Economics Weekly Exam Material

Week: 6 From: Jan. 26 To Jan. 30, 2020

Exam Timetable:

Sunday Monday Tuesday Wednesday Thursday

AMS & HW

Questions in bold are Grid Questions

Questions in italic are Poorly Answered Questions in past exam(s).
Questions with ** indicate anticipated low average questions.

AMS Material: 1920-20016

Sample Questions Exam

1. What are shares?

2. What financial assets are traded in the stock exchange market?

3. What is meant by quoted company?

4. Who can trade on the stock exchange market?

5. What can the government sell on the stock exchange and why?

6. How does the stock exchange market assist companies?

7. How do profitable public limited companies benefit from selling their shares on the stock
market?

8. Define “stock exchange market”.

Date 16-01-20 | Level L | 1

9. What are the role and functions of stock exchange markets?

10. What are the roles and functions of stock exchange markets? Give two such functions.

11. Why do people or firms buy shares?

12. How is the “dividend per share” calculated?

13. What effect would an increase in the market price of a share have on the yield?

14. Assume a share was issued for $20, and that due to the good performance of the
company, the price of the share increases to $25. If the company states that it is paying a 10%
dividend, this means that the dividend per share is ______.

15. Assume a share was issued for $20, and that due to the good performance of the
company, the price of the share increases to $25. If the company states that it is paying a 10%
dividend, this means that the yield is _____.

16. What are the factors that affect share price?

17. Explain the effect of a decrease in supply of shares on share prices.

18. What are the factors that could increase share prices?

19. Why is it better for a company to use retained profit as a source of finance, instead of
selling shares?

20. What are the benefits of share ownership to individual investors?

21. What is meant by the “price mechanism”?

22. What is meant by “maximum efficiency”?

23. What is meant by “standard of living”?

Date 16-01-20 | Level L | 2

Answers:
1. What are shares?
Sample question answer:
A source of finance for public limited companies

2. What financial assets are traded in the stock exchange market?

Sample question answer:
Second hand shares

3. What is meant by quoted company?

Sample question answer:
A company that sells its shares on the stock exchange market

4. Who can trade on the stock exchange market?

Sample question answer:
• Governments
• Stock brokers
• Local authorities
• Public limited companies

5. What can the government sell on the stock exchange and why?
Sample question answer:
Sell government bonds to raise capital for the government

6. How does the stock exchange market assist companies?

Sample question answer:
• By helping them raise more capital
• By attracting investors to buy shares
• By allowing them to grasp takeover opportunities
• By allowing them to see what is happening to their share price

7. How do profitable public limited companies benefit from selling their shares on the stock
market?
Sample question answer:
Profitable public limited companies that issue shares can attract more investors to buy their
shares

8. Define “stock exchange market”.

Sample question answer:
the market where shares are sold and bought

Date 16-01-20 | Level L | 3

9. What are the role and functions of stock exchange markets?
Sample question answer:
• Redistribute wealth
• Protect those who buy shares
• Mobilize savings for investment
• Help the government raise capital for development projects

10. What are the roles and functions of stock exchange markets? Give two such functions.
Sample question answer:
• Help businesses achieve external growth
• Reflect a country’s economic performance

11. Why do people or firms buy shares?

Sample question answer:
• Earn high dividends
• Benefit from higher capital gains
• Merge or take-over other smaller companies
• Influence the management and control of companies

12. How is the “dividend per share” calculated?

Sample question answer:
Dividends per share = Yield × Market share price

13. What effect would an increase in the market price of a share have on the yield?
Sample question answer:
As the market share price increases, yield decreases

14. Assume a share was issued for $20, and that due to the good performance of the
company, the price of the share increases to $25. If the company states that it is paying a 10%
dividend, this means that the dividend per share is ______.
Sample question answer:
10% of $20 = $2

15. Assume a share was issued for $20, and that due to the good performance of the
company, the price of the share increases to $25. If the company states that it is paying a 10%
dividend, this means that the yield is _____.
Sample question answer:
Yield = dividend per share / Market price of share = 2 / 25 X 100 = 8%

Date 16-01-20 | Level L | 4

16. What are the factors that affect share price?
Sample question answer:
• Potential takeover rumors are likely to affect share price
• When more shares are issued, the supply of shares increases
• Interest rates affect the level of savings and a company’s profit
• Expected profit and previous profit records influence the share price

17. Explain the effect of a decrease in supply of shares on share prices.

Sample question answer:
The decrease in supply of shares results in a rise in share prices

18. What are the factors that could increase share prices?
Sample question answer:
• Expected increase in profit
• A decrease in corporate taxes
• A decrease in the supply of shares
• An increase in the demand for shares

19. Why is it better for a company to use retained profit as a source of finance, instead of
selling shares?
Sample question answer:
Retained profit does not include interest

20. What are the benefits of share ownership to individual investors?

Sample question answer:
• Shares may go up in value
• Shareholders make capital gains
• Dividends are paid as a share of profit
• Shareholders are protected by limited liability

21. What is meant by the “price mechanism”?

Sample question answer:
Under the price mechanism, the buyer and seller determine the prices of commodities.
It is a system of rules where demand and supply interact to set the price.

22. What is meant by “maximum efficiency”?

Sample question answer:
It is when all resources in an economy are fully utilized.

23. What is meant by “standard of living”?

Sample question answer:
How well-off a person is in terms of the amount of goods and services he/she can
acquire.

Date 16-01-20 | Level L | 5

HW Material: 1920-NLH26
Sample Questions Exam

1. What is the role of the stock broker?

2. Give an example of who needs to raise large amounts of capital.

3. Give one case when the price of shares increases.

4. The current market price of a share is $40 and the dividend paid per share is $8. The yield
is therefore equal to _______.

5. Give sources of investment finance for companies.

6. Give one feature of retained profit.

7. What is the effect of an increase in a company’s profit on share price?

8. Share prices on the stock market are most likely to rise if interest rates ____.

9. Give one factor that reduce a share’s price.

10. What are the factors that affect the price of shares?

11. What are the functions of stock exchange markets?

12. What is the difference between private expenditure and public expenditure?

13. What conflicts may occur when trying to allocate resources?

14. What is meant by market failure and when does it occur?

15. Why are public goods an example of market failure?

Date 16-01-20 | Level L | 6

16. What are the areas of market failure?

17. What is the main cause that leads to market failure?

18. When the price of good A increases by 30%, the demand for good B decreases by
15%. What can be concluded about Goods A and B?

19. What are the factors that affect the price elasticity of supply?

20. What is the formula used to calculate the price elasticity of supply?

**21. Why does the price elasticity of demand matter to suppliers?

22. Judith buys 9 magazines per week when the price is $3. She buys 11 magazines per
week when the price decreases to $2. What is the price elasticity of demand?

23. What are the factors that influence the elasticity of demand?

24. What are the likely factors that would cause an increase in demand?

25. Why does the demand curve slope downward?

26. What is meant by the term “demand”?

27. What are the advantages of a market economy?

28. What are the features of a market economy?

Date 16-01-20 | Level L | 7

Answers:
1. What is the role of the stock broker?
Sample question answer:
He trades with shares on the stock exchange market

2. Give an example of who needs to raise large amounts of capital.

Sample question answer:
A firm assembling manufacturing equipment

3. Give one case when the price of shares increases.

Sample question answer:
When the government lowers corporate taxes on companies

4. The current market price of a share is $40 and the dividend paid per share is $8. The yield
is therefore equal to _______.
Sample question answer:

8 / 40 X 100 = 20%

5. Give sources of investment finance for companies.

Sample question answer:
• Issuing shares
• Retained profits
• Borrowing from banks

6. Give one feature of retained profit.

Sample question answer:
It can be used as a source of finance when investing

7. What is the effect of an increase in a company’s profit on share price?

Sample question answer:
Higher share price

8. Share prices on the stock market are most likely to rise if interest rates ____.
Sample question answer:
fall

9. Give one factor that reduce a share’s price.

Sample question answer:
An increase in corporate taxes

Date 16-01-20 | Level L | 8

10. What are the factors that affect the price of shares?
Sample question answer:
· Changes in the government policies.
· The economic situation.
· Changes in the interest rate.
· Speculation about the future economic and business performance.
· The level of profit and performance of firms.

11. What are the functions of stock exchange markets?

Sample question answer:
· Facilitate the exchange of shares of public limited companies.
· Secure the purchasers of shares.
· Reflect the economic performance.
· Affect the use of savings.
· A market for second-hand shares.

12. What is the difference between private expenditure and public expenditure?
Sample question answer:
Public expenditure is financed by the government to provide goods and services to
society such as merit and public goods. Private expenditure includes investment and
results in economic improvements. The government can control or influence the level of
private spending through imposing taxes, giving subsidies and using other
macroeconomic policies.

13. What conflicts may occur when trying to allocate resources?

Sample question answer:
The conflict between whether to use the resources or conserve them. If resources are
heavily exploited, they result in negative externalities and slow down sustainable future
development. Business that overuse resources aim to make as much profit as possible,
but when resources become depleted, output, employment and profit become affected
negatively. Firms must consider social costs and benefits when making the decision
about using or conserving resources.

14. What is meant by market failure and when does it occur?

Sample question answer:
Market failure refers to the inefficient allocation of resources that occurs in a market
economy. It includes negative externalities, underproduction of merit goods, and lack of
production of public goods.

15. Why are public goods an example of market failure?

Sample question answer:
Pure public goods are not normally provided by the private sector because they would
be unable to supply them for a profit. It is up to the government to decide what output

Date 16-01-20 | Level L | 9

of public goods is appropriate for society. To do this, it must estimate the social benefits
from making public goods available.

16. What are the areas of market failure?

Sample question answer:
· Failure to account for externalities
· Information failure
· Abuse of market power
· Immobility of resources
· Lower investment in capital goods
· Inequality
· Under-provision of merit goods
· Over-production of demerit goods
· No provision of public goods

17. What is the main cause that leads to market failure?

Sample question answer:
Market failure arises when markets are inefficient, i.e. when market forces fail to
produce the products that consumers demand in the right quantities and at the lowest
possible cost.

18. When the price of good A increases by 30%, the demand for good B decreases by
15%. What can be concluded about Goods A and B?
Sample question answer:
When the price of good A increases by 30%, the demand for good B decreases by 15%.
This means the cross price elasticity of demand is -15%/+30% = - 0.5
Since it is negative, the two goods are complements.

19. What are the factors that affect the price elasticity of supply?
Sample question answer:
· The time in the short-run or long-run.
· The spare capacity of firms.
· The type of product whether in the primary or secondary sector.
· The stock level.

20. What is the formula used to calculate the price elasticity of supply?
Sample question answer:
It is the quotient of the percentage change in quantity supplied to the percentage change
in price.

**21. Why does the price elasticity of demand matter to suppliers?

Sample question answer:
It allows them to determine the effect of a change in price on total revenue. For
instance, if demand is price elastic, it is better for them not to increase the price as this

Date 16-01-20 | Level L | 10

would lead to a drop in total revenue. If demand is price inelastic, an increase in price
will allow suppliers to generate higher revenues from sales.

22. Judith buys 9 magazines per week when the price is $3. She buys 11 magazines per
week when the price decreases to $2. What is the price elasticity of demand?
Sample question answer:
(Q2 – Q1)/Q1 = - 10 = -0.666
(P2 – P1) / P1

23. What are the factors that influence the elasticity of demand?
Sample question answer:
· The number of substitutes
· Necessary or luxury goods/services
· The extent of defining products
· The proportion of income spent on a commodity
· The time period

24. What are the likely factors that would cause an increase in demand?
Sample question answer:
· An increase in the size of the population.
· A higher income level.
· A decrease in the price of a complementary good.
· An increase in the price of a substitute good.
· Positive advertising.
· Favorable change in people’s taste and preference.

25. Why does the demand curve slope downward?

Sample question answer:
Because as price increases, quantity demanded decreases due to the law of demand.

26. What is meant by the term “demand”?

Sample question answer:
The amount that a person is willing and able to purchase at a given price and time.

27. What are the advantages of a market economy?

Sample question answer:
· High efficiency due to competition.
· High quality and low prices due to competition.
· Profit motive encourages firms to be productive.
· Goods and services that are not demanded will not be produced.
· Consumers have a wider choice of products.

Date 16-01-20 | Level L | 11

28. What are the features of a market economy?
Sample question answer:
· The allocation of resources is through demand and supply.
· The government plays no or little role in the economy.
· The price mechanism rules.
· Competition between suppliers is high.
· Profit is the main objective of firms.
· Consumers have a choice from a wide variety of products.

Date 16-01-20 | Level L | 12