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ECO401 Economics Final Term Solved Papers All Past In one Folder

ECO401 Economics Final Term Solved Papers All Past In one Folder

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ECO401 CURRENT PAPERS Spring 2010 SUBJECTIVE SOLVED BY LAIBA BUTT

Question No: 49    ( Marks: 3 )

What is meant by exchange rate? Also give example of exchange rate.

EXCHANGE RATE:

Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country.also called rate of exchange or foreign exchange rate or currency exchange rate.

EXAMPLE:

An exchange rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, \$) means that JPY 123 is worth the same as USD 1.

Question No: 50    ( Marks: 3 )

What is the reason of poverty in developing countries according to Prebisch-Singer hypothesis?

POVERTY means the state of being poor; lack of the means of providing material needs or comforts.

According to Prebisch-Singer hypothesis following are the reason of poverty in developing countries:

• One of the reson for poverty is increasing population.
• Another reason Lack of precious natural resources (like oil, gold, gas, iron, copper etc.) was also cited by some as the reason for LICs’ continued poverty.

Question No: 51    ( Marks: 5 )

According to the values given in the following table, calculate the injections at each level of output.

 Output (Y) Saving   (S) Gross Imports (M) Gross investment (I) Gross exports  (X) Govt. Expenditures (G) Taxes (T) 650 80 80 104 97 116 10 700 90 80 119 97 116 10 750 100 80 130 97 116 10 800 110 80 139 97 116 10 900 120 80 146 97 116 10

(Marks: 1 for each)

We know:

INJECTION=I+X+G

SO,

the injections at each level of output=

1-317

2-332

3-343

4-352

5-359

Question No: 52    ( Marks: 5 )

What are the major weaknesses of exogenous growth theory? Which theory was developed in against of exogenous growth theory?

EXOGENOUS GROWTH THEORY:

The Exogenous growth model, also known as the Neo-classical growth model or Solow growth model is

a term used to sum up the contributions of various authors to a model of long-run economic growth

within the framework of neoclassical economics.

Exogenous growth theory suffered from three major weaknesses:

i. It could not explain why the gap between the poor and rich countries had widened (anticatch

up),

ii. It could not explain why some countries in East Asia had apparently grown consistently

on the back of higher saving rates, and

iii. It modeled technology as exogenous, and beyond the influence of policy.

PART B SOLUTION:

In economics, endogenous growth theory or new growth theory was developed in the 1980s as a

response to criticism of the neo-classical growth model OR exogenous growth theory

Question No: 53    ( Marks: 5 )

Discuss the components on the assets and liabilities side of the balance sheet of a central bank.

Following are the components on the assets and liabilities side of the balance sheet of a central bank

ASSET SIDE COMPONENTS:

• Loans to Govt Notes
• Forex reserves
• Loans to private sector

LIABILITY SIDE COMPONENTS:

• Notes, coins & currency in circulation
• Govt & commercial bank deposits
•  Liquidity paper issued

Question No: 49    ( Marks: 3 )

Define balance of payment (BOP). How the BOP can be determined?

THE BALANCE OF PAYMENTS (BOP):

BOP is an accounting record of a country’s transactions with the rest of the world.

The balance of payments (or BOP) measures the payments that flow between any individual country

and all other countries. It is used to summarize all international economic transactions for that country

during a specific time period, usually a year.

PART B SOLUTION:

How the BOP can be determined?

IT CAN BE DETERMINED IN THE FOLLOWING WAY:

The BOP is determined by the country's exports and

imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments

and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).

Balance of payments is one of the major indicators of a country's status in international trade, with net

capital outflow.

Question No: 50    ( Marks: 3 )

Explain the shape of money demand curve with the help of diagram.

PERFECT ANSWER ON THIS LINK IS AVAILABLE SEE THIS(PG 9 AND PG 10)

http://www.ssc.wisc.edu/~ldrozd/my_files/102files/slides_9.pdf

Question No: 51    ( Marks: 5 )

How can a current account, which is in deficit, be restored to balance under fixed exchange rate regimes?

There is solution for how can a current account which is in deficit be restored to balance under fixed exchange rate regimes. The answer is “Economic Deflation”

Economic Deflation says  When a country’s national income rises, it spends more; part of that spending falls on imported goods; higher imports cause the current account to worsen.

The reverse is also true for this lower income must reduce import spending and therefore improve the current account spending.

However, economic contraction is not a good idea to restore current account equilibrium the other alternative solution presented by economist is to devaluate or “devaluation”.

Devaluation is the phenomena related to exchange rate where exchange rate faces depreciation but in the context of fixed exchange rates. The complement of devaluation is revaluation.

A concept of devaluation is to bring the exchange rate in line with its long-run equilibrium level, i.e. a level consistent with international competitiveness.

Question No: 52    ( Marks: 5 )

Identify which of the following are stock variables and which are flow variables?

hese are the terms used to differentiate things like "wealth versus income" or "debt versus deficit."

That is, a "stock variable" is a variable measurable at one particular time (wealth); whereas, a "flow variable" is a variable measured after a prolonged amount of time retrospecting spending in the past "x" amount of time (income).

a)   Unemployment

b)   Redundancies (job lay-offs)

c)   Profits

d)   A firm’s stock market valuation (share price)

e)   The value of property after a period of inflation

(Marks: 1 for each)

DEFINITION IS JST FOR CONCEPT NOT THE ANSWER.

These are the terms used to differentiate things like "wealth versus income" or "debt versus deficit."

That is, a "stock variable" is a variable measurable at one particular time (wealth); whereas, a "flow variable" is a variable measured after a prolonged amount of time retrospecting spending in the past "x" amount of time (income).

FOLLOWING ARE THE STOCK VARIABLES:

•   Unemployment
• A firm’s stock market valuation (share price)
• The value of property after a period of inflation
•

FOLLOWING ARE THE FLOW VARIABLES:

• Redundancies (job lay-offs)
• Profits

Question No: 53    ( Marks: 5 )

World Bank suggests some structural reform policies for the poor countries to grow. Discuss those policies briefly.

Ans:

World Bank has suggested following policies for the poor countries to grow,

To reduce over employment in public sector, reduce wastes and to improve the quality and reliability of public services. To strengthen the administration of taxes, to eliminate the corruption. To decentralize the control of fiscal policy making. To enrich the legal and regulator framework.

Privatization of state-owned enterprises:

Abbreviated as SOEs. These are influenced by political interference and it is one of the reasons SOEs are considered inefficient. SOEs are also suffering form lack of competition, cost awareness and fear of bankruptcy.

Financial liberalization:

It involves ending of financial repression policies including artificially low interest rates, credit rationing, restrictions on banking competition and government involvement in investment allocation

Deregulation involving dismantling of licensing systems and red-tape

including tariffication of non-tariff-barriers, harmonization of tariffs and an eventual reduction thereof

FDI liberalization:

To create a transparent, predictable environment for foreign investors to operate in.

apital account liberalization:

To remove controls on capital flows

(These policies are suggested by world bank and the successful implementation of these policies depend on the political and economic system of poor countries. In general these policies are expected to provide the poor nation with better understanding and help them to raise their growth.)

Question No: 50    ( Marks: 3 )

Differentiate between international trade and international finance.

By international trade, we mean the exchange of goods and services between different countries.

International trade is the trade between two or more different countries. It is just the opposite of the trade that takes place within a country i.e. national trade.

Whereas International finance is concerned with, among other thing, the mobility of financial capital across

countries, and the problems and opportunities this mobility presents individual countries with. It would

not be too inaccurate (in present day context) to say that while international trade deals with the current

account, international finance deals with the capital account of the BOPs. That said, issues like the

choice of exchange rate regime and of modern-day balance of payments crises also fall firmly within the

purview of international finance.

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Question No: 51    ( Marks: 5 )

Discuss the components on the assets and liabilities side of the balance sheet of a central bank.

Following are the components on the assets and liabilities side of the balance sheet of a central bank

ASSET SIDE COMPONENTS:

• Loans to Govt Notes
• Forex reserves
• Loans to private sector

LIABILITY SIDE COMPONENTS:

• Notes, coins & currency in circulation
• Govt & commercial bank deposits

Liquidity paper issued

Question No: 53    ( Marks: 5 )

If y = Y / L, where, Y = Total GDP, L = Population, y = Per capita GDP then prove that Growth rate of per capita income = Growth rate of total output - Growth rate of population

y = Y / L

Where,

• Y = Total GDP

• L = Population

• y = Per capita GDP

Taking log of both sides

• ln y = ln Y – ln L

Taking derivative w.r.t. time

• 1/y (dy/dt) = (dY/dt)/Y – (dL/dt)/L

gy = gY – gL

Growth rate of per capita income = Growth rate of total output - Growth rate of population

REFRENCE:

CHP NO 38 PAGE NO 168

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Question No: 49    ( Marks: 3 )

Differentiate between inflation and deflation.

Inflation is a situation in which there is a continuous rise in the general price level.

WHEREAS Deflation is the

opposite of inflation and occurs when the general level of prices falls.

Inflation is when the money supply increases by more than the real economy does. This means that one unit of currency will buy less than it could in the past.
Deflation is when the money supply contracts, making a unit of currency able to buy more than it could in the past. This is the exact opposite of inflation, but it is also bad.

Question No: 50    ( Marks: 3 )

What are the reasons that poor countries remained poor?

Question No: 51    ( Marks: 5 )

Explain the difference between endogenous growth model and exogenous growth model.

Question No: 52    ( Marks: 5 )

EXOGENOUS GROWTH THEORY

The Exogenous growth model, also known as the Neo-classical growth model or Solow growth model is

a term used to sum up the contributions of various authors to a model of long-run economic growth

within the framework of neoclassical economics

ENDOGENOUS GROWTH THEORY

In economics, endogenous growth theory or new growth theory was developed in the 1980s as a

response to criticism of the neo-classical growth model.

In neoclassical growth models, the long-run rate of growth is exogenously determined by assuming a

savings rate (the Solow model) or a rate of technical progress. This does not explain the origin of

growth, which makes the neo-classical model appear very unrealistic. Endogenous growth theorists see

this as an over-simplification

Following table shows different stages of production of cloth. Calculate the value added at each stage of production. What is GDP by this approach?

 Stage of production Money value (Rs) Value added at each stage (Rs) Raw cotton 10.50 ? Cotton yarn 25.68 ? Coarse cloth 45.82 ? Finished cloth 55.66 ?

 Stage of production Money value (Rs) Value added at each stage (Rs) Raw cotton 10.50 10.50 Cotton yarn 25.68 15.18 Coarse cloth 45.82 20.14 Finished cloth 55.66 9.84

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REFERENCE

METHODS OF MEASURING GDP

There are three equivalent ways of measuring GDP:

i. The product or value added method which sums the value added by all the productive

entities in the economy;

ii. The expenditure method which sums up the value of all the “final goods” transactions

taking place in the economy;

iii. The factor income method which sums up all the incomes earned by all the factors of

production in the economy (rent for land, wages for labour, interest for capital, and equity

returns for entrepreneurship).

Value added is the difference between the value of goods produced and the cost of materials and

supplies used in producing them. Value added consists of the wages, interest and profit components

added to the output by a firm. Value added is the difference between inputs and outputs e-g if a firm

spends Rs.500 making a good (inputs) and sells its product (output) for Rs.750, then value added is

Rs.250.

Question No: 53    ( Marks: 5 )

Discuss the equilibrium condition in money market. Explain this equilibrium condition with the help of diagram.

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Question No: 49    ( Marks: 3 )

It is said that growth is an important macroeconomic issue. Why? Discuss.

Why Growth is an Important Macroeconomic Issue:

It is obvious why growth is an important macroeconomic issue. Every government aspires to deliver a

higher growth rate for the country. High growth rates means higher national income which means better

living standards on average, which in democracies, means happier electorates and therefore increased

chances of re-election for another term in office. However, while all countries might wish to achieve

high growth rates, in practice, only a handful have been able to convert the wish into reality.

Question No: 50    ( Marks: 3 )

What are the different borrowing options available to the government for reducing the fiscal deficit?

By borrowing locally (i.e. issuing bonds), foreign financing (including non-relpayable grants) or printing

money (i.e. borrowing from the central bank). The first of these methods is least inflationary while the last

one is most inflationary.

Question No: 52    ( Marks: 5 )

Differentiate between fixed exchange rate and floating exchange rate.

Fixed exchange rate:

.A fixed exchange rate means the amount of currency received is set in advance.

A fixed exchange rate is based upon the government's view of the value of its currency as well as the monetary policy. It has advantages. Stability is one. Another is predictability. Businesses and individuals can plan their activities with the certainty of the value of money. A businessman shipping goods overseas knows the value in advance. A tourist travelling in other countries can budget knowing what his money will buy.

Floating exchange rates:

A floating exchange rate means that the rate is moving and the currency received depends on the time of the exchange

.The floating exchange rate, in its true form, allows the marketplace to set the rate. The forces of supply and demand determine the value of a currency. For example, when the US dollar is considered strong it will take more euros, the currency of most European countries, to buy. When the US dollar is considered weak or in decline the amount of euros needed to buy it will fall.

Question No: 53    ( Marks: 5 )

Some economists suggest “growth through trade strategy” to tackle the problem of poverty of under developed countries.

a)   What is the basic theme of this strategy?

b)   Why this strategy is not so much successful?

c)   What is the proposed solution presented to tackle the drawback of this strategy?

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Question No: 49    ( Marks: 3 )

Mention the transactions that cause the demand for dollars to increase in the foreign exchange market.

Pakistani imports of US goods.

Pakistani travelers traveling to the US.

Pakistani students paying for study in US universities.

profits repatriated to

US by US firms operating in Pakistan.

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Question No: 50    ( Marks: 3 )

Why countries have comparative advantage according to Ricardo?

The law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. There is a  source of comparative advantage can be productivity differentials.Ricardo argued that there is mutual benefit from trade (or exchange) even if one party (e.g. resource rich country, highly-skilled artisan) is more productive in every possible area than its trading counterpart (e.g. resource-poor country, unskilled laborer), as long as each concentrates on the activities where it has a relative productivity advantage

Question No: 51    ( Marks: 5 )

A.  "Slope of the consumption function is less than 1".What is meant by this statement?

When we drawn in expenditure income space, the consumption function plots as a straight line with positive intercept, and a positive but less than 1 slope. The slope is less than 1 because not all the income is consumed some part of the income is saved.

B.  What are the major macroeconomic variables involved in the determination of national income?

(Marks: 2+3)

Following are the major macroeconomic variables involved in the determination of national income :

C, I,   G, X, M, T, S, prices, exchange rate, interest rate and money supply.

Question No: 52    ( Marks: 5 )

What are the conditions in which foreign exchange market exists? Also give some examples of foreign exchange markets.

In a market there are buyers and sellers who negotiate and agree on the price for the or

price for the commodity being exchanged. The foreign exchange market is no different.

whatever, here the commodity being traded is foreign exchange and the price is the foreign exchange rate. Specifically, a foreign currency is being traded for the Pakistani Ruppee  at a particular rate of exchange.

The sellers and buyers of foreign exchange are not mutually exclusive. The

sellers of today, may be the buyers of tomorrow, or even of today.

CONDITION:

The main driving force for foreign exchange market is the law of supply and demand.

EXAMPLE:

US \$-PAK RS      Foregin exchange market

US \$ - UK POUND  Foregin exchange market

Question No: 53    ( Marks: 5 )

What thing determines comparative advantage among countries according to Hechshcer-Ohlin? What is the criticism against their argument?

According to Hechshcer-Ohlin suppose we are given two countries one abundant

in labour and one abundant in capital and a labour-intensive good and a capital intensive

good, the labour abundant country will have comparative advantage in the production of the labour-intensive good while the capital abundant country will have comparative advantage in the capital-intensive good.

So the determinants of comparative advantage among countries according to Hechshcer-Ohlin is capital goods and labour intensive goods.

Critics argued that comparative advantage can and should be viewed in a dynamic (time-varying) sense, and that it was not wise to rule out the possibility of Pakistan developing comparative advantage in cars at some future point in time.

Consequent:

The major criticism leveled against Hechscher-Ohlin type trade theories are that they views

comparative advantage in an essentially static sense; i.e. if Pakistan is better at producing

cotton and Japan better at producing, then this situation will always prevail.

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Question No: 49    ( Marks: 3 )

Differentiate between inflation and deflation.

Inflation is a situation in which there is a continuous rise in the general price level.

WHEREAS Deflation is the

opposite of inflation and occurs when the general level of prices falls.

Inflation is when the money supply increases by more than the real economy does. This means that one unit of currency will buy less than it could in the past.
Deflation is when the money supply contracts, making a unit of currency able to buy more than it could in the past. This is the exact opposite of inflation, but it is also bad.

( Marks: 5 )

What is meant by Philips Curve? Explain the shape of this curve with the help of diagram.

Philips Curve

W.A.Philips gave the idea of Keynes a formalized shape and draws the Philips curve stating inverse

relationship between unemployment and inflation rate.

Philips’s views were consistent with the Keynesian views. The cost of reducing inflation is

unemployment and the cost of reducing unemployment is inflation

DIAGRAM

For diagram take a look on chp#34 page no 149.

(I DON,T HV MICROSOFT WORD IN MY PC THATS Y GRPAH CAN,T BE DRAW HERE)

Question No: 53    ( Marks: 5 )

How crowding out of investment demand occur due to expansionary fiscal policy?

In economics, crowding out is any reduction in private consumption or investment that occurs because of an increase in government spending. If the increase in government spending is financed by a tax increase, the tax increase would tend to reduce private consumption. If instead the increase in government spending is not accompanied by a tax increase, government borrowing to finance the increased government spending would increase interest rates, leading to a reduction in private investment, although there is no empirical evidence that supports such interest rate effect on investment

1.      Comments of current account in balance of payment          3 marks

THE CURRENT ACCOUNT

The current account balance is essentially the trade balance (exports minus imports), but with net factor

If the exchange rate is fixed, then changes in reserves must mirror the combined balance on the current

and capital accounts in order to bring the overall BOPs to zero. If the exchange rate is floating, then

changes to reserves can remain zero, as the adjustment burden is borne by the exchange rate which

appreciates (depreciates) in response to a joint surplus (deficit) on the current and capital accounts.

REFRENCE FOR COMPLETE CONCEPT:

PARTS OF BOP

The BOPs can be divided into three parts:

i. Current account,

ii. Capital account and

iii. Changes to reserves

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2.     The reason of poverty in developing countries according Perbisch-Singer Hypothesis

( 3 marks)

POVERTY means the state of being poor; lack of the means of providing material needs or comforts.

According to Prebisch-Singer hypothesis following are the reason of poverty in developing countries:

• One of the reson for poverty is increasing population.
• Another reason Lack of precious natural resources (like oil, gold, gas, iron, copper etc.) was also cited by some as the reason for LICs’ continued poverty.

3.     Pull demand inflation, cost push inflation       (  5 marks)

DEMAND PULL INFLATION:

The inflation resulting from an increase in aggregate demand is called demand-pull inflation. Such an inflation may arise from any individual factor that increases aggregate demand, but the main ones that generate ongoing increases in aggregate demand are :

Increases in the money supply

Increases in government purchases

Increases in the price level in the rest of the world

COST PUSH INFLATION:

Inflation can result from a decrease in aggregate supply. The two main sources of decrease in aggregate supply are

• An increase in wage rates
• An increase in the prices of raw materials

These sources of a decrease in aggregate supply operate by increasing costs, and the resulting inflation is called cost-push inflation.

4.     What are the comparative advantages between countries according Hechshcer-Ohlin? And criticisms against it.

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According to Hechshcer-Ohlin suppose we are given two countries one abundant

in labour and one abundant in capital and a labour-intensive good and a capital intensive

good, the labour abundant country will have comparative advantage in the production of the labour-intensive good while the capital abundant country will have comparative advantage in the capital-intensive good.

So the determinants of comparative advantage among countries according to Hechshcer-Ohlin is capital goods and labour intensive goods.

Critics argued that comparative advantage can and should be viewed in a dynamic (time-varying) sense, and that it was not wise to rule out the possibility of Pakistan developing comparative advantage in cars at some future point in time.

Consequent:

The major criticism leveled against Hechscher-Ohlin type trade theories are that they views

comparative advantage in an essentially static sense; i.e. if Pakistan is better at producing

cotton and Japan better at producing, then this situation will always prevail

1.components of current account of BOPS:

Following are the components:

1.GOODS

2.SERVICES

3.INCOME

4.CURRENT ACCOUNT.

(FOR COMPLETE UNDERSTANDING AND MORE COMPONANTS VISIT THIS LINK)

http://www.investopedia.com/articles/03/061803.asp

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:
1. Difference between capital deepening and capital widening(5 MARKS)

Capital deepening

is a term used in economics to describe an economy where capital per worker is increasing. It is an increase in the

capital intensity. Capital deepening is often measured by the capital stock per labour hour.Overall, the

economy will expand, and productivity per worker will increase. However, economic expansion will not

continue indefinitely through capital deepening alone. This is partly due to diminishing returns and wear

& tear

capital widening:

is a term used to describe the situation where capital stock is increasing at the

same rate as the labour force, thus capital per worker remains constant. The economy will expand in

terms of aggregate output, but productivity per worker will remain constant

2 .Difference between GNP and NNP:(5 MARKS)

Gross National Product (GNP):

Gross national product (GNP) is the value, at current market prices, of all final goods and services

produced during a year by the factors owned by the citizens of a country. Thus the income earned by

Pakistani citizens working in the US would be included in Pakistan’s GNP but excluded from Pakistan’s

GDP. Conversely, the income earned by a US citizen (individual or corporate) in Pakistan would be

included in Pakistan’s GDP but excluded from Pakistan’s GNP. Generally, GNP = GDP + net factor

income from abroad. The abbreviation for gross national product, which is the total market value of all

goods and services produced by the citizens of an economy during a given period of time, usually one

year. Gross national product often was once the federal government's official measure of how much

output our economy produces.

GNP = GDP + Net factor incomes from abroad

Net National Product (NNP):

Mathematically, national income is net national product (NNP). It is GNP adjusted for depreciation. In

words, it is the net output of commodities and services flowing during the year from the country’s

production system in the hands of ultimate consumers. The total market value of all final goods and

services produced by citizens of an economy during a given period of time, usually a year, after

adjusting for the depreciation of capital. Net national product, abbreviated NNP, has the same relation to

net domestic product (NDP) as gross national product (GNP) has to gross domestic product (GDP). Net

national product also has the same relation to gross national product that net domestic product has to

gross domestic product. Like NDP, NNP is a measure of the net production in the economy.

NNP = GNP – Depreciation allowance

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3. Explain Comparative advantage among contries according to Hechshcer-Ohlin. And criricism on it?

According to Hechshcer-Ohlin suppose we are given two countries one abundant

in labour and one abundant in capital and a labour-intensive good and a capital intensive

good, the labour abundant country will have comparative advantage in the production of the labour-intensive good while the capital abundant country will have comparative advantage in the capital-intensive good.

So the determinants of comparative advantage among countries according to Hechshcer-Ohlin is capital goods and labour intensive goods.

Critics argued that comparative advantage can and should be viewed in a dynamic (time-varying) sense, and that it was not wise to rule out the possibility of Pakistan developing comparative advantage in cars at some future point in time.

Consequent:

The major criticism leveled against Hechscher-Ohlin type trade theories are that they views

comparative advantage in an essentially static sense; i.e. if Pakistan is better at producing

cotton and Japan better at producing, then this situation will always prevail.

Q # 1    Difference between inflation and deflation? Marks 3

Inflation is a situation in which there is a continuous rise in the general price level.

WHEREAS Deflation is the

opposite of inflation and occurs when the general level of prices falls.

Inflation is when the money supply increases by more than the real economy does. This means that one unit of currency will buy less than it could in the past.
Deflation is when the money supply contracts, making a unit of currency able to buy more than it could in the past. This is the exact opposite of inflation, but it is also bad.

Q # 2    How the central banks plays its important role in order to control the activities of commercial banks?  Marks 3

central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the government of whichever country the bank exists for, and to other commercial banks, typically as a 'lender of last resort'. However, a central bank is distinguished from a normal commercial bank because it has a monopoly on creating the currency of that nation, which is loaned to the government in the form of legal tender. It is a bank that can lend money to other banks in times of need. Its primary function is to provide the nation's money supply,

Q # 3    Difference between depreciation and appreciation of currency? Marks 5

Depreciation:

This is a more or less permanent decrease in value or price. "More or less permanent" doesn't include

temporary, short-term drops in price that are common in many markets. It's only those price declines

that reflect a reduction in consumer satisfaction.While all sorts of stuff can depreciate in value, some of

the more common ones are capital, real estate, corporate stock, and money

APPRECIATION

This is a more or less permanent increase in value or price. "More or less permanent" doesn't include

temporary, short-term jumps in price that are common in many markets. Appreciation is only those

price increases that reflect greater consumer satisfaction and thus value. While all sorts of stuff can

appreciate in value, some of the more common ones are real estate, works of art, corporate stock, and

money.

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Q # 4    what is meant by laffer curve? Also explain the shape of this curve? Marks 5

The graphical inverted-U relation between tax rates and total tax collections by government is known as

Laffer curve. This curve is developed by economist Arthur Laffer; the Laffer curve formed a key

theoretical foundation for supply-side economics of President Reagan during the 1980s. It is based on

the notion that government collects zero revenue if the tax rate is 0% and if the tax rate is 100%. At a

100% tax rate no one has the incentive to work, produce, and earn income, so there is no income to tax.

As such, the optimum tax rate, in which government revenue is maximized, lies somewhere between 0%

and 100%. This generates a curve shaped like an inverted U, rising from zero to a peak, and then falling

back to zero. If the economy is operating to the right of the peak, then government revenue can be

increased by decreasing the tax rate.

(AGAIN FOR DIAGRAM VISIT PAGE NO 175 OF CHP # 40)

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A slope of consumption function is less than 1." What is meant by this statement?

When we drawn in expenditure income space, the consumption function plots as a straight line with positive intercept, and a positive but less than 1 slope. The slope is less than 1 because not all the income is consumed some part of the income is saved.

Differentiate between Inflation and deflation.                               Marks3

Inflation is a situation in which there is a continuous rise in the general price level.

WHEREAS Deflation is the

opposite of inflation and occurs when the general level of prices falls.

Inflation is when the money supply increases by more than the real economy does. This means that one unit of currency will buy less than it could in the past.
Deflation is when the money supply contracts, making a unit of currency able to buy more than it could in the past. This is the exact opposite of inflation, but it is also bad

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FINALTERM  EXAMINATION

Fall 2009

ECO401- Economics

Time: 120 min

Marks: 87

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

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

► Increasing opportunity cost for both goods.

► Increasing opportunity cost for good X but not for good Y.

► Increasing opportunity cost for good Y but not for good X.

► Constant opportunity cost for both goods.

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

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

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

► An increase in equilibrium price and quantity of meal.

► A decrease in equilibrium price and quantity of meal.

► An increase in equilibrium price and a decrease in quantity of meal.

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

A demand curve is price elastic when:

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

► Changes in demand are equal to changes in price.

► None of the given options.

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

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

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

► Use.

► Pleasure.

► Utility.

► Satisfaction.

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

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

► Nominal income falls as the price of X falls.

► The absolute price of X falls, but the relative price between X and the composite good Y stays the same.

► It is always downward sloping for a normal good.

► It represents only those market baskets that are optimal for the given price ratio and preference pattern and therefore a demand curve can be plotted from it.

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

Marginal profit is equal to:

► Marginal revenue minus marginal cost.

► Marginal revenue plus marginal cost.

► Marginal cost minus marginal revenue.

► Marginal revenue times marginal cost.

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

The supply curve for a competitive firm is:

► Its entire marginal cost curve.

► The upward-sloping portion of its marginal cost curve.

► Its marginal cost curve above the minimum point of the average variable cost curve.

► Its marginal cost curve above the minimum point of the average total cost curve.

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

Second-degree price discrimination is the practice of charging:

► The reservation price to each customer.

► Different prices for different blocks of the same good or service.

► Different groups of customers different prices for the same products.

► Each customer the maximum price that he or she is willing to pay.

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

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

► Purely competitive.

► A monopoly.

► Monopolistically competitive.

► Oligopolistic.

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

The market structure in which strategic considerations are most important is:

► Monopolistic competition.

► Oligopoly.

► Pure competition.

► Pure monopoly.

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

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

► The good is a necessity.

► The good is a luxury.

► The good is a Giffen good.

► None of the given options.

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

Consumption spending, investment expenditures, government expenditures and net exports are:

► The components of household income.

► The components of aggregate supply.

► The components of aggregate demand.

► The components of government revenue.

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

Classical economics was replaced as the dominant theory of macroeconomic analysis by:

► Monetarism.

► Rational expectations.

► Keynesian economics.

► Neoclassical economics.

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

According to classical economics, the economy will always tend toward full employment due to:

► Minimum wages.

► Flexible wages and prices.

► Extended periods of unemployment.

► Inequality between saving and investment.

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

The real interest rate will increase:

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

► If there is an excess demand for loanable funds in the financial markets.

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

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

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

A source of fluctuations in investment spending is:

► Changes in government expectations of future output growth.

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

► Changes in household's expectations about future risk.

► Changes in investor's expectations about future profits.

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

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

► An increase in official international reserves.

► A positive statistical discrepancy.

► A negative statistical discrepancy.

► A decline in official international reserves.

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

M1 component of money supply consists of:

► Paper currency and coins.

► Paper currency, coins and check writing deposits.

► Paper currency, coins, check writing deposits and savings deposits.

► Paper currency, coins, check writing deposits, savings deposits and certificates of deposits.

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

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

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

What would result from a depreciation of the pound on the foreign exchange market?

► An increase in the price of imported computers.

► A fall in the purchasing power of US tourists in London.

► A fall in the price of imported computers.

► An increase in the purchasing power of UK tourists overseas.

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

The news on the television reports that the dollar has strengthened relative to the Japanese yen. This means that:

► The dollar can now purchase more yen.

► The US trade balance with the Japanese economy has improved.

► The yen can now purchase more dollars.

► The dollar has depreciated relative to the yen.

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

In Keynesian economics, if aggregate expenditures are less than aggregate output then:

► The price level rises.

► Inventories decrease.

► Employment decreases.

► Aggregate output increases.

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

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

► 1.

► 0.

► Infinity.

► Less than 1.

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

Demand is elastic when the elasticity of demand is:

► Greater than 0 but less than 1.

► Greater than 1.

► Less than 0.

► Equal to 1.

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

Which of the following statements is TRUE about cartels?

► These are considered as part of monopolistic competition.

► These are organizations of independent firms, producing similar products, that work together to raise prices and restrict output.

► These are organizations of interdependent firms, producing similar products, that work together to raise prices and restrict output.

► These are organizations of independent firms, producing different products, that work together to raise prices and restrict output.

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

After the collusion, oligopolists are able to:

► Raise price but not restrict output.

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

► Raise price and restrict output and therefore attain the monopoly profit.

► Restrict output but not raise price.

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

Which of the following statements is TRUE about the difference between nominal and real Gross Domestic Product (GDP)?

► Real GDP includes only goods; nominal GDP includes goods and services.

► Real GDP is measured using constant base-year prices; nominal GDP is measured using current prices.

► Real GDP is equal to nominal GDP less the depreciation of the capital stock.

► Real GDP is equal to nominal GDP multiplied by the CPI.

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

If production remains the same and all prices double, then which of the following will happen?

► Real GDP and nominal GDP will both remain constant.

► Real GDP will remain constant and nominal GDP will reduce by half.

► Real GDP will remain constant and nominal GDP will double.

► Real GDP will double and nominal GDP will remain constant.

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

Assume that there is no government or foreign sector, if the marginal propensity to consume (MPC) is 0.9, then the value of multiplier will be equal to:

► 2.

► 5.

► 8.

► 10.

Question No: 30    ( Marks: 1 )    - Please choose one

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

► 1000+1500+2500 = Rs. 5000

► 1000+500+2500 = Rs. 4000

► 1000+500+1000 = Rs. 2500

► 1000+1500+1000 =Rs. 3500

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

Which of the following is a transfer payment?

► Pocket allowance to children.

► Maintenance allowance to old parents.

► All of the given options.

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

The relationship between hours provided by labor and wage rate is:

► Positive.

► Negative.

► Ambiguous.

► Very strong.

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

Market failure occurs when:

► Competitive markets do not achieve equitable outcomes.

► Competitive markets do not achieve efficient outcomes.

► Government takes steps to intervene in markets.

► All of the given happen.

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

A graph that depicts the relationship between the total quantity of goods and services demanded and the price level is known as:

► Aggregate demand curve.

► Average price level.

► Circular flow model.

► GDP curve.

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

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

► The aggregate demand, the short-run aggregate supply and the long-run aggregate supply curves.

► The short-run aggregate supply and the long-run aggregate supply curves.

► The aggregate demand and the short-run aggregate supply curves.

► The aggregate demand and the long-run aggregate supply curves.

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

Changes in aggregate demand can be caused by changes in:

1. I.  Wages.

II.Raw materials costs.

1. III.                   Government spending.
2. IV.                  Government regulations that increase the cost of doing business.

► I, II, III, and IV.

► I and III only.

► I, III, and IV.

► III only.

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

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

► Aggregate demand.

► Aggregate supply.

► The government.

► Household income.

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

Which of the following is TRUE?

► 1 − MPS = MPC

► 1 + MPS = MPC

► 1 / MPS = MPC

► 1 × MPS = MPC

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

The above figure shows disposable personal income on the horizontal axis and consumption per period on the vertical axis. Which of the following is TRUE at every point on the 45-degree line?

► The value of disposable income equals the sum of personal saving and consumption.

► The value of disposable income equals consumption.

► The value of disposable income equals personal saving.

► The value of disposable income and consumption equals 1.

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

If the government wishes to achieve a fall in unemployment, which of the following policies should it adopt?

► Reduce the real value of income tax free allowances.

► Reduce government spending on capital projects.

► Raise Value Added Tax (VAT).

► Start public job training programs.

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

In the long run, sustained inflation is due to:

► A one-time increase in money growth.

► A continuous increase in the money growth rate.

► A continuous increase in aggregate demand.

► The rising price of oil.

Question No: 42    ( Marks: 1 )    - Please choose one

The situation when a country imports more than it exports is known as:

► An expansion.

► A recession.

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

Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

► Consumption.

► Gross private investment.

► Government purchases.

► Public investment.

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

The government has a balanced budget if:

► Its total revenues are equal to its total expenditures.

► Its total revenues are less than its total expenditures.

► Its total revenues are greater than its total expenditures.

► The money supply is less than total expenditures.

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

In general, personal income taxes:

► Rise automatically during a recession.

► Rise automatically during an expansion.

► Fall automatically during an expansion.

► Remains same in all phases of economic fluctuations.

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

A tax on individual’s income is known as:

► Sales tax.

► Excise tax.

► Corporate income tax.

► Personal income tax.

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

Which of the following is TRUE for banks?

► They deal with money only.

► They deal with shares and assets.

► They not only deal with money but also create money.

► They deal with money but do not create money.

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

In a period of boom, credit creation is:

► Small.

► Heavy.

► Unchanged.

► Zero.

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

What will be the impact of an increase in taxes?

► It will shift the IS curve to the left and decrease both the interest rate and the level of income.

► It will shift the IS curve to the right and increase both the interest rate and the level of income.

► It will shift the IS curve to the right and increase the level of income but decrease the interest rate.

► It will shift the LM curve downward (to the right) and increase the level of income but decrease the interest rate.

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

To determine whether an economy’s output is growing or shrinking, one must keep track of:

► Changes in nominal GDP.

► Changes in the growth rate of nominal GDP.

► Changes in the general price level.

► Changes in real GDP.

Question No: 51    ( Marks: 1 )    - Please choose one

Suppose the price of rail tickets decreases, what will happen to the demand for airline travel?

► The demand curve for airline travel shifts left.

► The demand curve for airline travel shifts right.

► The supply curve of airline travel shifts left.

► The supply curve of airline travel shifts right.

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

Production possibilities curve will shift upward if there is:

► A reduction in unemployment.

► An increase in the production of capital goods.

► A reduction in discrimination.

► All of the given options.

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

Which of the following is NOT included in the perfect information assumption of perfect competition?

► Consumers know their preferences.

► Consumers know their income levels.

► Consumers know the prices available.

► Consumers can anticipate price changes.

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

Suppose a monopolist set his output at the level where marginal revenue, marginal cost and average total cost are equal. In this case, economic profit will be:

► Negative.

► Positive.

► Zero.

► Indeterminate from the given information.

Question No: 55    ( Marks: 3 )

Differentiate between the terms flow and stock.

Question No: 56    ( Marks: 5 )

What should be the optimal role of government in an economy according to the Classical school of thought? Discuss.

Question No: 57    ( Marks: 5 )

Explain the difference between current account and capital account.

Question No: 58    ( Marks: 10 )

(A) The above demand curve has two distinct segments which have different elasticities that join to form a corner or kink. Why the firms are reluctant to change the price in these two segments?

(B) What are the major advantages that an oligopoly offers for public interests?

(Marks: 5+5)

Question No: 59    ( Marks: 10 )

The items of balance sheet of State Bank of Pakistan are given as follows:

Forex reserves = Rs. 500

Notes and coins = Rs. 800

Credit to government = Rs. 200

Government and commercial bank deposits = Rs. 300

Credit to private sector = Rs. 700

Liquidity paper = Rs. 300

Prepare the balance sheet in its proper format of asset and liabilities side. Also calculate total assets and total liabilities.

Solution:

The items of balance sheet of State Bank of Pakistan are given as follows:

Forex reserves = Rs. 500

Notes and coins = Rs. 800

Credit to government = Rs. 200

Government and commercial bank deposits = Rs. 300

Credit to private sector = Rs. 700

Liquidity paper = Rs. 300

Prepare the balance sheet in its proper format of asset and liabilities side. Also calculate total assets and total liabilities.

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

FINALTERM  EXAMINATION

Fall 2009

ECO401- Economics (Session - 2)

Time: 120 min

Marks: 87

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

If pen and ink are complements, then an increase in the price of pen will cause:

► An increase in the price of ink.

► Less ink to be demanded at each price.

► A decrease in the demand for pen.

► A rightward shift in the demand curve for ink.

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

A market is said to be in equilibrium when:

► Demand equals output.

► There is downward pressure on price.

► The amount consumers wish to buy at the current price equals the amount producers wish to sell at that price.

► All buyers are able to find sellers willing to sell to them at the current price.

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

As more of a good is consumed, then total utility typically:

► Increases at a decreasing rate.

► Decreases as long as marginal utility is negative.

► Decreases as long as marginal utility is positive.

► Is negative as long as marginal utility is decreasing.

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

A monopolistically competitive firm in short run equilibrium:

► Will make negative profit (lose money).

► Will make zero profit (break-even).

► Will make positive profit.

► Any of the given are possible.

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

A monopolistically competitive firm in the long run equilibrium:

► Will make negative profit.

► Will make zero profit.

► Will make positive profit.

► Any of the given are possible.

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

The market structure in which strategic considerations are most important is:

► Monopolistic competition.

► Oligopoly.

► Pure competition.

► Pure monopoly.

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

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

► The good is a necessity.

► The good is a luxury.

► The good is a Giffen good.

► None of the given options.

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

The textbook for your class was not produced in a perfectly competitive industry because:

► There are so few firms in the industry that market shares are not small, and firm's decisions have an impact on market price.

► Upper-division microeconomics texts are not all alike.

► It is not costless to enter or exit the textbook industry.

► All of the given options.

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

In monopoly, which of the following is NOT true?

► Products are differentiated.

► There is freedom of entry and exit into the industry in the long run.

► The firm is a price maker.

► There is one main seller.

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

Under the kinked demand curve model, an increase in marginal cost will lead to:

► An increase in output level and a decrease in price.

► A decrease in output level and an increase in price.

► A decrease in output level and no change in price.

► Neither a change in output level nor a change in price.

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

For a firm buying labor competitively, the marginal input cost is equal to the:

► Wage.

► Interest rate.

► Price of output.

► Cost of raw materials.

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

The aggregate supply curve is the relationship between:

► The price level and the real domestic output purchased.

► The price level and the real domestic output produced.

► The price level which producers are willing to accept and the price level purchasers are willing to pay.

► The real domestic output purchased and the real domestic output produced.

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

The long run aggregate supply curve will shift to the right if:

► The price level increases.

► Factors of production (such as labor and capital) increase.

► Expenditures (such as consumption and net exports) increase.

► The prices of inputs used to produce goods and services (such as wages and the price of oil) decrease.

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

Keynesian economics rejected the classical assumption that:

► Supply creates its own demand.

► Prices and wages are inflexible.

► Self-correction takes a long time.

► Consumption expenditures depend on disposable income.

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

Which of the following is NOT a stock variable?

► Government debt.

► Capital.

► The amount of money held by the public.

► Inventory investment.

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

A nation's balance of payments can be affected by changes in:

► Foreign income.

► The differential between domestic and foreign interest rates.

► The real exchange rate.

► All of the given options.

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

Real GDP is equal to:

► Nominal GDP – Inflation.

► Nominal GDP + Inflation.

► Nominal GDP/ Inflation.

► Inflation / Nominal GDP.

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

If we compare Gross Domestic Product  (GDP) with Gross National Product (GNP) then:

► GNP = GDP – Net income from abroad.

► GNP = GDP + Net income from abroad.

► GNP = NNP – Net income from abroad.

► GNP = NNP + Net income from abroad.

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

In Keynesian economics, if aggregate expenditures are less than aggregate output then:

► The price level rises.

► Inventories decrease.

► Employment decreases.

► Aggregate output increases.

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

Which of the following is true about supply curve under monopoly?

► It is same as the competitive market supply curve.

► It is the portion of marginal cost curve where marginal costs exceed the minimum value of average variable costs.

► It is the result of market power and production costs.

► None of the given statements is true.

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

After the collusion, oligopolists are able to:

► Raise price but not restrict output.

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

► Raise price and restrict output and therefore attain the monopoly profit.

► Restrict output but not raise price.

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

Which of the following event will lead towards cost-push inflation and therefore stagflation?

► An increase in taxes on individuals.

► A decrease in real interest rates.

► A union settlement that increases wage levels.

► An increase in government purchases.

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

Double counting in national income refers to:

► Counting a product more than once.

► Counting a product at the final stage of output process.

► Counting both as product and as factor payment.

► Counting both as real goods and as money flow.

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

For knowing the spending capacity of the household sector, we have to use the concept of:

► National income.

► Personal income.

► Private income.

► Personal disposable income.

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

For a study of the long term growth of the economy, we use:

► Real GNP.

► Nominal GNP.

► Personal income.

► Disposable personal income.

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

Which of the following is an example of a leakage?

► Saving.

► Investment.

► Exports.

► Government expenditures.

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

Total product of labor per day is shown in the following table and the price of the product is \$10/unit. What is the value of the marginal product of labor (VMPL) of the 3rd worker?

 Labor Total Product 1 10 2 25 3 35 4 40 5 41

► 5.

► 10.

► 50.

► 100.

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

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

► The aggregate demand, the short-run aggregate supply and the long-run aggregate supply curves.

► The short-run aggregate supply and the long-run aggregate supply curves.

► The aggregate demand and the short-run aggregate supply curves.

► The aggregate demand and the long-run aggregate supply curves.

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

What is the interest rate effect that explains why the aggregate demand curve slopes downward?

► It refers to the effect of changes in the price level on quantity of investment demanded which in turn affects interest rates.

► It refers to the effect of interest rates on borrowing which in turn affects consumption spending.

► It refers to the effect of changes in the price level on interest rates which in turn affects the quantity of investment demanded.

► It refers to the shifts in aggregate demand when interest rates change.

Question No: 30    ( Marks: 1 )    - Please choose one

In the classical world, you could always get a job if you:

► Worked in an industry that was recession proof.

► Had unemployment in the manufacturing sector.

► Would accept a lower wage.

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

The level of output produced when the labor market is in equilibrium is called:

► Target output.

► Product market equilibrium output.

► Full-employment output.

► Natural output.

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

Which of the following economists came up with a theory regarding the tradeoff between unemployment and inflation?

► A.W. Phillips.

► John Maynard Keynes.

► Joseph Schumpeter.

► Milton Friedman.

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

Refer to the above figure, moving from B to A shows a tradeoff of:

► More unemployment for less inflation.

► Less unemployment for more inflation.

► A fixed amount of unemployment for more inflation.

► Less unemployment for less inflation.

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

Falling inflation means:

► That the price level is falling from one period to the next.

► That the price level is falling at a decreasing rate.

► That the price level is falling at an increasing rate.

► That the price level is increasing at a decreasing rate.

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

 Disposable Personal Income \$ Consumption \$ 100 140 200 220 300 300 400 380 500 460

Refer to the above table, when disposable personal income is \$300, what is the amount of personal saving?

► −\$40.

► −\$20.

►  \$0.

►  \$20.

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

The real exchange rate is defined as the:

► Market exchange rate adjusted for prices.

► Market exchange rate adjusted for interest rates.

► Market exchange rate.

► Exchange rate determined by the government.

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

The interest rate parity is the basic identity that relates which of the following?

► Interest rates and exchange rates.

► Interest rates and inflation rate.

► Exchange rates and inflation rate.

► Discount rate and inflation rate.

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

Suppose there is a steady state condition in an economy with no population growth. In which condition, the steady-state level of capital per worker will increase?

► When the amount of investment per worker decreases.

► When the depreciation rate increases.

► When the saving rate increases.

► In all of the given options.

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

“Government collects zero revenue if the tax rate is 0% and if the tax rate is 100%.” Which of the following best describes this statement?

► Consumption curve.

► Supply curve.

► Laffer curve.

► Investment curve.

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

A tax on the accounting profits of corporations is known as:

► Sales tax.

► Excise tax.

► Corporate income tax.

► Personal income tax.

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

Which of the following shows the functions of money?

► A conductor of economic activity, a medium of exchange, and a store of value.

► A medium of exchange, a store of value, and a factor of production.

► A store of value, a medium of exchange, and a determinant of investment.

► A store of value, a unit of account, and a medium of exchange.

Question No: 42    ( Marks: 1 )    - Please choose one

Which of the following best describes a bank’s reserves?

► The minimum value of assets it must have.

► The amount of gold it is required to have as reserves against loans.

► The value of federal securities it is required to have as reserves against loans.

► Deposits that bank has accepted from customers but have not loaned out.

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

The special importance of banks among the financial institutions arises from:

► Their large and heavy transactions.

► Their position as suppliers of money.

► Their power to create money.

► Their influence on the economy.

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

Which of the following will be TRUE if real income rose and the interest rate fell following an increase in government purchases?

► IS curve must be vertical.

► LM curve must be vertical.

► Central Bank must have increased the money supply at the same time.

► Central Bank must have decreased the money supply at the same time.

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

If money supply is fixed by the central bank then in interest rate-money supply space, money supply curve will be:

► Horizontal.

► Vertical.

► Negatively sloped.

► Positively sloped.

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

Why agriculture sector has an important role to play in the development process?

► Because a balanced approach to growth is necessary.

► Because the vast majority of an under developed country is engaged in agriculture.

► Because agriculture may be a major bottleneck in the process of development.

► Because of all of the given options.

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

Refer to the above figure, the marginal propensity to consume is:

► 0.25.

► 0.50.

► 0.60.

► 0.67.

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

Refer to the above figure, when disposable personal income is \$2,000 billion:

► Personal saving is \$1,200 billion.

► Consumption is \$1,600 billion.

► Saving is \$800 billion.

► Consumption is \$800 billion.

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

What is meant by the negative slope of a production possibilities curve?

► It means that some resources are always unemployed.

► It means that an economy can produce more of one thing only by producing less of something else.

► It means that opportunity costs are constant.

► It means that business can sell more when prices are low.

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

Which of the following is TRUE for a Giffen good?

► Its marginal utility is zero.

► Its demand curve is perfectly elastic.

► Its substitution effect is positive.

► Its demand curve is positively sloped.

Question No: 51    ( Marks: 1 )    - Please choose one

Which of the following occur when an isocost line is just tangent to an isoquant?

► Output is being produced at minimum cost.

► Output is not being produced at minimum cost.

► The two products are being produced at the medium input cost to the firm.

► The two products are being produced at the highest input cost to the firm.

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

Which of the following is TRUE about L-shaped isoquant?

► It indicates that the firm could switch from one output to another costlessly.

► It indicates that the firm could not switch from one output to another.

► It indicates that capital and labor cannot be substituted for each other in production.

► It is impossible.

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

The total cost (TC) function is given as: TC = 200 + 5Q. What is the fixed cost?

► 5Q.

► 5.

► 5 + (200/Q).

► 200.

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

The total cost (TC) function is given as: TC = 200 + 5Q. What is the average total cost?

► 5Q.

► 5.

► 5 + (200/Q).

► None of the given options.

Question No: 55    ( Marks: 3 )

Define consumption function. Write down the determinants of consumption.

Question No: 56    ( Marks: 5 )

The paradox of thrift is demonstrated algebraically by equating leakages and injections. Suppose the Saving function is specified as S = -\$10 billion +0.2Y, Gross imports equal \$70 billion, Investment is \$100 billion and Gross exports equal \$70 billion. Calculate the equilibrium level of output by using leakages-injections approach.

Question No: 57    ( Marks: 5 )

 Country Commodity Amount that can be produced in 1 year USA Cotton 40 units Food 60 units UK Cotton 30 units Food 20 units

A.     Consider there is no international trade. See the above table and answer which country has absolute advantage in which product?

B.    Draw the production possibility frontiers for USA and UK.

(Marks: 2+3)

Question No: 58    ( Marks: 10 )

A.      From the information given below, calculate the following:

a)     Nominal GDP in year 1

b)     Nominal GDP in year 2

c)     Growth rate in nominal GDP

 Year 1 Year 2 Apples produced 100 150 Chicken produced 100 140 Cost per apple (Rs.) 2 4 Cost per chicken (Rs.) 4 6

B.    Suppose that in the economy of Pakistan, the Real Gross National Product in 1987 was 1483 billion. In 1988, Real Gross National Product was 1510 billion. Calculate the growth rate of real Gross National Product from this information.

(Marks: 6+4)

Question No: 59    ( Marks: 10 )

(A) Following table shows the income earned by different factors of production.

 Serial # Rewards Amount (billion rupees) 1 Wages and salaries 150.52 2 Interest on bonds and loans 50.63 3 Rent of properties 100.12 4 Profit 125.84 5 Corporate profit tax 50.26 6 Undistributed corporate profit 30.32 7 Contributions for social security 20.20

Find out the national income from this information.

(B) Although GDP provide us a good estimate about the overall production of the economy, but still it has some flaws. Discuss those flaws.

(Marks: 4+6)

FINALTERM  EXAMINATION

Fall 2009

ECO401- Economics (Session - 4)

Time: 120 min

Marks: 87

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

If the quantity demanded of a product is greater than the quantity supplied of a product, then:

► There is a shortage of the product.

► There is a surplus of the product.

► The product is a normal good.

► The product is an inferior good.

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

The cross price elasticity of demand for complementary goods is:

► Less than 0.

► Equal to 0.

► Greater than 0.

► Between 0 and 1.

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

Assume leisure is a normal good. If income effect equals substitution effect then a wage rate increase will lead a person to:

► Increase hours of work.

► Decrease hours of work.

► Not change hours of work.

► None of the given options.

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

_______________ arises when an increase in all inputs leads to a more-than-proportional increase in the level of output. _____________ means that as inputs are added to the production process, output increases proportionally.

► Economies of scale; constant returns to scale.

► Constant returns to scale; decreasing returns to scale.

► Decreasing returns to scale; economies of scale.

► Economies of scale; decreasing returns to scale.

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

An isoquant curve shows:

► All the alternative combinations of two inputs that yield the same maximum total product.

► All the alternative combinations of two products that can be produced by using a given set of inputs fully and in the best possible way.

► All the alternative combinations of two products among which a producer is indifferent because they yield the same profit.

► None of the given options.

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

Total costs are the sum of:

► Marginal costs and variable costs.

► Fixed costs and variable costs.

► Fixed costs and marginal costs.

► Average variable costs and marginal costs.

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

A firm is charging a different price for each unit purchased by a consumer.  This is called:

► First-degree price discrimination.

► Second-degree price discrimination.

► Third-degree price discrimination.

► None of the given options.

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

Which of the following best expresses the law of demand?

► A higher price reduces demand.

► A lower price reduces demand.

► A higher price reduces quantity demanded.

► A lower price shifts the demand curve to the right.

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

If a sales tax on beer leads to reduced tax revenue, this means:

► Elasticity of demand is < 1.

► Elasticity of demand is > 1.

► Demand is upward-sloping.

► Demand is perfectly inelastic.

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

For a firm buying labor competitively, the marginal input cost is equal to the:

► Wage.

► Interest rate.

► Price of output.

► Cost of raw materials.

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

The classical economists thought that the economy would quickly overcome any short run instability because:

► Price level and quantity are flexible.

► Prices would get stuck at a low level.

► The long run aggregate supply would shift to the left.

► Prices and wages are flexible.

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

Final goods are meant for:

► Direct use by the consumers.

► Further processing.

► The term do not exist.

► None of the given options.

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

The average propensity to consume is the ratio of:

► A change in consumption to a change in disposable income.

► A change in consumption to total disposable income at a specific income level.

► Total consumption to total disposable income at a specific income level.

► Total consumption to a change in disposable income.

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

The slope of the saving function (or line) is the:

► Average propensity to save.

► Average propensity to consume.

► Marginal propensity to save.

► Marginal propensity to consume.

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

The government increases the number of job centres and uses more advanced computers to improve the information database. This creates:

► Structural Unemployment.

► Regional Unemployment.

► Frictional Unemployment.

► Demand Deficient Unemployment.

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

Which one of the following can lead to a rise in inflation?

► An increase in costs of production.

► An increase in productive capacity.

► An increase in the level of direct taxation.

► An increase in the exchange rate.

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

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

► An increase in official international reserves.

► A positive statistical discrepancy.

► A negative statistical discrepancy.

► A decline in official international reserves.

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

How should fiscal policy be used during inflation?

► Increase Government expenditure and decrease taxes to decrease aggregate demand.

► Increase Government expenditure and decrease taxes to increase aggregate demand.

► Decrease Government expenditure and increase taxes to increase aggregate demand.

► Decrease Government expenditure and increase taxes to decrease aggregate demand.

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

If the demand curve for a good is downward sloping, then the good:

► Must be inferior.

► Must be giffen.

► Can be normal or inferior.

► Must be normal.

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

Keeping in view the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause:

► Both prices and output to rise.

► Prices to fall and output to remain unchanged.

► Both prices and output to fall.

► Prices to rise and output to remain unchanged.

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

Which of the following is TRUE according to classical economists?

► Aggregate demand curve is downward sloping and the aggregate supply curve is vertical.

► Aggregate demand curve is downward sloping and the aggregate supply curve is upward sloping.

► Aggregate demand curve is vertical and the aggregate supply curve is upward sloping.

► Aggregate demand curve is vertical and the aggregate supply curve is horizontal.

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

Why calculations of Gross Domestic Product (GDP) count only final goods and services?

► Because it is difficult to measure the prices of intermediate goods produced.

► Because these are the only goods and services that are purchased in an economy.

► Because counting all goods and services would lead to double-counting of many activities.

► Because one cannot calculate the quantities of intermediate goods produced.

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

------------------ plays an important role in making sure that the economy reaches and stays at equilibrium at the potential output level.

► Real exchange rate.

► The production function.

► Real price level.

► Real interest rate.

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

Why a \$1 increase in government spending will have a larger impact upon national income than a \$1 tax cut?

► Because the government prints the currency it spends.

► Because not all of the tax cut is spent.

► Because when taxes are cut, government spending is also cut.

► Because taxes are an injection into the system.

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

Commercial banks in Pakistan are supervised by:

► State bank of Pakistan.

► National bank of Pakistan.

► Finance minister of Pakistan.

► World bank.

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

Trade can be beneficial in which of the following situations?

► Two countries produce the same goods at the same costs.

► Two countries produce different goods at different costs.

► Two countries are isolated.

► Two countries have the same markets.

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

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

► 1000+1500+2500 = Rs. 5000

► 1000+500+2500 = Rs. 4000

► 1000+500+1000 = Rs. 2500

► 1000+1500+1000 =Rs. 3500

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

Which of the following best defines “subsidies”?

► Payment by Government for purchase of goods and services.

► Payment by business enterprises to factors of production.

► Payment by companies to share holders.

► Payment by Government to business enterprises without buying any goods and services.

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

National product at market prices incorporate:

► Prices which buyers actually pay.

► Payments made to the factor owners.

► Costs incurred in producing goods and services.

► Costs minus subsidies.

Question No: 30    ( Marks: 1 )    - Please choose one

A marginal propensity to consume (MPC) of 0.95 indicates that:

► ∆C to ∆Yd is 0.95.

► C / Yd is 0.95.

► ∆Yd to ∆C is 0.95.

► Yd / C is 0.95.

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

When MPC is 0.80 and APC is 0.95 then MPS is:

► 0.20 and APS is 0.05.

► 0.05 and APS is 0.20.

► 0.20 and APS is 0.20.

► 0.05 and APS is 0.05.

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

Which of the following are leakages from the circular flow?

► Consumption and saving.

► Saving and imports.

► Imports and exports.

► Exports and savings.

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

The time that a laborer uses for relaxation and all activities other than work or necessary sleep is known as:

► Free time.

► Leisure.

► Time not used for earning.

► All of the given options.

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

Labor supply curve is backward bending because:

► The income effect of higher income dominates the substitution effect of higher wages.

► The substitution effect of higher income dominates the income effect of higher wages.

► The income effect of higher income dominates the price effect of higher wages.

► None of the given options.

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

The government supports research in basic science because:

► It is a public good.

► External costs are created.

► Internal benefits are created.

► Free markets would do so otherwise.

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

In classical theory, excess supply of a product would be associated with:

► Rising interest rates.

► Falling interest rates.

► Rising price for the product.

► Falling price for the product.

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

Which of the following is NOT a determinant of net exports?

► Domestic and foreign incomes.

► Relative price levels.

► Domestic and foreign trade policies.

► Producers’ expectations about future prices.

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

► A country's firms open more stores abroad than foreign firms open in the country.

► Foreign firms open more stores in a country than the country opens in foreign countries.

► A country purchases more from abroad than other countries purchase from it.

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

A change from \$1.00 = Rs. 80.00 to \$1.00 = Rs. 85.00 represents:

► Depreciation of the dollar.

► An appreciation of the dollar.

► An appreciation of the rupee.

► None of the given options.

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

There is an increase in the economy’s potential output when there is:

► An increase in government spending.

► A decrease in government spending.

► An increase in the economy’s capital stock.

► An increase in the economy’s depreciation rate.

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

One of the implications of Solow growth model is that all other things remaining the same, countries with rapidly growing population will tend to:

► Be poorer than countries with lower population growth.

► Grow slower than countries with lower population growth.

► Grow higher than countries with lower population growth.

► Have lower marginal products of capital than countries with lower population growth.

Question No: 42    ( Marks: 1 )    - Please choose one

The rapid population growth in today’s developing nations is due to the:

► High birth rates only.

► Low death rates only.

► High birth rate and low death rate.

► Higher standard of living.

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

The principle of taxation which emphasizes on fairness or just sacrifice is known as:

► Efficiency.

► Equity.

► Progressive tax.

► Regressive tax.

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

The relationship between tax rates and total tax collections by government is known as:

► Laffer curve.

► Demand curve.

► Supply curve.

► Investment curve.

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

The optimum tax rate in which government revenue is maximized lies somewhere between:

► 0% and 1%.

► 0% and 50%.

► 50% and 100%.

► 0% and 100%.

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

Money is defined as an item that:

► Serves as a medium of exchange for goods and services.

► Can be converted into silver with relatively little loss in value.

► Can be converted into gold with relatively little loss in value.

► Facilitates a connecting link between credit instruments and debt instruments.

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

A tax imposed by a country on an imported good or service is called a:

► Quota.

► Tariff.

► Non-tariff barrier.

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

Poor countries remained poor because of:

► Higher per capita income.

► Vicious circle of poverty.

► High level of investment.

► High rates of savings.

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

If other things remaining the same, expected income can be used as a direct measure of well-being in which of the following situations?

► It can be used if and only if individuals are not risk-loving.

► It can be used if and only if individuals are risk averse.

► It can be used if and only if individuals are risk neutral.

► It can be used no matter what a person's preference to risk.

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

What questions are related with explanation? What questions are related with what ought to be?

► Positive, negative.

► Negative, normative.

► Normative, positive.

► Positive, normative.

Question No: 51    ( Marks: 1 )    - Please choose one

What will happen to the demand for product X, if there is an increase in consumer’s income?

► It will necessarily remain unchanged.

► It will shift to the right if X is a complementary good.

► It will shift to the right if X is a normal good.

► It will shift to the right if X is an inferior good.

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

Which of the following occur when an isocost line is just tangent to an isoquant?

► Output is being produced at minimum cost.

► Output is not being produced at minimum cost.

► The two products are being produced at the medium input cost to the firm.

► The two products are being produced at the highest input cost to the firm.

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

Suppose all inputs are increased by 20% but output increases by less than 20% in a production process.  This means that the firm experiences:

► Decreasing returns to scale.

► Constant returns to scale.

► Increasing returns to scale.

► None of the given options.

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

In which of the following conditions, a firm will never operate?

► At the minimum of its average total cost curve.

► At the minimum of its average variable cost curve.

► On the downward-sloping portion of its average total cost curve.

► On the downward-sloping portion of its average variable cost curve.

Question No: 55    ( Marks: 3 )

How the central bank plays its role in order to control the activities of commercial banks?

Question No: 56    ( Marks: 5 )

Briefly discuss different types of taxes which a government can impose.

Question No: 57    ( Marks: 5 )

1. A.      Differentiate between final goods and intermediate goods with the help of examples.
2. B.    See the following table:
 Year 1979 1980 1981 1982 1983 1984 1985 1986 Real GDP Growth Rate 1.2% -5.5% 1.8% 3.9% 4.5% 5.3% 2.6% 1.9%

a)     Calculate the average growth rate from 1982 and 1985.

b)     Calculate the average growth rate from 1979 and 1986.

(Marks: 3+2)

Question No: 58    ( Marks: 10 )

From the information given in the following table, calculate the number of unemployed persons and unemployment rate.

 Year Size of Labor Force Number of persons Employed 1984 113544 105005 1985 115461 107150 1986 117834 109597 1987 119865 112440 1988 121669 114968

(Marks: 5+5)

Question No: 59    ( Marks: 10 )

a)     What is interest parity condition?

b)     When does this condition hold?

c)     What is the equation of this condition?

d)     What will happen if the equality of the condition does not hold?

(Marks: 2+2+2+4)

FINALTERM  EXAMINATION

Fall 2009

ECO401- Economics (Session - 4)

Time: 120 min

Marks: 87

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

If the quantity demanded of a product is greater than the quantity supplied of a product, then:

► There is a shortage of the product.

► There is a surplus of the product.

► The product is a normal good.

► The product is an inferior good.

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

The cross price elasticity of demand for complementary goods is:

► Less than 0.

► Equal to 0.

► Greater than 0.

► Between 0 and 1.

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

Assume leisure is a normal good. If income effect equals substitution effect then a wage rate increase will lead a person to:

► Increase hours of work.

► Decrease hours of work.

► Not change hours of work.

► None of the given options.

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

_______________ arises when an increase in all inputs leads to a more-than-proportional increase in the level of output. _____________ means that as inputs are added to the production process, output increases proportionally.

► Economies of scale; constant returns to scale.

► Constant returns to scale; decreasing returns to scale.

► Decreasing returns to scale; economies of scale.

► Economies of scale; decreasing returns to scale.

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

An isoquant curve shows:

► All the alternative combinations of two inputs that yield the same maximum total product.

► All the alternative combinations of two products that can be produced by using a given set of inputs fully and in the best possible way.

► All the alternative combinations of two products among which a producer is indifferent because they yield the same profit.

► None of the given options.

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

Total costs are the sum of:

► Marginal costs and variable costs.

► Fixed costs and variable costs.

► Fixed costs and marginal costs.

► Average variable costs and marginal costs.

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

A firm is charging a different price for each unit purchased by a consumer.  This is called:

► First-degree price discrimination.

► Second-degree price discrimination.

► Third-degree price discrimination.

► None of the given options.

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

Which of the following best expresses the law of demand?

► A higher price reduces demand.

► A lower price reduces demand.

► A higher price reduces quantity demanded.

► A lower price shifts the demand curve to the right.

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

If a sales tax on beer leads to reduced tax revenue, this means:

► Elasticity of demand is < 1.

► Elasticity of demand is > 1.

► Demand is upward-sloping.

► Demand is perfectly inelastic.

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

For a firm buying labor competitively, the marginal input cost is equal to the:

► Wage.

► Interest rate.

► Price of output.

► Cost of raw materials.

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

The classical economists thought that the economy would quickly overcome any short run instability because:

► Price level and quantity are flexible.

► Prices would get stuck at a low level.

► The long run aggregate supply would shift to the left.

► Prices and wages are flexible.

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

Final goods are meant for:

► Direct use by the consumers.

► Further processing.

► The term do not exist.

► None of the given options.

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

The average propensity to consume is the ratio of:

► A change in consumption to a change in disposable income.

► A change in consumption to total disposable income at a specific income level.

► Total consumption to total disposable income at a specific income level.

► Total consumption to a change in disposable income.

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

The slope of the saving function (or line) is the:

► Average propensity to save.

► Average propensity to consume.

► Marginal propensity to save.

► Marginal propensity to consume.

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

The government increases the number of job centres and uses more advanced computers to improve the information database. This creates:

► Structural Unemployment.

► Regional Unemployment.

► Frictional Unemployment.

► Demand Deficient Unemployment.

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

Which one of the following can lead to a rise in inflation?

► An increase in costs of production.

► An increase in productive capacity.

► An increase in the level of direct taxation.

► An increase in the exchange rate.

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

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

► An increase in official international reserves.

► A positive statistical discrepancy.

► A negative statistical discrepancy.

► A decline in official international reserves.

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

How should fiscal policy be used during inflation?

► Increase Government expenditure and decrease taxes to decrease aggregate demand.

► Increase Government expenditure and decrease taxes to increase aggregate demand.

► Decrease Government expenditure and increase taxes to increase aggregate demand.

► Decrease Government expenditure and increase taxes to decrease aggregate demand.

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

If the demand curve for a good is downward sloping, then the good:

► Must be inferior.

► Must be giffen.

► Can be normal or inferior.

► Must be normal.

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

Keeping in view the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause:

► Both prices and output to rise.

► Prices to fall and output to remain unchanged.

► Both prices and output to fall.

► Prices to rise and output to remain unchanged.

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

Which of the following is TRUE according to classical economists?

► Aggregate demand curve is downward sloping and the aggregate supply curve is vertical.

► Aggregate demand curve is downward sloping and the aggregate supply curve is upward sloping.

► Aggregate demand curve is vertical and the aggregate supply curve is upward sloping.

► Aggregate demand curve is vertical and the aggregate supply curve is horizontal.

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

Why calculations of Gross Domestic Product (GDP) count only final goods and services?

► Because it is difficult to measure the prices of intermediate goods produced.

► Because these are the only goods and services that are purchased in an economy.

► Because counting all goods and services would lead to double-counting of many activities.

► Because one cannot calculate the quantities of intermediate goods produced.

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

------------------ plays an important role in making sure that the economy reaches and stays at equilibrium at the potential output level.

► Real exchange rate.

► The production function.

► Real price level.

► Real interest rate.

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

Why a \$1 increase in government spending will have a larger impact upon national income than a \$1 tax cut?

► Because the government prints the currency it spends.

► Because not all of the tax cut is spent.

► Because when taxes are cut, government spending is also cut.

► Because taxes are an injection into the system.

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

Commercial banks in Pakistan are supervised by:

► State bank of Pakistan.

► National bank of Pakistan.

► Finance minister of Pakistan.

► World bank.

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

Trade can be beneficial in which of the following situations?

► Two countries produce the same goods at the same costs.

► Two countries produce different goods at different costs.

► Two countries are isolated.

► Two countries have the same markets.

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

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

► 1000+1500+2500 = Rs. 5000

► 1000+500+2500 = Rs. 4000

► 1000+500+1000 = Rs. 2500

► 1000+1500+1000 =Rs. 3500

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

Which of the following best defines “subsidies”?

► Payment by Government for purchase of goods and services.

► Payment by business enterprises to factors of production.

► Payment by companies to share holders.

► Payment by Government to business enterprises without buying any goods and services.

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

National product at market prices incorporate:

► Prices which buyers actually pay.

► Payments made to the factor owners.

► Costs incurred in producing goods and services.

► Costs minus subsidies.

Question No: 30    ( Marks: 1 )    - Please choose one

A marginal propensity to consume (MPC) of 0.95 indicates that:

► ∆C to ∆Yd is 0.95.

► C / Yd is 0.95.

► ∆Yd to ∆C is 0.95.

► Yd / C is 0.95.

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

When MPC is 0.80 and APC is 0.95 then MPS is:

► 0.20 and APS is 0.05.

► 0.05 and APS is 0.20.

► 0.20 and APS is 0.20.

► 0.05 and APS is 0.05.

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

Which of the following are leakages from the circular flow?

► Consumption and saving.

► Saving and imports.

► Imports and exports.

► Exports and savings.

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

The time that a laborer uses for relaxation and all activities other than work or necessary sleep is known as:

► Free time.

► Leisure.

► Time not used for earning.

► All of the given options.

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

Labor supply curve is backward bending because:

► The income effect of higher income dominates the substitution effect of higher wages.

► The substitution effect of higher income dominates the income effect of higher wages.

► The income effect of higher income dominates the price effect of higher wages.

► None of the given options.

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

The government supports research in basic science because:

► It is a public good.

► External costs are created.

► Internal benefits are created.

► Free markets would do so otherwise.

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

In classical theory, excess supply of a product would be associated with:

► Rising interest rates.

► Falling interest rates.

► Rising price for the product.

► Falling price for the product.

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

Which of the following is NOT a determinant of net exports?

► Domestic and foreign incomes.

► Relative price levels.

► Domestic and foreign trade policies.

► Producers’ expectations about future prices.

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

► A country's firms open more stores abroad than foreign firms open in the country.

► Foreign firms open more stores in a country than the country opens in foreign countries.

► A country purchases more from abroad than other countries purchase from it.

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

A change from \$1.00 = Rs. 80.00 to \$1.00 = Rs. 85.00 represents:

► Depreciation of the dollar.

► An appreciation of the dollar.

► An appreciation of the rupee.

► None of the given options.

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

There is an increase in the economy’s potential output when there is:

► An increase in government spending.

► A decrease in government spending.

► An increase in the economy’s capital stock.

► An increase in the economy’s depreciation rate.

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

One of the implications of Solow growth model is that all other things remaining the same, countries with rapidly growing population will tend to:

► Be poorer than countries with lower population growth.

► Grow slower than countries with lower population growth.

► Grow higher than countries with lower population growth.

► Have lower marginal products of capital than countries with lower population growth.

Question No: 42    ( Marks: 1 )    - Please choose one

The rapid population growth in today’s developing nations is due to the:

► High birth rates only.

► Low death rates only.

► High birth rate and low death rate.

► Higher standard of living.

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

The principle of taxation which emphasizes on fairness or just sacrifice is known as:

► Efficiency.

► Equity.

► Progressive tax.

► Regressive tax.

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

The relationship between tax rates and total tax collections by government is known as:

► Laffer curve.

► Demand curve.

► Supply curve.

► Investment curve.

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

The optimum tax rate in which government revenue is maximized lies somewhere between:

► 0% and 1%.

► 0% and 50%.

► 50% and 100%.

► 0% and 100%.

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

Money is defined as an item that:

► Serves as a medium of exchange for goods and services.

► Can be converted into silver with relatively little loss in value.

► Can be converted into gold with relatively little loss in value.

► Facilitates a connecting link between credit instruments and debt instruments.

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

A tax imposed by a country on an imported good or service is called a:

► Quota.

► Tariff.

► Non-tariff barrier.

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

Poor countries remained poor because of:

► Higher per capita income.

► Vicious circle of poverty.

► High level of investment.

► High rates of savings.

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

If other things remaining the same, expected income can be used as a direct measure of well-being in which of the following situations?

► It can be used if and only if individuals are not risk-loving.

► It can be used if and only if individuals are risk averse.

► It can be used if and only if individuals are risk neutral.

► It can be used no matter what a person's preference to risk.

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

What questions are related with explanation? What questions are related with what ought to be?

► Positive, negative.

► Negative, normative.

► Normative, positive.

► Positive, normative.

Question No: 51    ( Marks: 1 )    - Please choose one

What will happen to the demand for product X, if there is an increase in consumer’s income?

► It will necessarily remain unchanged.

► It will shift to the right if X is a complementary good.

► It will shift to the right if X is a normal good.

► It will shift to the right if X is an inferior good.

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

Which of the following occur when an isocost line is just tangent to an isoquant?

► Output is being produced at minimum cost.

► Output is not being produced at minimum cost.

► The two products are being produced at the medium input cost to the firm.

► The two products are being produced at the highest input cost to the firm.

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

Suppose all inputs are increased by 20% but output increases by less than 20% in a production process.  This means that the firm experiences:

► Decreasing returns to scale.

► Constant returns to scale.

► Increasing returns to scale.

► None of the given options.

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

In which of the following conditions, a firm will never operate?

► At the minimum of its average total cost curve.

► At the minimum of its average variable cost curve.

► On the downward-sloping portion of its average total cost curve.

► On the downward-sloping portion of its average variable cost curve.

Question No: 55    ( Marks: 3 )

How the central bank plays its role in order to control the activities of commercial banks?

Question No: 56    ( Marks: 5 )

Briefly discuss different types of taxes which a government can impose.

Question No: 57    ( Marks: 5 )

1. A.      Differentiate between final goods and intermediate goods with the help of examples.
2. B.    See the following table:
 Year 1979 1980 1981 1982 1983 1984 1985 1986 Real GDP Growth Rate 1.2% -5.5% 1.8% 3.9% 4.5% 5.3% 2.6% 1.9%

a)     Calculate the average growth rate from 1982 and 1985.

b)     Calculate the average growth rate from 1979 and 1986.

(Marks: 3+2)

Question No: 58    ( Marks: 10 )

From the information given in the following table, calculate the number of unemployed persons and unemployment rate.

 Year Size of Labor Force Number of persons Employed 1984 113544 105005 1985 115461 107150 1986 117834 109597 1987 119865 112440 1988 121669 114968

(Marks: 5+5)

Question No: 59    ( Marks: 10 )

a)     What is interest parity condition?

b)     When does this condition hold?

c)     What is the equation of this condition?

d)     What will happen if the equality of the condition does not hold?

(Marks: 2+2+2+4)

FINALTERM  EXAMINATION

Spring 2010

ECO401- Economics (Session - 4)

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

An increase in supply is shown by:

► Shifting the supply curve to the left.

► Shifting the supply curve to the right.

Lesson # 4

► Upward movement along the supply curve.

► Downward movement along the supply curve.

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

Which of the following will be TRUE if demand is inelastic?

► The coefficient of elasticity is greater than one.

► The percentage change in quantity demanded is same as the percentage change in the price.

► An increase in price will increase total revenue.

P   28

► None of the given options.

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

Which of the following is regarded as a general determinant of price elasticity of demand?

► Nature of the good (luxury versus necessity).

► Availability of close substitutes.

► Share of consumer's budget and passage of time.

► All of the given options.

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

Suppose there are only two goods A and B, if more of good A is always preferred to less, and if less of good B is always preferred to more, then:

► Indifference curves slope downwards.

► Indifference curves slope upwards.

► Indifference curves may cross.

► Indifference curves could take the form of ellipses.

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

If a consumer’s marginal rate of substitution equals 2 eggs for 1 hamburger then:

► The consumer’s indifference curve must be positively sloped.

► The consumer’s indifference curve must be convex with respect to the origin of the graph.

► The ratio of the consumer’s marginal utility of 1 egg to that of 1 hamburger must equal ½.

► All of the given options.

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

Suppose you are a workaholic (like work a lot) and your friend is a leisure lover. Compared to your friend your indifference curve will be:

► Flatter.

► Steeper.

► Identical.

► None of the given options.

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

In economics, the “long run” is a time period in which:

► All inputs are variable.

► All inputs are paid for.

► All outputs are determined.

► All loans are repaid.

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

To find the profit maximizing level of output, a firm finds the output level where:

► Price equals marginal cost.

► Marginal revenue and average total cost.

► Price equals marginal revenue.

► None of the given options.

The  profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output. Indeed, the condition that marginal revenue equal marginal cost is used to determine the profit maximizing level of output of every firm, regardless of the market structure in which the firm is operating.

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

A perfectly competitive firm maximizes profit by finding the level of production at which:

► Price = Marginal Cost.

► Price = Average Total Cost.

► Average Total Cost = Marginal Cost.

► Price < Marginal Cost.

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

In the short run, a firm should shut down when:

► Production losses are less than fixed costs.

► Only normal profits are earned.

► Production losses exceed fixed costs.

► Fixed costs are zero.

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

Loud music from a neighbor's party is:

A negative externality whether or not you like it.

► A positive externality whether or not you like it.

► A positive externality if you like the music and a negative externality if you don't.

► A negative externality if you like the music and a positive externality if you don't.

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

Classical economics was replaced as the dominant theory of macroeconomic analysis by:

► Monetarism.

► Rational expectations.

► Keynesian economics.

► Neoclassical economics.

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

Unemployment benefits may increase the unemployment rate because:

► Unemployment benefits reduce the cost of job search.

► Unemployment benefits encourage people to quit their jobs.

► Unemployment benefits reduce the benefits of additional job searching.

► Unemployment benefits enable people to quit searching for work.

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

Naima has just finished her school job and is waiting to report to new job at the beginning of the month. Naima is considered to be:

► Cyclically unemployed.

► Employed.

► Structurally unemployed.

► Frictionally unemployed.

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

Which of the following is a less important component of the balance of payments?

► The capital account.

► The current account.

► The financial account.

► All three components are equally important.

Reference:

http://wps.prenhall.com/bp_hubbard_econ_2/85/21856/5595147.cw/-/559...

Question#10

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

An increase in ''per capita'' national income implies that:

► Everyone in the nation is enjoying a better standard of living.

► The population has increased.

National income has risen faster than the population has risen.

► The distribution of income has improved.

Reference:

http://www.ecoteacher.asn.au/devel2/devel2.htm

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

Suppose the government increases spending. Which of the following would be part of the crowding out effect?

► Interest rate rises and investment falls.

► Interest rate rises and velocity of circulation also rises.

► Higher interest rates encourage the central bank to increase the money supply.

► Interest rate falls and exports rise.

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

Real Gross National Product (GNP) is best defined as:

► The pound value of all final goods and services produced in the economy during a particular time period and measured in current prices.

► The pound value of all goods produced for final consumption by households in a particular year and measured in constant prices.

► The current pound value of all new and used goods produced and sold in the economy during a particular time period.

► The market value of all final goods and services produced by the economy during a given time period, with prices held constant relative to some base period.

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

The news on the television reports that the dollar has strengthened relative to the Japanese yen. This means that:

► The dollar can now purchase more yen.

► The US trade balance with the Japanese economy has improved.

► The yen can now purchase more dollars.

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

► The dollar has depreciated relative to the yen.

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

The Marginal Propensity to Save (MPS) is:

► One Minus Marginal Propensity to Consume (MPC).

► Saving divided by consumption.

► The slope of the consumption function (or line).

► The proportion of disposable income used for consumption.

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

Which of the following is true about supply curve under monopoly?

► It is same as the competitive market supply curve.

► It is the portion of marginal cost curve where marginal costs exceed the minimum value of average variable costs.

► It is the result of market power and production costs.

► None of the given statements is true.

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

All of the following conditions lead to the successful operation of a cartel EXCEPT:

► Market demand for the good is relatively inelastic.

► The cartel supplies all of the world's output of the good.

► Cartel members have substantial cost advantages over non-member producers.

► The supply of non-cartel members is very price elastic.

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

Which of the following is required to make the equation of exchange in the quantity theory of money?

► V and Q are assumed to be constant.

► The money supply is assumed to be produced by the banking system and not exclusively in currency.

► The quantity of money is assumed to determine the amount of Real GDP.

► M and P are considered constant.

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

Potential Gross Domestic Product (GDP) measures the economy’s ability to produce goods and services in which of the following conditions?

► If labor force is fully employed.

► If price level is stable.

► If trade balance is zero.

► If federal budget is balanced.

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

Which of the following specifies the maximum amount of a good that may be imported in a given period of time?

► Quota.

► Import restriction.

► Legislative restriction.

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

GNP is a good indicator of:

► The total payment of factor owners.

► The amount of consumption and investment.

► The conditions of production and employment.

► The amount of incomes available for spending.

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

The demand for factors of production is derived from:

► Money market.

► Goods market.

► Stock market.

► Financial market.

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

Labor supply curve is backward bending because:

► The income effect of higher income dominates the substitution effect of higher wages.

► The substitution effect of higher income dominates the income effect of higher wages.

► The income effect of higher income dominates the price effect of higher wages.

► None of the given options.

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

The discounted value of the net returns that the asset generates over a period of time plus the discounted value of its disposal value at the end of the period minus the initial purchase cost is known as:

► Future value.

► Net present value.

► Discounted value.

► Disposal value.

Question No: 30    ( Marks: 1 )    - Please choose one

Information products are also known as:

► Inferior products.

► Superior products.

Internet products.

► Expensive products.

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

Refer to the above figure, suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. What happens in the short-run?

► Real GDP remains at Y1 but the price level falls to P3.

► The quantity of real GDP demanded falls resulting in a movement from point A to point F.

► Real GDP decreases from Y1 to Y3 and the price level falls from P1 to P3.

► The economy moves to a short-run equilibrium at point D.

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

Which of the following is a cost of rising unemployment?

1. I.  Output foregone.

II.Unemployment compensation that must be paid.

1. III.          Rising inflation that erodes the value of money.

► I, II, and III.

► I and II.

► I and III.

► II and III.

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

Rising inflation means:

► That the price level is increasing by a given percentage rate.

► That the prices of all goods and services increase from year to year.

► That the price level is rising at an increasing rate.

► That the price level is rising at a variable rate.

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

Economic growth occurs by an outward shift of:

► The production possibility frontier.

► The gross domestic barrier.

► The marginal consumption frontier.

► The minimum efficient scale.

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

Which of the following is a necessary condition for the high rate of modern economic growth?

► Continuous technology progress.

► High rate of population growth.

► Development of urban centers.

► Expansion of railways.

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

The government has a balanced budget if:

► Its total revenues are equal to its total expenditures.

► Its total revenues are less than its total expenditures.

► Its total revenues are greater than its total expenditures.

► The money supply is less than total expenditures.

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

Which of the following is the monetary policy tool that involves the buying and selling of government bonds?

► Moral suasion.

► Reserve requirements.

► The discount rate.

► Open market operations.

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

When the comparative advantage in production of a good does occur?

► When a country can produce that good using fewer resources than other countries.

► When a country can produce that good at a greater opportunity cost than other countries.

► When a country can produce that good at a lower opportunity cost than other countries.

► When a country has a greater supply of natural resources required to produce that good, compared to other countries.

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

A quota is defined as:

► A restriction on exports.

► A unit tax imposed on a product.

► A limit on the quantity of a good that can be exported.

► A limit on the quantity of a good that can be imported.

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

Which of the following statements is TRUE about the agriculture sector in low income countries?

► The agricultural sector has been decreasing in size because its productive workers prefer to migrate to urban areas.

► The agricultural sector is by far the largest producer and the most productive sector in low-income countries.

► Although the agricultural sector is the largest employer, labor’s productivity in this sector is very low.

► The agricultural sector has been increasing in size and in terms of labor productivity as rural farmers increasingly start to mechanize.

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

Production possibilities curve will shift downward if there is:

► Immigration of skilled workers into the nation.

► An increase in the size of the working-age population.

► A decrease in the size of the working-age population.

► Increased production of capital goods.

Question No: 42    ( Marks: 1 )    - Please choose one

Suppose the total costs of first four units of an output produced are 10, 20, 30, and 40 respectively. What is the marginal cost of the fourth unit of output?

► 10.

► 20.

► 30.

► 40.

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

If marginal revenue is Rs. 15,000 and marginal cost is Rs. 20,000. The firm should:

► Expand output.

► Expand output until marginal revenue equals zero.

► Reduce output until marginal revenue equals marginal cost.

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

The average annual income per head for all the inhabitants of the country is known as:

► Gross domestic product.

► Gross national product.

► Net national product.

► Per capita income.

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

Gross domestic product deflator can be obtained by dividing nominal gross domestic product with:

► Real gross domestic product.

► Gross national product.

► Net national product.

► Per capita income.

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

The principle which states that a change in income causes a magnified change in investment is termed as the:

► None of the given.

► Multiplier effect.

► Accelerator effect.

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

If central bank increased the money supply, then what will be happen to IS curve?

► IS curve will Shifts rightward.

► IS curve will Shifts leftward.

► IS curve will remain unaffected.

► IS curve will become vertical.

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

The value of world trade has increased ----------over the period of 1930-2000.

► 20 fold

► 10 fold

► 5 fold

► 14 fold

Question No: 49    ( Marks: 3 )

Write down the functions of commercial banks.

Question No: 50    ( Marks: 3 )

How the growth rate of output is determined in the exogenous growth model?

Question No: 51    ( Marks: 5 )

Why is taxation necessary? What are the principles of taxation?

Question No: 52    ( Marks: 5 )

Following figure shows the circular flow of goods and income in a two sector economy. Interpret all the points in this figure that how the household sector and business sector work in an economy to produce goods and services.

Question No: 53    ( Marks: 5 )

Explain the difference between current account and capital account.

FINALTERM  EXAMINATION

Spring 2010

ECO401- Economics

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

Government authorities have managed to reduce the unemployment rate from 8% to 4% in a hypothetical economy. As a result:

► The economy's production possibilities curve will shift outward.

► The economy's production possibilities curve will become steeper.

► The economy will move downward along its production possibilities curve.

► The economy will move from a point inside to a point closer to its production possibilities curve.

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

Which of the following measures the percentage change in quantity demanded given a percentage change in consumer's income?

► Price elasticity of demand.

► Income elasticity of demand.

► Supply price elasticity.

► Cross price elasticity.

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

If the income elasticity of demand for boots is 0.2, a 10% increase in consumer's income will lead to a:

► 20 percent decrease in the quantity of boots demanded.

► 2 percent increase in the quantity of boots demanded.

► 0.2 percent increase in the quantity of boots demanded.

► 20 percent increase in the quantity of boots demanded.

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

Increase in pension benefits leads to income and substitution effect which:

► Encourage workers to retire later.

► Encourage workers to work more hours.

► Have no effect on incentive to retire.

► Encourage workers to retire earlier.

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

Marginal profit is equal to:

► Marginal revenue minus marginal cost.

► Marginal revenue plus marginal cost.

► Marginal cost minus marginal revenue.

► Marginal revenue times marginal cost.

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

The good produced by a monopoly:

► Has perfect substitutes.

► Has no substitutes at all.

► Has no close substitutes.

► Can be easily duplicated.

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

If a firm experiences economies of scale, then the:

► Long-run average total cost curve is equal to the economies of scope.

► Long-run average total cost curve is positively sloped.

► Long-run average total cost curve is horizontal.

► Long-run average total cost curve is negatively sloped.

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

When the marginal revenue product of labor is greater than the marginal input cost of labor then the profit maximizing firm will:

► Hire more labor.

► Hire less labor.

► Maintain the same employment.

► Decrease output.

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

An increase in the wage rate:

► Will usually lead to more people employed.

► Will decrease total earnings if the demand for labour is wage elastic.

► Is illegal in a free market.

► Will cause a shift in the demand for labour.

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

Keynesian economics rejected the classical assumption that:

► Supply creates its own demand.

► Prices and wages are inflexible.

► Self-correction takes a long time.

► Consumption expenditures depend on disposable income.

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

A nation's balance of payments can be affected by changes in:

► Foreign income.

► The differential between domestic and foreign interest rates.

► The real exchange rate.

► All of the given options.

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

According to Keynesian economics, aggregate expenditures are the sum of desired or planned spending undertaken by:

► All four sectors only when the economy is at full employment.

► All four sectors at a specific aggregate production level.

► The household sector after taxes.

► The business and government sectors.

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

All of the following conditions lead to the successful operation of a cartel EXCEPT:

► Market demand for the good is relatively inelastic.

► The cartel supplies all of the world's output of the good.

► Cartel members have substantial cost advantages over non-member producers.

► The supply of non-cartel members is very price elastic.

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

If the total product of labor per day is as shown in the table below and the price of the product is \$20/unit. What is the value of the marginal product of labor (VMPL) of the 5th worker?

 Labor Total output 1 8 2 23 3 33 4 38 5 41

► 100.

► 10.

► 40.

► 60.

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

All of the following are the reasons of downward sloping curve of aggregate demand EXCEPT:

► The exchange-rate effect.

► The wealth effect.

► The classical dichotomy / monetary neutrality effects.

► The interest-rate effect.

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

Why calculations of Gross Domestic Product (GDP) count only final goods and services?

► Because it is difficult to measure the prices of intermediate goods produced.

► Because these are the only goods and services that are purchased in an economy.

► Because counting all goods and services would lead to double-counting of many activities.

► Because one cannot calculate the quantities of intermediate goods produced.

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

Suppose in a macroeconomic model, there is no foreign trade or government spending. In this case, aggregate demand is the sum of:

► Personal saving and private investment.

► Personal saving and personal consumption.

► Personal consumption and personal income.

Personal consumption and private investment.

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

According to the quantity theory of money, which of the following is TRUE for the equation MV = PQ?

► M has no effect on the price level.

► V is the number of times each dollar is spent per year.

► Q is the real price level.

► P rises as V falls, other things constant.

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

Potential Gross Domestic Product (GDP) measures the economy’s ability to produce goods and services in which of the following conditions?

► If labor force is fully employed.

► If price level is stable.

► If trade balance is zero.

► If federal budget is balanced.

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

Suppose in an economy, a war destroys a large portion of a country's capital stock but the saving rate is unchanged. In this situation, the exogenous model predicts that output will grow and the new steady state will approach towards:

► A higher output level than before.

► The same output level as before.

► A lower output level than before.

► The Golden Rule output level.

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

International data suggest that economies which have different steady states level will converge to:

► The steady state below the Golden Rule level.

► The Golden Rule steady state.

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

Suppose there are two producers and two products. Which of the following is not TRUE in this situation?

► A producer has an absolute advantage on one product.

► A producer has the comparative advantage on both products.

► A producer has the comparative advantage on one product.

► A producer has an absolute advantage on both products.

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

The relationship between hours provided by labor and wage rate is:

► Positive.

► Negative.

► Ambiguous.

► Very strong.

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

Which of the following is equal to the number of people unemployed?

► The number of people employed minus the labor force.

► The labor force plus the number of people employed.

► The number of people employed divided by the labor force.

► The labor force minus the number of people employed.

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

Structural unemployment occurs:

► With economic fluctuations; it increases during bad times and decreases during good times.

► Because of a mismatch between the jobs that are available in the economy and the skills of workers seeking jobs.

► Naturally during the normal workings of an economy, as people change jobs, move across the country, etc.

► Because the government labels some people who aren't really in the labor force as unemployed.

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

Suppose real output in the economy increased. We would expect:

► A decrease in unemployment.

► A decrease in profit margins.

► An increase in unemployment.

► An increase in the natural rate of unemployment.

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

Which of the following would be expected to increase the natural rate of unemployment?

► An increase in the growth rate of the capital stock.

► A reduction in the corporate profits tax.

► An increase in the level of unemployment compensation paid to unemployed workers.

► A reduction in the number of new entrants into the labor force.

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

If foreign interest rate is 3% and expected depreciation is 10% then what will be the domestic interest rate?

► 3%.

► 10%.

► 7%.

► 13%.

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

One of the implications of Solow growth model is that all other things remaining the same, countries with rapidly growing population will tend to:

► Be poorer than countries with lower population growth.

► Grow slower than countries with lower population growth.

► Grow higher than countries with lower population growth.

► Have lower marginal products of capital than countries with lower population growth.

Question No: 30    ( Marks: 1 )    - Please choose one

The relationship between tax rates and total tax collections by government is known as:

► Laffer curve.

► Demand curve.

► Supply curve.

► Investment curve.

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

Which of the following shows the inverted-U shape when plotted on a graph?

► Consumption curve.

► Supply curve.

► Laffer curve.

► Investment curve.

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

In a period of recession, credit creation is:

► Small.

► Heavy.

► Unchanged.

► Zero.

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

LM curve shows the equilibrium in:

► Money Market.

► Goods Market.

► Labor Market.

► Financial Market.

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

A country has a comparative advantage:

► If it can produce a good at a higher opportunity cost than other nations.

► If it can produce a good at a lower opportunity cost than other nations.

► If it can produce a good by using less resources than other nations.

► If it can produce a good that lies outside its production possibilities curve.

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

Which of the following is an important feature of modern economic growth?

► Substantial rise in product per capita.

► Increased productivity per unit of labor input.

► Increasing use of modern scientific knowledge.

► All of the given options.

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

Suppose a consumer buys two goods X and Y. The demand for X is elastic, then a rise in the price of X will cause:

► Total spending on good Y to rise.

► Total spending on good Y to fall.

► Total spending on good Y to remain unchanged.

► An indeterminate effect on total spending on good Y.

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

Assume that pen and ink are complements.  When the price of pen goes up, the demand curve for ink:

► Shifts to the left.

► Shifts to the right.

► Remains constant.

► Shifts to the right initially and then returns to its original position.

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

Which of the following will happen if two indifference curves cross each other?

► The assumption of a diminishing marginal rate of substitution will be violated.

► The assumption of transitivity will be violated.

► The assumption of completeness will be violated.

► Consumers will minimize their satisfaction.

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

Constant returns to scale imply that by:

► Increasing the inputs by 1% leads to a 0.75% increase in output.

► Increasing the inputs by 1.6% leads to a 1.5% increase in output.

► Increasing the inputs by 2% leads to a 4% increase in output.

► None of the given options.

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

Average total costs are the sum of:

► Fixed costs and marginal costs

► Average variable costs and marginal costs

► Average fixed costs and average variable costs

► Average marginal costs and average variable costs

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

Theory of firm is not clearly discussed & established in

► Monopoly.

► Perfect competition.

► Oligopoly.

► None of the given options.

Question No: 42    ( Marks: 1 )    - Please choose one

If a 7% price reduction causes quantity demanded to rise by 10% then:

► Demand is inelastic.

► Demand is elastic.

► Demand is perfectly elastic.

► Total revenue will remain constant.

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

Which of the following is not a component of aggregate demand?

► Consumption spending.

► Investment expenditures.

Government expenditures.

► Household income.

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

If the simple Keynesian expenditure multiplier is 2, the Marginal Propensity to Consume (MPC) is:

► 0.75

► 0.50

► 0.25

► 1.00

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

Monetarists believed that the economy generally:

► Lies above full-employment.

► None of the given options.

► Lies below full-employment.

► Gravitated around a full-employment.

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

Balance of payment is an accounting record of a country’s transactions with:

► South Asian countries.

► Middle East.

► Rest of the world.

► USA and China.

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

How an economy will be affected if money supply is increased in the country?

► Interest rate increases, investment and GDP reduces.

► Interest rate increases, investment increases and GDP reduces.

► Interest rate reduces,  investment and GDP increases.

► Interest rate reduces, investment and GDP reduces.

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

The demand for money to buy bonds is called:

► Transactions demand for money.

► Precautionary demand for money.

► Speculative demand for money.

► All of the given options.

Question No: 49    ( Marks: 3 )

Mention the transactions that cause the demand for dollars to increase in the foreign exchange market.

Pakistani imports of US goods.

Pakistani travelers traveling to the US.

Pakistani students paying for study in US universities.

profits repatriated to

US by US firms operating in Pakistan.

Question No: 50    ( Marks: 3 )

Why countries have comparative advantage according to Ricardo?

The law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. There is a  source of comparative advantage can be productivity differentials.Ricardo argued that there is mutual benefit from trade (or exchange) even if one party (e.g. resource rich country, highly-skilled artisan) is more productive in every possible area than its trading counterpart (e.g. resource-poor country, unskilled laborer), as long as each concentrates on the activities where it has a relative productivity advantage

Question No: 51    ( Marks: 5 )

1. A.      "Slope of the consumption function is less than 1".What is meant by this statement?

When we drawn in expenditure income space, the consumption function plots as a straight line with positive intercept, and a positive but less than 1 slope.

The slope is less than 1 because not all the income is consumed some part of the income is saved.

1. B.    What are the major macroeconomic variables involved in the determination of national income?

(Marks: 2+3)

C, I, G, X, M, T, S, prices, exchange rate, interest rate and money supply.

Question No: 52    ( Marks: 5 )

What are the conditions in which foreign exchange market exists? Also give some examples of foreign exchange markets.

In a market there are buyers and sellers who negotiate and agree on the price for the or

price for the commodity being exchanged. The foreign exchange market is no different.

whatever, here the commodity being traded is foreign exchange and the price is the foreign exchange rate. Specifically, a foreign currency is being traded for the Pakistani Ruppee  at a particular rate of exchange.

The sellers and buyers of foreign exchange are not mutually exclusive. The

sellers of today, may be the buyers of tomorrow, or even of today.

The main driving force for foreign exchange market is the law of supply and demand.

Examples are US \$-PAK RS      Foregin exchange market

US \$ - UK POUND  Foregin exchange market

Question No: 53    ( Marks: 5 )

What thing determines comparative advantage among countries according to Hechshcer-Ohlin? What is the criticism against their argument?

According to Hechshcer-Ohlin suppose we are given two countries one abundant

in labour and one abundant in capital and a labour-intensive good and a capital intensive

good, the labour abundant country will have comparative advantage in the production of the labour-intensive good while the capital abundant country will have comparative advantage in the capital-intensive good.

So the determinants of comparative advantage among countries according to Hechshcer-Ohlin is capital goods and labour intensive goods.

Critics argued that comparative advantage can and should be viewed in a dynamic (time-varying) sense, and that it was not wise to rule out the possibility of Pakistan developing comparative advantage in cars at some future point in time.

Consequent:

The major criticism leveled against Hechscher-Ohlin type trade theories are that they views

comparative advantage in an essentially static sense; i.e. if Pakistan is better at producing

cotton and Japan better at producing, then this situation will always prevail.

FINALTERM  EXAMINATION

Spring 2010

ECO401- Economics (Session - 1)

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

Government authorities have managed to reduce the unemployment rate from 8% to 4% in a hypothetical economy. As a result:

► The economy's production possibilities curve will shift outward.

► The economy's production possibilities curve will become steeper.

► The economy will move downward along its production possibilities curve.

► The economy will move from a point inside to a point closer to its production possibilities curve.

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

Which of the following measures the percentage change in quantity demanded given a percentage change in consumer's income?

► Price elasticity of demand.

► Income elasticity of demand.

► Supply price elasticity.

► Cross price elasticity.

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

If the income elasticity of demand for boots is 0.2, a 10% increase in consumer's income will lead to a:

► 20 percent decrease in the quantity of boots demanded.

► 2 percent increase in the quantity of boots demanded.

► 0.2 percent increase in the quantity of boots demanded.

► 20 percent increase in the quantity of boots demanded.

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

Increase in pension benefits leads to income and substitution effect which:

► Encourage workers to retire later.

► Encourage workers to work more hours.

► Have no effect on incentive to retire.

► Encourage workers to retire earlier.

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

Marginal profit is equal to:

► Marginal revenue minus marginal cost.

► Marginal revenue plus marginal cost.

► Marginal cost minus marginal revenue.

► Marginal revenue times marginal cost.

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

The good produced by a monopoly:

► Has perfect substitutes.

► Has no substitutes at all.

► Has no close substitutes.

► Can be easily duplicated.

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

If a firm experiences economies of scale, then the:

► Long-run average total cost curve is equal to the economies of scope.

► Long-run average total cost curve is positively sloped.

► Long-run average total cost curve is horizontal.

► Long-run average total cost curve is negatively sloped.

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

When the marginal revenue product of labor is greater than the marginal input cost of labor then the profit maximizing firm will:

► Hire more labor.

► Hire less labor.

► Maintain the same employment.

► Decrease output.

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

An increase in the wage rate:

► Will usually lead to more people employed.

► Will decrease total earnings if the demand for labour is wage elastic.

► Is illegal in a free market.

► Will cause a shift in the demand for labour.

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

Keynesian economics rejected the classical assumption that:

► Supply creates its own demand.

► Prices and wages are inflexible.

► Self-correction takes a long time.

► Consumption expenditures depend on disposable income.

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

A nation's balance of payments can be affected by changes in:

► Foreign income.

► The differential between domestic and foreign interest rates.

► The real exchange rate.

► All of the given options.

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

According to Keynesian economics, aggregate expenditures are the sum of desired or planned spending undertaken by:

► All four sectors only when the economy is at full employment.

► All four sectors at a specific aggregate production level.

► The household sector after taxes.

► The business and government sectors.

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

All of the following conditions lead to the successful operation of a cartel EXCEPT:

► Market demand for the good is relatively inelastic.

► The cartel supplies all of the world's output of the good.

► Cartel members have substantial cost advantages over non-member producers.

► The supply of non-cartel members is very price elastic.

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

If the total product of labor per day is as shown in the table below and the price of the product is \$20/unit. What is the value of the marginal product of labor (VMPL) of the 5th worker?

 Labor Total output 1 8 2 23 3 33 4 38 5 41

► 100.

► 10.

► 40.

► 60.

Reference:

5th worker MPL = 41 - 38 = 3

3*20 = 60

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

All of the following are the reasons of downward sloping curve of aggregate demand EXCEPT:

► The exchange-rate effect.

► The wealth effect.

► The classical dichotomy / monetary neutrality effects.

► The interest-rate effect.

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

Why calculations of Gross Domestic Product (GDP) count only final goods and services?

► Because it is difficult to measure the prices of intermediate goods produced.

► Because these are the only goods and services that are purchased in an economy.

► Because counting all goods and services would lead to double-counting of many activities.

► Because one cannot calculate the quantities of intermediate goods produced.

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

Suppose in a macroeconomic model, there is no foreign trade or government spending. In this case, aggregate demand is the sum of:

► Personal saving and private investment.

► Personal saving and personal consumption.

► Personal consumption and personal income.

► Personal consumption and private investment.

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

According to the quantity theory of money, which of the following is TRUE for the equation MV = PQ?

► M has no effect on the price level.

► V is the number of times each dollar is spent per year.

► Q is the real price level.

► P rises as V falls, other things constant.

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

Potential Gross Domestic Product (GDP) measures the economy’s ability to produce goods and services in which of the following conditions?

► If labor force is fully employed.

► If price level is stable.

► If trade balance is zero.

► If federal budget is balanced.

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

Suppose in an economy, a war destroys a large portion of a country's capital stock but the saving rate is unchanged. In this situation, the exogenous model predicts that output will grow and the new steady state will approach towards:

► A higher output level than before.

► The same output level as before.

► A lower output level than before.

► The Golden Rule output level.

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

International data suggest that economies which have different steady states level will converge to:

► The steady state below the Golden Rule level.

► The Golden Rule steady state.

Reference:

http://www.econ.ucdavis.edu/faculty/amtaylor/teaching/ecn101/sample...

Question#16

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

Suppose there are two producers and two products. Which of the following is not TRUE in this situation?

► A producer has an absolute advantage on one product.

► A producer has the comparative advantage on both products.

► A producer has the comparative advantage on one product.

► A producer has an absolute advantage on both products.

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

The relationship between hours provided by labor and wage rate is:

► Positive.

► Negative.

► Ambiguous.

► Very strong.

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

Which of the following is equal to the number of people unemployed?

► The number of people employed minus the labor force.

► The labor force plus the number of people employed.

► The number of people employed divided by the labor force.

► The labor force minus the number of people employed.

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

Structural unemployment occurs:

► With economic fluctuations; it increases during bad times and decreases during good times.

► Because of a mismatch between the jobs that are available in the economy and the skills of workers seeking jobs.

► Naturally during the normal workings of an economy, as people change jobs, move across the country, etc.

► Because the government labels some people who aren't really in the labor force as unemployed.

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

Suppose real output in the economy increased. We would expect:

► A decrease in unemployment.

► A decrease in profit margins.

► An increase in unemployment.

► An increase in the natural rate of unemployment.

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

Which of the following would be expected to increase the natural rate of unemployment?

► An increase in the growth rate of the capital stock.

► A reduction in the corporate profits tax.

► An increase in the level of unemployment compensation paid to unemployed workers.

► A reduction in the number of new entrants into the labor force.

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

If foreign interest rate is 3% and expected depreciation is 10% then what will be the domestic interest rate?

► 3%.

► 10%.

► 7%.

► 13%.

Reference:

Domestic interest rate = Foreign interest rate + Expected depreciation

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

One of the implications of Solow growth model is that all other things remaining the same, countries with rapidly growing population will tend to:

► Be poorer than countries with lower population growth.

► Grow slower than countries with lower population growth.

► Grow higher than countries with lower population growth.

► Have lower marginal products of capital than countries with lower population growth.

Question No: 30    ( Marks: 1 )    - Please choose one

The relationship between tax rates and total tax collections by government is known as:

► Laffer curve.

► Demand curve.

► Supply curve.

► Investment curve.

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

Which of the following shows the inverted-U shape when plotted on a graph?

► Consumption curve.

► Supply curve.

► Laffer curve.

► Investment curve.

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

In a period of recession, credit creation is:

► Small.

► Heavy.

► Unchanged.

► Zero.

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

LM curve shows the equilibrium in:

► Money Market.

► Goods Market.

► Labor Market.

► Financial Market.

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

A country has a comparative advantage:

► If it can produce a good at a higher opportunity cost than other nations.

► If it can produce a good at a lower opportunity cost than other nations.

► If it can produce a good by using less resources than other nations.

► If it can produce a good that lies outside its production possibilities curve.

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

Which of the following is an important feature of modern economic growth?

► Substantial rise in product per capita.

► Increased productivity per unit of labor input.

► Increasing use of modern scientific knowledge.

► All of the given options.

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

Suppose a consumer buys two goods X and Y. The demand for X is elastic, then a rise in the price of X will cause:

► Total spending on good Y to rise.

► Total spending on good Y to fall.

► Total spending on good Y to remain unchanged.

► An indeterminate effect on total spending on good Y.

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

Assume that pen and ink are complements.  When the price of pen goes up, the demand curve for ink:

► Shifts to the left.

► Shifts to the right.

► Remains constant.

► Shifts to the right initially and then returns to its original position.

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

Which of the following will happen if two indifference curves cross each other?

► The assumption of a diminishing marginal rate of substitution will be violated.

► The assumption of transitivity will be violated.

► The assumption of completeness will be violated.

► Consumers will minimize their satisfaction.

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

Constant returns to scale imply that by:

► Increasing the inputs by 1% leads to a 0.75% increase in output.

► Increasing the inputs by 1.6% leads to a 1.5% increase in output.

► Increasing the inputs by 2% leads to a 4% increase in output.

► None of the given options.

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

Average total costs are the sum of:

► Fixed costs and marginal costs

► Average variable costs and marginal costs

► Average fixed costs and average variable costs

► Average marginal costs and average variable costs

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

Theory of firm is not clearly discussed & established in

► Monopoly.

► Perfect competition.

► Oligopoly.

► None of the given options.

Question No: 42    ( Marks: 1 )    - Please choose one

If a 7% price reduction causes quantity demanded to rise by 10% then:

► Demand is inelastic.

► Demand is elastic.

► Demand is perfectly elastic.

► Total revenue will remain constant.

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

Which of the following is not a component of aggregate demand?

► Consumption spending.

► Investment expenditures.

► Government expenditures.

► Household income.

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

If the simple Keynesian expenditure multiplier is 2, the Marginal Propensity to Consume (MPC) is:

► 0.75

► 0.50

► 0.25

► 1.00

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

Monetarists believed that the economy generally:

► Lies above full-employment.

► None of the given options.

► Lies below full-employment.

► Gravitated around a full-employment.

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

Balance of payment is an accounting record of a country’s transactions with:

► South Asian countries.

► Middle East.

► Rest of the world.

► USA and China.

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

How an economy will be affected if money supply is increased in the country?

► Interest rate increases, investment and GDP reduces.

► Interest rate increases, investment increases and GDP reduces.

► Interest rate reduces,  investment and GDP increases.

► Interest rate reduces, investment and GDP reduces.

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

The demand for money to buy bonds is called:

► Transactions demand for money.

► Precautionary demand for money.

► Speculative demand for money.

► All of the given options.

Question No: 49    ( Marks: 3 )

Mention the transactions that cause the demand for dollars to increase in the foreign exchange market.

Pakistani imports of US goods.

Pakistani travelers traveling to the US.

Pakistani students paying for study in US universities.

profits repatriated to

US by US firms operating in Pakistan.

Question No: 50    ( Marks: 3 )

Why countries have comparative advantage according to Ricardo?

The law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. There is a  source of comparative advantage can be productivity differentials.Ricardo argued that there is mutual benefit from trade (or exchange) even if one party (e.g. resource rich country, highly-skilled artisan) is more productive in every possible area than its trading counterpart (e.g. resource-poor country, unskilled laborer), as long as each concentrates on the activities where it has a relative productivity advantage

Question No: 51    ( Marks: 5 )

1. A.      "Slope of the consumption function is less than 1".What is meant by this statement?

When we drawn in expenditure income space, the consumption function plots as a straight line with positive intercept, and a positive but less than 1 slope.

The slope is less than 1 because not all the income is consumed some part of the income is saved.

1. B.    What are the major macroeconomic variables involved in the determination of national income?

(Marks: 2+3)

C, I, G, X, M, T, S, prices, exchange rate, interest rate and money supply.

Question No: 52    ( Marks: 5 )

What are the conditions in which foreign exchange market exists? Also give some examples of foreign exchange markets.

In a market there are buyers and sellers who negotiate and agree on the price for the or

price for the commodity being exchanged. The foreign exchange market is no different.

whatever, here the commodity being traded is foreign exchange and the price is the foreign exchange rate. Specifically, a foreign currency is being traded for the Pakistani Ruppee  at a particular rate of exchange.

The sellers and buyers of foreign exchange are not mutually exclusive. The

sellers of today, may be the buyers of tomorrow, or even of today.

The main driving force for foreign exchange market is the law of supply and demand.

Examples are US \$-PAK RS      Foregin exchange market

US \$ - UK POUND  Foregin exchange market

Question No: 53    ( Marks: 5 )

What thing determines comparative advantage among countries according to Hechshcer-Ohlin? What is the criticism against their argument?

According to Hechshcer-Ohlin suppose we are given two countries one abundant

in labour and one abundant in capital and a labour-intensive good and a capital intensive

good, the labour abundant country will have comparative advantage in the production of the labour-intensive good while the capital abundant country will have comparative advantage in the capital-intensive good.

So the determinants of comparative advantage among countries according to Hechshcer-Ohlin is capital goods and labour intensive goods.

Critics argued that comparative advantage can and should be viewed in a dynamic (time-varying) sense, and that it was not wise to rule out the possibility of Pakistan developing comparative advantage in cars at some future point in time.

Consequent:

The major criticism leveled against Hechscher-Ohlin type trade theories are that they views

comparative advantage in an essentially static sense; i.e. if Pakistan is better at producing

cotton and Japan better at producing, then this situation will always prevail.

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