~~EC2020 ZA d0

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON EC1002 Part I ZA

EC1002Q ZA

BSc degrees and Diplomas for Graduates in Economics, Management, Finance

and the Social Sciences, the Diplomas in Economics and Social Sciences and
Access Route

Introduction to Economics

Friday, 2 May 2014: 10:00 to 11:30

This is Part I (Section A) of the examination, which consists of Multiple Choice

Questions.

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.

Part I is worth 50% of the marks for the entire examination.

PLEASE TURN OVER

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SECTION A

1. An allocation which is on the Production Possibility Frontier necessarily means:

(a) That it is both productively and allocatively efficient.

(b) That all means of production are necessarily fully employed.
(c) That it is allocatively efficient.
(d) That it is productively efficient.

2. A technological development specific to the production of x will have the following effect on the
Production Possibility Frontier:

(a) (b)
y y

x x

(c) (d)
y

x x

3. In a world of two goods (x and y) the price elasticity of the demand for x is greater than unity.

(a) The two goods are necessarily complements.

(b) The goods are necessarily gross substitutes.
(c) The goods will be gross substitutes when the price of x falls but complements when the
price of x increases.
(d) We cannot infer from the data anything about the relationship between the two goods.

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4. When the cross price elasticity between x and y is given by: !,!! = 2 then:

(a) An increase in the price of y by 10% will decrease the quantity demanded of x by 20% and
the two goods are complements.
(b) An increase in the price of y by 10% will increase the quantity demanded of x by 10% and
the two goods are complements.
(c) An increase in the price of y by 20% will decrease the quantity demanded of x by 10% and
the two goods are gross substitutes.
(d) An increase in the price of y by 10% will increase the quantity demanded of x by 20% and
the two goods are gross substitutes.

5. In a world of two goods where one of the goods is inferior, an increase in nominal income will
lead to:

(a) An increase in the consumption of both goods.

(b) A decrease in the consumption of both goods.
(c) A decrease in the consumption of the inferior good and a necessary increase in the
consumption of the other good.
(d) A decrease in the consumption of the inferior good and an increase or decrease in the
consumption of the second good depending on whether it is also inferior or normal.

6. A production function using labour and capital exhibits constant returns to scale. Therefore:

(a) The marginal product of labour in the short run and the long run marginal cost will be
increasing with output.
(b) The marginal product of labour in the short run will be diminishing with output but the long
run marginal cost will be constant.
(c) The marginal product of labour in the short run will be constant but the long run marginal
cost will be rising with output.
(d) The marginal product of labour in the short run will be diminishing but the long run
marginal cost will be rising with output.

7. When a unit tax is levied on a competitive industry then in the short run:

(a) The burden of tax on consumers will be greater when demands price elasticity is higher.
(b) The burden of tax on both consumers and producers will be unaffected by price elasticity
of demand.
(c) The burden of tax on producers will be greater when demands price elasticity is lower.
(d) The burden of tax on consumers will be greater when demands price elasticity is lower.

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8. An increase in the cost of capital will have the following effect on a perfectly competitive market:

(a) Short run average and marginal cost will increase which would lead to a fall in output and
an increase in price. In the long run, firms will leave and price will rise further.
(b) Short run average and marginal cost will not change but there will be a fall in output and
an increase in price. In the long run, firms will leave and price will rise further.
(c) Short run average will increase but there will be no change in output or price. In the long
run, firms will leave and price will rise.
(d) Short run marginal cost will increase which would lead to a fall in output and an increase in
price. In the long run, firms will leave and price will rise further.

9. A monopolist faces the following demand function: = 100 2

Costs are given by: = 20

(a) The deadweight loss created by the monopolist will be equal to 400.
(b) The deadweight loss created by the monopolist will be equal to 200.
(c) The deadweight loss created by the monopolist will be equal to 150.
(d) The deadweight loss created by the monopolist will be equal to 800.

10. When a monopolist produces at a point where long-run average cost is above the long-run
marginal cost:

(a) It is necessarily making losses and must leave the market immediately.
(b) It could be making profits and should therefore not change its behaviour.
(c) It is necessarily making profits and should therefore stay in the market.
(d) It could be making losses but should nevertheless stay in the market.

11. In monopolistic competition, long run equilibrium is achieved when:

(a) Price equals average costs, profits are normal and marginal cost equals the price.
(b) Price equals average costs, profits are above normal but marginal costs are below
average cost.
(c) Price equals average costs, profits are above normal and marginal cost equals the price.
(d) Price equals average costs, profits are normal but marginal costs are below the average
cost.

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12. In a market where two firms interact strategically, the total demand they face is given by:
= 400 4
The cost of production is given by: = 40

(a) Each firm will produce 45.

(b) Each firm will produce 25.
(c) Each firm will produce 30.
(d) Each firm will produce 15.

13. An allocation is Pareto efficient when:

(a) Offer curves intersect.

(b) Indifference curves intersect.
(c) Offer curves are tangent to one another.
(d) Indifference curves are tangent to the offer curve.

14. If the production of x generates a negative externality for the production of y, a competitive
equilibrium will be such that:

(a) The price of x measured in units of y reflects the social cost of x but the outcome is
productively and allocatively inefficient.
(b) The price of x measured in units of y is smaller than the social cost of x and the outcome
is productively efficient and allocatively inefficient.
(c) The price of x measured in units of y is greater than the social cost of x and the outcome is
productively and allocatively inefficient.
(d) The price of x measured in units of y reflects the social cost of x and the outcome is
productively and allocatively efficient.

15. Optimal provision of a public good requires that the social cost of the public good will be:

(a) Greater than the sum of individuals marginal utilities.

(b) Equal to the sum of individuals marginal utilities.
(c) Equal to the marginal utility which should be the same for every individual.
(d) Smaller than each individuals willingness to pay.

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16. In an open economy the marginal propensity to consume is 0.8 and the proportional tax rate is
0.2. Government spending, demand for investment and for exports are independent of national
income. The marginal propensity to import is 0.14. The multiplier will be:

(a) 5
(b) 1
(c) 2
(d) 4

17. You have the following information (in billions) about an economy: private savings = 50,
investment = 30, imports = 40, exports = 30, income tax = 40, corporate tax =30.
Which of the following is true:

(a) Government spending = 100

(b) Total savings = 30
(c) Government spending = 50
(d) Total savings = 40

18. In a closed economy where government spending is independent of income, undistributed

profits constitute 20% of income and are used for investment. There is a corporate tax which is
levied only on undistributed income at the rate of 40%. The marginal propensity to invest will be:

(a) 1
(b) 0.3
(c) 0
(d) 0.12

19. The price of a console bond with a face value of 50 when the interest rate is 5% will be:

(a) 500
(b) 1,000
(c) 2,000
(d) 1,500

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20. A simultaneous increase in the interest rate and national income will affect the demand for liquid
assets in the following way:

(a) Definitely lead to an increase in quantity demanded of liquid assets.

(b) Definitely lead to a fall in quantity demanded of liquid assets.
(c) Could leave quantity demanded of liquid assets unchanged.
(d) None of the above.

21. The public loses trusts in banks and increases the amount of assets held in cash by 40 million.
Assuming that the reserve ratio is 20% and that there are no other assets in the economy:

(a) The quantity of money will decrease by 160 million and there will be no change in public
wealth.
(b) The quantity of money will decrease by 160 million and so will public wealth.
(c) The quantity of money will increase by 40 million and so will public wealth.
(d) The quantity of money will increase by 40 million and there will be no change in public
wealth.

22. The money base is equal to 20 billion and the cash held by the public equals 5 billion.
Therefore, with a reserve ratio of 10% the amount in deposits will be equal to:

(a) 200 billion.

(b) 125 billion.
(c) 100 billion.
(d) 150 billion.

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23. An increase in international prices in an open economy without capital mobility and with a fixed
exchange rate regime would lead to an equilibrium at which point in the diagram below (the
economy is initially at (! , ! ) which is also where option (b), suggesting no change, will be):

E0 p *0
NX ( )=0
p0
r LM ( M 0 , P0 )
E0 p *1
NX ( )=0
p0

r1 a LM ( M 1 , P0 )
r0 b c
r2 d

E0 p *1
IS (G , )
p0

E0 p *0
IS (G, )
p0

Y
Y0

24. In an economy with a fixed exchange rate policy, when both capital and current accounts are in
surplus:

(a) The balance of payments will be balanced through a decrease in reserves and there will
be an increase in the supply of liquid assets.
(b) The balance of payments will be balanced through an increase in reserves and there will
be an increase in the supply of liquid assets.
(c) The balance of payments will be balanced through an increase in reserves and there will
be a decrease in the supply of liquid assets.
(d) The balance of payments will be balanced through a decrease in reserves and there will
be a decrease in the supply of liquid assets.

25. A monetary expansion in an open economy with perfect capital mobility and a flexible exchange
rate will:

(a) Lead to an increase in the long run output without a long run change to the interest rate.
(b) Lead to a fall of output in the long run without a long run change to the interest rate.
(c) Lead to no change in output or the interest rate in the long run.
(d) Lead to no change in output but a long run increase in the interest rate.

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26. In a closed economy with flexible prices and wages, a fall in demand for investment will:

(a) Reduce both nominal and real wages.

(b) Reduce nominal wages but increase real wages.
(c) Reduce nominal wages but will not affect real wages.
(d) Will have no effect on either nominal or real wages.

27. The IS schedule for an open economy relative to that of a closed economy will be:

(a) Flatter.
(b) Steeper.
(c) The same.
(d) Cannot tell.

28. A successful drive to increase competition in an economy will cause the short-run augmented
Phillips curve:

(a) To shift upwards and therefore, the short run aggregate supply curve will shift downwards.
(b) To shift upwards and therefore, the short run aggregate supply curve will shift upwards.
(c) To shift downwards and therefore, the short run aggregate supply curve will shift upwards.
(d) To shift downwards and therefore, the short run aggregate supply curve will shift
downwards.

29. In an open economy without capital mobility, with a fixed exchange rate policy, government
spending which is independent of income and a lump sum tax system, a decrease in the
marginal propensity to import will lead to:

(a) An increase in output and the interest rate.

(b) A decrease in output and a decrease in the interest rate.
(c) An increase in output and a decrease in the interest rate.
(d) A decrease in output and an increase in the interest rate.

30. An increase in the desire to save in an open economy with perfect capital mobility and a flexible
exchange rate policy will, in the long run:

(a) Reduce equilibrium levels of output and the interest rate.

(b) Have no effect on output or the interest rate.
(c) Increase equilibrium level of output without changing the equilibrium level of the interest
rate.
(d) Reduce equilibrium level of output without changing the equilibrium level of the interest
rate.

END OF PART I

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