Examination

Question and
Answer Book
Write here your full examination number
Centre Code:
Hall Code:
Desk Number:

Foundation Level Economics for Business

3a FECB
18 November 2002
Day 1 – morning

INSTRUCTIONS TO CANDIDATES
Read this page before you look at the questions

THIS QUESTION PAPER BOOKLET IS ALSO YOUR ANSWER BOOKLET.

Sufficient space has been provided for you to write your answers, and also for workings where questions
require them. For section B questions, you must write your answers in the shaded space provided. Blank
pages are included within this booklet if you require more space for notes or workings. Please note that
you will NOT receive marks for your notes or workings. Do NOT remove any sheets from this booklet:
cross through neatly any work that is not to be marked. Avoid the use of correction fluid.

You are allowed two hours to answer this question paper. All questions are compulsory.

Answer the ONE question in section A (this has 26 sub-questions and is on pages 2-7)
Answer the THREE questions in section B (these are on pages 8-13)

You are advised to spend 10 minutes reading through the paper before starting to answer the questions.
You should spend no more than 55 minutes on answering the ONE question in section A, which has 26
sub-questions.
You should spend no more than 55 minutes on answering the THREE questions in section B.

Hand this entire booklet to the invigilators at the end of the examination. You are NOT permitted to leave
the examination hall with this booklet.

Do NOT write your name or your student registration number anywhere on this booklet.

© The Chartered Institute of Management Accountants 2002

SECTION A — 52 MARKS
ANSWER ALL TWENTY-SIX SUB-QUESTIONS – 2 MARKS EACH

Each of the sub-questions numbered from 1.1 to 1.26 inclusive, given below, has only ONE correct
answer.

REQUIRED:
Place a circle “O” around the letter A, B, C or D that gives the correct answer to each sub-question.
If you wish to change your mind about an answer, block out your first answer completely and then circle
another letter. You will NOT receive marks if more than one letter is circled.

Please note that you will NOT receive marks for any notes or workings to these sub-questions.

Question One

1.1 In economics, the term opportunity cost refers to

A the monetary cost of a good or service.

B the cost of producing the goods measured in money terms.

C the monetary cost of acquiring a factor of production.

D the value of a good or service forgone.

1.2 The importance of saving in promoting economic growth is because of the relationship between
savings and

A present consumption.

B future consumption.

C investment.

D interest rates.

1.3 Economic growth is desirable because it makes all of the following possible EXCEPT which ONE?

A The elimination of the economic problem.

B Higher living standards.

C Increased private and public consumption.

D Increased leisure.

FECB 2 November 2002

1.4 All of the following policies would promote export-led economic growth EXCEPT which ONE?

A A reduction in the country's tariffs on imports.

B A restrictive domestic monetary policy.

C The removal of taxes on employing labour.

D An appreciation in the country’s foreign exchange rate.

1.5 Economic growth in developed economies tends to be associated with

A a reduction in the output of the industrial sector in the economy.

B a rise in the importance of the service sector in the economy.

C a reduction in the dependence on imports.

D a rise in the number of workers in the primary sector.

1.6 Economies of scale are best described as the process by which

A large, dominant firms can secure higher profits.

B large firms can better organise their factors of production.

C large-scale production permits the use of new technology.

D large-scale production leads to lower costs per unit of output.

1.7 Which ONE of the following will tend to make the demand for a company’s product LESS price elastic?

A A rise in consumer incomes.

B A rise in the price of complementary goods.

C A fall in the number of substitute goods.

D A lower price for the good.

1.8 Which ONE of the following does NOT restrict the number of firms in an industry?

A Low levels of product differentiation.

B Significant economies of scale.

C Barriers to entry.

D The use of capital-intensive technology in the industry.

November 2002 3 FECB

1.9 A profit-seeking company may engage in advertising to achieve any of the following outcomes
EXCEPT which ONE?

A To increase the cross elasticity of demand for the product.

B To shift the demand curve for the company's product to the right.

C To make the demand curve for the product more price inelastic.

D To increase total sales revenue.

1.10 All of the following are features of oligopoly EXCEPT which ONE?

A Non-price competition.

B Interdependence in decision making.

C Entry barriers.

D A large number of firms.

1.11 A policy of price discrimination by a monopolist may involve all of the following EXCEPT which ONE?

A Charging different prices to different customers.

B Charging different prices in different markets.

C Charging different prices for products of differing quality.

D Charging different unit prices for different quantities purchased.

1.12 Which ONE of the following is an example of an external social cost?

A Bad weather reducing the output of the farm sector.

B Possible illness caused to owners of mobile phones as a result of excessive use.

C Smoke emissions by a factory causing health problems for nearby residents.

D Cost increases caused by rising prices of imported raw materials.

1.13 If, in the long run, a business doubles all the inputs it uses, but total output less than doubles, it is
experiencing

A diminishing returns.

B decreasing returns to scale.

C diminishing marginal utility.

D market saturation.

FECB 4 November 2002

1.14 If a business sells a product with a high income elasticity of demand,

A its sales will fall steeply if it raises its prices.

B its sales will fall only slightly if there is a fall in consumer income.

C its sales will be unaffected by changes in the prices of substitutes and complements.

D its sales will rise steeply when consumer income is rising rapidly.

1.15 In a market economy, prices perform all of the following functions EXCEPT which ONE?

A A means of allocating resources between competing uses.

B A means of ensuring a fair distribution of incomes.

C A signal to consumers.

D A signal to producers.

1.16 The minimum condition for a business to continue to operate in the short run is that

A its revenue is sufficient to cover variable costs.

B its revenue is at least equal to its total costs.

C its marginal revenue is equal to its marginal cost.

D it is making normal profits.

1.17 The government may discourage horizontal mergers in manufacturing industry because

A by controlling the sources of supply, the merged firms will have unfair advantages over rivals.

B the merged firms will be unable to secure economies of scale.

C consumers may lose out if the merged firm acquires market dominance.

D multi-product firms tend to become inefficient.

1.18 The main function of the money market is to

A enable businesses and government to obtain liquidity.

B encourage saving.

C permit the efficient buying and selling of shares.

D deal in credit instruments of more than one year maturity.

November 2002 5 FECB

1.19 The effects of low real interest rates include all of the following EXCEPT which ONE?

A Credit-based sales will tend to be high.

B Nominal costs of borrowing will always be low.

C Business activity will tend to increase.

D Investment will be encouraged.

1.20 The recession phase of the trade cycle

A is often caused by excessive consumer expenditure.

B is normally characterised by accelerating inflation.

C is most prolonged when the country has high levels of imports.

D is usually caused by falling aggregate monetary demand.

1.21 Supply side policy is designed to

A raise the level of aggregate monetary demand in the economy.

B manage the money supply in the economy.

C improve the ability of the economy to produce goods and services.

D reduce unemployment by limiting the supply of labour.

1.22 All of the following are direct taxes EXCEPT which ONE?

A Corporation tax.

B Value added tax.

C Income tax.

D National insurance (social security tax).

1.23 Two countries, Northland and Southland, both produce two goods, X and Y. Northland has a
comparative advantage in the production of good X if

A less of good X must be given up to produce one unit of Y than in Southland.

B less of good Y must be given up to produce one unit of X than in Southland.

C less labour is required to produce one unit of X than in Southland.

D less labour and capital are required to produce one unit of X than in Southland.

FECB 6 November 2002

1.24 All of the following are examples of international factor mobility EXCEPT which ONE?

A The migration of skilled labour from one country to another.

B A business investing in a new factory in another country.

C The switching of cash from a bank account in one country to an account in another country.

D A company sending managers to work in its subsidiary in another country.

1.25 If a country were to join a free trade area, its business sector would gain because

A it could get tariff-free raw materials from countries inside the free trade area.

B there would be exchange rate stability between the member countries.

C prices of competitors from countries not in the free trade area would rise.

D there would be fewer barriers to establishing subsidiaries in other countries in the free trade area.

1.26 All of the following are features of globalisation EXCEPT which ONE?

A Rising trade ratios for countries.

B Increased international capital flows.

C Improved terms of trade for all countries.

D Reduced barriers to international factor movements.

(Total = 52 Marks)

November 2002 7 FECB

SECTION B – 48 MARKS
ANSWER ALL THREE QUESTIONS

IMPORTANT
MARKS ARE AWARDED FOR CORRECTLY COMPLETING THE SHADED BOXES WITH THE
CORRECT ANSWER WHERE A MARK IS INDICATED IN THE RIGHT-HAND COLUMN.

DO NOT WRITE IN THE MARGINS NOR IN THE COLUMNS FOR USE BY MARKERS.

Question Two

The following diagram refers to the demand and supply for a good.

Price D0 D1 S0

S0
D0 D1

Quantity

Required:
Use BOTH your knowledge of economic theory AND the diagram (where Do not write in these
appropriate) to answer the following: columns below

(a) With reference to the diagram, state whether the following are true
or false as possible explanations for the shift in the demand curve For use For use
from D0 to D1. by the by the
(circle the correct answer in the shaded boxes below) Marks first second
available marker marker
(i) There has been a rise in consumer TRUE FALSE 1
income.
(ii) There has been a fall in the price of TRUE FALSE 1
substitutes.
(iii) A price rise has led to an increase in TRUE FALSE 1
supply.
(iv) Consumers expect prices to rise in the TRUE FALSE 1
future.
(v) The price of complementary goods has TRUE FALSE 1
fallen.
(vi) The good has a very low price elasticity of TRUE FALSE 1
demand.
sub-total:
6

Parts (b) and (c) of Question Two are on page 9

FECB 8 November 2002

Required:
Use BOTH your knowledge of economic theory AND the diagram (where Do not write in these
appropriate) to answer the following: columns below

(b) Complete the following statement with no more than three words
in each gap:
(i) An outward shift in the supply curve would lead to
in price 1

and the change in price will be greatest when the demand for the
good is . 1

(ii) An outward shift in the market supply curve could occur for either
or both of the following two reasons:
(in no more than 15 words for each reason in the shaded areas
below)
Reason 1

2
Reason 2

2
sub-total:
12
(c) Complete, in no more than two words in each gap, the following
statements
(i) In the diagram, the effect of a government subsidy for the
production of this good would be to shift the supply curve to the
causing a

in its price. 2

(ii) The government may wish to subsidise a good or service if there

are external social in either

the production or of the

good or service. 2
sub-total:
4
Total Marks for Question Two = 16

Total for Question Two = 16 Marks

November 2002 9 FECB

Question Three

The following data refer to an economy for the period 1994 to 2000.

Year Exchange rate Interest rate Balance of

payments
current account
Note (1) Note (2) Note (3)
1994 89·2 6·1% - $3·8 billion
1995 85·1 6·5% - $5·9 billion
1996 86·3 6·0% - $1·1 billion
1997 100·6 6·3% + $12·3 billion
1998 104·2 7·0% - $1·0 billion
1999 104·3 7·5% - $15·5 billion
2000 104·6 7·4% - $21·0 billion

Note (1) Effective exchange rate, 1990 = 100.

Note (2) Bank base rate.
Note (3) Balance of payments, current account balance for the year.

Required:
Use BOTH your knowledge of economic theory AND the data above to
answer the following. Do not write in these
columns below
(a)

(i) Explain, in no more than 20 words in the shaded area below, what For use For use
is meant when it is said that a currency has appreciated. by the by the
Marks first second
available marker marker

2
(ii) State in the shaded box below whether this currency appreciated
or depreciated between 1994 and 2000.
1
(iii) State, in no more than 20 words in the shaded area below, what
the data suggest is the reason for the change in the exchange
rate.

(iv) State, in no more than 15 words in the shaded area below, what
the data suggest is the result of the change in the exchange rate.

1
sub-total:
5

FECB 10 November 2002

 Company ZZZ operates in this economy. It imports its raw
(b) materials and exports a high proportion of its output. The company
has a high level of borrowing.
From the data above, and with reference to the period 1996-2000,
For use For use
state, in no more than 15 words in each of the shaded areas by the by the
below, three effects on the company of the changes in the Marks first second
variables shown. available marker marker
Effect (i)

Effect (ii)

Effect (iii)

2
sub-total:
6
(c) State whether the following are TRUE or FALSE.
(circle the correct answer in the shaded boxes below)
(i) The real rate of interest is the difference
between the nominal rate of interest and TRUE FALSE 1
the rate of inflation.
(ii) Higher interest rates reduce the level of
business investment only when that TRUE FALSE 1
investment is financed by borrowing.
(iii) With flexible exchange rate systems, the
trading sector of an economy cannot TRUE FALSE 1
become uncompetitive.
(iv) Under a fixed exchange rate system, the
exchange rate has to be managed by TRUE FALSE 1
government policy.
(v) It is desirable for a country to have a
balance of payments current account
surplus because this shows that it is TRUE FALSE 1
trading at a profit with the rest of the
world.
sub-total:
5
Total Marks for Question Three = 16

Total for Question Three = 16 Marks

November 2002 11 FECB

Question Four

Aggregate monetary demand (AMD) is the total demand for goods and services in an economy over a period
of time. The components of AMD are consumption, investment, government expenditure and net exports.
Any change in AMD is likely to have an impact on some of the important variables in the economy.

Required:
Do not write in these
columns below

(a) In the following table, state whether the change (fall or rise) in Marks For use For use
aggregate monetary demand would, other things being equal, lead available by the by the
to a rise or fall or have no effect on the stated variable. first second
Write either rise or fall or no effect in the each of the shaded marker marker
boxes below

Economic variable A fall in A rise in

AMD AMD
The rate of inflation. 1

The level of structural 1

unemployment.
The level of cyclical unemployment. 1

The deficit on the current account 1

of the balance of payments.
The surplus on the government 1
budget.
sub-total:
5
(b) In no more than two words each, fill in the gaps in the following
statements.
(i) A fall in AMD will have a large effect on company sales if the
demand for the product is . 1

(ii) Governments can raise AMD by

1
the level of taxation.

(iii) The level of AMD will be stable when injections into the circular flow 1
are equal to .

(iv) A fall in the exchange rate for a country’s currency tends to lead to 1
in the level of AMD.

(v) A fall in business investment will cause a larger fall in AMD because 1
of the operation of the .
sub-total:
5

FECB 12 November 2002

Required:
Do not write in these
columns below

(c) Complete each of the following statements, in no more than 15 Marks For use For use
words, in the shaded areas below available by the by the
first second
marker marker
(i) Cost-push inflation can be defined as

2
(ii) The Phillips curve shows

2
(iii) Frictional unemployment can be defined as the unemployment
which occurs

2
sub-total:
6
Total Marks for Question Four = 16

Total for Question Four = 16 Marks

End of Question Paper

November 2002 13 FECB