prices of basic essential
ix. commodities and some non-food items such as Petrol and diesel for
those households whose monthly income ranges from Rs.3000 to
Rs.12000 per month.
During the fiscal 2004-2005, the aggregate share of defence and
x. interest payment on Government borrowings was about 75% of the
total current expenditures.
The auction system introduced by SBP under Financial System
xi. reforms program allows the Commercial Bank to invest in
Government debt paper at a pre-determined rate of return.
Gross Net Product at factor cost is equal to expenditure on GNP at
xii.
market price plus subsidies less indirect business taxes.
Expansionary fiscal policy is intended to enhance and prolong a
xiii.
business-cycle expansion.
Continued economic growth is capable of eliminating poverty as
xiv.
measured by an absolute standard, not by a relative standard.
Transfer payments such as social security or unemployment
xv.
compensation are counted in the calculation of GDP.

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Q.2 Please write the alphabet of selected answer column: (15)

(Answer)
Disintermediation is most likely to occur during periods of
A) High and rapidly rising interest rate.
B) High consumption and low saving.
i.
C) High, but stable interest rate.
D) Rapid inflation, while interest rates remain relatively low.
E) None of the above.
Primary Reserves for a Bank consists of all of the following except.
A) Deposits held in other Commercial Bank.
B) Deposits at SBP.
ii.
C) Cash in the Bank’s vault.
D) Investment in T-Bills.
E) Investment in bonds floated by a triple ‘A’ company.
The principal determinant of the volume of saving by households in an economy is
A) The level of interest rate.
iii. B) Desired saving target of each household.
C) Tastes and Preferences of consumer.
D) Level of household saving. E) Stages of business cycle.
The motive of holding money in response to expected changes in interest rate
is known as the
iv. A) Transaction motives B) Precautionary motives
C) Speculative motives D) Liquidity motives
E) None of the above
Which of the following can Central Bank affect with its actions
A) The cost of credit
v. B) The volume of growth of money supply
C) The wealth of investors
D) All of the above E) None of the above
The supply siders recommend
A) Increased rate of monetary expansion
vi. B) Increased tax rates
C) Regulatory reforms to stimulate competition
D) Reduced depreciation E) None of the above
The definition of money as M1 views money as a
A) Medium of exchange B) Store of value
vii.
C) Temporary saving reserve D) All of the above
Which of the following tool is used by SBP as direct instruments for credit
control
viii. A) Changes in discount rate B) T-bill auction
C) OMO D) Credit ceiling
Which of the following is True about the Balance of Payment
A) Current accounts debits must equal current account credits
B) Visibles must equal invisibles
ix.
C) Total debits must equal total credits
D) Desired payments must equal actual payments
E) Merchandise exports must equal merchandise imports.
Which of the following is not a direct part of the total of final goods included
in the GNP as currently measured.
x. A) Transfer items B) Goods sold to Government
C) Capital goods D) Addition to inventories
E) Government payments of goods produced by foreign firms

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The short-run Phillips curve is the relationship between inflation and

unemployment that holds for a
A) Given rate of inflation B) Given expected rate of inflation
xi.
C) Given level of unemployment
D) Given expected level of unemployment
E) Given expected level of natural unemployment
A Lorenz curve shows
A) The tax and transfer trade-off
xii. B) How many families are living in poverty
C) Perfect income equality D) The distribution of income
E) The trade off between equality and efficiency
An increase in the interest rate (i) will cause
A) A right ward shift in money demand
B) A left ward shift in money demand
xiii.
C) An increase in money supply
D) A reduction in money demand
An increase in real exchange rate indicates that foreign goods are now more
expensive compared to domestic goods
A) Foreign goods are now more expensive compared to domestic goods
B) Domestic goods are now relatively more expensive compared to
xiv.
foreign goods
C) A real depreciation of the domestic currency has occurred
D) Both (a) and (c)
If GNP exceeds GDP, we know with certainty that
A) A budget deficit exists
B) A trade deficit exists
C) Receipt of factor income from rest of the word exceeds payments of
xv.
factor income to the rest of the world
D) Receipts of factor income from rest of the world are less then
payments of factor income to the rest of the world
E) Both (c) and (d)
Q.3 Application Module and Case Analysis (05)

i) The Government of Pakistan granted Rs.150 million for the flood victims of a
neighboring country. The recipient of grant used the money to buy medicines,
food and construction material from Pakistani suppliers. How would these
transactions affect Pakistan’s Balance of Payment position?
ii) The table given below provides information about a hypothetical economy:
Period Implicit Price Normal GDP Real GDP

Deflator for GDP
Period 1=100
1 100 300
2 900 600
3 300 1500
4 200 1200
Fill in the blanks. Was there a recession or deflation in any of the period? (04)

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iii) Chief Executive Officer (CEO) of XYZ manufacturing while looking at the
Statement of affairs told the Chief Financial Officer (CFO) of the company.
“The financial charges have climbed up. We have hardly left with any profit
margin.
CFO: I have discussed with Bank’s credit Chief. They have re -priced the
loans upwards. Apparently, they talk about a further rise in lending rate. The
State Bank has raised the discount rate to 9%. The cut off rates of Auction are
also gradually rising.
CEO: Do you recall when the discount rates were reduced in the past; there
was no lowering down of lending rates.
Answer the following questions:

i) What is the likely impact of change in ‘discount’ rate and cut-off
rates on Government debt papers, on lending rates of the Banks?
Explain with an example. (03)
ii) What are your comments about the remarks of CEO that decline
in discount rate did not have a significant impact on the lending
rates of the Banks. (03)
iii) What has been the impact of Globalization on Financial Sector of

Pakistan? (05)
Q.4 i) Compare the Classical and Keynesian views on the speed of wage and
price adjustments. What are the important consequences of the difference
in their viewpoints? (8)
Q.4 ii) How does an expansionary fiscal policy affect the exchange rate in an
open economy? (06)
Q.5 i) What initiatives have been taken for Islamization of Financial

Services in Pakistan? Suggest steps to be taken to accelerate the growth
of Interest free banking in the country? (08)
Q.5 ii) Why the corporate debt market is still at infancy stage in Pakistan? (07)
Q.6 i) Explain the concept of “Development Finance”. Briefly comment on the

role of Development Financial Institution in Pakistan’s economy. (07)
Q.6 ii) How does inflation affect real interest rate. Can high real interest rate
stimulate savings in a country like Pakistan? (07)
Q.7 Explain why “Shallow Finance” has negative implications on growth and
development. (07)
-.-.-.-.-

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Macro Economics and Financial System of Pakistan - Stage-I

ISQ Examination (Winter-2006)
Q.1 State True or False in the answer column. Give brief reason for your selection at the space
provided below the question. (20)
(Answer)
The external debt burden of Pakistan as percentage of GDP is

i
continuously rising.
An increase in real GDP indicates that there is an increase in the
ii
material well being of all individuals in the economy.
A country which experiences net out flow of capital has a deficit
iii
balance in its capital account.
Over longer period of time potential output shows a cyclical pattern
iv where increases and decreases in output are of the same length and
magnitude.
The amount of money held as a store of value is negatively related
v
with interest rate.
An equal increase in autonomous taxes and autonomous transfers has
vi
no effect upon equilibrium output.
Changes in potential output in the short run are normally the result of
vii
increased capital resources.
viii The liquidity effect is large when investment is interest sensitive.
The increase in nominal money supply ceteris paribos, results in an
ix
increase in the real money supply.
When aggregate supply curve is constant, higher rates of inflation are
x
accompanied by higher rates of unemployment.
Treasury Bills are the short-term debt obligations issued by the
xi
Federal Government.
xii The resident’s foreign currency deposits constitute the part of M1.
In case of Pakistan, the rule-based fiscal policy as compared to
xiii discretionary fiscal policy is not appropriate because it has an interest
deficit bias.
The impact of a shift in the aggregate demand curve on prices and
xiv
real output will depend upon the slope of the aggregate supply curve.
If Marginal Propensity to save is equal to 1, the multiplier will also
xv
be equal to 1.
An increase in the world supply of oil would increase real gross
xvi domestic product (GDP) and the aggregate price level would tend to
decline, if other things remain same?
If the government simultaneously engages in expansionary monetary
xvii
and fiscal policies, interest rates will decrease?
If nominal gross domestic product fell while real gross domestic
xviii
product rose, it suggests that the economy is facing hyperinflation.
A rise in budget deficit as percent of GDP in 2005-06 relative to
xix
2004-05 increased only due to earthquake related spending.
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Under expansionary fiscal policy in a developing economy, imports

xx
are likely to surge rapidly.

(Answer)
In case of Pakistan for FY 2005-2006, the highest contribution in

commodity producing sector was made by:
i
(A) Large scale manufacturing (B) Construction
(C) Electricity & Gas Distribution (D) Mining and Qarrying
(E) None of the above
The most widely used indicator of financial deeping in an economy is
ii
A) M1/M2 B) M1/GDP C) M2/GDP
D) Demand Deposit/GDP E) Liquid Reserve/M2
In Pakistan, privatization is used as an important economic reform policy
tool aiming at:
iii (A) Generating Growth (B) Reducing Fiscal Deficit
(C) Reducing Structural Inefficiencies
(D) Opening the Economy to Competition (E) All the above
An autonomous increase in saving:
(A) is necessarily accompanied by an income in consumption spending

(B) will shift the expenditure schedule
iv (C) will not effect the level of income as neither the aggregate demand nor
aggregate supply curve will shift
(D) shift the aggregate demand curve up
(E) shift the aggregate supply curve up
Which of the following statements about the Lorenz Curve is false?
(A) It is a graph of the cumulative percentage of families (or persons) and

the associated cumulative percentage of total income they receive
(B) It has a positive slope
v (C) It would be a straight line if there was no economic discrimination
(D) Gini coefficient, the aggregate inequality measure can be determined by
it
(E) Its downwards shifting would show a relatively more equitable
distribution of wealth
Defining poor people as those who fall in the bottom 20% of the income
distribution.
(A) Is an absolute measure of poverty.

vi (B) Is a relative measure of poverty.
(C) Means continued economic growth will eliminate poverty.
(D) Implies poverty gap will be large.
(E) Means Gini coefficient is closer to zero.
Which of the following is probably the most important factor explaining
both low productivity and the productivity gap in Pakistan?
vii (A) Lack of entrepreneurship (B) Low rates of investment
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(C) Lack of Government sponsored industrial policy.

(D) Lack of international competitiveness.
(E) Low living standards.
In an open economy when exchange rates are flexible, a decrease in taxes.
(A) Would have no effect upon output.

viii (B) Causes output to increase
(C) Results in an increase in exports
(D) Results in an increase in imports.
(E) Results in a decrease in the value of its currency.
When there is full employment and aggregate supply curve is positively
sloped, an increase in Government spending:
ix (A) Decrease output and price level (B) Decrease output and real wage
(C) Increase output and real wage (D) Increase output and price level
(E) None of the above.
Dis-inflationary demand management policies:
(A) Achieve lower rate of inflation without causing a decrease in output.

x (B) Reduce output without having an initial effect on inflation rate.
(C) Require an increase in Government spending.
(D) Require a reduction in growth rate of normal money supply.
(E) Reduce output but real wage increase.
The liquidity effect occurs when:
(A) A reduction in government spending lowers the rate of interest.

xi (B) A money supply decrease lowers the interest rate.
(C) A money supply increase lowers the interest rate.
(D) An increase in government spending increases the rate of interest.
(E) A money supply increase raises the interest rates.
In a two sector model S = -40+0.20 Yd and investment is 60, the
xii equilibrium output is:
(A) 100 (B) 400 (C) 450 (D) 500 (E) 1000
The primary function of a financial system is :
(A) Resource Allocation (B) Clear and settle payment

xiii (C) Accumulate and discriminate information
(D) Provide ways to manage risk.
(E) Provide wages for dealing with incentive problems.
The real rate of interest is determined by:
(A) The Fisher equation

xiv (B) The interaction of returns to productive opportunities and individual
fine preferences for consumption.
(C) The supply and demand of loanable funds
(D) All the above (E) B & C
Suppose the nominal interest rate is fixed, an increase in expected inflation
will cause:
(A) An increase in real interest rate. (B) A reduction in real interest

xv rate
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(C) No change in real interest rate since nominal interest rate is fixed
(D) A decrease in investment and a reduction in output
If the government increases expenditures on goods and services and
increases taxation by the same amount, which of the following will occur?
(A) Aggregate demand will be unchanged. (B) Aggregate demand will

xvi increase.
(C) Interest rates will decrease. (D)The money supply will
decrease.
To counteract a recession, State Bank of Pakistan should
(A) sell securities on the open market and raise the discount rate
xvii (B) sell securities on the open market and lower the discount rate
(C) buy securities on the open market and raise the discount rate
(D) buy securities on the open market and lower the discount rate
If State Bank of Pakistan sells a significant amount of government securities
in the open market, which of the following will occur?
(A) The total amount of loans made by commercial banks will decrease.
xviii (B) The total amount of loans made by commercial banks will increase.
(C) The money supply will increase.
(D) Rates of interest will decrease.
If the total reserve requirement is 25 percent and banks hold no excess
reserves, an open market sale of Rs 4 billion of government securities by
the State Bank of Pakistan will
xix (A) increase the money supply by up to Rs.16 billion

(B) decrease the money supply by up to Rs.16 billion
(C) increase the money supply by up to Rs. 3 billion
(D) increase the money supply by up to Rs.1 billion
The opportunity cost of holding currency is the
xx (A) prices of goods and services (B) cost of printing currency notes
(C) level of wages and income (D) interest rate on deposits
(E) holding currency does not involve an opportunity cost
Q.3 (A) The extracts of a report are given hereunder :
“While there is a complete consensus among the economists and the businessmen on the fact that
Pakistan’s rupee exchange parity is over-valued, there is a sharp difference of opinion when it comes to
the issue of reviewing/re-adjusting or devaluation of national currency. There is a consensus that rupee
parity is over-valued by atleast 10% because of the inflation differentials between Pakistan and its
trading partners. Some economists are of the view that this over-valuation is causing stress on the
external sector and the rupee should be gradually de-valued while others believe that any idea of
devaluation recipe would de-stabilize the whole system as it will set in motion a new wave of
unprecedented inflationary wave. Some think that devaluation alone is not the solution. It also requires
some supportive steps by the Government such as to rein in mounting demand and growing consumption
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which is showing no sign of respite.”
i) Explain why Rupee is considered over-valued. How is it going to effect Pakistans’ external sector.
(03)
ii) What other measures do you consider appropriate to address to the problem if devaluation is
not adopted. (03)
Q.3 (B) A dialogue took place between two executives of a bank:
Mr.X. “The steps being taken by SBP are definitely sending the signal in the market that a tight
monetary policy is being pursued”.
Mr. Y. “without doubt, they (SBP) have raised the discount rate and recently increased the cash/statutory
liquid reserve requirements. The cut off rates of T-Bills and FIBs are gradually rising. The purpose is to
push the inflation down.
Mr.Y. “Low inflation would definitely reduce the input prices as well as real exchange and real interest
rates which would make the investment propositions more lucrative.
Mr.X “but tightening of money supply would push the mark-up which would discourage investment.
Mr. Y “I agree. Moreover, the higher financial cost may push-up price of output which would increase
inflation pressure”.
Based on the above discussion, answer the following questions.
i) Is tightening of money supply justified in the present scenario. Base your answer on the issues
raised in the aforesaid discussion. (03)
ii) Are the remarks given by Mr.X about discouragement of investment in the economy teneable. (03)
Q.3 (C) Extract from SBP Third Quarterly Report for FY06
By end-February 2006, government borrowing for budgetary support from the banking sector had
exceeded the Rs 98.0 billion FY06 annual target by 64 percent, principally due to substantial borrowings
from SBP. However, the inflows under PTCL privatization and the issuance of Eurobonds during March
2006 allowed the government to retire a large part of these borrowings. As a result, the cumulative
government borrowings from the banking sector dropped to Rs 120 billion during 1st Jul-10th June
FY06, which remains higher than that in the corresponding period of FY05.
The growth in private sector credit during 1st Jul-10th June FY06 was a little higher than the annual
credit plan estimates for the year, but was significantly lower than the increase during the same period of
FY05. This slowdown is despite the larger increases in trade-related loans and the private sector
commodity finance during Jul-May FY06 compared with the preceding year. This slowdown in the
credit market appears to be driven by both demand and supply side factors.
Your senior executive has invited your comments to above paragraphs more specifically to :
A) Government borrowings trend in FY 2006 and your expectations for the current fiscal-FY2007. (03)
B) Private sector credit decline; reasons and expectations for FY 2007. (03)
Q.4 (A) What is the difference in the national income accounts between:
i) A firm buying an auto for an executive and the firm’s paying the executive additional income to buy
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the automobile herself. (02)
ii) You have decided to buy a foreign car rather than a Pakistani car. (02)
Q.4 (B) Case studies and Application Modules.
The Consumer Price Index for four years 2002 – 2005 is given hereunder with 2003= 100.
2002 2003 2004 2005

87.3 100 109.3 246.5
Find the purchasing power of Rupee for 2002 – 2005. What was 2005 rupee worth in terms of 2002
rupee? (04)
Q.5 (A) What policies have been adopted to liberalize financial sector in Pakistan evaluate the
effectiveness of these policies. (08)
Q.5 (B) What steps would you propose to improve the functioning of credit markets in Pakistan. (10)
Q.6 (A) Why does a reduction in aggregate demand reduce total output rather than price level. (04)
Q.6 (B) Why would an up sloping aggregate supply curve weakens the realized multiplier effect. (04)
Q.7 (A) How does fiscal policy work in an open economy. (04)
Q.7 (B) “Inflations is a stimulus to investment in a developing economy.” Do you agree? Explain. (04)
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Macro Economics and Financial System of Pakistan - Stage-I

ISQ Examination (Summer-2007)

Lead to a decrease in aggregate demand by:
i A) An increase in government spending B) A decrease in labor productivity

C) An increase in personal income taxes D) An increase in society’s total wealth
An example of structural unemployment is
A) A computer programmer who quits his job to move to a warmer climate

ii B) A construction worker who loses his job in the winter
C) An autoworker who loses her job during a recession
D) A steelworker who is replaced by a robot E) None of the above
If the rate of growth in an economy is 2 percent, inflation is 3 percent, and the nominal rate of interest is
10 percent, the real rate of interest is _____ percent.
iii
A) 5 B) 7 C) 8 D) 12 E) None of the above
If a nation's depreciation exceeds its gross investment, we can say that:
iv A) net investment is positive B) the nation’s stock of capital is growing

C) the nation’s stock of capital is declining D) the nation’s GDP will rise
Expand aggregate demand according to Keynesians (demand-side economists), but stimulate aggregate
supply according to supply-siders by:
A) Increasing government purchases of goods and services

v B) Increasing transfer payments
C) Decreasing the money supply
D) Increasing the general level of interest rates
According to Keynesian theory, a combination of __________ policies below is consistent (that is, the
policies would tend to reinforce instead of offset each other).
A) Decrease taxes; increase government spending; increase the money supply

vi B) Decrease taxes; decrease government spending; increase the money supply
C) Decrease taxes; increase government spending; decrease the money supply
D) Increase taxes; increase government spending; increase the money supply
The discount rate is the interest rate at which
vii A) the SBP lends to commercial banks B) commercial banks lend to each other
C) the public lends to the federal government D) the SBP lends to the Government of Pakistan
An economy is experiencing low rates of unemployment with high inflation. An appropriate mix of
government policies might be to
A) increase taxes; decrease government spending; increase interest rates

viii
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B) decrease taxes; increase government spending; decrease interest rates

C) decrease taxes; decrease government spending; decrease interest rates
D) increase taxes; decrease government spending; decrease interest rates
E) none of the above
Fiscal policy refers to the control of
A) interest rates by the SBP

ix B) business policies to increase competition
C) the government budget to influence total spending
D) government spending in order to balance the budget
Contractionary economic policy?
x A) The selling of securities by the SBP B) Increases in the size of the federal budget deficit
C) Reductions in interest rates D) Increased rate of growth of the money supply
Which one of the following could lead to an increase in the underlying rate of inflation?
xi A) A fall in the exchange rate B) A fall in the balance of payments surplus

C) A fall in the government budget deficit D) A fall in consumer spending
The table below shows the rate of inflation for a country over a four year period.
Year 1997 1998 1999 2000

Rate of Inflation 5% 7% 8% 2%
Which of the following statements is correct?

xii
A) The price level was at its lowest at the start of the period
B) The price level was at its lowest at the end of the period
C) The rate of inflation was at its highest in the year 2000
D) The price level fluctuated over the period
The primary result of inflation is
xiii A) a decline in prices B) a rise in personal wealth

C) a rise in wages D) a decline in the value of money
The following figures are taken from the index of retail prices for three countries
Country Year2 Year3
A) 100 110
B) 115 130
C) 112 118
D) None None
(Year 1 = 100)
xiv
The table shows that between Year 2 and Year 3
A) Country A had the highest rate of economic growth

B) Country C had the lowest rate of inflation
C) Country C had the highest national income per head of population
D) Country B had the lowest rate of inflation
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Inflation is defined as
A) The increase in average prices in the retail sector

xv B) The percentage expansion of the economy over the last year
C) The rise in labour costs over the last year
D) The percent change in the price level over the preceding twelve months
Price stability occurs when
A) The general price level in the economy increases at a steady and low rate
xvi B) There is no change in the exchange rate against other currencies
C) All prices in the economy are constant
D) The rate of inflation is zero
Between April 2005 and July 2006, State Bank of Pakistan increased interest rates by 2.0% to try to curb
inflationary pressures. An increase in interest rates might be expected to help reduce inflation because a
rise in interest rates is likely to
xvii
A) Reduce consumer spending B) Increase investment spending
C) Reduce the value of the Pak Rupee D) Lead to an increase in the money supply
Which one of the following is not a major macroeconomic objective of the government.
xviii A) low inflation B) sustained economic growth

C) high level of employment D) fall in the crude oil prices
The money value of goods and services produced in a year within geographical boundaries of a country is
known as
xix A) Gross national product B) Gross domestic product
C) Balance of payments D) Per capita income
In the commonly accepted definition of recession, the level of level of national output
xx A) rises at faster rate B) rises at a slower rate
C) rises lower than inflation rate D) falls E) None of the above
Which one of the following would best indicate economic growth, an index of
xxi A) Share prices B) Company profile

C) Consumer spending D) Gross domestic product
Which one of the following is a direct tax
xxii A) Car insurance tax B) Value added tax
C) Excise duty on petrol D) Income tax E) None of the above
A decision by the government to introduce an expansionary fiscal policy would be less likely to succeed
in reducing unemployment if a country had
xxiii A) A high level of cyclical unemployment and spare capacity

B) A fixes exchange rate
C) A low level of business and consumer confidence
D) A high marginal propensity to import
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All other things being same, a government is undertaking a contractionary fiscal policy if it reduced
xxiv A) Exchange rate B) Tax rate
C) Government expenditures D) Interest rate E) None of the above
Mr. A earns Rs.2 million per year and pays Rs.0.4 million in income tax. Mr. B earns Rs.3 million and
pays Rs.0.8 million in income tax. Mr. C earns Rs.1 million and pays Rs.0.1 million in income tax. The
xxv income tax system is
A) Proportional B) Progressive C) Regressive
D) Flat rate E) None of the above
In national income accounting which one of the following is treated as a transfer payment
A) Interest paid to holders of government debt

xxvi B) Expenditure on the government's armed forces operating in other countries
C) Government spending on research and development spending in the defense sector
D) Salaries paid to civil servants E) None of the above
Which of the following is the most accurate indicator of a nation's standard of living?
xxvii A) Gross domestic product B) Real national income per capita
C) Gross national product D) Real national income E) None of the above
A government may seek to improve the current account of the balance of payments by introducing either
expenditure-reducing or expenditure-switching policies. Which of the following is an expenditure-
reducing policy?
xxviii
A) Devaluation of the currency B) A rise in income tax
C) The introduction of an import tariff
D) The introduction of an export subsidy E) None of the above
A foreign firm builds a subsidiary factory in Pakistan to produce goods solely for the Pakistan market.
Assuming that this subsidiary is profitable, the impact on Pakistan’s balance of payments is likely to be
A) A capital credit item following by a stream of current account debit items

xxix B) A capital credit item following by a stream of capital account debit items
C) A current account credit item following by a stream of capital account debit items
D) A current account credit item following by a stream of current account debit items
If the aggregate supply curve is drawn as perfectly inelastic, an increase in aggregate demand will lead to
an increase in
xxx
A) The price level B) Economic growth C) Real national output
D) Employment E) None of the above
In a hypothetical economy, without taxes, the consumption(C) at different levels of real GDP (Y)
is given here under:
Q.2 (A) Real GDP Consumption (Rs in Billion)

(Y) (C)
3,000 1,500
5,000 3,000
i Determine the size of MPC, MPS and Multiplier. (02)
What increase in Government expenditures would be required to enhance the GDP level by Rs.3,000
ii
billion, other things being equal. (01)
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Suppose Government wishes to reduce taxes. How much tax reduction shall be required to increase the
iii
GDP level by Rs.3000 billion. (02)
Read the following passage and answer the question given below:
As a result of the combined impact of improved investment to GDP ratio and deterioration in
savings to GDP ratio, the saving investment gap is expected to widen during FY 2007 in
Q.2 (B) Pakistani economy which would pose serious threat to macroeconomic stability. The short term
strategy should aim at finding ways and means to finance this resource to improve domestic
savings. However, there is a need to improve domestic savings in long-run by adopting a well
thought out strategy.
Explain how rise in saving investment gap may have adverse implications on macroeconomic
i
stability? (04)
ii How can saving investment gap be financed in short run? (02)
iii What policies should be adopted to improve domestic savings in long run? (04)
Q.3 A dialogue took place between two executives of a leading export company.
Mr. A: “Pakistan is a large cotton growing country but have a tiny 3% of the words’ textile market.
Even it had become difficult to maintain this share”.
Mr. B: “I fully agree with you. There are certain countries that do not produce any cotton but their
share is growing and is larger than our share. Japan and Bangladesh are two such countries”.
Mr. A: Even Cambodia is emerging as a large textile exporter, you know we have set a textile export
target for Pakistan of $14.5 billion by 2010. This would require an investment in textile industry of $6
billion spread over three years in addition to $6 billion invested in the industry during the last three
years.
Mr. B: To be competitive in global market, we need better competitive positioning, cheaper long term
loans and favourable fiscal and monetary policy framework.
i What are the major factors responsible for slower growth in textile exports? (5)
What policy framework would you recommend to make the exports of our textiles globally
ii
competitive? (5)
“Pakistan’s financial sector in pre-reform period was marred with physical and institutional
Q.4
weaknesses”. Do you agree. Give a brief over view of these weaknesses? (10)
Define the concept of inflation and core inflation? Identity some causes of inflation in Pakistan.
Q.5 (A)
(05)
Q.5 (B) Briefly outline the effects of Demand pull inflation and cost push inflation on real output? (05)
Q.6 (A) What are the net capital outflow and trade balance? Explain how these are related? (05)
How would increase in marginal propensity to save effect the level of output, prices and interest
Q.6 (B)
rates in the short-run and in the long-run? (05)
“In an economy with no real growth, Government shall have no option but to finance its
Economics Past For
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Pakistan
Q.7
programs through debt financing”. Discuss (05)
State Bank of Pakistan (SBP) released its second quarterly report on the State of Economy on
Q.8
30th March, 2007. An extract from the report is reproduced hereunder.
“More importantly, the significant improvement (and stability) in the macroeconomic fundamentals,
high growth rates in recent years, sustained policy focus on the implementation of reforms for the
liberalization of the economy, and relative stability of the exchange rate, continues to attract
investors, resulting in a substantial rise in investment, particularly Foreign Direct Investment (FDI).
This improvement in investment will substantially boost the economy’s prospects of managing
macroeconomic imbalances and improving the prospects of sustaining high growth rates in years
ahead”.
A senior executive has asked for a clarification of the paragraph as also for your candid opinion as to
the future trends. (10)
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Macro Economics and Financial System of Pakistan – Stage-I

(Answer)
Which one of the following statements about Pakistan’s Banking
System is not true?
A) SBP issues guidelines for various sub-sectors for the Banks.

B) SBP has introduced both Basel-I and Basel-II for Pakistan Banks.
1 C) Pakistan’s banking sector is predominantly state owned.
D) Liberalization and deregulation are the core pillars of reforms
process in Pakistan’s banking sector.
E) SBP has introduced variable capital adequacy ratio for the Banks
operating in Pakistan.
M1 component of money supply includes
A) Currency held by public and checking deposits.

B) Currency held by public, checking deposits and travelers’
2 cheques.
C) Currency outstanding and checking deposits.
D) Currency outstanding, checking deposits and money market
deposit accounts.
When there is full employment and aggregate supply is vertical, an

increase in Normal Money Supply.
A) Reduces the rate of interest and changes the composition of

output.
3 B) Increase the real money supply, which changes the composition
of output.
C) Causes a proportional increase in real output.
D) Has no effect no real money supply or the composition of output.
Disinflationary demand management policies
A) Achieve a lower rate of inflation without causing a decrease in

output.
B) Reduce output but have no initial effect on the inflation rate.
4
C) Require a reduction in the growth rate of the nominal money
supply.
D) Require an increase in Government inflation spending.
For more
Which of the following is not a direct part of the total of final goods
included in GNP as currently measured:
5 A) Capital goods B) Addition to inventories

C) Transfer payments D) Goods sold to Government
E) All the above
Which of the following would not be included in measures of the

consumption component:
A) Expenditure of new house B) Expenditure for service

6
C) Expenditure for durable goods, such as automobile
D) Expenditures on non-durable goods such as fresh food
E) All the above would be included.
Which of the following is not true about the difference between GDP
Implicit Price Deflator and Consumer Price Index:
A) CPI is based on fixed basket of goods while components of GDP

deflator may change.
B) CPI is computed on the basis of fixed weights of commodities
7 while GDP deflator is based on variable weights of commodities.
C) CPI includes imported items while GDP deflator excludes
imported items.
D) Exchange rate fluctuations affect GDP deflator but do not affect
CPI.
E) All the above are true.
The Standard Monetary Policy framework may not produce the desired
results in the developing countries because
A) Markets and financial institutions in LDCs are highly

unorganized and spatially fragmented.
8 B) The linkage between lower interest rates and higher investment
and output levels is not as strong in LDCs.
C) Strong Government Controls do not let monetary policies to
work effectively.
D) (A) and (B) only. E) All the above are true.
Which of the following is not part of a typical IMF macroeconomic

stabilization programme:
A) Liberalization of foreign exchange and import controls.

B) Introduction of wage and price controls to combat inflation.
9
C) Greater hospitality to foreign investment.
D) Devaluation of the exchange rate.
E) Stringent anti-inflation policies, both on monetary policy side
and the fiscal policy.
For more
Gini Co-efficient of Country A is 0.72 and Country B’s Gini co-

efficient is 0.38, we can conclude that
A) Country A is not likely to be a country with a history of

Socialism and Communism.
10 B) Income is distributed relatively more equally in country A as
compared to country B.
C) Population density is higher in country A than in country B.
D) Income is relatively less equally distributed in the country A as
compared to country B.
Automatic or built in stability of an economy is higher in case of
A) Progressive tax system

B) Regressive tax system
11
C) Uniform tax system
D) Lump-sum tax system
The factor that may not cause an outward shift in production

possibility is
A) Increase in supplies of resources

12 B) The improvement in resource quality
C) Technological advancement
D) Increase in price of inputs
Suppose a cheques for Rs.20,000 is encashed and customer held

currency as a personal reserve. If required reserve is 20%, the total
potential effect on the money supply would be
A) Plus Rs.10,000
13
B) Negative Rs.10,000
C) No change in money supply
D) Negative Rs.80,000
E) Cannot be answered as information is not sufficient
The natural rate of unemployment in an economy equals the sum of
A) Frictionally and structurally unemployed

B) Frictionally and cyclically unemployed
14
C) Structurally and cyclically unemployed
D) Frictionally, structurally and cyclically unemployed
For more
Which of the following taxes may be classified as a direct tax:
A) Withholding tax B) Sales tax

15
C) Custom duty D) Central excise
Which of the following is not closely related to the calculation of GDP

in an economy?
A) The sum of its factor incomes.

16 B) The sum of its productive assets.
C) The sum of value added.
D) The sum of final sales of final sales.
The GDP deflator can be used
A) to reduce the overstatement of economic activity that would

occur if we included intermediate production.
B) to correct nominal GDP for the contribution to domestic GDP
made by foreign owned factors of production.
17
C) to decompose a change in nominal GDP into a change in real
GDP and an average change in prices.
D) to obtain the factor income flows that result from the economic
activity that has produced the GDP.
“Absorption” is
A) is the difference between GDP and GNP.

B) is the difference between saving and investment.
18
C) is the sum of value-added in the economy.
D) is the sum of private and public spending on goods and services
Which of following is not a leak from the circular flow diagram of

expenditure/income?
19
A) Taxes B) Net imports C) Transfers
D) Savings E) None of the above
One reason that the value of the GDP differs from the value of national
income is:
20 A) indirect taxation. B) property taxation.

C) corporate taxation. D) personal income taxation.
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If the monetary authority of a country buys back its own currency, the
transaction would appear in the balance of payments statistics as:
A) a credit item in the current account.

21 B) a debit item in the current account.
C) a credit item in the official account.
D) a debit item in the official account.
A current account imbalance must be matched, or financed, one-for-

one by either the private financial account or:
A) balance f payments.
22 B) unilateral transfers.
C) official interventions by the monetary authorities.
D) Foreign credits.
Which of the following choices is an objective of monetary policy as

opposed to being an instrument or a target?
A) Long-term market interest rates

23 B) Bank refinancing rates
C) Price stability
D) Exchange rate
The monetary base (reserve money or high-powered money) is what?
A) The sum of currency in circulation and commercial bank

reserves.
B) The sum of currency in circulation and the currency held by
24
commercial banks.
C) The sum of gold and foreign exchange held by the central bank.
D) The sum of real assets of the banking sector plus its net worth.
Very low reported per capita income levels in developing economies

underestimate true value added and income because:
A) of adjustments in purchasing power between countries.

B) local goods are seldom competitive on international markets.
25
C) governments are still relatively small in developing economies.
D) non-market activity such as food production within the family
unit is not included in measures of per capita income levels.
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According to the Principle of Purchasing Power Parity (PPP) for a

regime of fixed exchange rates: In the long run there can be (A)
_________ deviations between domestic and foreign inflation rates. If
not, the real exchange rate would (B) _________ .
26 A) (A) no; (B) appreciate or depreciate without end.

B) (A) no; (B) equal the nominal exchange rate.
C) (A) constant; (B) appreciate or depreciate without end.
D) (A) constant; (B) equal the nominal exchange rate.
For a small economy in a flexible exchange rate system that begins in

the long-run equilibrium point, a fiscal expansion leaks abroad because
a real (A) _________ leads to a worsening of the primary current
account. The aggregate demand curve (B) _________ .
27 A) (A) depreciation; (B) shifts right.

B) (A) depreciation; (B) does not move.
C) (A) appreciation; (B) shifts right.
D) (A) appreciation; (B) does not move.
Which of the following is generally inconsistent with the economic

functions of a government in a market economy?
A) Provision of public goods and services
B) Regulate private economic activity
28
C) Income redistribution
D) Stabilization of aggregate economic activity
An example of a good produced under increasing returns is:
29 A) defense B) roads C) law & order

D) human capital E) None of the above
Modern Keynesian and neoclassic views differ essentially about what?
A) Whether expectations of the future have an impact on economic

choices and behaviour in the present.
B) The importance of intertemporal budget constraints for
households, firms, governments and nations.
30 C) The usefulness of a concept of equilibrium unemployment to
characterize labour markets in the long-run
D) The relative size of the output gap and the speed of adjustment
for the macroeconomy to eliminate output gaps in the absence of
macroeconomic policy intervention.
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The basic problem with any macroeconomic policy that is time

inconsistent is that such a policy:
A) fails to satisfy the government's intertemporal budget constraint.

31 B) is based upon the element of surprise alone.
C) is not credible.
D) all of the above
The possibility of a fiscal consolidation by a government resulting in

an expansionary impulse for an economy is called:
32 A) money illusion. B) a non-Keynesian effect.

C) time inconsistency. D) Sargent's Paradox.
The economic logic behind granting central banks independence from

government in the conduct of monetary policy is:
A) to eliminate seigniorage.
33
B) to allow open market operations.
C) to enhance the credibility of monetary policy.
D) none of the above.
To stop a raging hyperinflation, it is necessary:
A) to introduce fiscal austerity.

B) to begin a lasting, credible reduction in money growth.
34 C) to introduce binding limits on lending to the government by the
central bank.
D) all of the above.
The functions of the International Monetary Fund include all of the

following except:
A) to provide emergency loans to countries facing balance of

payments problems.
35 B) to monitor macroeconomic developments continuously in
member countries.
C) to serve as the world central bank.
D) to provide a line of credit for each member country.
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Q.2 Assume a car dealer in Pakistan imported 20 cars directly from Japan at a cost
of Rs.500,000 per car in 2005. By close of year 2005, 15 cars were sold at
Rs.600,000 per car. The remaining 5 cars were sold in 2006 for Rs.550,000 each.
How are the GNP and its major components affected in 2005 and in 2006
through this transaction? (05)
Q.3 (A) Are budget deficits a problem? Why and why not? (03)
Q.3 (B) When should, and shouldn’t the Central Bank monetize the deficit? (02)
Q.4 (A) Explain why anticipated and unanticipated inflation differ in its impact? (03)
Q.4 (B) “The impact of anticipated inflation is less severe”. True or False. Why? (02)
Q.5 (A) How does a permanent increase in country’s exports affect its income level,
prices and real money supply? (03)
Q.5 (B) How can the Central Bank of the country intervene if such a situation
arises? (02)
Q.6 (A) What is the major cause of macroeconomic instability as viewed by (03)
i) Monetarists ii) Keynesians
Q.6 (B) Can economy ‘self-correct’ itself if economic instability occurs? (02)
Q.7 What improvements have been observed in Bank’s assets/liabilities structure

after implementation of Banking Reforms Program? (05)
Q.8 Assume that national savings in Pakistan increases.

(A) Explain the effect of this increase on the real interest rate in Pakistan? (2)
(B) Suppose that real interest rates in the rest of the world remain
unchanged: explain the effect of the real interest rate change in Pakistan
that you identified in part [8(A)] on the demand for Pak rupee in the
foreign exchange market. What will happen to exchange rate of Pak
rupee? (05)
Q.9 (A) Why per capita GDP comparisons between countries may be misleading?
What do economists do to avoid some of the problems? (04)
Q.9 (B) “Pakistan’s real GDP grew at an average of 7 percent during the last five
years, however poverty has not been reduced due to this growth is mainly
stemmed from services sector”, evaluate this statement? (04)
Q.10 How is the unemployment rate calculated? Describe the three principal types of
unemployment? (05)
Q.11 “The high spread between lending and deposit rates in Pakistan is a reflection of
lack of awareness amongst the depositors rather than inefficiency of the banking
industry”, what is your opinion? Give arguments in favor of your opinion. (05)
Q.12 What is financial repression? What measures were taken in Pakistan to improve
the efficiency in resource allocation in Pakistan during the 1990s? (10)
-.-.-.-.-
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MACRO ECONOMICS AND FINANCIAL SYSTEM OF PAKISTAN – Stage-I

Q.1 State True or False in the answer column. (10)
Q.2 Please write the alphabate of selected answer in the given space: (14)
Q.3 For a hypothetical economy

(in million) (Rs.)
i) GDP = 6,000
ii) Personal Disposable Income = 5,100
iii) Government Budget Deficit = 200
iv) Consumption = 3,800
v) Trade Deficit = 100
What is the
a) Level of savings in the economy (02)
b) How large is investment level in the economy (02)
c) How large is Government spending (02)
Q.4 Consumer Price Index for the last five years is given hereunder:
2001 2002 2003 2004 2005

95 88 100 105 140
Determine the purchasing power of rupee for each year. For which years
purchasing power of Rupee was the highest and lowest. (05)
Q.5 (A) Explain the difference between Inflation and Expected Inflation. How
does changing inflation expectations affect Short-run Philpse curve. (05)
Q.5 (B) What is stagflation? Describe the situation which can produce it (05)
Q.6 (A) If Government increases its spending and finance it by raising taxes.
What happens to the interest rate? Why? (05)
Q.6 (B) How would you analyze the impact on the economy of an increase in
Government spending financed by printing money? (05)
Q.7 (A) What is crowding-out effect of deficit spending? Does reduction in Budget
Deficit always increase private investment? Why or why not? (05)
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Q.7 (B) Explain why inflation at very high levels as well as at very low levels is
harmful for the economy. (05)
Q.7 (C) How would monetary tightening measures taken by SBP help containing
macro economic imbalances in Pakistan’s economy? (05)
Q.8 (A) What are the major functions of a financial system? (05)
Q.8 (B) What steps are taken for financial deepening in a developing economy? (05)
Q.9 (A) The key obstacle to the development of the corporate debt market in
Pakistan has been higher returns offered by low-risk alternate
instruments? Do you agree? Explain. (05)
Q.9 (B) What are the major challenges Islamic Financial Industry is facing in
Pakistan? What steps would you propose to overcome these challenges? (05)
Q.10 Given below is the extract from the IBP weekly Economic Letter dated April 4,
2008 based on Second Quarterly Report on Economy Issued by SBP.
Export earnings are estimated at $ 19.7 bn against the target of $ 18.9 bn

and realized $ 17.2 bn in FY07. Import payments are projected at $ 32.1
bn against the target of $ 29.6 bn and actuals of $ 27.0 bn in FY07
respectively. Trade deficit during July-December 2007 was 7.9% of GDP
against 6.2% in the comparative period last fiscal;
Fiscal deficit as a proportion of the GDP during July-December 2007

stood at 3.6% against 1.9% in the same period last fiscal. Current account
deficit during this period as a proportion of the GDP stood at 4.8%
against 3.6% in the same period last fiscal; the full fiscal deficit is
anticipated at 6.0% against the target of 5.0% and actuals of 5.3% in FY
07. Budgetary deficit as a proportion of GDP in FY 08 is estimated at
5.2% against the target of 4.0% and actuals of 4.3% in FY07.
Kindly develop a detailed note for the head of your organization explaining the
triple deficits, their causes and impact on economy and anticipated scenario. In
the end enlist your brief suggestions. (10)
-.-.-.-.-
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MACRO ECONOMICS AND FINANCIAL SYSTEM OF PAKISTAN – STAGE-I

ISQ EXAMINATION (WINTER) 2008
(Answer)
In a full employment economy, net saving is equal to net
1
Investment.
Q.2 Please write the alphabet of the selected answer in the given space: (34)
Answer
The effective rate of protection measures how much
A) Investment will be drawn into the protected industry.

B) Profits can be earned by producing the protected products.
1 C) The margin of price over input cost for domestic producer can
exceed the margin at world market price.
D) The price of product increases due to tariff.
Q.3 (A) Assume that in an economy GDP is Rs.10.00 billion and unemployment
rate is 5% higher than natural rate of unemployment. What shall be the
shortfall in potential GDP if OKUN’s LAW holds? (02)
Q.3 (B) At current equilibrium level GDP is Rs.75 billion. The target level of GDP
is fixed at Rs.100 billion. If Government plans an investment of Rs.20
billion to achieve the target, what MPC is assumed? (02)
Q.3 (C) Suppose we have been given the following information.
Nominal GDP in year 2001 = $ 500 billion
The GDP deflator doubles in year 2006. The real output has increased by
40%. What shall be nominal output in year 2006? (02)
Q.4 A dialogue between two financial economists is given hereunder:
Mr. A. You see, the banking spread in Pakistan is still highest in the region.
Mr. B. This is despite the measures taken by SBP to obtain slow-off take of the credit in
the country. This means the demand of credit may shrink but the Banks are not
budging much. The average banking spread during the first six months of the

For more
current year is 7.08% as against the previous years average of 7.3%, which means
it has declined by 31 basis point only. Still it is the highest in the region.
Mr. A. “Since there is a pressure on banks to offer higher rates to acquire deposits but the
lending rates are also gradually increasing. This has brought negligible effect on
spread in current scenario”.
Mr. B. “The Banks have a justification. The cost of banking has gone high due to higher
inflation. Moreover, slower growth of economy means slower off-take of credit,
which means pressure on lending rates. With less chances at least in short-run that
inflation shall come down, the deposit rates are less likely to decline. This means
pressure is on spread of the Banks. High KIBOR may lend support to rising
lending rates”.
Answer the following questions based on the above dialogue:
A) Are higher spreads in Pakistan ascribed to exploitive behaviour of the

Banks? (02)
B) What trend would you forecast for the current year i.e. 2008-2009 (02)
C) Would you favour SBP’s direct intervention in the system to reduce the
spreads? Why or why not? (02)
Q.5 (A) How are National Income and Personal Income related? (02)
Q.5 (B) Define Purchasing Power Parity method for determining GNP. (02)
Q.5 (C) Why is GNP defective as a measure of welfare? (02)
Q.6 (A) Elaborate the criteria used to determine the efficiency of a financial
system? (03)
Q.6 (B) Does Islamic financial system meet this efficiency criteria? (02)
Q.7 (A) How might a government use fiscal policy to counteract a period of
recession? Discuss in the context of Pakistan. (05)
Q.7 (B) Given; Exchange rate of Pak Rupee per US$ = 62.8 as on 30th June, 2007
Exchange rate of Pak Rupee per US$ = 70.3 as on 30th June, 2008
(i) Compute the depreciation of Pak Rupee against US$ during the fiscal
year 2007-08. (02)
(ii) Evaluate the impacts of this depreciation on Pakistan’s exports, imports
and inflation. (03)
Q.8 Country Y is experiencing severe and unanticipated inflation.

For more
(A) Explain the effect of this inflation on a business repaying a long-term,

fixed-interest-rate loan. (01)
(B) Identify one fiscal policy action that could be implemented to reduce
inflation. (01)
(C) Identify an open-market operation that could be implemented to reduce

inflation. (02)
(D) If Country Y’s inflation is high relative to that of other countries, explain
the effect of this inflation on the international value of Country Y’s
currency. (01)
Q.9 (A) Explain the difference between poverty in terms of income and
consumption? (05)
Q.9 (B) Evaluate the impacts of present high inflation on poverty in Pakistan. (04)
Q.10 In recent years, a gradual structural transformation is taking place in Pakistan’s

economy as the share of services sector is increasing at the cost of commodity
producing sector. Give arguments in favor or against the conclusion that this
transformation is a root cause of present economic problems. (05)
Q.11 In Interim Monetary Policy Statement, SBP imposed a minimum 5% return on

all types of deposits. Some analysts believe that it is a reversal of financial
reforms, and some suggest it as an important step to encourage savings.
Comment and analyze the impact of this decision on financial sector, savings and
profitability of banks. (05)
-.-.-.-.-

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Q.2 Please write the alphabet of selected answer in the given space: (46)
Q.3 A dialogue took place between two economists is as follows:
Mr. A: The neo-classical model which is promoted by the IMF and its
followers in developing countries needs to be re-assessed. The
emphasis on macroeconomic stability, in particular controlling
inflation should not be at the expense of growth in the developing
countries such as Pakistan.
Mr. B: The issue of macro stability is also very important. If that is

ignored, the growth achieved shall falter in the long-run. I believe
we should first look at achieving stability and arresting
inflationary trend as major focus of our economic policy.
Mr. A: We can not over-look stability question. However, we should not

ignore more basic issues confronting our economy. Poverty rate
has jumped from 23.9% to 37.5% in the course of three years. We
need investment in infrastructure, human development projects
and for improving living standard of poorer sections of society.
Mr. B: I think if we are able to keep inflation and growing macro

economic imbalances in check, we may then adopt policies aiming
at achieving growth on sustainable basis.
Based on the above discussion, Answer the following questions:
i) Is there any trade-off between inflation and growth in Pakistan’s

economy? Justify your view point with reasoning. (03)
ii) Explain why macro economic stability is important for smooth

functioning of economy. (03)
Q.4 (A) Outline the major factors responsible for liquidity pressures experienced
by Banking System in Pakistan in recent past? (05)
Q.4 (B) What are the implications of high fiscal deficits for monetary policy?
Discuss in the context of Pakistan. (05)
Q.5 (A) What does a balance of payments statement tell us? (02)
For more
Q.5 (B) How does deficit in Balance of Payment influence Economic

Activity? (03)
Q.6 (A) Explain that how the economic growth decreases poverty? (02)
Q.6 (B) What are the causes of Devaluation of Pakistan currency? (02)
Q.7 (A) Evaluate the effect of Devaluation on the Trade and Economic
growth. (02)
Q.7 (B) Why the financial intermediaries are less risky and provide liquidity to
the savers? Explain. (03)
Q.8 (A) Explain why it is not a sustainable policy to attempt to keep

unemployment below its natural level according to the augmented
Phillips Curve model. (04)
Q.8 (B) ‘The Government uses an income yardstick of a dollar-a-day per person
to define poverty’. But this is a very misleading figure in Pakistan’s case.
Explain why? (03)
Q.8 (C) What is the money multiplier? (02)
Q.9 (A) Higher monetary growth will never affect unemployment, rather, it will
be reflected in higher inflation. Explain. (03)
Q.9 (B) Is GDP and GNP accurately measures human welfare? Support your
answer with a suitable reason. (03)
-.-.-.-.-
For more

Q.1 State True or False in the answer column.
Q.2 Please write the alphabet of the selected answer in the given space:
Q.3 Two leading business executives of large concern were discussing the potential
for future business operations.
Mr. A. The new trade policy has spelled out various incentives for augmenting
export base during the next three years. We can now think about planning to
extend product range offering export potential.
Mr. B. I think the role of exports as “the driver” of economic activity and growth
is somewhat over exaggerated. The export sector cannot perform in isolation i.e.
without boosting overall economic growth and in particular domestic trade and
commerce. However, the key is conducive investment climate.
Mr. A. You may be right in long term perspective but in short-run the incentives
offered are lucrative and we can explore opportunities in export markets.
Mr. B. No., I strongly believe you need to boost domestic commerce to create new
opportunities for investment and push sustainable economic activities. Unless
you become competitive, you cannot make a successful entry in export market.
Based on the above discussion, answer the following questions:
i) Do you agree with the comments the role of exports as driver of economic growth
is exaggerated?
ii) What is the importance of a vibrant domestic market in boosting export sector?
Q.4 For an economy following information is available
Natural Rate of Employment = 5.5%

Current Unemployment Rate = 7%
Current GDP level = Rs.10.00 billion
What is the shortfall in potential GDP if Okun’s law holds?
Q.5 (A) What is hyper inflation, what factors leads to hyper inflation?
Q.5 (B) Explain how hyper inflation might lead to a severe decline in total output?
For more
Q.5 (C) Can monetary policy change real out-put when investment is independent
of interest rates?
Q.6 What criteria is used to determine allocative efficiency of financial system?
Q.7 (A) What are the major components of Current Account Balance?
Q.7 (B) Is negative balance in the Current Account is necessarily always bad?
Discuss with reference to Pakistan’s case.
Q.8 (A) How does the following fiscal policy stances effect savings in an economy?
i) An increase in Government purchases

ii) A decrease in taxes
Q.8 (B) Discuss the factors that cause changes in Investment Demand in an
economy.
Q.9 (A) Explain the difference between nominal and real exchange rate.
Q.9 (B) Discuss the determinants of real exchange rate.
Q.10 (A) What determines the natural rate of unemployment?
Q.10 (B) Why imposition of minimum wage law is not always favoured by the
economists?
Q.11 Explain why Transformation and Distribution of risk is considered to be an

important function of a sound financial system.
-.-.-.-.-
Economics Past Papers - ibpnextgen.blogspot.com
MACRO ECONOMICS AND FINANCIAL SYSTEM

OF PAKISTAN – STAGE-I
Q.3 (A) A dialogue took place between two senior executives of a Bank:
Mr. A: The estimate of debt servicing has been revised upwards for the current
fiscal which is an alarming sign.
Mr. B: “Of course, the issue of fiscal sustainability is important. However, the
root cause of problem is inflationary pressure.
Mr. A: It is estimated that foreign debt servicing cost in the next fiscal year
would be $ 1.50 billion. The fall in rupee value would further worsen the
situation.
Mr. B: First thing first. Inflation appears to be our major problem. High
inflation leads to all kinds of distortion. We need make adjustments (by
way of depreciation) in value of Pak rupee to offset the effect of inflation.
Mr. A: The total Government debt is around 60% of GDP and with depreciation
of Pak rupee, the foreign debt servicing cost shall escalate further.
(i) Explain how does inflation effect exchange rate in an economy?

(ii) What are the pros and cons of depreciation of exchange rate in Pakistan?
Q.3 (B) In an economy income (Y) is 4,800, consumption is 3,500, Government

spending is 1,000 and tax revenue is 800.
i) What shall be private saving?

ii) What shall be public saving?
iii) What is total (National) saving?
Q.3 (C) Marginal Propensity to consume in an economy is 0.8. The Government

wishes to bring $ 400 million increase in output.
i) What increase in Government spending is required?
ii) Suppose Government instead uses tax cuts, how much amount of
tax cuts shall have to be made to achieve the $ 400 million increase
in output?
Q.4 (A) Can the value of the nominal GNP of a country be used as a measure of
the economic welfare of its people? Explain your answer?
Q.4 (B) Indicate the factors which were responsible for the emergence of Circular
Debt Problem in Pakistan.
Q.4 (C) What are the significant implications of Circular Debt Problem?
Q.5 (A) Why the monetary policy is predominantly used to achieve stabilization in
Pakistan. What advantages are attributed to monetary policy over fiscal
policy?
Q.5 (B) Explain why short-run aggregate supply curve differs with that of long-
run aggregate? Supply curve?
Q.6 (A) What is trade-off between inflation and unemployment in the short-run?
Does this relationship also hold in the long-run?
Q.6 (B) “Monetarists and Keynesians both agree that inflation can only be
reduced at the cost of higher unemployment”. Do you agree?
Explain with justification.
Q.7 (A) Explain why for an open economy the size of multiplier is directly related
to marginal propensity to imports?
Q.7 (B) What is likely impact of the following on Internal and External Balances
in an open economy?
i. An increase in Government spending

ii. A loss of export market
iii. A reduction in saving and corresponding increases in the demand for
domestic goods
Q.8 (A) How is equilibrium interest rate determined in money market?
Q.8 (B) How does interest rate effect Bond Prices?
Q.9 (A) How does restrictive monetary policy control inflation?
Q.9 (B) A country barely has enough resources to meet the requirement of its
people but does not have enough resources to devote to investment to
increase per capita output. Indicate how such a country can increase its
level of investment without reducing current expenditure?
Q.10 (A) What is indicated by a horizontal LM curve?
Q.10 (B) When would I.S. curve become more flatter?
-.-.-.-.-
THE INSTITUTE OF BANKERS PAKISTAN

MACRO ECONOMICS AND FINANCIAL SYSTEM OF PAKISTAN
Q.2 Please write the alphabet of the selected answer in the given space
Q.3 A) In an economy, the three goods are produced. Price/Quantities for 2008,
2009 and 2010 are given hereunder. 2008 is to be considered as base year:
Quantities Price (2008) Price (2009) Price (2010)

A Food 450 kg Rs.25 per kg Rs.30 per kg Rs.40 per kg
B Clothing 100 pairs Rs.250 per pair Rs.400 per pair Rs.450 per pair
C Housing 4 units Rs.25,000 per unit Rs.40,000 per unit Rs.55,000 per unit
i) Find CPIs for 2009 and 2010.

ii) Calculate inflation for 2010.
B) In an economy, the commercial banking system has the following balance

sheet:
Assets (in billion Rs.) Liabilities (in billion Rs.)

Reserves 40 Demand Deposit 200
Loans 80 Capital Stock 120
Securities 100
Fixed Assets 100
320 320
The Required Reserve Ratio is 12.5%.
Based on the above balance sheet, answer the following questions:
i) What is maximum amount by which the commercial banking system can

expand the supply of money? Show all calculations.
ii) If a deposit of Rs.20 billion of new currency is made into chequing

accounts in the banking system, by how much amount the excess reserves
shall increase. Show all calculations.
Q.4 Owners of two leading export houses were commenting on SBP’s recent decision of
raising export-refinance rate.
Mr. A SBP has increased the export refinance rate by half a percentage point to eight percent
from April 1. The Banks shall now charge nine percent interest on export financing by
adding their own margin of one percent. This would add to problems for export houses.
Mr. B SBP is pursuing a policy to gradually withdraw subsidies on mark-up rates. So

the rate increase may be seen in this perspective. It is a question more of a policy
than exception.
Mr. A You know countries like China, India and Bangladesh provide interest rate subsidies. The
subsidies in Pakistan would help our exporters to compete with them in international
market. Moreover, the subsidy may compensate exporters for additional input costs being
incurred by industries due to electricity and gas load shedding and inefficiencies in the
system.
Mr. B The best option is to re-align the subsidies for the time being by shifting them
gradually from less-efficient traditional export sector to most efficient non-
traditional export sectors.
Mr. A Our competition in world market provide subsidies while our input cost are high; there is
a strong case for subsidy in mark-up for export-based industrial sector.
A) What are the arguments for and against withdrawal of subsidies on mark-up?
B) Would you support re-aligning the mark-up subsidies to efficient non-traditional

sector? Explain with justification.
Q.5 (A) Does fiscal deficit necessarily lead to inflation?
(B) Is growing domestic debt a problem for a Government in the same way as
it is for the household raising debt for meeting emergent consumption
needs.
Q.6 A) Is Central Bank more effective in fighting recession or inflation?

Why?
B) What relationship is explained by the Phillips curve between

inflation and unemployment? Why these relationships do not hold
in the long-run?
Q.7 A) Discuss the factors which determine the supply and demand of loanable
funds in a financial system.
B) How does a financial system transform and distribute risk in an

economy?
Q.8 A) “Flexible exchange rates automatically adjust and eliminate Balance of

Payment deficits or surpluses”. Do you agree? Why?
B) What problems are associated with shallow finance in financial

system?
Q.9 A) Discuss the need and scope of “development banking” for LDCs.
B) Is economic growth enough to reduce absolute poverty?
-.-.-.-.-

MACRO ECONOMICS & FINANCIAL SYSTEM OF PAKISTAN
Q.2 Pakistan economy has shown meager economic growth in recent past. The
Government and economists are much concerned to boost this growth rate.
A) Define economic growth

B) Briefly explain the ingredients of economic growth
C) Why economic growth has been slow in Pakistan
Q.3 (A) Why is there a trade-off between the amount of consumption that people
can enjoy today and the amount of consumption that they can enjoy in the
future? Why cannot people enjoy more of both?
(B) How does saving relate to investment and what role do banks and other
financial institutions play in adding to the economic growth?
C) Why should GDP not be interpreted as a complete measure of well-being?
Q.4 A) What do you mean by fiscal policy?
B) What are the problems that complicate the enactment and implementation
of fiscal policy?
Q.5 A) What is a GDP Deflator? Give its formula.
B) Define the natural rate of unemployment.
Q.6 A) Define Lorentz Curve and explain how it portrays inequitable distribution
of income?
B) Explain atleast 2 various measures to control inflation.
Q.7 Compare real interest rates to nominal interest rates.

A) What Is a Nominal Interest Rate?
B) What Is Inflation?
C) What Is the Real Interest Rate?
Q.8 A) Compare real exchange rates to nominal exchange rates. Briefly explain
which rate is more important?
B) Define a capital market. Describe the primary role and significance of a

capital market.
Q.9 A) Define deregulation and liberalization of financial sector. Argue in favour

of deregulation and liberalization of financial sector.
Page 1 of 2
Q.9 B) What were the major financial reforms that had been implemented
during the last two years?
Q.10 A) What are the major objectives of macroeconomics?
B) Explain carefully why each objective is important?
-.-.-.-.-
Page 2 of 2
Economics – Stage-II
Section-I
Multiple Choice Questions
Number of Questions: 30
Marks: 45
Allotted Time: 60 minutes
Section-II
Constructed Response Questions
Number of Questions: 9
Marks: 55
Allotted Time: 120 minutes

Q.31 A) What is a safety net program? State two of its main roles.
Q.31 B) State any THREE problems that can exist if the GNP is used for the
economic well-being.
Q.32 A) Write TWO disadvantages of floating exchange rate.
Q.32 B) Suppose SBP decides to increase the interest rate. With the help
of a graph, suggest how might this decision affect the exchange
rate equilibrium?
Q.33 A) Define the Money Multiplier and explain how does it impact on
money in circulation?
Page 1 of 2
Q.33 B) Suppose initial deposit is Rs. 100 billions and reserve requirement
is 20%. Calculate the multiplier effect.
Q.34 A) Briefly explain FOUR effects of Contractionary Monetary policies

on the economy.
Q.34 B) Describe Contractionary Monetary policy.
Q.35 A) Define money.
Q.35 B) Why are cheques and credit cards not counted as money?
Q.35 C) Describe any THREE functions of money.
Q.36 Describe any FIVE key objectives of the International Monetary Fund
(IMF)?
Q.37 List the various tools of monetary policy. Describe any of the two
qualitative and two quantitative tools.
Q.38 A) What is meant by a demand for money?
Q.38 B) Identify the cost of holding money?
Q.38 C) Describe any THREE factors that affect the demand for money.
Q.39 Discuss the decision making process emphasizing on risk and its
management.
-.-.-.-.-.-
Page 2 of 2

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Economics Past Papers - ibpnextgen.blogspot.

Study for JAIbP

Macro Economics & Financial System of Pakistan - Stage-I

IBP-the knowledge Institute

Q.2 Please write the alphabet of selected answer column: (15)

IBP-the knowledge Institute

The short-run Phillips curve is the relationship between inflation and

Q.3 Application Module and Case Analysis (05)

Period Implicit Price Normal GDP Real GDP

IBP-the knowledge Institute

Answer the following questions:

iii) What has been the impact of Globalization on Financial Sector of

Q.5 i) What initiatives have been taken for Islamization of Financial

Q.6 i) Explain the concept of “Development Finance”. Briefly comment on the

IBP-the knowledge Institute

Macro Economics and Financial System of Pakistan - Stage-I

The external debt burden of Pakistan as percentage of GDP is

Under expansionary fiscal policy in a developing economy, imports

Q.2 Please write the alphabet of selected answer column: (20)

In case of Pakistan for FY 2005-2006, the highest contribution in

(A) is necessarily accompanied by an income in consumption spending

(A) It is a graph of the cumulative percentage of families (or persons) and

(A) Is an absolute measure of poverty.

vii (A) Lack of entrepreneurship (B) Low rates of investment

(C) Lack of Government sponsored industrial policy.

(A) Would have no effect upon output.

(A) Achieve lower rate of inflation without causing a decrease in output.

(A) A reduction in government spending lowers the rate of interest.

(A) Resource Allocation (B) Clear and settle payment

(A) The Fisher equation

(A) An increase in real interest rate. (B) A reduction in real interest

(A) Aggregate demand will be unchanged. (B) Aggregate demand will

xix (A) increase the money supply by up to Rs.16 billion

Q.3 (A) The extracts of a report are given hereunder :

which is showing no sign of respite.”

Q.3 (B) A dialogue took place between two executives of a bank:

Based on the above discussion, answer the following questions.

the automobile herself. (02)

Q.4 (B) Case studies and Application Modules.

2002 2003 2004 2005

Macro Economics and Financial System of Pakistan - Stage-I

Q.1 Please write the alphabet of selected answer column: (30)

i A) An increase in government spending B) A decrease in labor productivity

A) A computer programmer who quits his job to move to a warmer climate

iv A) net investment is positive B) the nation’s stock of capital is growing

A) Increasing government purchases of goods and services

A) Decrease taxes; increase government spending; increase the money supply

A) increase taxes; decrease government spending; increase interest rates

B) decrease taxes; increase government spending; decrease interest rates

A) interest rates by the SBP

xi A) A fall in the exchange rate B) A fall in the balance of payments surplus

Year 1997 1998 1999 2000

Which of the following statements is correct?

xiii A) a decline in prices B) a rise in personal wealth

A) Country A had the highest rate of economic growth

A) The increase in average prices in the retail sector

xviii A) low inflation B) sustained economic growth

xxi A) Share prices B) Company profile

xxiii A) A high level of cyclical unemployment and spare capacity

A) Interest paid to holders of government debt

A) A capital credit item following by a stream of current account debit items

Q.2 (A) Real GDP Consumption (Rs in Billion)

Macro Economics and Financial System of Pakistan – Stage-I