Beruflich Dokumente
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1. The demand for most products varies directly with the change in consumer income. Such products are < Answer
>
known as
(a) Normal goods
(b) Prestigious goods
(c) Complementary goods
(d) Inferior goods
(e) Substitute goods.
(1 mark)
2. The situation of market equilibrium occurs when < Answer
>
(a) Demand for the goods is greater than supply of the goods
(b) Quantity demanded for the goods equals quantity supplied of the goods
(c) The price, sellers ask for the goods is less than the price consumers pay of those goods
(d) There exist a shortage of the supply of the goods
(e) Demand for the goods is less than supply of the goods.
(1 mark)
3. Essexx Design Inc. produces very costly and attractive sports watches. Now Sofex Inc. introduced a < Answer
>
stylish sports watch in the market. The watches of Essexx Design Inc. and Sofex Inc. are considered to
be perfect substitutes. The cross elasticity of demand between these watches is
(a) Infinity
(b) Positive, less than infinity
(c) Zero
(d) Less than zero
(e) One.
(1 mark)
4. Which of the following does not cause a shift in the demand curve? < Answer
>
(a) Change in the price of the good
(b) Change in the income of the buyers
(c) Change in the personal preferences
(d) Change in the price of the related goods
(e) Change in the consumer patterns.
(1 mark)
5. The demand and supply functions of a commodity are estimated as < Answer
>
Qd = 100 – P
Qs = –20 + 3P
AC = + 20 + 4Q.
What is total variable cost for the firm at an output of 15 units?
(a) Rs. 100
(b) Rs. 750
(c) Rs.1,200
(d) Rs.1,300
(e) Rs.2,100.
(2 marks)
38. In a perfectly competitive market, the marginal revenue curve < Answer
>
(a) Slopes downward
(b) Slopes upward
(c) Is vertical
(d) Is horizontal
(e) Is absent.
(1 mark)
39. The following data is taken from National Income Accounts of a country: < Answer
>
Million Units of Currency
Particulars
(MUC)
GNP at market prices 1,700
Transfer payments 242
Indirect taxes 173
Personal taxes 203
Consumption of capital 190
Undistributed corporate profits 28
Corporate tax 75
Subsidies 20
(a) Keynesian economists actively promote the use of fiscal policy while the classical economists do
not
(b) Keynesian economists actively promote the use of monetary policy to improve aggregate
economic performance while classical economists do not
(c) Classical economists believe that monetary policy will certainly affect the level of output while
Keynesians believe that money growth affects only prices
(d) Classical economists believe that fiscal policy is an effective tool for achieving economic
stability while Keynesians do not
(e) Keynesian economists actively promote the use of rational expectations while the classical
economists do not.
(1 mark)
57. Which of the following is true for a classical aggregate supply curve? < Answer
>
(a) Aggregate supply curve is horizontal
(b) Aggregate supply curve is positively related to real output
(c) Aggregate supply curve is negatively related to real output
(d) Aggregate supply curve is unrelated to price level
(e) Aggregate supply curve is rectangular hyperbola.
(1 mark)
58. According to Keynesian theory, full employment refers to a situation where there is < Answer
>
(a) Zero unemployment
(b) Natural rate of unemployment
(c) Least demand for labor
(d) Least supply of labor
(e) Demand for goods which is less than supply.
(1 mark)
59. The Chief Economist to the Government told the Cabinet that the people cannot be influenced if the < Answer
>
government increases it’s spending during election years, as people will anticipate this kind of behavior
as previous governments used to do so. The economist is an advocate of
(a) Classical economics
(b) Rational expectations
(c) Keynesian economics
(d) Supply-side economics
(e) Monetarism.
(1 mark)
60. Unemployment that results from the normal workings of the labor market is a combination of < Answer
>
(a) Frictional and structural unemployment
(b) Cyclical and structural unemployment
(c) Frictional and cyclical unemployment
(d) Frictional and disguised unemployment
(e) Higher quantity demanded and lower quantity supplied in the labor market.
(1 mark)
61. Which of the following would you suggest to counter a recession? < Answer
>
(a) Decrease in government expenditure
(b) Decrease in transfer payment
(c) Decrease in the discount rate
(d) Decrease in the money supply
(e) Increase in the tax rate.
(1 mark)
62. Which of the following is not a major determinant of economic growth? < Answer
>
(a) Tastes and preferences of consumers
(b) Technological advancement
(c) Natural resources
(d) Physical capital
(e) Human resources.
(1 mark)
63. Inflation accompanied by a slowing of economic activity is < Answer
>
(a) Known as deflation
(b) A result of a stagnant aggregate supply
(c) A result of fiscal stimulus
(d) Known as stagflation
(e) Known as a recession.
(1 mark)
64. The Phillips curve shows the short run trade off between < Answer
>
(a) Inflation and unemployment
(b) Unemployment and output
(c) Inflation and the nominal interest rate
(d) The nominal interest rate and investment
(e) Inflation and output.
(1 mark)
65. Economic growth is said to have occurred when there is an increase in < Answer
>
(a) Interest rate
(b) Aggregate demand
(c) The rate of inflation
(d) Productive capacity
(e) Wage rate.
(1 mark)
66. Which of the following policy measures is considered as fiscal policy measures? < Answer
>
(a) The government cuts taxes or raises spending to get the economy out of a slump
(b) The government changes the quantity of money supplied to affect the price level, interest rates,
and exchange rates
(c) The government stimulates aggregate supply to stimulate the potential growth of output and
income
(d) The government changes the statutory liquidity ratio
(e) The government restricts imports and stimulates exports.
(1 mark)
67. Expansionary monetary policy affects the goods market because < Answer
>
(a) It raises interest rates and leads to lower investment spending
(b) It lowers interest rates and raises investment spending
(c) It leads to an expansionary fiscal policy
(d) It lowers both interest rates and investment spending
(e) It lowers both interest rates and exports.
(1 mark)
68. If the government increased its spending and the Reserve Bank of India increased the money supply, < Answer
>
which of the following would we expect to happen in the short run?
(a) Increases in both output and the price level
(b) A decrease in output and an increase in the price level
(c) Decreases in both output and the price level
(d) Ambiguous changes in both output and the price level
(e) A decrease in price level and an increase in output.
(1 mark)
69. A current account deficit implies that < Answer
>
(a) There is net debit balance in the merchandise account
(b) There is net credit balance in the merchandise account
(c) Foreign exchange outflows on account of imports of goods and services and gifts made exceed
inflows on account of exports of goods and services received
(d) Decrease in Foreign Exchange Reserves
(e) Increase in Foreign Exchange Reserves.
(1 mark)
70. Which of the following is true if, for a given period, there is no change in the foreign exchange reserves < Answer
>
of a country?
(a) Balance in the current account is equal to the balance in capital account
(b) Surplus (deficit) in the current account is equal to deficit (surplus) in the capital account
(c) Current account balance is zero
(d) Trade balance is zero
(e) Capital account balance is zero.
(1 mark)
71. In balance of payments statement, short term inflows and outflows of capital are recorded in < Answer
>
(a) Current account
(b) Capital account
(c) Official reserves account
(d) Errors and omissions account
(e) Transfer payments account.
(1 mark)
72. Who among the following will be benefited most from unanticipated inflation? < Answer
>
I. Creditors.
II. Debtors.
III. Retirees earning fixed income.
IV. Employees whose salaries are linked to the consumer price index.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) Both (III) and (IV) above.
(1 mark)
73. Which of the following best describes an expansionary fiscal policy? < Answer
>
(a) Increase in government spending and increase in money supply
(b) Increase in government spending and decrease in taxes by the same amount
(c) Decrease in government spending and decrease in money supply
(d) Decrease in government spending and increase in taxes
(e) Increase in government spending and increase in taxes.
(1 mark)
74. In the short run, an increase in the government’s budget deficit is most likely to reduce < Answer
>
(a) Interest rate
(b) Inflation
(c) The demand for imported goods and services
(d) Unemployment
(e) Money supply.
(1 mark)
75. The following information is available from balance of payments of an economy: < Answer
Item MUC >
Trade balance –5,000
Current account balance –2,000
Capital account balance 7,000
The foreign exchange reserves of the country will
(a) Decrease by 5,000 MUC
(b) Decrease by 2,000 MUC
(c) Remain unchanged
(d) Increase by 5,000 MUC
(e) Increase by 2,000 MUC.
(2 marks)
76. Financial assets of the RBI does not include < Answer
>
(a) RBI’s credit to government
(b) Credit to commercial banks
(c) RBI’s credit to commercial sector
(d) Net foreign exchange assets with RBI
(e) Furniture and buildings of RBI.
(1 mark)
77. The following information is taken from Union Budget for the year 2006: < Answer
>
Rs.
(crore)
Revenue Receipts
Tax Revenue (Net) 1,72,965
Non-tax Revenue 72,140
Capital Receipts
Recoveries of Loans 17,680
Other Receipts 12,000
Borrowings & Other Liabilities 1,35,524
Non-plan Expenditure
On Revenue Account 2,70,169
(Of which, interest payments is Rs.1,17,390 crore)
On Capital Account 26,640
Plan Expenditure
On Revenue Account 70,313
On Capital Account 43,187
The revenue deficit for the year 2006 was
(a) Rs.95,300 crore
(b) Rs.95,377 crore
(c) Rs.90,300 crore
(d) Rs.94,500 crore
(e) Rs.97,735 crore.
(2 marks)
78. Consider the following information: < Answer
>
Particulars MUC
Earnings on loans and investments from abroad 500
Earnings on loans and investments to abroad 2,200
Import of services 4,000
Private remittances to abroad (transfers) 500
Private remittances from abroad (transfers) 500
Exports of services 2,000
Merchandize exports 15,000
Merchandize imports 12,000
The current account balance for the country is
(a) 700 MUC (Surplus)
(b) 700 MUC (Deficit)
(c) 500 MUC (Deficit)
(d) 500 MUC (Surplus)
(e) Zero.
(2 marks)
Suggested Answers
Economics (CFA520): October 2007
1. Answer : (a) < TOP >
Reason : In case of normal goods, a given increase in income results in increase of demand. Normal goods can
be further classified into luxury good or necessary goods based on the value of the income elasticity
of demand. If the value of income elasticity is more than one, it signifies that the good is a luxury
item. Since, the value of the income elasticity of demand is not known; we can classify the good to
be normal goods.
a. In case of normal goods the quantity demanded increases/decreases with the increase/decrease
in the income levels of the consumers.
b. In case of necessities, though there would be positive change in the quantity demanded of the
good for a given change in the income, the percentage change in the quantity demanded would
be less than the percentage change in the income. Since, we do not know the value of the
income elasticity of demand; we cannot classify the good as luxury or necessary good.
c. Complementary goods are those which are jointly used to satisfy a want. Cross elasticity of
demand, and not income elasticity of demand, is used to determine the relationship between the
two goods.
d. In case of inferior goods percentage change in the quantity demanded is negative with the
change in the income. Hence, (d) is not the correct answer.
e. In case of Luxury goods, the percentage change in quantity demanded is greater than the
percentage change in the income. Since, we do not know whether the percentage change in
quantity demanded is greater than the percentage change in the income, we cannot classify the
good to be luxury good.
2. Answer : (b) < TOP >
Reason : When total quantity demanded in the market equals total quantity supplied, the market is said to be
in equilibrium.
3. Answer : (a) < TOP >
Reason : The cross-elasticity of demand between two perfect substitutes is infinity.
Here, the smallest possible increase (decrease) in the price of one good causes an infinitely large
increase (decrease) in the quantity demanded of other good.
4. Answer : (a) < TOP >
Reason : Movement of the demand curve implies that the change in the price of the good will lead to change
in the demand for the good. For instance, fall in the price leads to extension in the demand curve.
Similarly increase in the price of good leads to contraction in the demand for the good. A shift in the
demand curve is caused by a change in any non-price determinant of demand. The curve can shift to
the right or left. The factors that are responsible for shift in the demand curve may be listed out as
follows:
• Income of the consumers
• prices of other goods (substitutes or complements)
• Tastes and preferences of consumers.
a. It is appropriate in this instance because it is not the factor that is responsible for the shift in the
demand curve but it represents the movement along the demand curve.
b. It is not appropriate in this instance because it is one of the factors that is responsible for shift in
the demand curve.
c. It is not appropriate in this instance because it is one of the factors that is responsible for shift in
the demand curve.
d. It is not appropriate in this instance because it is one of the factors that is responsible for shift in
the demand curve.
e. It is not appropriate in this instance because it is one of the factors that is responsible for shift in
the demand curve. The correct answer is (a).
5. Answer : (d) < TOP >
Reason : 100 – P = - 20 + 3P
or P = Rs.30
Q = 100 – P = 100 – 30 = 70 units.
6. Answer : (e) < TOP >
Reason : Qd = 1000
ep = 1.25
ey = 2.00
ed =
1.25 =
% change in Q = 12.5%
ey =
2.00 =
∴ % change in Q = 14.00%
∴ Net effect is = 14.00 – 12.5 = 1.5%
1000 × 1.5% = 15
∴ Demand for apple is expected to be = 1000 + 15 = 1015 boxes per week.
7. Answer : (d) < TOP >
Reason : When marginal utility becomes negative, it implies that the total utility has start diminishing
8. Answer : (e) < TOP >
Reason : Consumer surplus is the difference between the willingness price and actual price for a consumer.
a. Producer costs represent the cost incurred by the producer in producing the good.
b. Monopolist Profit: Economic profit generated as a result of a firm’s market control. It’s termed
monopoly profit as a reflection of the most prominent market structure with market control—
monopoly.
c. Economic Profit: The difference between business revenue and total economic cost. This is the
revenue received by a business over and above the minimum needed to produce a good.
d. Producers Surplus: The revenue that producers obtain from selling a good over and above the
opportunity cost of production. This is the difference between the minimum supply price that
sellers would be willing to accept and the price that is actually received.
e. Consumer Surplus is the satisfaction that consumers obtain from a good over and above the
price paid. This is the difference between the maximum demand price that the consumer would
be willing to pay and the price that he actually pays.
The correct answer is (e).
9. Answer : (e) < TOP >
Reason :
∴ PA = = Rs.100.
10. Answer : (b) < TOP >
Thus if investment increases by 1,000, income increases by 1000 × 2.5 = 2,500 MUC.
45. Answer : (c) < TOP >
Reason : Y = C + I
Y = 1800 + 0.5 Y + I
0.5 x 4400 = 1800 + I
I = 400.
46. Answer : (b) < TOP >
Reason : The ‘investment multiplier’ explains the change in national product due to change in investment
expenditure.
47. Answer : (e) < TOP >
Reason: At equilibrium, IS = LM
Y = 4800 + 0.5Y – 50i
Y = 9600 – 100i ………… IS function
Y = 4,600+ 400i ………… LM function
Thus at simultaneous equilibrium,
9600 – 100i = 4,600+ 400i
Or, 5000 = 500i
Or, I = 10.00
When government spending increase by 200, the IS function becomes
0.5Y= (4800 + 200) – 50i
0.5Y = 5000 – 50i
Or, Y = 10000 – 100i
Thus, at equilibrium,
4,600+ 400i = 10000 – 100i
Or,500i = 5400
Or, I = 10.80.
48. Answer : (e) < TOP >
Reason : An increase in nominal money supply, a decrease in the price level, or a purchase of bonds by the
RBI increases real money stock, which shifts the LM curve to the right.
49. Answer : (c) < TOP >
Reason : At simultaneous equilibrium,
0.5Y = 2860 – 60i (or) Y = 5720 – 120i is equal to Y = 2600 + 400i
Or, 5720 – 120i = 2600 + 400i
Or, 3120 = 520i
Or, i = 6
Thus, Y = 2600 + 400(6) = 5000
When government spending is raised to meet the objective, Y = 5000 + 10% = 5500. If Y = 5500,
then using LM function, 400i = 5500 – 2600 (or) i = 7.25%
Initial investment = 800 – 50(6) = 500
New investment = 800 – 50(7.25) = 437.5
Change in investment = 500 – 437.5 = 62.5.
50. Answer : (a) < TOP >
Reason : Aggregate demand (supply) curve is a curve showing relationship between the level of real domestic
output demanded (available) at each possible price level. The aggregate demand shows the overall
demand for goods and services produced in a country. Thus, AD = C + I + G + NE. A shift in the
aggregate demand curve takes place if the any of the factor other than price levels affect the
aggregate demand. Aggregate supply, on the other hand, shows the overall supply of goods and
services at various price levels. Any factor other than price level that affect the aggregate supply
results in shift in aggregate supply curve. Increase in the factor input prices reduces the incentive for
production that lead to reduction in aggregate supply. A reduction in supply because of any other
factors other than price level is shown by a leftward shift in the aggregate supply curve. A shift in the
aggregate demand curve is caused by changes in the consumption spending, investment spending,
government spending and net export spending. Changes in the prices of factor inputs do not affect
aggregate demand. Hence, statement (a) is correct.
51. Answer : (b) < TOP >
Reason : If an economy is reviving from a recession, in the short run, there will be an increase in the demand.
This increase in demand causes an increase in price which in turn results in a rise in real output.
52. Answer : (a) < TOP >
Reason : High powered money = monetary liabilities + government money = 10,500 + 1,500
= 12,000
Ms = H ×
48,000 = 12,000
= (1 + 0.25)/(0.25 + r) = 4
= 1 + 4r = 1 + 0.25
4r = 0.25
r = 0.0625 = 6.25%.
53. Answer : (e) < TOP >
Reason : High powered money = Monetary liabilities of central bank + Government money
Monetary liabilities of central bank = Financial Assets + Other assets – Non-monetary liabilities
Financial Assets = Credit to government + claims on commercial banks + credit to commercial
sectors + foreign exchange assets
= 10,080+ 3,150 + 4,950 + 1,350= 19530
Non-monetary liabilities = 900+ 3780 = 4680
Monetary liabilities of central bank = 19,530 + 450 – 4,680 = 15,300
High powered money = 15,300 + 225 = 15,525 MUC
54. Answer : (c) < TOP >
Reason : Stock of high powered money ( H)
= monetary liabilities of the central bank + government money = 1,250 MUC
Current deposit ratio (Cu) = 0.20
Reserve ratio (r) = 0.05
∴ Money supply Ms =
= 4.8 × 1,250
= 6,000 MUC
55. Answer : (b) < TOP >
Reason : The balance sheet of Reserve Bank of India contains particulars of Bank’s current assets and
liabilities.
(a) Is not the answer because Central government’s borrowings from RBI constitutes assets of
RBI.It will affect the balance sheet.
(b) Is the answer because loan taken by one commercial bank from the other is a inter bank loan. It
will not affect the balance sheet of the Reserve Bank of India. It is neither a liability nor an asset
to the RBI.
(c) Is not the answer because refinancing of NABARD loans constitutes assets of RBI.
(d) Is not the answer because increase in reserves of commercial banks increases the liabilities of
RBI.
(e) Is not the answer because increase in net foreign exchange assets increases the assets of RBI.
56. Answer : (a) < TOP >
Reason : An important difference between the approaches of the classical and Keynesian economists use to
achieve a macroeconomic equilibrium is that Keynesian economists actively promote the use of
fiscal policy; the classical economists do not. Classical economists believe intervention can be de-
stabilizing and advocate laissez- faire economy. Therefore the answer is (a).
57. Answer : (d) < TOP >
Reason : According to classical economist, aggregate supply curve is a vertical straight line. Hence it is
unrelated to the price level.
58. Answer : (b) < TOP >
Reason : According to Keynesian theory the term full employment refers to a situation where there is natural
Rate of unemployment.
59. Answer : (b) < TOP >
Reason : According to rational expectations school, discretionary monetary and fiscal policy cannot be used to
stabilize the economy. Proponents of rational expectation argue that consumers and business firms
anticipate the implications of rise in government spending. Moneywage rate and prices will rise, but output and
employment will remain the same. So government can no longer fool the people by increasing its
spending during elections years. So the answer is (b).
60. Answer : (a) < TOP >
Reason : Frictional unemployment is a short-run job/skill matching problem while structural unemployment is
a long-run matching problem.
61. Answer : (c) < TOP >
Reason : To counter the recession the fiscal and monetary policies should be expansionary.
a. Decrease in government expenditure is a contractionay fiscal policy. This measure will worsen
the recessionary situation.
b. Decrease in government expenditure is a contractionay fiscal policy. This measure will worsen
the recessionary situation.
c. Decrease in the discount rate increase money supply in the economy and is an expansionary
monetary policy. This will counter the recession by increasing the aggregate demand in the
economy.
d. Decrease in money supply is a contractionary monetary policy. This measure will worsen the
recessionary situation.
e. Increase in the tax rate is a contractionary fiscal policy. This measure will worsen the
recessionary situation.
62. Answer : (a) < TOP >
Reason : Economic growth refers to situation where increased productive capabilities of an economy are made
possible by either an increasing resource base or technological advance. A country, thus, can achieve
economic growth through:
a. Improvement in technology
b. Natural resources
c. Capital
d. Human resources
Change in tastes and preferences of consumers only affect the demand of an individual good or
services, and it does not increase the production capabilities of an economy.
63. Answer : (d) < TOP >
Reason : Slowing of economic activity accompanied by inflation is defined as stagflation.
64. Answer : (a) < TOP >
Reason : Phillips curve in the short-run shows an inverse relation between inflation and unemployment. But in
the long run there is no trade-off because Phillips curve is vertical in the long-run.
65. Answer: (d) < TOP >
Reason: Economic growth, by definition, is said to occur hen there is an increase in the productive capacity
of the nation, shifting the production possibility frontier to the right.
66. Answer : (a) < TOP >
Reason : Fiscal policy refers to policies pertaining to government spending and taxation. The overall conduct
of these policies play an important role in maintaining economic stability in the economy.
67. Answer : (b) < TOP >
Reason : Expansionary monetary policy effects the goods market because it lowers interest rates and raises
investment spending.
68. Answer : (a) < TOP >
Reason : If the government increased its spending and the Reserve Bank of India increased the money supply,
it will lead to increases in both output and the price level in the short run.
69. Answer : (c) < TOP >
Reason : Current account captures the transactions related to trade in goods and services, transfer payments
and factor incomes. If foreign exchange out flow on account of these is more than inflows, the
current account is in deficit.
70. Answer : (b) < TOP >
Reason : Because of the double entry concept underlying the recording of transactions, BoP account must
always be in balance. Thus, ‘Balance in current account + Balance in capital account + Change in
reserves = Zero’. When there is no change in the foreign exchange reserves, then ‘balance in current account +
balance in capital account = zero’ (or) balance in current account = - (balance in capital account).
a. Balance in current account + Balance in capital account = Change in reserves. When balance in
current account + balance in capital account is zero, then balance in the current account =
Negative balance in capital account. Hence, statement (a) is not correct.
b. There will be no change in the foreign exchange reserves of a country only when surplus
(deficit) in current account is equal to deficit (surplus) in capital account.
c. Current account balance may or may not be zero when the change in foreign exchange reserves
of a country is zero.
d. Trade balance (exports – imports) may or may not be zero when the change in foreign exchange
reserves of a country is zero.
e. Capital account balance may or may not be zero when the change in foreign exchange reserves
of a country is zero.