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Introduction to Economics
You have 90 minutes and you should attempt to answer ALL the questions.
Each question has FOUR possible answers (a-d). There is only ONE correct answer to
each of the questions.
Please mark the correct answer in the special multiple choice answer sheet
provided using an HB pencil.
1. An economy produces only agricultural products (x) and manufactured goods (y). A quarter of
the land in the country is arid and not suitable for agricultural products. Therefore, if half of the
arid land is not used at all:
(a) The economy could be productively efficient when the opportunity cost of x (agricultural
products) is infinite;
(b) The economy could be productively efficient when the opportunity cost of y (manufactured
goods) is zero;
(c) The economy could be productively inefficient with infinite opportunity cost for the
production of x (agricultural products);
(d) The economy could be productively inefficient with infinite opportunity cost for the
production of y (manufactured goods).
600
A
400
B
250
If the economy is producing efficiently 500 units of y and the international price of x is 1.2 units
of y per x. The economy will:
Note: Specialisation is the production of goods not for the purpose of their direct consumption.
6. When long-run average costs are rising, short-run and long-run marginal costs:
(a) Intersect above average costs;
(b) Intersect below average costs;
(c) Intersect at the level of average costs;
(d) Never intersect.
7. Short-run equilibrium in a perfectly competitive market (where the number of firms is not as it
would be in the long run) is consistent with:
(a) Price equals average cost, profits are normal and the outcome is efficient;
(b) Price equals marginal cost which is greater than average cost, profits are above normal
and the outcome is inefficient;
(c) Price equals marginal cost which is greater than average cost, profits are normal and the
outcome is efficient;
(d) Price equals marginal cost which is greater than average cost, profits are above normal
and the outcome is efficient.
8. In a small country, the supply of land is perfectly inelastic. A tax on the land will:
(a) Be borne by consumers alone only if price elasticity of demand is less than unity;
(b) Be borne by owners of land alone regardless of price elasticity of demand;
(c) Be shared by consumers and owners of land equally if price elasticity of demand is unity;
(d) Be shared by consumers and owners of land regardless of price elasticity of demand.
11. A firm in monopolistic competition faces, in the long run, a demand with price elasticity of
-2 (, = 2) and a cost function of: () = 400 + 4 . Long-run equilibrium is where:
(a) = 8; = 200 and profits are above normal;
(b) = 4; = 100 and profits are normal;
(c) = 8; = 100 and profits are normal;
(d) = 8; = 100 and profits are above normal.
12. In a market where two firms interact strategically, the total demand they face is given by:
() = 1,000 3 The cost of production is given by: () = 100
(a) Deadweight loss will be 20,000;
(b) Deadweight loss will be 10,000;
(c) Deadweight loss will be 5,000;
(d) Deadweight loss will be 15,000.
13. In a world of two goods (x and y) technological improvements in the production of x will lead
to:
(a) A fall in the relative price of x (a decrease in ) but not necessarily an expansion of the
x industry;
(b) A fall in the relative price of x with a necessary expansion of the x industry;
(c) An increase in the relative price of x with a necessary expansion of the x industry;
(d) An increase in the relative price of x but not necessarily an expansion in the x industry.
16. An unplanned increase in stocks will occur at the following level of national income in the
diagram below:
AE
AE ( r0 )
y
y1 y0 y2
18. The following information (in billions) about an economy is given: Net taxation = 600;
Government spending = 400; Private consumption = 800; Imports = 200 and
private savings = 300:
(a) National income will be 1,500 and if investment equals 300, exports must be equal to 200;
(b) National income will be 1,700 and if investment equals 300, exports must be equal to 400;
(c) National income will be 2,000 and if investment equals 300, exports must be equal to 300;
(d) National income will be 1,800 and if investment equals 300, exports must be equal to 400.
19. In an economy, the marginal propensity to consume is 0.8. The government balances the
budget by adjusting the proportional tax level to the required government spending. An increase
by 10 million in government required spending will lead to an increase in equilibrium level of
national income by:
(a) 10
(b) 50
(c) 20
(d) 30
20. Eliminating all charges for the use of cash withdrawal machines will:
(a) Increase demand for liquid assets and reduce the price of bonds;
(b) Reduce demand for liquid assets and increase the price of bonds;
(c) Reduce the supply of liquid assets and reduce the price of bonds;
(d) Increase the supply of liquid assets and increase the price of bonds.
LM ( M 0 , P2 ) LM ( M 0 , P1 )
r
C
r2 LM ( M 0 , P0 )
r1 B
r0 A IS (' )
IS ()
Y
p SAS ( w1 )
SAS ( w0 )
C
p2
p1 B
p0 A
AD (' )
AD ()
Y
Y0 Y1
Which of the following could have triggered on its own the changes depicted in this diagram (the
move from A to C)?
(a) An increase in the autonomous element of government spending;
(b) An increase in the supply of liquid assets;
(c) A reduction in the rate of a proportional tax;
(d) A fall in the marginal propensity to consume.
24. In an open economy with no capital mobility and a fixed exchange rate, an increase in the
marginal propensity to import will:
(a) Reduce equilibrium level of national income and reduce the interest rate;
(b) Increase equilibrium level of national income and have no effect on the interest rate;
(c) Reduce equilibrium level of national income and have no effect on the interest rate;
(d) Reduce equilibrium level of national income and increase the interest rate.
26. An increase in the rate of a proportional tax will affect the IS schedule (relative to the current
position) in the following way:
(a) Shift to the left and become flatter;
(b) Shift to the left and become steeper;
(c) Shift to the right and become steeper;
(d) Shift to the right and become flatter.
27. There is a fixed exchange rate regime. Assuming that all accounts are balanced in the balance
of payments, a sale of a local enterprise to a foreign buyer will create:
(a) A surplus in the capital account which will lead to an increase in reserves;
(b) A surplus in the capital account which will lead to a fall in reserves;
(c) A deficit in the capital account which will lead to a surplus in the current account;
(d) A deficit in the capital account which will lead to a fall in reserves.
28. When there are expectations that there will be inflation and expectations are rational, the long-
run equilibrium will be:
(a) Where the actual rate of inflation is lower than the expected rate;
(b) Where the actual rate of inflation is higher than the expected rate;
(c) When the actual rate of inflation is the same as the expected rate;
(d) There cannot be equilibrium when there are expectations of inflation.
r
LM ()
LM (' )
A
r0 r0 * BOP
B C
r1 * BOP
IS ()
IS (' )
Y
Y1 Y0
If the economy has a flexible exchange rate, the economy will end up at point:
(a) A
(b) B
(c) C
(d) D
30. An increase in international prices in an open economy with perfect capital mobility and a
flexible exchange rate will:
(a) Lead to an increase in long-run output without a long run change to the interest rate;
(b) Lead to a fall in long-run output without a long run change to the interest rate;
(c) Lead to no change in output or interest rate in the long run;
(d) Lead to no change in long-run output but a long run increase in interest rate.
END OF PART I