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IFoA - CB2 > Past Paper MC questions > Flashcards

Past Paper MC questions Flashcards

1
Q

The quantity theory of money assumes that the:
A ratio of the velocity of circulation to the price level rises when the money supply
increases.
B ratio of the velocity of circulation to the price level is fixed.
C ratio of the money supply to the velocity of circulation is fixed.
D ratio of the money supply to the price level is fixed.

A

D

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2
Q

Assume that the actual rate of unemployment is below the natural rate of unemployment because
the expected rate of inflation is below the actual rate of inflation. If the expected rate of inflation
rises to equal the actual rate of inflation, then:
A real output will increase and unemployment will increase.
B real output will increase and unemployment will decrease.
C real output will decrease and unemployment will increase.
D real output will decrease and unemployment will decrease.

A

C

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3
Q

Which of the following factors could lead to an upward shift in the expectations-augmented Phillips curve?
I an increase in expected inflation
II an increase in actual inflation
III an increase in demand-deficient unemployment.

A I only
B I and II only
C I and III only
D I, II and III

A

B

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4
Q

Which of the following statements is NOT true?
A Stagflation can be explained in terms of Phillips loops.
B If inflation is falling, the adaptive expectations hypothesis suggests that inflation will be
consistently over-estimated.
C A fall in structural unemployment will shift the Phillips curve to the right.
D The vertical long-run Phillips curve suggests that inflation can be reduced without a
long-term increase in unemployment.

A

C

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5
Q

Which of the following is NOT a reason why the power of labour has reduced?
A a reduction in the power of trade unions
B an increase in the use of short-term contracts
C an increase in the number of nationally negotiated wage contracts
D an increase in the exposure to international competition

A

C

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6
Q

Which of the following is NOT an interventionist supply-side policy?
A the use of public-private partnerships
B the provision of infrastructure
C the location of government offices in depressed areas
D provision of R&D by government research institutions

A

A

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7
Q

Which of the following statements is FALSE?
A The neo-Austrian / libertarian school of thought advocates minimum liberty for economic
agents to pursue their own interests and to own property.
B Modern Keynesians advocate supply-side policies to shift the Phillips curve to the left.
C New classical economists favour market-orientated supply-side policies.
D ‘Third Way’ supply-side policies are based on the concept of helping people to help
themselves.

A

A

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8
Q

An increase in government spending has:
A a greater impact than an equal decrease in taxation has on national income.
B the same impact as an equal decrease in taxation has on national income.
C a smaller impact than an equal decrease in taxation has on national income.
D a multiplier effect on national income that is smaller than the multiplier effect of an equal
decrease in taxation.

A

A

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9
Q

A government wishing to increase aggregate demand might use any of the following measures EXCEPT:
A buying government securities on the open market.
B allowing interest rates to fall.
C increasing the tax on consumer goods.
D increasing social security benefits.

A

C

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10
Q

The payment of wages to refuse collectors is categorised as both:
A current expenditure and final expenditure.
B capital expenditure and final expenditure.
C current expenditure and transfers.
D capital expenditure and transfers

A

A

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11
Q

An exchange rate system in which rates are fixed for a period of time but may be revalued or
devalued in response to a substantial balance of payment surplus or deficit is referred to as:
A an adjustable peg.
B a crawling peg.
C a joint float.
D managed floating.

A

A

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12
Q

Which of the following is NOT a possible advantage of freely floating exchange rates?
A Current account deficits are corrected automatically.
B Their operation requires that there is sufficient international liquidity.
C It provides a degree of insulation against external shocks.
D Governments are free to implement their chosen domestic macroeconomic policy

A

B

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13
Q

In order to adopt the euro, each EU country had to meet convergence criteria that referred to all
of the following EXCEPT:
A the national debt.
B unemployment.
C interest rates.
D the inflation rate.

A

B

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14
Q

The loss of separate monetary policies within the eurozone is:
A an advantage of European Monetary Union.
B an argument against the principle of European Monetary Union.
C a criticism of the current design of European Monetary Union.
D none of the above.

A

B

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15
Q

Which of the following do you NOT associate with classical economists?
A loanable funds theory
B Say’s law
C quantity theory of money
D paradox of thrift

A

D

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16
Q

Possible causes of the financial crisis in 2008 include all of the following EXCEPT:
A the increase in sub-prime debt.
B the increased use of wholesale funding by the banks.
C moral hazard.
D counter-cyclical bank lending.

A

D

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17
Q

If a central bank decides to reduce the money supply to fight inflation, then if the country has a floating exchange rate this will assist in the process because the exchange rate of the domestic currency will tend to:
A appreciate and reduce the price of exports.
B appreciate and reduce the price of imports.
C depreciate and reduce the price of exports.
D depreciate and reduce the price of imports.

A

B

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18
Q

According to Keynesian analysis, the adoption of a policy to reduce the government’s budget deficit will involve:
A an increase in aggregate demand and a reduction in real output.
B an increase in aggregate demand and an increase in real output.
C a reduction in aggregate demand and a reduction in real output.
D a reduction in aggregate demand and an increase in real output.

A

C

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19
Q

Which of the following is best suited to reducing the level of structural unemployment?
A lowering the rate of interest
B raising the rate of unemployment benefit
C higher voluntary redundancy payments for workers in declining industries
D more government funds for retraining of the unemployed

A

D

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20
Q

Which of the following is a supply-side economic policy aimed at promoting economic growth?
A increases in social security benefits designed to increase expenditures of unemployed
workers
B measures designed to increase trade union powers so that real wage rises can increase
expenditures of employed workers
C increases in tariffs designed to increase production of domestic goods
D reduction in corporate taxation

A

D

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21
Q

Which of the following statements about a Taylor rule is NOT true?
A It can be used to influence expectations of inflation.
B It requires that interest rates be increased if inflation is above its target level.
C It requires that interest rates be increased if real GDP is above its potential level.
D It is open to political abuse.

A

D

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22
Q

Which of the following pairs is most likely to reduce aggregate demand?
A an increase in the budget surplus and decrease in the money supply
B an increase in the budget deficit and a tightening of credit availability
C an increase in the budget deficit and an increase in interest rates
D a decrease in interest rates and an increase in the budget surplus

A

A

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23
Q

Which of the following statements is TRUE?
A If aggregate demand exceeds actual output, then firms’ stocks will fall and national income will rise.
B If aggregate demand exceeds actual output, then firms’ stocks and national income will both rise.
C If aggregate demand exceeds actual output, then firms’ stocks and national income will both fall.
D If aggregate demand exceeds actual output, then firms’ stocks will rise and national income will fall.

A

A

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24
Q

Which one of the following will increase the size of the multiplier?
A an increase in the marginal propensity to import
B an increase in the marginal tax rate
C a decrease in the marginal propensity to consume
D a decrease in the marginal propensity to save

A

D

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25
Q

The theory of surplus value was developed by:
A Adam Smith.
B David Ricardo.
C Karl Marx.
D John Maynard Keynes.

A

C

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26
Q

Under the gold standard:
A an increase in prices led to an inflow of gold.
B an increase in imports led to an inflow of gold.
C balance of payments deficits were paid in gold.
D there was no relationship between the amount of gold and the price level.

A

C

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27
Q

The record of a country’s transactions in goods and services and assets with the rest of the world
is referred to as its:
A balance of trade.
B capital account.
C balance of payments.
D current account.

A

C

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28
Q

Which of the following is recorded as a plus in the balance of payments accounts of Country A?
A the export of goods by Country A to the rest of the world
B short-term lending by Country A to the rest of the world
C the purchase of foreign shares by residents of Country A
D the payments of interest by residents of Country A to residents of other countries

A

A

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29
Q

Which one of the following is a high-earning but relatively illiquid asset of banks?
A certificates of deposit
B loans and advances to customers
C Treasury bills
D cash held at the central bank

A

B

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30
Q

An increase in the money supply will have a bigger impact on real output the more:
A interest-elastic is the demand for money and the more interest-elastic is the demand for
investment.
B interest-inelastic is the demand for money and the less interest-elastic is the demand for
investment.
C interest-elastic is the demand for money and the less interest-elastic is the demand for
investment.
D interest-inelastic is the demand for money and the more interest-elastic is the demand for
investment.

A

D

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31
Q

Which one of the following is NOT a ‘crowding out’ effect resulting from a fiscal expansion?
A a fall in investment due to the associated rise in the interest rate
B a fall in consumer demand due to the associated rise in the interest rate
C reduced import expenditure due to increased government demand for domestically
produced goods
D a fall in demand for exports due to an exchange rate appreciation caused by the
associated rise in the interest rate

A

C

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32
Q

The process of repackaging assets into marketable securities is known as:
A secondary action.
B speculation.
C securitisation.
D subcontracting.

A

C

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33
Q

An increase in the average riskiness of a bank’s assets, assuming that nothing else changes, will
result in:
A an increase in the capital adequacy ratio.
B a decrease in the capital adequacy ratio.
C an increase in the liquidity ratio.
D a decrease in the liquidity ratio.

A

B

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34
Q

Prudential control:
A is concerned with the financial health of the banking system as a whole and its impact on
the wider economy.
B is a requirement that each bank maintains sufficient liquidity.
C is measured in terms of the ratio of a bank’s share capital and reserves to its risk-weighted
assets.
D does not apply to global systemically important banks.

A

B

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35
Q

To improve the cash position of banks, the central bank could do any of the following EXCEPT:
A buy government bonds from banks with an agreement to sell them back later.
B issue more government bonds and fewer Treasury bills.
C buy Treasury bills from the banks before maturity.
D rediscount Treasury bills

A

B

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36
Q

Consumption smoothing may be explained by:
A the ability of households to borrow against future incomes.
B the banking system’s increased willingness to lend in a boom.
C a positive relationship between spending and net financial wealth.
D an increase in the number of credit-constrained households.

A

A

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37
Q

Which of the following will lead to a decrease in the demand for money?
A an increase in actual prices
B increased expectations of price rises
C a reduction in the use of credit cards
D a switch from weekly to monthly payment of wages

A

B

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38
Q

The central bank is concerned about rising domestic inflation. Which of the following monetary
measures would NOT be suitable as a means to try and reduce inflation?
A introducing minimum reserve ratios for banks
B reducing its lending to banks
C buying government bonds from banks
D funding the PSNCR with more government bonds and fewer Treasury bills

A

C

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39
Q

The policy remit of the European Central Bank is to:
A achieve a target inflation rate of below, but close to, 2% pa over the medium term.
B target an inflation rate of close to 2% pa, whilst taking account of the volatility of output.
C target low inflation, together with sustainable growth, low unemployment and moderate
long-term interest rates.
D target an inflation rate of exactly 2% pa.

A

A

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40
Q

Suppose that in Country A, the budget surplus is 20, investment is equal to 50 and savings are equal
to 40. Then the trade balance must be equal to:
A –10.
B +10.
C –30.
D +30

A

B

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41
Q

Which of the following describes social efficiency?
I a situation of Pareto optimality
II a situation in which changes in production or consumption can only make one person
better off if they make another worse off
III a situation in which marginal social benefit equals marginal social cost
A I and II
B I, II and III
C I only
D III only

A

B

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42
Q

A key difference between a public good and a merit good is that:
A public goods are provided by central government and merit goods by public corporations.
B it is possible to provide a public good to one person without it being available to others,
whereas it is impossible to provide a merit good to one person without it being available
to others.
C the supply of public goods is infinite whereas merit goods are limited in supply.
D one person’s consumption of a public good leaves the amount available for others
unaffected, whereas one person’s consumption of a merit good can reduce the amount
available for others

A

D

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43
Q

The demand and supply functions for Good A are as follows:
q_d = 40-2p
Q_s = ½p
The government now introduces a subsidy of 5 per unit, payable to firms, in order to encourage
consumption of Good A. The cost of this subsidy will be:
A 20
B 30
C 40
D 50

A

D

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44
Q

Which of the following is NOT an example of collusion between firms?
A horizontal price fixing
B agreement to limit production to keep supply low
C increasing R&D to gain a competitive advantage
D sharing out sources of supply

A

C

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45
Q

Which of the following is NOT a condition required for first-degree price discrimination?
A The firm must operate under perfect competition.
B The firm must have a degree of price control.
C Consumers must be unable to sell goods on to other consumers.
D It must be possible to easily determine the prices that consumers are willing to pay.

A

A

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46
Q

Which of the following statements about national income is always true in a country in which
taxes on goods exceed subsidies?
I GNY > GDP
II GNY > NNY
III NNY at market prices > NNY at basic prices
A I and II
B II and III
C I only
D III only

A

B

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47
Q

Aggregate demand in France is:
A the amount that French firms, households and government plan to spend on goods and
services.
B the amount that French firms, households and government plan to spend on domestic
goods and services.
C the amount that French and foreign firms, households and governments plan to spend on
French goods and services.
D the amount that French firms, households and government actually spend on domestic
goods and services.

A

C

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48
Q

Which of the following is NOT a substitution effect on aggregate demand as a result of a rise in
the price level?
A the decrease in investment caused by the increase in interest rates
B the decrease in consumption caused by the real balance effect
C the decrease in consumption caused by a decrease in real incomes
D the increase in the demand for imports caused by reduced competitiveness

A

C

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49
Q

For an economy in equilibrium, savings = 300, investment = 200, exports = 100, imports = 150 and
government spending is 250. Taxation is therefore:
A 50
B 100
C 150
D 200

A

B

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50
Q

Which one of the following is best suited to reducing the level of structural unemployment?
A lowering the rate of interest
B raising the rate of unemployment benefit
C higher voluntary redundancy payments for workers in declining industries
D more government funds for retraining of the unemployed

A

D

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51
Q

A consumer prices index is a measure of changes in:
A the pattern of consumer spending.
B the average standard of living.
C average earnings.
D the average cost of living.

A

D

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52
Q

Which of the following is NOT a method of measuring the output gap?
A de-trending techniques
B business surveys
C production function approach
D production possibility curve

A

D

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53
Q

Country A exports Good X to Country B and imports Good Y from Country B. If the price of Good X
rises by 40% and the price of Good Y falls by 30%, what can be said about Country A’s terms of
trade?
A It has increased by 40%.
B It has increased by 70%.
C It has increased by 100%.
D It has decreased by 100%.

A

C

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54
Q

If, with one hour of labour, Country A can produce 10 units of Good X or 5 units of Good Y; and
Country B can produce 6 units of Good X or 2 units of Good Y, then:
A Country A has an absolute advantage in Good X and a comparative advantage in Good X.
B Country B has an absolute advantage in Good X and a comparative advantage in Good X.
C Country A has an absolute advantage in Good X and Country B has a comparative
advantage in Good X.
D Country B has an absolute advantage in Good X and Country A has a comparative
advantage in Good X.

A

C

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55
Q

A loss leader may be used as part of which of the following pricing strategies?
A predatory pricing
B full-range pricing
C peak-load pricing
D first-degree price discrimination

A

B

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56
Q

An increase in the value of the pound sterling will:
I increase the price of imports into the UK.
II increase the volume of exports from the UK.
III improve the UK’s terms of trade.
A I and II
B II and III
C I only
D III only

A

D

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57
Q

Which of the following is NOT one of the four limits to trade?
A increasing opportunity costs
B transport costs outweighing any comparative advantage
C strategy, structure and rivalry of firms
D government restrictions on trade

A

C

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58
Q

What do economists mean by opportunity cost?
A the value of the best alternative use for a resource
B the equilibrium price for a scarce good
C the revenue lost by missing an economic opportunity
D the cost of allocating scarce resources

A

A

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59
Q

Points to the right of the production possibility curve show combinations of goods:
A at which production is efficient.
B at which production is inefficient.
C that are unattainable given the current level of scarce resources.
D that have zero opportunity cost.

A

C

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60
Q

Which of the following events would shift the demand curve for Good X (a normal good) to the
left?
A an increase in the price of Good X
B an increase in the price of a substitute good
C an increase in the price of a complementary good
D an increase in consumer income

A

C

61
Q

Prices are most volatile when:
A supply is elastic and demand inelastic.
B supply is inelastic and demand elastic.
C both supply and demand are elastic.
D both supply and demand are inelastic

A

D

62
Q

Good X has an income elasticity of demand of - 0.5 and a cross-price elasticity of demand with
respect to Good Y of + 0.6 . Good X is:
A a normal good and a substitute for Good Y.
B an inferior good and a substitute for Good Y.
C an inferior good and a complement for Good Y.
D a normal good and a complement for Good Y.

A

B

63
Q

Which of the following best illustrates the problems of moral hazard?
A A woman becomes less concerned about locking her garage after increasing her buildings
and contents insurance.
B A man chooses not to insure his life because he has no dependants.
C A person effects a long-term disability policy, shortly before taking a course of flying
lessons.
D A company offers cheaper life insurance to women than to men.

A

A

64
Q

The principle of diminishing marginal utility of wealth implies that a risk-averse individual will be
prepared to insure themself against an event:
A even though the expected return is negative.
B only if the expected return is zero.
C only if the expected return is positive.
D only if the event has a high probability of occurrence.

A

A

65
Q

Marginal cost is:
A the change in total costs when one more unit of labour is employed.
B the change in average total costs when output is expanded by one unit.
C the change in variable costs when output is expanded by one unit.
D the same as marginal revenue.

A

C

66
Q

At present, Company A is producing 10 units of Good X with quantities of labour and capital such
that the marginal physical product of labour is 38 and the marginal physical product of capital is
14. The current cost of a unit of labour is $30, whereas the cost of a unit of capital is $10.
Assuming that both factors are subject to diminishing marginal returns, in order to produce
10 units of Good X as efficiently as possible, Company A should:
A use less labour and more capital.
B use more labour and less capital.
C use more labour and more capital.
D use less labour and less capital.

A

A

67
Q

Which of the following is NOT a reason why economies of scale may exist?
A indivisibilities
B the division of labour
C economies of scope
D the increase in technological knowledge over time

A

D

68
Q

Which of the following conditions produces normal profits?
A average revenue = marginal revenue
B average revenue = average cost
C marginal revenue = marginal cost
D average cost = marginal cost

A

B

69
Q

A profit-maximising firm should keep producing in the short run:
A when average fixed cost is above average revenue and average fixed costs are less than
average variable costs.
B when average revenue is above average variable cost.
C when average revenue is above average fixed costs.
D when total revenue is above total fixed costs and total fixed costs are less than total
variable costs.

A

B

70
Q

High entry and exit costs:
A make collusion more likely.
B are the main feature of perfectly contestable markets.
C will benefit consumers.
D encourage hit and run strategies by new firms.

A

A

71
Q

Which of the following statements is FALSE?
A A perfectly competitive market naturally maximises welfare.
B Potential competitors are those that are actually entering and leaving the industry.
C Inefficient monopolists may face competition for corporate control.
D A credible threat is one that rivals expect a firm to carry out.

A

B

72
Q

The price of a product in perfect competition is always equal to:
I the marginal cost of all firms
II the average revenue of all firms
III the short-run average cost of all firms
A I and II
B II and III
C I only
D III only

A

A

73
Q

Which of the following is NOT an example of a barrier to entry?
A the application of termination fees for consumers who wish to leave a contract before the
end of the contract period
B producing a range of products
C constant returns to scale
D excessive expenditure on advertising

A

C

74
Q

A managing director of a monopoly firm is given the following data:
Marginal revenue £9
Marginal cost £10
Average cost £11
Average revenue £15
To maximise profits the firm should:
A reduce price and increase output.
B reduce price and reduce output.
C increase price and increase output.
D increase price and reduce output.

A

D

75
Q

Firms operating under monopolistic competition will:
A produce identical goods and enjoy supernormal profits in the long run.
B produce identical goods and enjoy normal profits in the long run.
C produce different goods and enjoy supernormal profits in the long run.
D produce different goods and enjoy normal profits in the long run.

A

D

76
Q

Which of the following will NOT shift the supply curve for Good X to the right?
A An increase in labour productivity in the industry producing Good X
B A fall in the price of raw materials used to produce Good X
C An increase in real wages in the industry producing Good X
D A government subsidy on the production of Good X.

A

C

77
Q

Which of the following best describes the opportunity cost of producing Good X?
A The cost of producing Good X in money terms
B The next best alternative use to which the factors of production used to produce
Good X could be put
C The stream of services provided by Good X over its entire lifetime
D The production of Good X foregone in the previous year to enable Good X to
be produced this year.

A

B

78
Q

Under the Cournot model of duopoly, a firm:
A attempts to maximise sales after assuming that the other firm will attempt to
maximise sales.
B assumes the other firm will produce a given output and then chooses its
profit-maximising output.
C assumes the other firm’s price is given and then chooses its profit-maximising
price.
D will attempt to collude with the other firm so as to set a price and output level
that will maximise industry level profits.

A

B

79
Q

Which of the following is NOT a feature of monopolistic competition?
A Equilibrium price will be equal to marginal cost
B There are no barriers to entry
C Each firm produces a differentiated product
D Only normal profits are made in the long run.

A

A

80
Q

Following an increase in the price of fuel, there is a 20% increase in the price of air
travel tickets that results in a 20% decrease in total revenue.
Which of the following statements is TRUE about the demand for air travel?
A It is price inelastic
B It is price elastic
C It is infinitely price elastic
D It has zero price elasticity.

A

B

81
Q

A consumer uses only two goods, X and Y. Currently the marginal utility of the last
unit of Good X consumed is six times as great as the marginal utility of the last unit of
Good Y consumed. The price of Good X is three times that of Good Y. To maximise
utility, the consumer should:
A consume more of Good X and less of Good Y.
B consume less of Good X and more of Good Y.
C increase consumption of both Goods X and Y.
D decrease consumption of both Goods X and Y.

A

A

82
Q

When a consumer with a given income chooses between two goods with fixed prices,
the slope of the budget line is equal to the:
A ratio of the prices of the two goods.
B income of the consumer divided by the price of each good.
C ratio of the total utility of each good divided by the price of each good.
D ratio of the total utilities of both goods.

A

A

83
Q

A perfectly competitive firm is currently producing 2,000 units of Good X per week
that are sold at £3 per unit. The firm’s total cost is currently £12,000 per week of
which £4,000 is the fixed cost per week. The marginal cost of production is £3 per
unit. To maximise profits or minimise losses, the firm should:
A expand its output in order to increase its total revenue.
B shutdown and produce no units of Good X in order to minimise its losses.
C reduce its output to 1,000 units of Good X in order to reduce its total cost of
production by £6,000.
D continue producing 2,000 units of Good X in the short run but not in the long
run.

A

B

84
Q

The short run supply curve for a firm in a perfectly competitive industry is its:
A average cost curve.
B average variable cost curve.
C marginal cost curve above the lowest point of the average total cost curve.
D marginal cost curve above the lowest point of the average variable cost curve.

A

D

85
Q

The demand for Good X has a price elasticity of –3 while the supply curve has a
positive slope. If the government decided to impose a tax of £10 per unit on Good X,
this would shift the supply curve for Good X up by:
A less than £10 and increase the price by less than £10.
B less than £10 and increase the price by more than £10.
C £10 and increase the price by £10.
D £10 and increase the price by less than £10.

A

D

86
Q

Which of the following is an example of economies of scope?
A A firm doubles its inputs of capital and labour and its output more than
doubles
B A firm doubles the number of products it produces and also doubles its
research budget
C A firm produces a new product and in so doing lowers the average cost of
producing its existing products
D A firm produces a new product and lowers the price it charges on its existing
products.

A

C

87
Q

An “inferior good” is defined as a good:
A that will be bought by consumers only at a low price.
B whose quantity purchased will decline if consumers’ income rises.
C that is of poor quality compared to more expensive versions of the good.
D that is bought only by people on low incomes.

A

B

88
Q

Which of the following would constitute a supply side economic policy for reducing
unemployment?
A Increasing social security benefits
B Increasing the money supply
C Reducing corporate and personal taxation
D Increasing government expenditure aimed at exploiting the multiplier effect.

A

C

89
Q

An increase in the natural rate of unemployment will cause the long run Phillips curve
to:
A shift to the right.
B shift to the left.
C remain unchanged.
D become upward sloping.

A

A

90
Q

According to Keynesian analysis, once a closed economy is in macroeconomic
equilibrium such that planned savings equals planned investment, then:
A there will be no unemployment in the economy.
B the marginal propensity to consume must be greater than the marginal propensity
to save.
C consumption will be equal to or greater than income.
D there may or may not be unemployment.

A

D

91
Q

An increase in the general price level with no change in the money supply will:
A increase the demand for money and increase aggregate demand.
B decrease the demand for money and increase aggregate demand.
C increase the demand for money and decrease aggregate demand.
D decrease the demand for money and decrease aggregate demand.

A

C

92
Q

Which one of the following statements about real variables in the economy is
FALSE?
A If nominal Gross Domestic Product (GDP) rises by 5%, then the real GDP may
have risen, fallen or remained unchanged
B If the money supply falls by 20% and the price level falls by less than 20%, then
the real money supply falls
C An increase in real income will lead to a rise in the demand for real money
balances
D Real interest rates are positive if the expected rate of inflation is greater than the
nominal rate of interest.

A

D

93
Q

In a simple economy, consumption is given by the relationship:
C = 0.75 Y
where C is consumption expenditure and Y is Gross Domestic Product (GDP).
If government expenditure is £150 million, investment is £50 million and there is no
taxation or international trade, the equilibrium value of GDP of the economy will be:
A £200 million.
B £312.5 million.
C £1,000 million.
D £800 million.

A

D

94
Q

In Country A, government expenditure is £350 billion, tax revenue is £275 billion,
aggregate saving is £300 billion and aggregate investment is £250 billion. The net
exports of Country A are equal to a:
A surplus of £125 billion.
B deficit of £125 billion.
C surplus of £25 billion.
D deficit of £25 billion.

A

D

95
Q

The proportion of deposits held by the public as cash is 0.5 and the proportion of
deposits held by the banks for reserves is 0.5. If the broad money supply is £300
million, what is the value of the narrow money supply?
A £150 million
B £200 million
C £450 million
D None of the above.

A

B

96
Q

If the money supply increases due to an expansionary open market operation by the
central bank, then the price of treasury bills will:
A rise as the short-term interest rate rises.
B rise as the short-term interest rate falls.
C fall as the short-term interest rate rises.
D fall as the short-term interest rate falls.

A

B

97
Q

The Phillips curve shows:
A the influence of fiscal policy on the level of inflation and unemployment.
B the influence of monetary policy on the level of inflation and unemployment.
C an inverse relationship between inflation and unemployment.
D a positive relationship between inflation and unemployment.

A

C

98
Q

You are given the following data for an economy:
£ million
Consumer expenditure (including indirect taxes) 120
Investment 60
Government expenditure (including transfer payments) 70
Exports 40
Imports 30
Net income from abroad 20
Indirect taxes 10
Capital depreciation 20
Transfer payments 10
The value of the economy’s Gross National Income at market prices is:
A £250 million.
B £260 million.
C £270 million.
D £280 million.

A

C

99
Q

Given the Gross Domestic Product (GDP) at basic prices cost we can calculate the
GDP at market prices by:
A adding indirect taxes and adding subsidies.
B adding indirect taxes and subtracting subsidies.
C subtracting indirect taxes and subtracting subsidies.
D subtracting indirect taxes and adding subsidies.

A

B

100
Q

Which of the following statements is NOT correct in relation to Say’s Law?
A There will be demand deficient unemployment
B The production of goods will generate sufficient demand to ensure they are
sold
C There may be structural unemployment or frictional unemployment if markets
do not work efficiently
D Aggregate demand and aggregate supply will always be equal.

A

A

101
Q

If an 8% rise in the price of Good X results in a 4% fall in the quantity demanded of
Good Y, then the cross elasticity of demand for Good Y is approximately:
A –2 and the two goods are complements.
B –0.5 and the two goods are complements.
C –2 and the two goods are substitutes.
D –0.5 and the two goods are substitutes.

A

B

102
Q

A production possibility frontier illustrates the limits on output of finished goods, as
imposed by a limited supply of productive inputs. On the axes of the production
possibility frontier, we place the:
A quantity of productive inputs.
B quantity of inputs on one axis and quantity of outputs on the other axis.
C quantities of finished goods.
D prices of productive inputs.

A

C

103
Q

A firm’s decision to reduce its expenditure on advertising is most likely to have the
following impact on its demand curve:
A The curve will shift to the left and become less elastic.
B The curve will shift to the right and become less elastic.
C The curve will shift to the left and become more elastic.
D The curve will shift to the right and become more elastic.

A

C

104
Q

In an industry characterised by perfect competition:
A the average revenue is equal to marginal cost.
B the industry demand curve must be perfectly elastic.
C there may be difficulty for some firms in exiting the industry.
D there are no supernormal profits in the short run.

A

A

105
Q

Water is generally cheaper than diamonds when consumers are in equilibrium because
the:
A total utility of water is less than the total utility of diamonds.
B total utility of water is greater than the total utility of diamonds.
C marginal utility of water is less than the marginal utility of diamonds.
D marginal utility of water divided by the marginal utility of diamonds, is greater
than the price of water divided by the price of diamonds.

A

C

106
Q

Which of the following features is NOT a typical characteristic of oligopoly?
A A firm’s fear that if it raises its price then the rise will be matched by
competitors, but if it cuts its price then the cut will not be matched by
competitors
B Supernormal profits
C A belief that one firm’s actions has an influence on the actions of other firms
D Advertising and other non-price competition.

A

A

107
Q

A monopoly firm faces a linear demand schedule, has positive but constant marginal
costs and is currently producing where its marginal cost is below its marginal revenue.
If the firm wishes to maximise profits then it should:
A raise its price and increase output.
B lower its price and decrease output.
C lower its price and increase output.
D raise its price and decrease output.

A

C

108
Q

In the Cournot model of duopoly, when the two firms are at the equilibrium level of
output:
A the joint output of the two firms is greater than the monopoly output, but less
than the perfect competition output.
B the joint output of the two firms is identical to the monopoly output.
C the joint output of the two firms is identical to the perfect competition output.
D the output of the two firms will always be identical.

A

A

109
Q

Which one of the following reveals decreasing returns to scale?
A If more labour is added to a given amount of capital, the marginal product of
labour falls.
B If the ratio of labour to capital increases by 100%, the output of the firm
increases by less than 100%.
C If the input of both capital and labour increases by 120%, the output of the
firm increases by 100%.
D If more labour is added to a given amount of capital, the marginal product of
labour rises.

A

C

110
Q

Good X has a price elasticity of demand of –1. Which of the following statements is
TRUE, following the removal of a £10 per unit sales tax on Good X?
A The price of Good X will rise by £10.
B The price of Good X will fall by more than £10.
C The price of Good X will fall by less than £10.
D The price of Good X will fall by £20.

A

C

111
Q

Other things being equal, a fall in a monopolist’s fixed costs of production, which
does not lead to new entrants, causes:
A the market price to fall and the quantity supplied to rise.
B the market price to fall and the quantity supplied to fall.
C both market price and quantity supplied to fall.
D no change to the market price or output

A

D

112
Q

Which one of the following is NOT a ‘crowding out’ effect resulting from a fiscal
expansion?
A A fall in investment due to the associated rise in interest rates
B A fall in consumer demand due to fear of higher future taxes
C A fall in demand for exports due to an exchange rate appreciation caused by
the associated rise in interest rates
D Reduced import expenditure due to increased government demand for
domestically produced goods.

A

D

113
Q

If the money supply decreases due to a contractionary open market operation by the
central bank, then the price of Treasury bills will:
A fall as the short-term interest rate falls.
B fall as the short-term interest rate rises.
C rise as the short-term interest rate falls.
D rise as the short-term interest rate rises.

A

B

114
Q

If the rate of income tax is cut from 30% to 25% while the marginal propensity to
import falls from 20% to 15%, the effect on the open economy fiscal multiplier will
be:
A a rise.
B a fall.
C no change.
D uncertain.

A

A

115
Q

The Phillips curve shows:
A the influence of fiscal policy on the level of inflation and unemployment.
B the influence of monetary policy on the level of inflation and unemployment.
C an inverse relationship between inflation and unemployment.
D a positive relationship between inflation and unemployment.

A

C

116
Q

An increase in the money supply will have a stronger impact on real output the more:
A elastic is the demand for money and the more interest elastic is the level of
investment.
B inelastic is the demand for money and the less interest elastic is the level of
investment.
C elastic is the demand for money and the less interest elastic is the level of
investment.
D inelastic is the demand for money and the more interest elastic is the level of
investment.

A

D

117
Q

If both government spending and the money supply are increased, and the economy
has a high degree of unemployment, then:
A the national income and interest rates will both rise.
B the national income and interest rates will both fall.
C the effect on both national income and interest rates is uncertain.
D the national income will rise but the effect on interest rates is uncertain

A

D

118
Q

The ‘crowding out’ effect associated with an increase in government borrowing could
be reduced or eliminated by an accommodating increase in:
A government expenditure.
B taxation.
C money supply.
D none of the above.

A

C

119
Q

Which of the following costs of inflation occurs because of the possibility of
unanticipated extra-high inflation?
A Fixed interest rate borrowers lose
B Menu costs
C Shoe-leather costs
D Fixed interest rate lenders lose.

A

D

120
Q

A short-run fall in real Gross Domestic Product (GDP) would result from an increase
in all of the following with the exception of:
A autonomous saving.
B the marginal propensity to consume.
C the marginal propensity to import.
D the marginal rate of taxation.

A

B

121
Q

An unexpected increase in the price level, which causes a temporary reduction in the
real wage rate, may:
A lead to an actual rate of unemployment that is temporarily greater than the
natural rate.
B lead to an actual rate of unemployment that is temporarily lower than the
natural rate.
C increase the natural rate of unemployment.
D decrease the natural rate of unemployment

A

B

122
Q

The nominal rate of interest is 7% and the expected rate of inflation is 4%. Which one
of the following is TRUE?
A The real rate of interest is negative.
B The rate of inflation is less than the real rate of interest.
C The real rate of interest is 11%.
D The nominal rate of interest exceeds the real rate of interest

A

D

123
Q

Which of the following statements about the demand for money is FALSE?
A The demand for money is negatively related to the interest rate.
B The demand for money is positively related to nominal income.
C The demand for money is negatively related to the general price level.
D The demand to hold money is positively related to real income

A

C

124
Q

Other things being equal, if there is an unexpected fall in money supply, there is no
change in the expected rate of inflation and the unemployment rate is above the
natural rate of unemployment, then the long-run Phillips curve would suggest that the
inflation rate will eventually:
A fall and the unemployment rate would rise.
B fall and the unemployment rate would fall.
C rise and the unemployment rate would fall.
D rise and the unemployment rate would rise.

A

B

125
Q

Which of the following statements is NOT correct in relation to the Austrian school
of thought?
Economists following the Austrian school of thought:
(i) place emphasis on individual subjective preferences.
(ii) focus on market forces determining prices.
(iii) believe in a centrally planned economic system.
A (i) only
B (ii) only
C (iii) only
D (i), (ii) and (iii).

A

C

126
Q

If the government chooses to use resources to build a hospital instead of a school, this
illustrates the concept of:
A a market system.
B macroeconomics.
C competition.
D opportunity cost.

A

D

127
Q

The substitution effect of a price decrease causes an individual to purchase more units
of a normal good because:
A the good becomes less expensive relative to all other products.
B the change in price causes a decline in purchasing power.
C the good becomes more expensive relative to all other products.
D the change in price causes an increase in purchasing power

A

A

128
Q

Which of the following would NOT explain why, when the price of a good rises, the
quantity supplied will also rise?
A Firms expect future prices to rise.
B At higher levels of output, firms will incur higher costs.
C The higher the price, the more profitable a good becomes to produce.
D Firms expect future prices to fall.

A

A

129
Q

If the income elasticity of demand for Good X is 2, a rise in all consumers’ disposable
incomes from £50 million to £52 million will increase the quantity demanded of Good
X by:
A 2%.
B 4%.
C 6%.
D 8%.

A

D

130
Q

In a perfectly competitive market, a typical firm cannot affect the price of its output,
and so it maximises profits when marginal cost is:
A less than the price.
B greater than the price.
C equal to the price.
D below average variable cost.

A

C

131
Q

In the long run, a firm operating in an industry characterised by monopolistic
competition will:
A produce at the lowest point of its long run average cost curve.
B have excess capacity.
C produce at a socially efficient output level.
D produce at the lowest point of its marginal cost curve.

A

B

132
Q

In relation to insurance, moral hazard describes the fact that:
A people who know that they are a particularly high risk are more inclined to
take out insurance.
B people who know that they are a particularly high risk are less inclined to take
out insurance.
C an insurance company will face false insurance claims.
D a policyholder may act in a way that makes the insured event more likely to
occur.

A

D

133
Q

Which of the following is an example of economies of scope?
A A firm doubles its inputs of capital and labour and its output more than
doubles.
B A firm doubles the number of products it produces and also doubles its
research budget.
C A firm produces a new product and in so doing lowers the average cost of
producing its existing products.
D A firm produces a new product and in so doing lowers the price it charges on
its existing products.

A

C

134
Q

Increasing long-run average costs are associated with:
A constant returns to scale.
B decreasing returns to scale.
C increasing returns to scale.
D the law of diminishing returns.

A

B

135
Q

Which of the following statements is TRUE?
A Marginal physical product is equal to total physical product divided by
average product.
B Average physical product is always greater than marginal physical product.
C Marginal physical product can never become negative.
D Average physical product can never become negative

A

D

136
Q

Assuming that the marginal and average cost curves are unchanged, then following an
increase in demand, firms in a perfectly competitive industry will:
A raise their price in the short run but restore the price back to its original level
in the long run.
B keep their price constant in both the short run and the long run.
C raise their price in both the short run and the long run.
D keep their price constant in the short run but raise their price in the long run

A

A

137
Q

A firm producing carpets has average variable costs of production of £420, marginal
costs of production of £500 and operates in a perfectly competitive market. A
decrease in the demand for carpets that reduces the price from £600 to £400 will mean
that in the short run the firm will:
A shut down its production.
B decrease its level of output but continue to produce carpets.
C reduce its fixed costs of production.
D increase its level of output.

A

A

138
Q

For a monopoly, price exceeds marginal revenue because:
A the firm has to charge a price higher than the marginal cost of producing the
last unit.
B any decision by the monopolist to sell an additional unit of output does not
affect price.
C the firm has to reduce the price on all units sold in order to sell an additional
unit.
D of the law of diminishing returns.

A

C

139
Q

A firm is producing 1,000 units of output at a price of €20, with a marginal cost of €5
and average cost of €8 at that level of output. What is the supernormal profit that the
monopoly firm is making?
A €20,000
B €15,000
C €7,000
D €12,000.

A

D

140
Q

Which of the following would constitute a supply side economic policy for reducing
unemployment?
A Increasing social security benefits
B Increasing the money supply
C Reducing corporate and personal taxation
D Increasing government expenditure aimed at exploiting the multiplier effect

A

C

141
Q

Assuming no crowding out effects, the adoption of a policy to reduce the
government’s budget deficit will involve:
A an increase in aggregate demand and a reduction in real output.
B an increase in aggregate demand and an increase in real output.
C a reduction in aggregate demand and a reduction in real output.
D a reduction in aggregate demand and an increase in real output.

A

C

142
Q

In a country with a population of 25 million, there are 16 million employed and 2
million unemployed. What is the rate of unemployment?
A 8%
B 11.1%
C 12.5%
D 13%

A

B

143
Q

The introduction of a restrictive monetary policy in an open economy operating with a
flexible exchange rate would most likely lead to:
A higher domestic interest rates and an exchange rate appreciation.
B higher domestic interest rates and an exchange rate depreciation.
C lower domestic interest rates and an exchange rate appreciation.
D lower domestic interest rates and an exchange rate depreciation

A

A

144
Q

Which one of the following would NOT constitute a demand side economic policy
for reducing unemployment?
A Increased government expenditure on domestically produced goods
B Increased money supply
C Reduced corporate and personal taxation
D A privatisation programme.

A

D

145
Q

If the government imposes a minimum wage that is above the market equilibrium
wage, we would expect:
A an increase in the quantity of labour demanded.
B the labour supply curve to shift to the left.
C an increase in the quantity of labour supplied.
D the demand for labour curve to shift to the left.

A

C

146
Q

Other things being equal, the natural rate of unemployment would increase if the:
A length of time for the typical job search increased.
B level of unemployment benefits paid to unemployed workers decreased.
C level of labour productivity rose.
D rate of inflation increased.

A

A

147
Q

A government’s attempts to increase the narrow money supply through open market
operations are likely to cause short-term interest rates to:
A rise and reduce money demand.
B rise and raise money demand.
C fall and reduce money demand.
D fall and raise money demand

A

D

148
Q

Assuming all other variables remain constant, a decrease in the average price level
will result in a:
A fall in the real interest rate.
B rise in the nominal wage rate.
C rise in the real wage rate.
D rise in the nominal interest rate.

A

C

IFoA - CB2 (8 decks)

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