CIMA Economics For Business Fundamentals Past Papers

Foundation Level
Economics for Business
3a
INSTRUCTIONS TO CANDIDATES Read this page before you look at the questions
FECB
21 May 2001 Day 1 morning
You are allowed TWO hours to answer this question paper. Answer the ONE question in section A (this has 26 sub-questions). Answer THREE questions ONLY from section B. Write your examination number in the boxes provided on the front of the answer book. Write FECB on the line marked "Subject" on the front of the answer book. Write your examination number on the special answer sheet for section A which is on page 3 of this question paper booklet. Detach the sheet from the booklet and insert it into your answer book before you hand this in. Do NOT write your name or your student registration number anywhere on your answer book. Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered.
The Chartered Institute of Management Accountants 2001
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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.
Question One 1.1 A B C D Governments could raise labour productivity by all of the following EXCEPT which ONE? Providing tax relief for Research and Development expenditure by companies. Increasing expenditure on education and training. Reducing discrimination in employment practices. Reducing social security payments.
1.2 A B C D
Diseconomies of scale occur in a business when minimum efficient scale is reached. short-run variable costs begin to rise. x-inefficiency exists. long-run average costs begin to rise.
1.3 A B C D
If the demand for a good increases, which ONE of the following will occur? Price rises and the quantity sold falls. Price falls and the quantity sold rises. Price and quantity sold both rise. Price and quantity sold both fall.
1.4 A B C D
The economic problem of WHAT to produce is concerned with which goods and services and how much of each are to be produced. which goods will meet individual and social needs. which goods will maximise the rate of growth of welfare over time. which combination of resources should be used in production.
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May 2001
1.5 A B C D
Which ONE of the following will produce the largest fluctuations in a market price? Large shifts in supply with price elastic demand. Large shifts in supply with price inelastic demand. Large shifts in supply with perfectly price elastic demand. Small shifts in supply with price inelastic demand.
1.6 A B C D
Which ONE of the following is NOT a potential source of market failure? External costs. External benefits. An unequal income distribution. The existence of monopolies.
1.7 A B C D
The kinked demand curve model of oligopoly is designed to explain price leadership. price rigidity. collusion between producers. price competition.
1.8 A B C D
Under monopolistic competition, excess profits are eliminated in the long run because of the lack of barriers to entry. the effects of product differentiation. the existence of excess capacity. the downward sloping demand curve for the product.
1.9
The economic welfare case for governments increasing taxes on petrol to raise its real price is that oil is a scarce resource. it would reduce the imports of oil. there is a large demand for petrol. petrol consumption involves external social costs.
A B C D
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1.10 All of the following would lead to an upward shift in a firms demand curve for labour EXCEPT which ONE? A B C D An increase in the demand for the firms product. An increase in the productivity of labour. A fall in the price of labour. A rise in the price of substitute factors of production.
1.11 Gross national product will be higher than gross domestic product if A B C D exports of goods and services exceed imports of goods and services. there is a net inflow of factor payments on the current account of the balance of payments. there is a net inflow on the capital account of the balance of payments. government taxation exceeds government expenditure.
1.12 In the circular flow model of the economy, the level of national income will always reach an equilibrium because A B C D injections and withdrawals are always equal. withdrawals are a function of the level of income. governments will change taxes and expenditure to ensure equilibrium. expenditure equals income.
1.13 All of the following are disadvantages of inflation EXCEPT which ONE? A B C D It redistributes wealth from debtors to creditors. It reduces international competitiveness. Market price signals are distorted. Fixed income earners experience a fall in real income.
1.14 Cyclical unemployment refers to unemployment A B C D which occurs because of the seasonal nature of some industries. resulting from the long-term decline of an industry. which occurs at particular times of the year. which occurs during recessions.
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1.15 Which ONE of the following does NOT form part of the equity capital market? A B C D Life assurance companies. Pension funds. Retail banks. Venture capitalists.
1.16 The crowding out effect occurs when a A B C D rise in interest rates reduces private investment. rise in interest rates reduces the demand for money. fall in interest rates discourages saving. rise in interest rates raises mortgage rates.
1.17 An expansionary fiscal policy would be most likely to reduce unemployment if the country had A B C D a high marginal propensity to import. a low marginal propensity to save. a high marginal tax rate. a low marginal propensity to consume.
1.18 Monetarists believe that inflation will follow from A B C D excessive demand for money in the economy. trades unions demanding higher wage rates. expansion of the money supply. firms and individuals spending their excess money balances.
1.19 The effect on a business of a contractionary fiscal policy will be greatest when the business A B C D has a high gearing ratio. produces a good with a high income elasticity of demand. produces non-durable goods. exports a high proportion of its output.
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1.20 The real rate of interest is defined as the A B C D rate of interest banks actually charge their customers. annualised percentage rate of interest. yield on undated fixed interest government securities. difference between the money rate of interest and the inflation rate.
1.21 If a country can produce all goods more efficiently than its trading partner, it should export A B C D no goods. only those goods in which it has an absolute advantage. only those goods in which its efficiency advantage is greatest. all goods.
1.22 All of the following are reasons for trans-national companies locating production of a good in more than one country except one. Which ONE is the EXCEPTION? A B C D The existence of trade barriers. Significant transport costs. Economies of scale in production. Differences in demand conditions between countries.
1.23 An increase in the international mobility of factors of production leads to A B C D an increase in international trade. increased unemployment in low wage economies. increasing differences in wage rates between countries. decreasing differences in factor prices between countries.
1.24 All of the following are characteristics of the process of globalisation EXCEPT which ONE? A B C D Increased international specialisation. Greater integration of production in manufacturing. Higher levels of international trade. Movement of manufacturing industries to low labour cost locations.
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May 2001
1.25 All of the following are characteristics of a common market EXCEPT which ONE? A B C D Free trade in goods and services among member states. Common levels of direct taxation. Free movement of factors of production between member states. A common external tariff.
1.26 Which ONE of the following would be likely to result in a rise in the value of UK sterling against the Euro? A B C D A rise in interest rates in the UK. The UK central bank buying Euros in exchange for sterling. A rise in interest rates in the Euro zone. Increased capital flows from the UK to the Euro zone.
(Total = 52 Marks)
May 2001
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SECTION B 48 MARKS ANSWER THREE QUESTIONS ONLY

Question Two The following diagram shows production possibility frontiers (PPF) for an economy:
Investment goods
A B C
PPF1
PPF2 Consumer goods
Required:
Use your knowledge of economic theory and the diagram above to answer the following.
(a) Explain what is meant by the term opportunity cost. (2 marks)

State how opportunity cost can be demonstrated from production possibility frontier 1 (PPF1).
(2 marks) (b) Describe the features of the diagram that illustrate (i) (ii)
the existence of unemployment in the economy;
(2 marks)
the process of economic growth.
(2 marks) (c) Explain, with examples, the sources of economic growth for an economy. (8 marks) (Total = 16 marks)
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May 2001
Question Three The following data refer to the cost and revenue schedules of a business. Quantity sold 0 1 2 3 4 5 6 7 Price 16 14 12 10 8 6 4 Total cost 12 20 25 30 34 45 66 110
Required:
Use your knowledge of economic theory and the data above to answer the following.
(a) For each level of sales, calculate (i) (ii)

the marginal revenue;
(2 marks)
the marginal cost.
(2 marks) (b) Calculate the price elasticity of demand for a price rise from 10 to 12. (2 marks) (c) Calculate the profit maximising level of sales and the total profits at this point. (2 marks) (d) Identify the shape of the average cost curve for this business, and explain why it should
have this shape.
(8 marks) (Total = 16 marks)
M2001
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Question Four The following is based on an article from a business journal and refers to the case brought by the US Justice Department against the Microsoft Corporation. Microsoft established first MS-DOS and later Windows, as the dominant operating system for the personal computer. Once the firm had achieved a position of strength, would-be competitors faced insuperable difficulties. In particular, since software developers would make new programs and applications for Microsoft systems and not others, new firms found it difficult to secure a share of the market. This applications barrier to entry gave Microsoft its enduring monopoly power. This was reflected in the high level of profits the company enjoyed. Microsoft attempted to defend itself from the accusation of anti-competitive behaviour. It argued that it effectively competes with itself by continually releasing new and improved versions of Windows, thus making old versions more difficult to sell. However, this might mean that personal computer producers had to install the new versions of Windows since most new applications were designed for them and not other systems. Also, Microsoft argued that there was always potential competition via rapid technological change. Thus it was forced to limit its prices because of the threat of the emergence of new competition should it charge the monopoly profit-maximising price. Nonetheless, the court found against Microsoft, and it was held to have engaged in anticompetitive practices. US law has no quarrel with "natural monopolies" but the judgement found that in this case Microsoft's dominance of the market reflected its business practices and not the nature of the industry.
Required:
Use your knowledge of economic theory and the passage above to answer the following.
(a) Using examples, explain what is meant by barrier to entry. (2 marks) (b) Explain the two arguments used by Microsoft in its defence. (4 marks) (c) Explain the meaning of natural monopoly and give two examples to illustrate your
explanation.
(4 marks) (d) Discuss two benefits for consumers that might result from Microsoft's near monopoly in the
computer operating systems market.
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May 2001
Question Five The following diagram shows the relationship between income and expenditure for an economy.
Expenditure E EX F A C
B 45 D YF Income
Required:
Use your knowledge of economic theory and the diagram to answer the following.
(a) With reference to the diagram, state what the following are: the components of the expenditure curve; (i) (2 marks) (ii) (iii)
the equilibrium level of national income;
(1 mark)
the deflationary gap.
(1 mark) (b) State what would happen to the components of expenditure AND the impact on the
equilibrium level of national income if there was:
(i) (ii) (iii) (iv)
an increase in the marginal propensity to save;
(1 mark)
a move towards surplus on the current account of the balance of payments;
(1 mark)
a decrease in taxation;
(1 mark)
an increase in stockholding by businesses.
(1 mark) (c) Explain how the government might use interest rate policy to raise the equilibrium level of
national income.
(4 marks) (d) Explain the impact of a change in interest rates on the business sector. (4 marks) (Total = 16 marks)
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11
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Question Six The following data refer to a country's balance of payments accounts, measured in billions of dollars. Credits $ billion 164 60 105 15 29 31 37 44 16 Debits $ billion 184 48 95 22 40
Trade in goods Trade in services Investment income Transfers Direct investment abroad Inward direct investment Portfolio investment (assets) Portfolio investment (liabilities) Other investments
Required:
Use your knowledge of economic theory and the data above to answer the following.
(a) Distinguish between the current account and the capital account (transactions in assets and
liabilities) of the balance of payments.
(4 marks) (b) Calculate the country's (i) (ii) (iii)

balance of trade;
(1 mark)
balance on current account;
(1 mark)
adjusting item needed to balance the accounts.
(1 mark) (c) Explain how an appreciation (rise) in the country's exchange rate will affect the current
account balance.
(4 marks) (d) Explain the effects of an appreciation in a country's currency on a typical business in that
country.
End of paper
FECB
12
May 2001
Foundation Level
3a
INSTRUCTIONS TO CANDIDATES Read this page before you look at the questions
FECB
19 November 2001 Day 1 morning
You are allowed TWO hours to answer this question paper. Answer the ONE question in section A (this has 26 sub-questions and is on pages 2 7). Answer THREE questions ONLY from section B (these questions are on pages 8 12). Write your examination number in the boxes provided on the front of the answer book. Write FECB on the line marked "Subject" on the front of the answer book. Write your examination number on the special answer sheet for section A. Detach the sheet from the booklet and insert it into your answer book before you hand this in. Do NOT write your name or your student registration number anywhere on your answer book. Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered.

Question One 1.1 Which ONE of the following would lead directly to an outward shift in a countrys production possibility frontier? A rise in the population of working age. A fall in unemployment. An increase in outward migration. A rise in the school leaving age.
A B C D
1.2
The cost of one good or service measured in terms of what must be sacrificed to obtain it is called real cost. potential cost. opportunity cost. social cost.
A B C D
1.3
All of the following are supply side policies which would promote economic growth EXCEPT which ONE? Increased expenditure on education and training. A reduction in marginal rates of taxation. Deregulation of industry and finance. Increased social welfare expenditure.
A B C D
1.4 A B C D
All of the following are essential features of a market economy EXCEPT which ONE? Private ownership of productive resources. Allocation of resources by the price mechanism. Absence of entry and exit barriers to and from industries. Prices determined by market forces.
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November 2001
1.5 A B C D
The profit-maximising output will always be where average cost = marginal revenue. marginal cost = marginal revenue. average cost = average revenue. marginal cost = average revenue.
1.6
If a business currently sells 10,000 units of its product each month at $10 each unit and the demand for its product has a price elasticity of -25, a rise in the price of the product to $11 will raise total revenue by $7,250. reduce total revenue by $17,500. reduce total revenue by $25,000. raise total revenue by $37,500.
A B C D
1.7
In the kinked demand curve model of oligopoly, the kink in the firms demand curve is due to the firms belief that competitors will set a price at the kink of the demand curve. match all price increases and price reductions. match any price increases, but not any price reductions. match any price reductions, but not any price increases.
A B C D
1.8
Which ONE of the following is a natural barrier to the entry of new firms into an industry? Large initial capital costs. The issuing of patents. A government awarded franchise. The licensing of professions.
A B C D
1.9 A B C D
A good which is characterised by both rivalry and excludability is called a public good. a private good. a government good. an external good.
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1.10 A B C D
The burden of an indirect tax on a good will fall more heavily on the producer when demand for the good is price elastic. demand for the good is price inelastic. demand for the good has unit elasticity. supply of the good is price elastic.
1.11
In practice, a monopoly may have its market power limited by all of the following EXCEPT which ONE? Countervailing power from its customers. The market may be contestable. There may be close substitutes for the good. The firms long-run average cost curve may be falling.
A B C D
1.12
All of the following are examples of where externalities are likely to occur EXCEPT which ONE? A business providing training schemes for its employees. Government expenditure on vaccination programmes for infectious diseases. Attending a concert given by a government-funded orchestra. Private motorists driving cars in city centres.
A B C D
1.13
Whenever government intervention prevents prices from reaching their equilibrium level, the result will always include ALL of the following EXCEPT which ONE? Shortages or surpluses. Demand and supply not equal. Reduced profits for producers. Resources not allocated by price.
A B C D
1.14 A B C D
Which ONE of the following would cause the value of the multiplier to fall? A fall in the level of government expenditure. A rise in the marginal propensity to consume. A fall in business investment. A rise in the marginal propensity to save.
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November 2001
1.15 A B C D
The linking of net savers with net borrowers is known as the savings function. financial intermediation. financial regulation. a store of value.
1.16
The recession phase of the trade cycle will normally be accompanied by all of the following EXCEPT which ONE? A rise in the rate of inflation. A fall in the level of national output. An improvement in the trade balance. A rise in the level of unemployment.
A B C D
1.17
According to the new classical school, in order to manage the economy, governments should use active fiscal and monetary policy. adopt a laissez faire approach and leave everything to market forces. announce monetary rules to control inflation, and liberalise product and factor markets. use only monetary policy to increase output and employment.
A B C D
1.18
All of the following will normally lead to a fall in the level of economic activity in an economy EXCEPT which ONE? A rise in cyclical unemployment. A fall in business investment. A decrease in government expenditure. A rise in interest rates.
A B C D
1.19 A B C D
International trade is best explained by the fact that all countries have an absolute advantage in the production of something. all countries have specialised in the production of certain goods and services. no country has an absolute advantage in the production of all goods and services. all countries have a comparative advantage in the production of something.
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1.20
All of the following will encourage the process of the globalisation of production EXCEPT which ONE? Reductions in international transport costs. Higher levels of tariffs. Reduced barriers to international capital movements. Increased similarity in demand patterns between countries.
A B C D
1.21 A B C D
Intra-industry trade occurs when a country exports and imports different products. exports and imports the same products. imports materials to be used by its domestic industry. exports materials for use in industries in other countries.
1.22 A B C D
Which ONE of the following shows the lowest degree of international mobility? Unskilled labour. Financial capital. Technical knowledge. Management.
1.23
A deficit on a countrys balance of payments current account can be financed by a surplus of exports over imports. of invisible exports over invisible imports. on the capital account. of taxes over expenditure.
A B C D
1.24
A fall in the exchange rate for a countrys currency will improve the balance of payments current account if the price elasticity of demand for imports is greater than for exports. the price elasticity of demand for exports is greater than for imports. the sum of the price elasticities for imports and exports is less than one. the sum of the price elasticities for imports and exports is greater than one.
A B C D
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November 2001
1.25
All of the following are benefits which all countries will gain from the adoption of a single currency such as the Euro, EXCEPT which ONE? Reduced transactions costs. Increased price transparency. Lower interest rates. Reduced exchange rate uncertainty.
A B C D
1.26
Compared to a fixed exchange rate system, an economy will benefit from a flexible exchange rate system because it enables businesses to vary their export prices. the government will not have to deflate the economy when balance of payments deficits occur. it reduces the cost of acquiring foreign exchange. it ensures that businesses never become uncompetitive in international markets.
A B C D
(Total = 52 marks)
November 2001
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SECTION B 48 MARKS ANSWER THREE QUESTIONS ONLY

Question Two The following is based on a journal article. The price of oil has increased dramatically. A barrel sold for $11 in December 1998, but the price in March 2000 reached $29. As a consequence of this price rise, some commentators are worrying that the US economy may be facing an "oil price shock" similar to those in the 1970s and 1980s. Following these earlier shocks, the US economy saw its general price level rise while national output fell a combination known as "stagflation". Is the US economy facing a similar threat? A closer look at the data suggests not. The darker line on the chart shows the price of oil deflated by the consumer price index the real price of oil. In inflation-adjusted terms, today's oil prices are roughly the same as they were in the second half of the 1980s. Also, the share of oil in GDP has fallen sharply since the 1970s (shown by the lighter line) and so changes in oil prices have less effect on the economy. The decreasing share of oil in the economy reflects both changes in economic structure and increased energy efficiency.
Required:
Use both your knowledge of economic theory and the data above to answer the following.
(a) With respect to the price of oil,

(i) (ii)
explain the meaning of the real price of oil; describe the changes in the real price of oil since 1980.
Dollars per Barrel
(2 marks) (2 marks)
(b) Using a simple aggregate demand (AD) and aggregate supply (AS) model, explain
(i) (ii)
what is meant by the term stagflation; how an oil price shock could cause stagflation.
(2 marks) (4 marks)
(c) Discuss TWO reasons why oil has become less important in the US and developed
economies.

FECB 8 November 2001
Percentage of GDP
Question Three The following is based on a newspaper article. British cod the staple of fish and chips is on the verge of becoming an endangered species, according to the Worldwide Fund for Nature (WWF), the conservation group. It stressed that the crisis in the fishing industry was due to poor management and to overfishing. The total weight of cod caught in the North Sea had halved since the 1960s. Similar falls in catches had occurred for other types of fish. The WWF proposes the establishment of fishing-free zones to protect areas where young fish grow and develop. The WWF said that such a strategy would lead to increased fish stocks and a larger fishing catch for fishermen within five years. However, the problem may become less urgent as consumer demand for this type of fish may decline in the long run. Some observers believe that for many consumers fish and chips may be an inferior good and, in any case, faces a growing number of alternatives.
Required:
Use both your knowledge of economic theory and the information above to answer the following.
(a) Using a supply and demand diagram, explain:

(i) (ii)
the impact of falling stocks of fish on the prices and sales of fish;
(2 marks)
the possible long-term benefits of the WWF conservation plan.
(2 marks) (b) Explain the role of price elasticity of demand and supply in determining the extent to which
fish prices would rise as the supply of fish fell.
(6 marks) (c) Discuss THREE possible reasons why the demand for fish may decline over the long run. (6 marks) (Total = 16 marks)
November 2001
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Question Four The minimum efficient scale (MES) refers to that level of output for a business at which most economies of scale have been gained and the long-run average cost curve is becoming horizontal. The following data refers to the MES of factories for a variety of industries in the UK and the USA, expressed as a percentage of the domestic market for the product. It also shows how much average costs (AC) would rise if factory size was only one third of the MES. MES as a % of US market Cement Steel Fibres Refrigerators Oil refining Cigarettes Shoes 17 26 02 141 19 65 02 MES as a % of UK market 61 154 18 833 116 303 06 % increase in AC at 1 3 MES 260 110 76 65 48 22 15
Required:
(a) Using the above table:

(i)
identify one industry that exhibits strong economies of scale and one industry that shows weak economies of scale, explaining your choice in each case;
(4 marks)
(ii) explain why the MES in each industry is at a lower percentage of the US market than
of the UK market.
(2 marks) (b) Explain the differences between:

(i)
internal and external economies of scale;
(3 marks)
(ii) economies arising from the size of the business and economies of scale arising from
the size of the factory.
(3 marks) (c) Using examples from the table, discuss how you would expect the number and size of firms
in those industries to vary.
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10
November 2001
Question Five The following diagram is known as the economic diamond and is used to illustrate how well an economy is performing in terms of the major objectives of economic policy. 0 2 4 6 8 4 2 0 -2 -4 2 4 6 8 10
Economic growth, % Inflation, %
10
Current account, % of GDP
Unemployment, %
Required:
Use both your knowledge of economic theory and the diagram above to answer the following.
Note: Candidates are not required to draw further diagrams.
(a) Explain how the economic diamond for a country would change if it improved its overall
economic performance.
(2 marks) (b) Describe how, other things being equal, a rise in the rate of economic growth would affect
the other three indicators of economic performance shown in the diamond.
(6 marks) (c) State TWO reasons why a reduction in inflation is normally regarded as economically
beneficial.
(4 marks) (d) Explain how a typical business organisation would be affected if the government were to
adopt a deflationary monetary policy.
November 2001
11
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Question Six The following table shows some of the economic characteristics of a group of countries. The data shows total population, gross national product (GNP) and imports and exports. This data shows that the trade ratio (the ratio of exports or imports to GNP) varies considerably. Population (million) 249 62 123 57 15 1,111 3 144 GNP ($ billion) 5,200 941 2,843 839 223 422 29 338 Imports ($ billion) 493 270 210 198 104 58 50 20 Exports ($ billion) 364 341 274 152 108 52 45 34
USA Germany Japan UK Netherlands China Singapore Brazil
Required:
(a) Explain what is meant by the term the trade ratio and identify the FOUR countries which
have the lowest trade ratios.
(4 marks) (b) (i)

Using examples from the table, explain ONE reason why some countries have low trade ratios.
(2 marks)
(ii)
Explain how government policy might lead to a country having a low trade ratio.
(2 marks) (c) Discuss TWO ways in which the business sector of a country may suffer as a result of the
imposition of tariffs on imports by the government of that country.
End of paper
FECB
12
November 2001
Examination Question and Answer Book

Write here your full examination number Centre Code: Hall Code: Desk Number:
Foundation Level
3a
INSTRUCTIONS TO CANDIDATES
Read this page before you look at the questions
FECB
20 May 2002 Day 1 morning
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. Additional blank pages (16-18) are included towards the back of 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 2-8) Answer the THREE questions in section B (these are on pages 9-15) 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. TURN OVER
For office use only

Marks awarded (First marker) for each question Marks awarded (Second marker) for each question
Total
One
Two
Three
Four
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 A B C D Which ONE of the following is NOT a factor of production? Land. Entrepreneurship. Labour. Money.
1.2
All of the following government policies would tend to raise the long-term rate of economic growth EXCEPT which ONE? Increased expenditure on the economic infrastructure. Tax cuts to encourage higher demand from consumers. Measures to increase the mobility of labour. Financial incentives to encourage personal and corporate saving.
A B C D
1.3
All of the following are features of modern economic growth in developed economies EXCEPT which ONE? Increased importance of human capital as a source of growth. An increased role for public sector industries. A declining share of manufacturing in the economy. An increased role for multinational companies.
A B C D
For office use only

Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question
FECB 2
Total
1.1
1.2
1.3
May 2002
1.4 A B C D
A countrys production possibility frontier (curve) would shift outwards if more resources became available. unemployment was reduced. aggregate demand for goods and services increased. labour productivity fell.
1.5 A B C D
Which ONE of the following is true of the corporate form of business organisation? Owners do not share in the profits of the corporation. Corporations are, by definition, large companies. Owners always exercise day-to-day decision making. The liability of the owners for the debts of the corporation is limited.
1.6 A B C D
A rise in the price of a good accompanied by a fall in the quantity sold would result from a decrease in supply. an increase in demand. a decrease in demand. an increase in supply.
1.7 A B C D
If the demand curve for Good A shifts to the left when the price of Good B rises, we may conclude that the goods are substitutes. Good A is an inferior good. the goods are complements. the demand for Good A is price elastic.
TURN OVER
For office use only

May 2002 3
Total
1.4
1.5
1.6
1.7
FECB
1.8
The introduction of a national minimum wage will lead a business to reduce its number of employees most when the demand for its final product is price inelastic. wage costs are a small proportion of total costs. there is a high degree of substitutability between capital and labour. the supply of substitute factors of production is price inelastic.
A B C D
1.9 A B C D
All of the following will lead to an imperfect allocation of resources EXCEPT which ONE? There are some production costs that are not borne by the producer. Consumers only wish to buy a limited amount of the product. There are spillover benefits in consumption. Consumers have limited knowledge of market prices.
1.10 Constant returns to scale mean that as all inputs are increased, A B C D total output remains constant. long-run average cost rises at the same rate as inputs. long-run average cost remains constant. profits remain constant as output rises.
1.11 All of the following statements about oligopoly are true EXCEPT which ONE? A B C D Oligopolistic firms may make excess profits in the long run. Oligopolistic firms do not generally produce where average costs are lowest. Non-price competition is a normal feature of oligopolistic competition. Oligopolistic firms can never achieve lower long-run average costs than could competitive firms in the same industry.
For office use only Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question
FECB 4
Total
1.8
1.9
1.10
1.11
May 2002
1.12 All of the following are benefits for firms participating in horizontal mergers EXCEPT which ONE? A B C D Control over sources of supply of inputs. Reduction of competition. Economies of scale. Sharing of technical knowledge.
1.13 Which ONE of the following would tend to increase the degree of monopoly power of a company? A B C D The ending of one of its patents. An increase in excess profits. A fall in the cross price elasticity of demand for its product. Diversification into a wider range of products.
1.14 Which ONE of the following forms of government intervention would be most appropriate for dealing with a failure by the business sector to provide public goods? A B C D Taxes and subsidies. Government provision of goods and services. Legal controls. Price controls.
1.15 In a boom period in the economy, the demand for electrical goods will rise more rapidly than the demand for groceries because A B C D the demand for groceries is price inelastic. the demand for electrical goods is income elastic. groceries are inferior goods. electrical goods are cheaper in booms than in recessions.
TURN OVER For office use only Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question
May 2002 5
Total
1.12
1.13
1.14
1.15
FECB
1.16 The best measure of the standard of living in a country is A B C D gross domestic product per capita. per capita personal consumption. gross national product per capita. personal disposable income.
1.17 If a consumer price index rises, it shows that A B C D the value of the currency has increased. real consumer income has fallen. all prices in the economy have risen. the purchasing power of money has decreased.
1.18 Which ONE of the following would lead a countrys balance of payments current account to move towards a surplus? A B C D A rise in commodity imports. An inflow of foreign capital into the economy. An increase in foreign tourism into the country. An increase in government tax receipts.
1.19 All of the following would normally lead to a rise in the exchange rate for a countrys currency, EXCEPT which ONE? A B C D An increase in the countrys exports. An increased inflow of foreign direct investment into the country. A rise in interest rates in the country. An increase in the export of capital from the country.
FECB 6
Total
1.16
1.17
1.18
1.19
May 2002
1.20 All of the following are benefits for a business from a depreciation (reduction) in the rate of exchange for the countrys currency EXCEPT which ONE? A B C D The business could charge lower prices for its exports. Imported raw materials used by the business would be cheaper. The business could raise profit margins on exports without losing sales. In its home market, the business would face reduced competition from imports.
1.21 To maximise its gains from trade, a country should try to maximise net exports. export products in which it has an absolute advantage. protect domestic producers from competition from cheap imports. export products in which it has a comparative advantage.
A B C D
1.22 Multinational companies locate production in more than one country for all of the following reasons EXCEPT which ONE? A B C D The existence of trade barriers. High transport costs. Capital is internationally immobile. To increase market share.
1.23 All of the following are the likely consequences of increased international mobility of factors of production EXCEPT which ONE? A B C D Narrower interest rate differentials between countries. Increased foreign exchange transactions. Increasing differences in average wages between countries. Increased flows of profits, dividends and factor earnings on balance of payments current accounts.
TURN OVER For office use only Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question
May 2002 7
Total
1.20
1.21
1.22
1.23
FECB
1.24 The terms of trade are defined as A B C D the ratio of export prices to import prices. the total value of exports minus the total value of imports. the change in volume of exports compared to changes in the volume of imports. the commercial conditions under which international trade takes place.
1.25 The balance of payments accounts are defined as A B C D the difference between the governments receipts and its expenditure over the period of a year. the difference between the exports of goods and services and imports of goods and services over the period of a year. the surplus or deficit on a countrys international trade over a given period. a statement of the economic transactions between residents of a country and the rest of the world over a given period.
1.26 All of the following statements are true EXCEPT which ONE? A B C D Import quotas tend to reduce prices. Trade protection tends to reduce consumer choice. Trade protection tends to reduce exports. Tariffs tend to reduce competition.
(Total = 52 Marks)
End of Section A
FECB 8
Total
1.24
1.25
1.26
May 2002
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 shows the rate of growth of GDP in an economy:
GDP growth (% per year) 6 GDP growth (% per annum) 5 4 3 2 1 0 1 3 5 7 -1 -2 -3
C D
A
9 11 13 15 17 19 21
B
23 25 27
E
Years (1 - 28)
Required:
Use your knowledge of economic theory and the diagram above to answer the following: Do not write in these columns below
For use by the second marker For use by the first marker
Write your answers in the shaded boxes below
Marks available 1 1 1 1 Sub-total: 4
(a)
(i) (ii) (iii)
Identify which of the periods A to E on the diagram correspond to: a recession; a recovery phase of the trade cycle; a boom phase of the trade cycle.
What is the average duration (length) of the trade cycle in this economy?
Parts (b) and (c) of Question Two are on page 10

TURN OVER
May 2002 9 FECB
Question Two continued
Required:
Use your knowledge of economic theory and the diagram on page 9 to answer the following: In the shaded boxes below, circle the correct answers.
Marks available
Do not write in these columns below
For use by the second marker
For use by the first marker
(b)
(i) (ii) (iii) (iv)
As the economy moves from A to E, other things being equal, would you expect the level of unemployment to the rate of inflation to the trade balance to move towards business investment to rise rise surplus rise fall fall deficit fall
1 1 1 1 Sub-total: 4
(c)
(i) (ii) (iii) (iv)
For each of the following, identify the effect on the level of economic activity in the short to medium run of a fall in the average propensity to save a rise in interest rates a depreciation in the exchange rate a reduction in the value of the multiplier Rise Rise Rise Rise Fall Fall Fall Fall Unchanged Unchanged Unchanged Unchanged
Space for workings and/or notes for question two
Part (d) of Question Two is on page 11

FECB 10 May 2002
Question Two continued Do not write in these columns below

Marks available
(d)
Complete the following sentences If a government wishes to limit a boom in the economy, it should shift the government budget towards a and the growth of the money supply. (one word in each shaded area) The effectiveness of fiscal policy in preventing recessions is often reduced by which lead to policy working too late, and by uncertainty over the value of the .. which leads to
4 Sub-total: 4
too much or too little fiscal stimulation. (one word in each shaded area)
Total for Question Two = 16 Marks
Section B continues overleaf
TURN OVER
May 2002 11 FECB
Question Three The following diagram shows the cost and revenue curves for a firm. The cost curves are of the normal U shape. Assume the demand for the product is price elastic.
Price, revenue & costs
P1 P2 P3 P4
Q1
Q2
Q3
Q4
Output
Required:
Use your knowledge of economic theory and the diagram above to answer the following. Do not write in these columns below
Marks available
(a)
(i) (ii) (iii) (iv)
Assuming the firm is a profit maximiser, identify from the diagram: the equilibrium level of output the equilibrium price excess (abnormal) profits the optimal level of output
(b)
(i)
Using the diagram, state (in no more than 10 words in the shaded areas below) what would happen to the equilibrium price and output if the firms costs rose?
2
(ii)
there was a fall in the incomes of the firms customers?

2
Parts (c) to (d) of Question Three are on page 13

FECB 12
SubTotal: 4
May 2002
Marks available
(c)
(i)
Complete the following sentences: If this firm was operating in a perfectly competitive market, the equilibrium price would be and the equilibrium output would be . (one word in each shaded area)
2
(ii)
The monopoly firm can earn in the long run because of the existence of
(maximum of three words in each shaded area)
2 Sub-total: 4
In the shaded boxes below, circle the correct answers.
(d)
(i)
State whether the following are true or false. A discriminating monopolist can charge different prices in different markets only if the price elasticity of demand in each market is different. If there are large economies of scale, a monopoly industry may produce more output and charge lower prices than does a perfectly competitive industry. Vertical integration is a common source of monopoly power. Natural monopolies occur when the supply of raw materials is concentrated in one country.
TRUE
FALSE
(ii)
TRUE
FALSE
(iii) (iv)
TRUE TRUE
FALSE FALSE
1 1 Sub-total: 4
Total for Question Three = 16 Marks
Section B continues overleaf
TURN OVER
May 2002 13 FECB
Question Four The following data refer to the public expenditure and taxation revenue of a government for the year 2000/2001. Tax Revenue Income tax Social Security Contributions Excise Duties Corporation Tax Value Added Tax Business Rates Other $bn 144 89 56 51 90 24 104 Expenditure Social Security National Health Service Education Defence Debt Interest Law and Order Housing and Environment Industry and Agriculture Transport Other Total $bn 155 81 69 35 42 30 22 21 15 88 558
Total
558
Required:
Use your knowledge of economic theory and the data in the table above to answer the following. Do not write in these columns below
Marks available
(a)
(i) (ii) (iii) (iv)
Identify from the above table ONE example of each of the following: indirect taxation direct taxation government purchase of goods and services transfer payments
(b)
(i) Complete (in a maximum of 15 additional words in the shaded box below) the following sentence: A progressive tax is defined as one where
(ii)
From the above table, give ONE example (in the shaded boxes below) of a progressive tax and ONE example of a regressive tax A progressive tax A regressive tax
1 1 Sub-total: 4
Parts (c) and (d) of Question Four are on page 15

FECB 14 May 2002
Required:
Use your knowledge of economic theory to answer the following. In the shaded boxes below, circle the right answers.

Marks available
(c)
(i)
State whether each of the following is true or false. The burden of an indirect tax falls most heavily on a business when the demand for its product is price elastic. A reduction in income tax will raise the demand for the products of a business only if the product has an income elasticity of demand exceeding +10. If the government ran a budget deficit, it would be necessary for it to borrow money from overseas to finance that deficit. The existence of automatic stabilisers means that in a recession an existing government budget deficit would become larger.
TRUE
FALSE
(ii)
TRUE
FALSE
(iii)
TRUE
FALSE
(iv)
TRUE
FALSE
Sub-total: 4
(d) Complete the following sentences:

(i) A public good is one where the provide the good because of the sector will not problem.
2
(maximum of two words in each shaded area) (ii) The state often provides goods since private
producers would supply less than the optimum amount because of the existence of external social . (one word in each shaded area)
2 Sub-total: 4
(Total for Question Four = 16 Marks)
End of Question Paper
TURN OVER FOR ADDITIONAL SPACE FOR WORKINGS AND NOTES

May 2002 15 FECB
You may use this sheet for notes and workings (no marks are awarded for workings)
FECB
16
May 2002
May 2002
17
FECB
FECB
18
May 2002
DO NOT WRITE ON THIS SHEET
May 2002
19
FECB
3a
FECB
Day 1 morning
FECB
20
May 2002

Foundation Level
3a
FECB
18 November 2002 Day 1 morning
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.
Question One 1.1 A B C D In economics, the term opportunity cost refers to the monetary cost of a good or service. the cost of producing the goods measured in money terms. the monetary cost of acquiring a factor of production. the value of a good or service forgone.
1.2 A B C D
The importance of saving in promoting economic growth is because of the relationship between savings and present consumption. future consumption. investment. interest rates.
1.3 A B C D
Economic growth is desirable because it makes all of the following possible EXCEPT which ONE? The elimination of the economic problem. Higher living standards. Increased private and public consumption. Increased leisure.
FECB
November 2002
1.4 A B C D
All of the following policies would promote export-led economic growth EXCEPT which ONE? A reduction in the country's tariffs on imports. A restrictive domestic monetary policy. The removal of taxes on employing labour. An appreciation in the countrys foreign exchange rate.
1.5 A B C D
Economic growth in developed economies tends to be associated with a reduction in the output of the industrial sector in the economy. a rise in the importance of the service sector in the economy. a reduction in the dependence on imports. a rise in the number of workers in the primary sector.
1.6 A B C D
Economies of scale are best described as the process by which large, dominant firms can secure higher profits. large firms can better organise their factors of production. large-scale production permits the use of new technology. large-scale production leads to lower costs per unit of output.
1.7 A B C D
Which ONE of the following will tend to make the demand for a companys product LESS price elastic? A rise in consumer incomes. A rise in the price of complementary goods. A fall in the number of substitute goods. A lower price for the good.
1.8 A B C D
Which ONE of the following does NOT restrict the number of firms in an industry? Low levels of product differentiation. Significant economies of scale. Barriers to entry. The use of capital-intensive technology in the industry.
November 2002
FECB
1.9 A B C D
A profit-seeking company may engage in advertising to achieve any of the following outcomes EXCEPT which ONE? To increase the cross elasticity of demand for the product. To shift the demand curve for the company's product to the right. To make the demand curve for the product more price inelastic. To increase total sales revenue.
1.10 All of the following are features of oligopoly EXCEPT which ONE? A B C D Non-price competition. Interdependence in decision making. Entry barriers. 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 B C D Charging different prices to different customers. Charging different prices in different markets. Charging different prices for products of differing quality. Charging different unit prices for different quantities purchased.
1.12 Which ONE of the following is an example of an external social cost? A B C D Bad weather reducing the output of the farm sector. Possible illness caused to owners of mobile phones as a result of excessive use. Smoke emissions by a factory causing health problems for nearby residents. 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 B C D diminishing returns. decreasing returns to scale. diminishing marginal utility. market saturation.
FECB
November 2002
1.14 If a business sells a product with a high income elasticity of demand, A B C D its sales will fall steeply if it raises its prices. its sales will fall only slightly if there is a fall in consumer income. its sales will be unaffected by changes in the prices of substitutes and complements. 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 B C D A means of allocating resources between competing uses. A means of ensuring a fair distribution of incomes. A signal to consumers. A signal to producers.
1.16 The minimum condition for a business to continue to operate in the short run is that A B C D its revenue is sufficient to cover variable costs. its revenue is at least equal to its total costs. its marginal revenue is equal to its marginal cost. it is making normal profits.
1.17 The government may discourage horizontal mergers in manufacturing industry because A B C D by controlling the sources of supply, the merged firms will have unfair advantages over rivals. the merged firms will be unable to secure economies of scale. consumers may lose out if the merged firm acquires market dominance. multi-product firms tend to become inefficient.
1.18 The main function of the money market is to A B C D enable businesses and government to obtain liquidity. encourage saving. permit the efficient buying and selling of shares. deal in credit instruments of more than one year maturity.
November 2002
FECB
1.19 The effects of low real interest rates include all of the following EXCEPT which ONE? A B C D Credit-based sales will tend to be high. Nominal costs of borrowing will always be low. Business activity will tend to increase. Investment will be encouraged.
1.20 The recession phase of the trade cycle A B C D is often caused by excessive consumer expenditure. is normally characterised by accelerating inflation. is most prolonged when the country has high levels of imports. is usually caused by falling aggregate monetary demand.
1.21 Supply side policy is designed to A B C D raise the level of aggregate monetary demand in the economy. manage the money supply in the economy. improve the ability of the economy to produce goods and services. reduce unemployment by limiting the supply of labour.
1.22 All of the following are direct taxes EXCEPT which ONE? A B C D Corporation tax. Value added tax. Income tax. 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 B C D less of good X must be given up to produce one unit of Y than in Southland. less of good Y must be given up to produce one unit of X than in Southland. less labour is required to produce one unit of X than in Southland. less labour and capital are required to produce one unit of X than in Southland.
FECB
November 2002
1.24 All of the following are examples of international factor mobility EXCEPT which ONE? A B C D The migration of skilled labour from one country to another. A business investing in a new factory in another country. The switching of cash from a bank account in one country to an account in another country. 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 B C D it could get tariff-free raw materials from countries inside the free trade area. there would be exchange rate stability between the member countries. prices of competitors from countries not in the free trade area would rise. 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 B C D Rising trade ratios for countries. Increased international capital flows. Improved terms of trade for all countries. Reduced barriers to international factor movements.
(Total = 52 Marks)
November 2002
FECB

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 appropriate) to answer the following: Do not write in these 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 from D0 to D1. (circle the correct answer in the shaded boxes below) income. There has been a fall in the price of substitutes. A price rise has led to an increase in supply. Consumers expect prices to rise in the future. The price of complementary goods has fallen. The good has a very low price elasticity of demand. TRUE TRUE TRUE TRUE TRUE TRUE FALSE FALSE FALSE FALSE FALSE FALSE
Marks available 1 1 1 1 1 1 sub-total: 6
(i) There has been a rise in consumer (ii) (iii) (iv) (v) (vi)
Parts (b) and (c) of Question Two are on page 9

Required:
Use BOTH your knowledge of economic theory AND the diagram (where appropriate) to answer the following: Do not write in these columns below
(b) (i)
Complete the following statement with no more than three words in each gap: An outward shift in the supply curve would lead to in price 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
Reason 2
2 sub-total: 12
(c) (i)
Complete, in no more than two words in each gap, the following statements 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 the production or good or service. of the
in either
2 sub-total: 4 16
Total Marks for Question Two =
November 2002
FECB
Question Three The following data refer to an economy for the period 1994 to 2000. Year Exchange rate Note (1) 892 851 863 1006 1042 1043 1046 Interest rate Note (2) 61% 65% 60% 63% 70% 75% 74% Balance of payments current account Note (3) - $38 billion - $59 billion - $11 billion + $123 billion - $10 billion - $155 billion - $210 billion
1994 1995 1996 1997 1998 1999 2000 Note (1) Note (2) Note (3)
Effective exchange rate, 1990 = 100. Bank base rate. 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
For use by the first marker For use by the second marker
(a) (i) Explain, in no more than 20 words in the shaded area below, what
is meant when it is said that a currency has appreciated.
Marks available
(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
(b)
Company ZZZ operates in this economy. It imports its raw 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, state, in no more than 15 words in each of the shaded areas below, three effects on the company of the changes in the variables shown. Effect (i)
Marks available
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 (ii) (iii) (iv) (v)
between the nominal rate of interest and the rate of inflation. Higher interest rates reduce the level of business investment only when that investment is financed by borrowing. With flexible exchange rate systems, the trading sector of an economy cannot become uncompetitive. Under a fixed exchange rate system, the exchange rate has to be managed by government policy. It is desirable for a country to have a balance of payments current account surplus because this shows that it is trading at a profit with the rest of the world.
TRUE TRUE TRUE TRUE
FALSE FALSE FALSE FALSE
TRUE
FALSE
Total Marks for Question Three =
sub-total: 5 16
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:
(a)
In the following table, state whether the change (fall or rise) in aggregate monetary demand would, other things being equal, lead to a rise or fall or have no effect on the stated variable. Write either rise or fall or no effect in the each of the shaded boxes below
Marks available
Economic variable
The rate of inflation. The level of structural unemployment. The level of cyclical unemployment. The deficit on the current account of the balance of payments. The surplus on the government budget.
A fall in AMD
A rise in AMD
1 1 1 1 1 sub-total: 5
(b)
In no more than two words each, fill in the gaps in the following statements. demand for the product is the level of taxation. .
1 1 1 1
(i) A fall in AMD will have a large effect on company sales if the (ii) Governments can raise AMD by
(iii) The level of AMD will be stable when injections into the circular flow
are equal to .
(iv) A fall in the exchange rate for a countrys currency tends to lead to
in the level of AMD.
(v) A fall in business investment will cause a larger fall in AMD because
of the operation of the .
1 sub-total: 5
FECB
12
November 2002
Required:
(c) (i)
Complete each of the following statements, in no more than 15 words, in the shaded areas below Cost-push inflation can be defined as
Marks available
(ii)
The Phillips curve shows
(iii) Frictional unemployment can be defined as the unemployment

which occurs
2 sub-total: 6 16
Total Marks for Question Four =
Total for Question Four = 16 Marks
November 2002
13
FECB

Foundation Level
3a
FECB
19 May 2003 Monday morning
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. Do not exceed the stated number of words. 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 2-8) Answer the THREE questions in section B (these are on pages 10-15) 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.
Question One
1.1 A B C D For a business producing shirts and dresses, the opportunity cost of a dress is the market price that the business can obtain for a dress. the cost of the labour and raw materials used in making the dress. the shirts that could have been produced with the resources used to make the dress. the total cost of all the resources used to make one dress.
1.2 A B C D
An increase in labour productivity in a business can be caused by all of the following EXCEPT which ONE? An increase in the stock of capital equipment. An increase in the quantity of labour employed. An increase in the rate of technical innovation. An increase in the level of training of the labour force.
1.3 A B C D
The term economic welfare refers to the stock of wealth in an economy. the expenditure on social welfare by the government. the private consumption levels of the population as a whole. the overall standard of living in an economy.
FECB
May 2003
1.4 A B C D
Long term economic growth is encouraged by all of the following policies EXCEPT which ONE? The encouragement of research and development. An expansion of aggregate demand to increase the level of employment. The establishment of education and training centres to improve human capital. Tax allowances for business investment expenditure.
1.5 A B C D
A slow down in economic growth in the US would be transmitted to the rest of the world by all EXCEPT which ONE of the following processes? A fall in US interest rates. A fall in the US demand for imports. A decline in the level of US capital flows to the rest of the world. Falling US stock market prices leading to similar falls in other countries.
1.6 A B C D
An economy is usually described as a mixed economy when production is partly for the home market and partly for export. consists partly of capital goods and partly of consumer goods. takes place in all three sectors; agriculture, industry and services. is partly in the private sector and partly in the public sector.
1.7 A B C D
What does the elasticity of supply measure? The time taken for supply to adjust to changes in price. The responsiveness of the quantity supplied to a change in demand. The responsiveness of the quantity supplied to a change in price. The change in the quantity supplied divided by the price.
May 2003
FECB
1.8 A B C D
A business producing an inferior good will find that the demand for the good will not respond to a reduction in price. will fall when consumer incomes rise. has a very low price elasticity of demand. has a positive, but low, income elasticity of demand.
1.9 A B C D
Which ONE of the following would lead the demand curve for a good to shift to the right? A rise in consumer income. A decrease in the supply of a complementary good. An increase in the supply of a substitute good. A fall in the price of the good.
1.10 The law of diminishing returns applies to a business only when the quantity of A B C D all factors of production used in the production process can be varied. all factors of production used in the production process are fixed. at least one factor of production which is used in the production process is fixed. capital used in the production process is fixed but the amount of labour employed can be varied.
1.11 If a business is taxed by an amount equal to the external costs it imposes on the rest of society by its production activity, then A B C D there will be a misallocation of resources because the price mechanism has been interfered with. the increase in costs will lead the business to produce more in order to maintain its profits. there will be no change in production and resource allocation because costs and prices will adjust. resource allocation will be improved since prices will more accurately reflect costs and benefits.
FECB
May 2003
1.12 All of the following are internal economies of scale for a firm EXCEPT which ONE? A B C D The firm is able to reduce administration costs per unit of output when it opens a second production plant. The firm can buy raw materials from other firms at lower prices when it buys in bulk. TV advertising costs can be spread over a larger output. Training costs are reduced when the firm can draw on the pool of skilled labour in the region.
1.13 What is meant by the divorce of control from ownership in modern market economies? A B C D The employment of salaried senior managers who do not have significant shareholdings in the companies that employ them. The increased rights and roles of employees in business organisations. The growth in government regulation and control of business through regulatory bodies. The increased importance of institutional shareholders relative to individual shareholders.
1.14 If the total revenue from the sales of a good rises by 10% when its price is increased by 10%, then the demand for the good must A B C D be perfectly price elastic. be perfectly price inelastic. be of unitary elasticity. have a price elasticity of -1.
1.15 On scheduled airflights, airlines sell standby passenger tickets at discounted (lower) prices because A B C D the demand for seats is always price elastic. the marginal cost is low up to the point where all seats on the aeroplane are occupied. the average cost for standby seats is less than the marginal cost. this price discrimination raises marginal revenue.
May 2003
FECB
1.16 A perfectly competitive market has all of the following features EXCEPT which ONE? A B C D There are many buyers and sellers. Buyers and sellers have full information. Sellers can earn only normal profits in both the short and the long run. There are no barriers to entry into, and to exit from, the market.
1.17 A merger between two companies producing similar products might be in the public interest for all of the following reasons EXCEPT which ONE? A B C D Rationalisation of production may permit economies of scale. The new company may be able to afford higher levels of research and development. The new company may be able to compete more effectively with an established large company. Increased control of the market by the company will limit the opportunities for overseas companies to compete.
1.18 Which ONE of the following would lead to a fall in the value of the multiplier? A B C D A decrease in the marginal propensity to consume. A fall in the level of public expenditure. Consumers saving a lower proportion of their income. A decrease in the marginal propensity to import.
1.19 The weights used in an index of retail (consumer) prices take account of A B C D changes in the quality of goods. the redistribution of income that occurs when prices change. the relative importance of different goods in the pattern of consumer expenditure. seasonal variations in the prices of some goods.
FECB
May 2003
1.20 All of the following statements about the monetary system are true EXCEPT which ONE? A B C D Financial intermediation links net savers and net debtors. In developed economies cash and notes form only a very small part of the money supply. The capital market deals in long term financial assets. The more liquid a financial asset is, the higher is the expected rate of return.
1.21 The downswing phase of the trade cycle usually has each of the following features EXCEPT which ONE? A B C D A fall in the level of government revenue from taxation. A rise in structural unemployment. A reduction in inflationary pressures. Lower levels of demand for imported goods.
1.22 Which ONE of the following would result from a reduction in interest rates? A B C D Lower levels of business investment. Increased business costs. Higher wage pressure resulting from lower unemployment. Reduced international competitiveness
1.23 If there is inflation caused by excess aggregate demand, which ONE of the following policies is likely to be most effective in controlling the rise in prices? A B C D An increase in the level of direct taxation. The imposition of barriers to imports. A reduction in interest rates. A reduction in VAT and excise taxes.
May 2003
FECB
1.24 A progressive tax is defined as one where A B C D the amount paid in tax increases as income rises. the amount of tax revenue received by the government rises over time. the proportion of income paid in taxation increases as income rises. high income earners pay more direct tax than do low income earners.
1.25 A multinational company may wish to locate production in an economy to which it currently exports for all of the following reasons EXCEPT which ONE? A B C D There is little cost for the company to move its capital and management to the other economy. Production costs may be lower in the other economy. There are tariff barriers in the other economy. There are significant transport costs.
1.26 The process of globalisation leads to all of the following EXCEPT which ONE? A B C D Increasing foreign competition in domestic markets. Decreasing interdependence of national economies. Greater international division of labour. Rising levels of international trade relative to national income.
(Total = 52 Marks)
End of Section A
FECB
May 2003

IMPORTANT MARKS ARE AWARDED FOR 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 is that of the kinked demand curve model for company ZZZ producing a consumer good in an oligopolistic market. D P1 MC2
Costs, revenue
MC1
MR1 0
D Output Do not write in these columns below

Required:
q1
Use your knowledge of economics AND the diagram above to answer the following:
(a)
Complete the following (maximum of 8 words per gap).

Marks available
(i) The kinked demand curve model shows that if company ZZZ
raises its prices from P1, then its competitors 1 and if company ZZZ reduces its prices from P1, its competitors 1
(ii) If company ZZZ is a profit maximiser, it will produce where

and its price will only rise if costs rise from MC1 to
1 1
(iii) Because of the kinked demand curve, firms in oligopoly tend to

avoid and depend heavily on to compete. sub-total:
May 2003 9
1 1 6
FECB

Use your knowledge of economics AND the diagram opposite to answer the following:
Required: (a) Complete the following (maximum of 8 words per gap).

Marks available
(iv) In oligopoly markets, companies making decisions on price and

output must consider the of rival companies. This is called
1 1
in decision making.
(b)
(i) (ii)
(iii)
sub-total: Using no more than 5 words for each, describe the effects of the following on the demand curve (curve DD opposite) for company ZZZs product. Event The demand curve would A successful advertising campaign by one of ZZZs rival companies. The introduction of a new production technology which significantly reduces production costs for all firms in the industry. A fall in the price of a good which is complementary to ZZZs product. the country which is ZZZs main market.
(iv) Significant rises in income tax in

sub-total:
1 12
(c) State whether each of the following is TRUE or FALSE. (i) Oligopolies are most likely to occur where there are
significant barriers to entry. long run.
1 1 1
(ii) Excess profits may persist in oligopolies even in the (iii) Collusion is rare in oligopoly industries because the
dominant company has nothing to gain from cooperating with rivals.
(iv) Price leadership in oligopoly occurs where one firm

sets a price for the product and other firms are not allowed to charge more than this.
FECB
10
May 2003
Question Three
The following diagram represents the aggregate demand curve (AD) and aggregate supply curve (AS) for an economy. AS Price level P2 P1 AD2
AD1 O Y1 Y2
National output
Required:
Use your knowledge of economics AND the diagram above to answer the following:

(a) With respect to the aggregate supply curve,

Marks available
(i) identify the effect on national output and on the price level of a
negative supply shock (maximum of 5 words each); Effect on output Effect on price
(ii) state whether each of the following would produce a negative

supply shock for an economy (YES/NO). A steep rise in the price of oil imported into the economy. 1 1 1 1 sub-total: 5
An increase in labour productivity brought about by the widespread application of information technology. The introduction of strict regulations reducing the length of the working week. Deregulation of the financial system producing a sharp increase in the availability of credit.
May 2003
11
FECB
Required:
Use your knowledge of economics AND the diagram opposite to answer the following: Do not write in these columns below
(b)
Marks available
(i) With respect to the aggregate demand curve, identify the two
missing components of aggregate demand; Private Business consumption investment State whether each of the following could be a reason for the shift in the aggregate demand curve from AD1 to AD2 (YES/NO). A significant fall in the average propensity to save in the economy. An improvement (move towards surplus) in the countrys current account of the balance of payments. An increase in the rate of income tax levied by the countrys government. A large rise in the rate of return expected by the business sector on all new investment. sub-total: 2
(ii)
1 1 1 1 11
(c) Complete the following (maximum of three words per gap). (i) An effective policy of improving the education and training of
unemployed workers would shift the curve to the and, as a result, both and the price level would fall.
1 1 1 1 1
(ii) For the business sector as a whole, a shift in the aggregate

demand curve to the right would mean higher as a benefit, but higher as a disadvantage.
FECB
12
May 2003
Question Four
Anyland is a small economy with a high per capita income by world standards. It has a high trade ratio with both imports and exports being a high proportion of gross domestic product. The most important exports are textiles, consumer electronics and tourism. Imports are mainly raw materials, oil and engineering and transport equipment. The economy is an open one with low trade barriers and no significant controls on the international movement of capital. The current and capital accounts of the balance of payments are currently in balance. Multinational companies are generally welcomed by Anyland.
Required:
Use your knowledge of economics and the information contained above to answer the following: Do not write in these columns below
(a) State whether, other things being equal, the direct effect on
Anylands balance of payments current and capital accounts, of each of the following would be a MOVE TOWARDS SURPLUS, or a MOVE TOWARDS DEFICIT or would have NO EFFECT. Current Capital Economic process account account A significant rise in consumer expenditure in Anylands trading partners. A large rise in interest rates in Anyland. Investment by a multinational oil company in an offshore oilfield in Anyland. Increased remittance of profits of foreign companies in Anyland back to their parent companies. sub-total:
Marks available
1 4
(b) Complete the following (maximum of 8 words per gap). (i) Trade theory would suggest that the Anyland economy has
1 in the production of textiles and consumer electronics because it has a in the production of these goods. 1
(ii) The Anyland economy is vulnerable to changes in world economic

activity because it has a 1
(iii) The balance of exports and imports of goods for Anyland is known
as its balance of trade, while its terms of trade are the ratio of 1 sub-total: 8
May 2003
13
FECB
Required:
(c) State whether each of the following items would appear in
Anylands balance of payments CURRENT ACCOUNT or CAPITAL ACCOUNT and state whether each item would be a CREDIT or a DEBIT. Item Current or capital account? Credit or debit?
Marks available
Interest paid to an Anyland resident on capital held in a bank account in the USA. Expenditure by an Anyland resident on an overseas holiday. A financial gift by the Anyland government to a developing country. The sale of an airliner by the US company Boeing to Anyland International Airways. sub-total:
1 12
(d) State whether each of the following are TRUE or FALSE. (i) If Anyland adopted a fixed exchange rate system
business in Anyland could avoid transaction costs when buying and selling foreign exchange.
(ii) Intra-industry trade is when a country imports and

exports the same types of goods and services.
(iii) If a country adopted high trade barriers on the goods

produced by companies based overseas, such companies would be discouraged from locating production there. 1
(iv) The imposition of trade barriers normally reduces

economic welfare in the importing as well as the exporting country.
FECB
14
May 2003

Write your full examination number, your contact ID and your name on a double-sided card, which must be attached to this booklet here.
Foundation Level
3a
FECB
17 November 2003 Monday morning
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. 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 9). Answer the THREE questions in section B (these are on pages 10 16). 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 contact ID anywhere on this booklet. TURN OVER
For office use only

Marks awarded (First marker) for each question Marks awarded (Second marker) for each question
Total
One
Two
Three
Four
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 A B C D The cost of one product, measured in terms of what must be given up to produce it, is called the real cost. opportunity cost. total cost. potential cost.
1.2 A B C D
Which ONE of the following would be most likely to raise economic welfare in a country in the long run? An increase in the countrys trade surplus. An expansion of the countrys social welfare provision. A rise in the rate of growth of labour productivity in the country. An equal reduction in taxation and public spending.
For office use only

FECB 2
Total
1.1
1.2
November 2003
1.3
All of the following would lead to an inward shift (to the left) in a countrys production possibility frontier (curve) EXCEPT ONE. Which ONE is the EXCEPTION?
A B C D
A rise in unemployment. A decrease in the size of the labour force. A reduction in the level of business investment. A slower rate of technological progress.
1.4 A B C D
Which ONE of the following is a supply side policy designed to promote long-term economic growth? Regional aid to reduce structural unemployment. Increasing the rate of growth of the money supply. Tax incentives for business investment. Raising aggregate demand to encourage firms to expand their supply of goods and services.
1.5 A B C D
Conventional measures of national income fail to give an accurate indication of sustainable economic welfare because they do not allow for inflation. do not allow for improvements in the quality of goods and services. do not allow for increases in productivity. do not exclude defensive expenditure to offset environmental damage.
1.6 A B C D
Which ONE of the following would be the outcome of a market economy operating with a high degree of competition? The interaction of demand and supply would ensure that resources are equally distributed. Companies would produce only those goods that are desirable for society since only such goods can be sold at a profit. Large differences in incomes would be avoided. Producers would respond to changes in demand and consumers would respond to changes in supply.
TURN OVER
For office use only

November 2003 3
Total
1.3
1.4
1.5
1.6
FECB
1.7 A B C D
If the demand for a good has a price elasticity of demand of 2 then a fall in price will lead to a fall in demand. a rise in price will lead to a larger than proportionate fall in sales volume. the good must have no effective substitutes. a fall in price will lead to a fall in total revenue from sales.
1.8
What will be the effect of a rise in the price of cars on the demand curve for petrol?
There will be A B C D a leftward shift in the demand curve for petrol. a movement down along the demand curve for petrol. a rightward shift in the demand curve for petrol. a movement upward along the demand curve for petrol.
1.9 A B C D
If the imposition of a congestion charge on the use of cars in cities does not significantly reduce the use of cars for travelling to and from work (commuting), this must be because there are no substitutes for cars. the demand for commuting by car is price inelastic. the supply of alternative means of transport is price elastic. what matters is the marginal cost of driving and this will not be affected.
1.10 Which ONE of the following, in a competitive labour market, would explain differences in wages between occupations in the long run? A B C D There is geographical immobility of labour. In the long run, everyone has to accept the wage levels determined by the market. The skill and knowledge content of some occupations acts as a barrier to entry. In some occupations, wages may rise above the equilibrium level.
For office use only

FECB 4
Total
1.7
1.8
1.9
1.10
November 2003
1.11 Which ONE of the following statements about prices is true? A B C D An increase in demand will lead to higher prices only if supply is price inelastic. A shortage of goods can occur if prices are above the equilibrium level. The imposition of a minimum price for a good will always lead to a surplus of output over demand. If prices are flexible, there can be no market surpluses or shortages in the long run.
1.12 Oligopolistic competition is often characterised by the avoidance of price competition. Which ONE of the following is the best explanation for this? A B C D Profit margins are too small to allow price cuts. Most oligopolies are cartels that fix prices. The expectation that rival companies will always reduce prices in response to a price cut. Price reductions would encourage the entry of new competitors into the industry.
1.13 Assuming that pollution reduces economic welfare, which ONE of the following would be most likely to raise long-term economic welfare? A B C D A total ban on all polluting activities. A tax on all products whose production involves pollution. A tax on the emission of pollutants. Allowing the free market to find the optimal level of pollution.
1.14 Railway companies offering off-peak services at reduced prices must ensure that, in the short run, these reduced prices cover at least A B C D the variable cost of providing the service. the fixed costs of production. overhead costs. the average cost of providing the service.
TURN OVER
For office use only

November 2003 5
Total
1.11
1.12
1.13
1.14
FECB
1.15 Goods whose production involves net social costs greater than private costs are normally A B C D under-produced by the private sector relative to the optimal level of output. over-produced by the private sector relative to the optimal level of output. not produced in the private sector because it would be unprofitable to do so. produced at the optimal level by the private sector.
1.16 Normal profit is the A B C D average level of profit earned in an industry. level of profit earned by firms in the long run. level of profit required to keep the business operating in an industry. reward to capital as a factor of production.
1.17 In comparing perfect competition with monopoly, which ONE of the following statements is true? A B C D Monopolies always earn profits; perfectly competitive firms rarely do. In the short run, firms in both monopoly and perfect competition attempt to minimise average fixed costs. In the long run, firms in both monopoly and perfect competition produce where average costs are lowest. Profits in perfect competition will be reduced in the long run by the entry of new firms, but long-run monopoly profits are protected by entry barriers.
1.18 A countrys gross national product (GNP) will be greater than its gross domestic product (GDP) when A B C D there is a net inflow of factor incomes. exports of goods exceed imports of goods. there is a surplus on the balance of payments current account. the government is running a budget surplus.
For office use only

FECB 6
Total
1.15
1.16
1.17
1.18
November 2003
1.19 Each of the following is a source of funds for capital investment for business enterprises EXCEPT ONE. Which ONE is the EXCEPTION? A B C D The central bank. The stock market. Internally-generated funds. Commercial banks.
1.20 All of the following are effects on a business of a reduction in interest rates EXCEPT ONE. Which ONE is the EXCEPTION? A B C D Increased credit-based sales. A lower net present value of investment projects. A fall in the cost of servicing bank debts. An increased incentive to undertake investments.
1.21 Other things being equal, which ONE of the following is a typical feature of the recovery phase of the trade cycle? A B C D A slow down in employment growth. An improvement in the trade balance. A stable rate of growth of GDP. Increased inflationary pressures.
1.22 A significant fall in stock market values in a country will be likely to contribute to a contraction of the circular flow of income because A B C D the circular flow is one of individual wealth of which shares are a part. reductions in consumer wealth will encourage lower consumption and higher saving. the buying of shares is an injection into the circular flow, and falling share prices will discourage the buying of shares. outflows from the economy increase as investors switch savings to overseas stock markets.
TURN OVER
For office use only

November 2003 7
Total
1.19
1.20
1.21
1.22
FECB
1.23 All of the following would occur in an economy which experienced a fall in the general level of prices EXCEPT ONE. Which ONE is the EXCEPTION? A B C D Some consumer expenditure would be postponed. The international competitiveness of the business sector would tend to increase. The real burden of business debts would fall. Government indirect tax revenues would tend to decline.
1.24 The comparative advantage theory of international trade shows that countries can benefit from trade because A B C D countries can export their surplus output. all countries have an absolute advantage in the production of some goods and services. they can profit by running a trade surplus with the rest of the world. countries can acquire imported goods at a lower opportunity cost than from domestic production.
1.25 A multinational company may wish to locate production in a number of countries for all of the following reasons EXCEPT ONE. Which ONE is the EXCEPTION? A B C D To secure economies of scale in production. To avoid transport costs. To avoid tariff barriers in overseas markets. To secure a variety of sources of supply of components.
For office use only

Total
1.23
1.24
1.25
FECB
November 2003
1.26 If a group of countries forms a regional trading bloc, the long-run economic welfare benefits gained will be smaller if the bloc A B C D allows the free movement of labour within the bloc. encourages companies to change their location within the bloc. abolishes all internal barriers to trade in goods and services. maintains a high external tariff.
(Total = 52 Marks)
End of section A
Section B starts on the next page
TURN OVER
For office use only

November 2003 9
Total
1.26
FECB

IMPORTANT MARKS ARE AWARDED FOR 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 shows the long-run average total cost curve (LRAC) for a business. Average total costs LRAC
Output Using your knowledge of economics and the diagram, answer the following:
Required: (a)

Marks available
(i) Define, in the shaded area below, the term "economies of scale"
(ii)
Maximum 25 words With reference to the diagram, state, in the shaded boxed below, which part of the long-run average cost curve (A, B or C) refers to each of the following: Description Decreasing returns to scale Increasing returns to scale sub-total: Section of the long-run average cost curve (A, B or C)
1 1 4
Question Two continues on page 11

Required: (b) In the shaded boxes below, give an example of each one of the scale
effects that a business might experience. A technical economy of scale (Maximum 15 words each)

Marks available
1 A commercial economy of scale
1 A managerial economy of scale
1 A diseconomy of scale
(c)
sub-total: Indicate with a cross (X) in the appropriate box whether each of the following is TRUE or FALSE? TRUE FALSE Statement Economies of scale limit the number of firms in an industry by acting as a barrier to entry. Even if a firm experiences economies of scale in the long run, its short-run average cost curve will always be U-shaped because of diminishing marginal returns. If a businesss long-run cost curve is falling, it can always increase total profits by raising output. The main source of economies of scale is technological change because this reduces costs over the long run. sub-total:
1 4
1 1
1 4
(d) Fill in the gaps in the following statements (Maximum 3 words per gap) (i) Economies of scale tend to lead to
industries; here there are a few large firms and competition is often by methods. 2
(ii) For a business, the
is the level of output where almost all economies of scale have been secured. If this is large relative to the total market, a is likely to emerge. sub-total:
2 4
(Total for Question Two = 16 Marks)

TURN OVER
November 2003 11 FECB
Question Three
The following is a list of types of unemployment:

Structural unemployment; Cyclical unemployment; Real wage (classical) unemployment; Frictional unemployment; Seasonal unemployment.
Using your knowledge of economics and the list given above, answer the following.
Required: (a) Match ONE of the above types of unemployment to each of the
following definitions.

Marks available
Definition of unemployment Unemployment associated with industries or regions where the demand for labour and wage rates regularly rise and fall over the year. Unemployment that occurs in particular industries and arises from long-term changes in the pattern of demand or supply. Unemployment that occurs as a result of imperfect information in the labour market resulting in time spent unemployed between jobs Unemployment caused by a general fall in aggregate demand in the economy.
Type of unemployment 1
1 sub-total: 4
(b) Indicate with a cross (X) in the appropriate box whether each of the
following is TRUE or FALSE. Statement Unemployment and inflation tend to rise and fall together over the trade cycle. TRUE FALSE 1
In a recession, most businesses face falling sales, but this is especially true for those whose products have a high income elasticity of demand. Rising real wages will cause most unemployment when the demand for the product of the business is highly price inelastic. Changes in real wage costs have least effect on employment in those industries that are relatively capital intensive. sub-total:
1 4
Question Three continues on page 13

Required:
(c) For each of the following events, indicate with a cross (X) in the
appropriate box below whether the direct effect for the economy as a whole would be raise the level of unemployment, lower the level of unemployment or to leave the level of unemployment unchanged. Event The imposition of a legal national minimum wage below the equilibrium wage rate. Monetary policies leading to a rise in the real exchange rate for the countrys currency. A reduction in the level of real interest rates. A downturn in economic activity in the countrys trading partner countries. Sub-total:
Raise unemployment Lower employment Leave unemployment unchanged
Marks available
1 4
(d) Fill in the gaps in the following (maximum of 3 words per gap).
A Keynesian approach to unemployment would emphasise the need to raise deficits would be financed by In contrast, the approach would focus on reducing both direct taxes and unemployment benefits to make employment more attractive, and on the removal of imperfections in the market Sub-total: 1 4 arising from regulations and from the activity of trade unions. by increasing public . 1 1 1 expenditure or reducing the level of taxation. Subsequent budget
(Total for Question Three = 16 Marks)
Section B continues on page 14

TURN OVER
Question Four
The following diagram shows the demand and supply for US dollars on the foreign exchange market and the exchange rate with the Euro. D1 Exchange rate Euros per $ D2 S1
Demand for and supply of dollars
Required:
Using the diagram above and your knowledge of economic theory, answer the answer the following: Do not write in these columns below
(a)
Marks available
(i) State whether the shift in demand curve for dollars from D2 to D1 will
cause the dollar exchange rate to appreciate or depreciate relative to the Euro. 1
(ii) Indicate with a cross (X) in the appropriate box what the effect on the
dollar exchange rate will be an increase in imports from Europe into the USA: The demand curve for dollars will shift to the left. be unchanged. shift to the right. The supply curve for dollars will shift to the left. be unchanged. shift to the right. The exchange rate for dollars will rise. be unchanged. fall. sub-total: 1 4 1 1
Question Four continues on page 15

Question Four continued:
Required:
(b) Indicate with a cross (X) in the appropriate box whether each of the
following processes would lead to a shift in the demand curve for dollars from D1 to D2 Process An increase in the level of capital inflows into the USA. A rise in exports of US services to eurozone countries. A higher level of exports of capital from the USA A reduction in demand in the USA for overseas holidays. sub-total: YES
Marks available
NO 1 1 1 1 4
(c) There is a variety of exchange rate systems. These include

Dirty floating Free floating Adjustable peg Fixed Managed floating Exchange rate band Joint float Match each of the following to ONE of the above types. Description The government has no exchange rate target, but intervenes in the foreign exchange market to prevent excessively large changes in the exchange rate. The government allows the currency to float, but intervenes to achieve an exchange rate target. The government pegs the exchange rate permanently to another currency and intervenes in the foreign exchange market to maintain that rate of exchange. The government allows the currency to float between an upper and lower exchange rate, but intervenes to prevent the currency moving outside of these limits. sub-total: Name of exchange rate system
1 4
Question Four continues on page 16

TURN OVER
Question Four continued:
Required: (d) Assume that the US economy recovers strongly from the recent
recession and inflationary pressures begin to emerge. As a result, the US monetary authorities raise US interest rates. For each of the following statements, indicate with a cross (X) in the appropriate box, whether they would result from the action of the US monetary authorities in raising interest rates. TRUE FALSE Statement There would be increased outflows of capital from the USA to other countries. European businesses would experience increased competition from US businesses because the dollar would tend to depreciate relative to the Euro. Interest rates would tend to rise in other countries. US national income would be lower than otherwise thus reducing the potential market for European exporters. sub-total:
Marks available
1 1
1 4
FECB
16
November 2003
November 2003
17
FECB
FECB
18
November 2003
DO NOT WRITE ON THIS SHEET
November 2003
19
FECB
3a
FECB
Monday morning
FECB
20
November 2003

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Foundation Level

Economics for Business

The Chartered Institute of Management Accountants 2001

FOR FREE CIMA, ACCA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.com

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

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SECTION B 48 MARKS ANSWER THREE QUESTIONS ONLY

PPF2 Consumer goods

(a) Explain what is meant by the term opportunity cost. (2 marks)

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(a) For each level of sales, calculate (i) (ii)

(8 marks) (Total = 16 marks)

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(6 marks) (Total = 16 marks)

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(i) (ii) (iii) (iv)

an increase in the marginal propensity to save;

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(4 marks) (b) Calculate the country's (i) (ii) (iii)

(5 marks) (Total = 16 marks)

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Economics for Business

The Chartered Institute of Management Accountants 2001

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

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SECTION B 48 MARKS ANSWER THREE QUESTIONS ONLY

(a) With respect to the price of oil,

Dollars per Barrel

(6 marks) (Total = 16 marks)

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(a) Using a supply and demand diagram, explain:

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(a) Using the above table:

(2 marks) (b) Explain the differences between:

(4 marks) (Total = 16 marks)

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Current account, % of GDP

Note: Candidates are not required to draw further diagrams.

(4 marks) (Total = 16 marks)

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USA Germany Japan UK Netherlands China Singapore Brazil

(4 marks) (b) (i)

(8 marks) (Total = 16 marks)

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Examination Question and Answer Book

Economics for Business

For office use only

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

For office use only

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