CIMA | Economics for Business Fundamentals past papers

© The Chartered Institute of Management Accountants 2001

Foundation Level Economics for Business

3a FECB21 May 2001

Day 1 – morning

INSTRUCTIONS TO CANDIDATES

Read this page before you look at the questions

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 ofthis 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 haveanswered.

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FECB May 20012

SECTION A — 52 MARKS

ANSWER ALL TWENTY-SIX SUB-QUESTIONS – 2 MARKS EACH

Question One

1.1 Governments could raise labour productivity by all of the following EXCEPT which ONE?

A Providing tax relief for Research and Development expenditure by companies.

B Increasing expenditure on education and training.

C Reducing discrimination in employment practices.

D Reducing social security payments.

1.2 Diseconomies of scale occur in a business when

A minimum efficient scale is reached.

B short-run variable costs begin to rise.

C x-inefficiency exists.

D long-run average costs begin to rise.

1.3 If the demand for a good increases, which ONE of the following will occur?

A Price rises and the quantity sold falls.

B Price falls and the quantity sold rises.

C Price and quantity sold both rise.

D Price and quantity sold both fall.

1.4 The economic problem of WHAT to produce is concerned with

A which goods and services and how much of each are to be produced.

B which goods will meet individual and social needs.

C which goods will maximise the rate of growth of welfare over time.

D which combination of resources should be used in production.

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



May 2001 FECB3

1.5 Which ONE of the following will produce the largest fluctuations in a market price?

A Large shifts in supply with price elastic demand.

B Large shifts in supply with price inelastic demand.

C Large shifts in supply with perfectly price elastic demand.

D Small shifts in supply with price inelastic demand.

1.6 Which ONE of the following is NOT a potential source of market failure?

A External costs.

B External benefits.

C An unequal income distribution.

D The existence of monopolies.

1.7 The kinked demand curve model of oligopoly is designed to explain

A price leadership.

B price rigidity.

C collusion between producers.

D price competition.

1.8 Under monopolistic competition, excess profits are eliminated in the long run because of

A the lack of barriers to entry.

B the effects of product differentiation.

C the existence of excess capacity.

D the downward sloping demand curve for the product.

1.9 The economic welfare case for governments increasing taxes on petrol to raise its realprice is that

A oil is a scarce resource.

B it would reduce the imports of oil.

C there is a large demand for petrol.

D petrol consumption involves external social costs.



FECB May 20014

1.10 All of the following would lead to an upward shift in a firm’s demand curve for labourEXCEPT which ONE?

A An increase in the demand for the firm’s product.

B An increase in the productivity of labour.

C A fall in the price of labour.

D A rise in the price of substitute factors of production.

1.11 Gross national product will be higher than gross domestic product if

A exports of goods and services exceed imports of goods and services.

B there is a net inflow of factor payments on the current account of the balance of payments.

C there is a net inflow on the capital account of the balance of payments.

D government taxation exceeds government expenditure.

1.12 In the circular flow model of the economy, the level of national income will always reach anequilibrium because

A injections and withdrawals are always equal.

B withdrawals are a function of the level of income.

C governments will change taxes and expenditure to ensure equilibrium.

D expenditure equals income.

1.13 All of the following are disadvantages of inflation EXCEPT which ONE?

A It redistributes wealth from debtors to creditors.

B It reduces international competitiveness.

C Market price signals are distorted.

D Fixed income earners experience a fall in real income.

1.14 Cyclical unemployment refers to unemployment

A which occurs because of the seasonal nature of some industries.

B resulting from the long-term decline of an industry.

C which occurs at particular times of the year.

D which occurs during recessions.



May 2001 FECB5

1.15 Which ONE of the following does NOT form part of the equity capital market?

A Life assurance companies.

B Pension funds.

C Retail banks.

D Venture capitalists.

1.16 The crowding out effect occurs when a

A rise in interest rates reduces private investment.

B rise in interest rates reduces the demand for money.

C fall in interest rates discourages saving.

D rise in interest rates raises mortgage rates.

1.17 An expansionary fiscal policy would be most likely to reduce unemployment if the countryhad

A a high marginal propensity to import.

B a low marginal propensity to save.

C a high marginal tax rate.

D a low marginal propensity to consume.

1.18 Monetarists believe that inflation will follow from

A excessive demand for money in the economy.

B trades unions demanding higher wage rates.

C expansion of the money supply.

D firms and individuals spending their excess money balances.

1.19 The effect on a business of a contractionary fiscal policy will be greatest when thebusiness

A has a high gearing ratio.

B produces a good with a high income elasticity of demand.

C produces non-durable goods.

D exports a high proportion of its output.



FECB May 20016

1.20 The real rate of interest is defined as the

A rate of interest banks actually charge their customers.

B annualised percentage rate of interest.

C yield on undated fixed interest government securities.

D 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 no goods.

B only those goods in which it has an absolute advantage.

C only those goods in which its efficiency advantage is greatest.

D all goods.

1.22 All of the following are reasons for trans-national companies locating production of a goodin more than one country except one. Which ONE is the EXCEPTION?

A The existence of trade barriers.

B Significant transport costs.

C Economies of scale in production.

D Differences in demand conditions between countries.

1.23 An increase in the international mobility of factors of production leads to

A an increase in international trade.

B increased unemployment in low wage economies.

C increasing differences in wage rates between countries.

D decreasing differences in factor prices between countries.

1.24 All of the following are characteristics of the process of globalisation EXCEPT whichONE?

A Increased international specialisation.

B Greater integration of production in manufacturing.

C Higher levels of international trade.

D Movement of manufacturing industries to low labour cost locations.



May 2001 FECB7

1.25 All of the following are characteristics of a common market EXCEPT which ONE?

A Free trade in goods and services among member states.

B Common levels of direct taxation.

C Free movement of factors of production between member states.

D A common external tariff.

1.26 Which ONE of the following would be likely to result in a rise in the value of UK sterlingagainst the Euro?

A A rise in interest rates in the UK.

B The UK central bank buying Euros in exchange for sterling.

C A rise in interest rates in the Euro zone.

D Increased capital flows from the UK to the Euro zone.

(Total = 52 Marks)



FECB May 20018

SECTION B – 48 MARKS

ANSWER THREE QUESTIONS ONLY

Question Two

The following diagram shows production possibility frontiers (PPF) for an economy:

Investmentgoods

• A• E

• B• D

• 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) the existence of unemployment in the economy;

(2 marks)

(ii) the process of economic growth.

(2 marks)

(c) Explain, with examples, the sources of economic growth for an economy.

(8 marks)

(Total = 16 marks)



M2001 FECB9

Question Three

The following data refer to the cost and revenue schedules of a business.

Quantity sold Price Total cost

£ £

0 – 12

1 16 20

2 14 25

3 12 30

4 10 34

5 8 45

6 6 66

7 4 110

Required:Use your knowledge of economic theory and the data above to answer the following.

(a) For each level of sales, calculate

(i) the marginal revenue;

(2 marks)(ii) 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 shouldhave this shape.

(8 marks)

(Total = 16 marks)



FECB May 200110

Question Four

The following is based on an article from a business journal and refers to the case brought bythe US Justice Department against the Microsoft Corporation.

Microsoft established first MS-DOS and later Windows, as the dominant operating systemfor the personal computer. Once the firm had achieved a position of strength, would-becompetitors faced insuperable difficulties. In particular, since software developers wouldmake new programs and applications for Microsoft systems and not others, new firmsfound it difficult to secure a share of the market. This applications barrier to entry gaveMicrosoft its enduring monopoly power. This was reflected in the high level of profits thecompany enjoyed.

Microsoft attempted to defend itself from the accusation of anti-competitive behaviour. Itargued that it effectively competes with itself by continually releasing new and improvedversions of Windows, thus making old versions more difficult to sell. However, this mightmean that personal computer producers had to install the new versions of Windows sincemost new applications were designed for them and not other systems.

Also, Microsoft argued that there was always potential competition via rapid technologicalchange. Thus it was forced to limit its prices because of the threat of the emergence of newcompetition should it charge the monopoly profit-maximising price.

Nonetheless, the court found against Microsoft, and it was held to have engaged in anti-competitive practices. US law has no quarrel with "natural monopolies" but the judgementfound that in this case Microsoft's dominance of the market reflected its business practicesand 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 yourexplanation.

(4 marks)

(d) Discuss two benefits for consumers that might result from Microsoft's near monopoly in thecomputer operating systems market.

(6 marks)

(Total = 16 marks)



M2001 FECB11

Question Five

The following diagram shows the relationship between income and expenditure for an economy.

ExpenditureE

EX

FA 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:

(i) the components of the expenditure curve;

(2 marks)

(ii) the equilibrium level of national income;

(1 mark)

(iii) the deflationary gap.

(1 mark)

(b) State what would happen to the components of expenditure AND the impact on theequilibrium level of national income if there was:

(i) an increase in the marginal propensity to save;

(1 mark)

(ii) a move towards surplus on the current account of the balance of payments;

(1 mark)

(iii) a decrease in taxation;

(1 mark)

(iv) an increase in stockholding by businesses.

(1 mark)

(c) Explain how the government might use interest rate policy to raise the equilibrium level ofnational income.

(4 marks)

(d) Explain the impact of a change in interest rates on the business sector.

(4 marks)

(Total = 16 marks)



FECB May 200112

Question Six

The following data refer to a country's balance of payments accounts, measured in billions ofdollars.

Credits Debits

$ billion $ billion

Trade in goods 164 184

Trade in services 60 48

Investment income 105 95

Transfers 15 22

Direct investment abroad 40

Inward direct investment 29

Portfolio investment (assets) 31

Portfolio investment (liabilities) 37

Other investments 44 16

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 andliabilities) of the balance of payments.

(4 marks)

(b) Calculate the country's

(i) balance of trade;

(1 mark)

(ii) balance on current account;

(1 mark)

(iii) adjusting item needed to balance the accounts.

(1 mark)

(c) Explain how an appreciation (rise) in the country's exchange rate will affect the currentaccount balance.

(4 marks)

(d) Explain the effects of an appreciation in a country's currency on a typical business in thatcountry.

(5 marks)

(Total = 16 marks)

End of paper





3a FECB19 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 sheetfrom 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 haveanswered.



FECB 2 November 2001



Question One

1.1 Which ONE of the following would lead directly to an outward shift in a country’sproduction possibility frontier?

A A rise in the population of working age.

B A fall in unemployment.

C An increase in outward migration.

D A rise in the school leaving age.

1.2 The cost of one good or service measured in terms of what must be sacrificed to obtainit is called

A real cost.

B potential cost.

C opportunity cost.

D social cost.

1.3 All of the following are supply side policies which would promote economic growthEXCEPT which ONE?

A Increased expenditure on education and training.

B A reduction in marginal rates of taxation.

C Deregulation of industry and finance.

D Increased social welfare expenditure.

1.4 All of the following are essential features of a market economy EXCEPT which ONE?

A Private ownership of productive resources.

B Allocation of resources by the price mechanism.

C Absence of entry and exit barriers to and from industries.

D Prices determined by market forces.

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



November 2001 3 FECB

1.5 The profit-maximising output will always be where

A average cost = marginal revenue.

B marginal cost = marginal revenue.

C average cost = average revenue.

D marginal cost = average revenue.

1.6 If a business currently sells 10,000 units of its product each month at $10 each unit andthe demand for its product has a price elasticity of -2∙5, a rise in the price of the productto $11 will

A raise total revenue by $7,250.

B reduce total revenue by $17,500.

C reduce total revenue by $25,000.

D raise total revenue by $37,500.

1.7 In the kinked demand curve model of oligopoly, the kink in the firm’s demand curve isdue to the firm’s belief that competitors will

A set a price at the kink of the demand curve.

B match all price increases and price reductions.

C match any price increases, but not any price reductions.

D match any price reductions, but not any price increases.

1.8 Which ONE of the following is a natural barrier to the entry of new firms into anindustry?

A Large initial capital costs.

B The issuing of patents.

C A government awarded franchise.

D The licensing of professions.

1.9 A good which is characterised by both rivalry and excludability is called

A a public good.

B a private good.

C a government good.

D an external good.




1.10 The burden of an indirect tax on a good will fall more heavily on the producer when

A demand for the good is price elastic.

B demand for the good is price inelastic.

C demand for the good has unit elasticity.

D supply of the good is price elastic.

1.11 In practice, a monopoly may have its market power limited by all of the followingEXCEPT which ONE?

A Countervailing power from its customers.

B The market may be contestable.

C There may be close substitutes for the good.

D The firm’s long-run average cost curve may be falling.

1.12 All of the following are examples of where externalities are likely to occur EXCEPTwhich ONE?

A A business providing training schemes for its employees.

B Government expenditure on vaccination programmes for infectious diseases.

C Attending a concert given by a government-funded orchestra.

D Private motorists driving cars in city centres.

1.13 Whenever government intervention prevents prices from reaching their equilibrium level,the result will always include ALL of the following EXCEPT which ONE?

A Shortages or surpluses.

B Demand and supply not equal.

C Reduced profits for producers.

D Resources not allocated by price.

1.14 Which ONE of the following would cause the value of the multiplier to fall?

A A fall in the level of government expenditure.

B A rise in the marginal propensity to consume.

C A fall in business investment.

D A rise in the marginal propensity to save.




1.15 The linking of net savers with net borrowers is known as

A the savings function.

B financial intermediation.

C financial regulation.

D a store of value.

1.16 The recession phase of the trade cycle will normally be accompanied by all of thefollowing EXCEPT which ONE?

A A rise in the rate of inflation.

B A fall in the level of national output.

C An improvement in the trade balance.

D A rise in the level of unemployment.

1.17 According to the new classical school, in order to manage the economy, governmentsshould

A use active fiscal and monetary policy.

B adopt a laissez faire approach and leave everything to market forces.

C announce monetary rules to control inflation, and liberalise product and factor markets.

D use only monetary policy to increase output and employment.

1.18 All of the following will normally lead to a fall in the level of economic activity in aneconomy EXCEPT which ONE?

A A rise in cyclical unemployment.

B A fall in business investment.

C A decrease in government expenditure.

D A rise in interest rates.

1.19 International trade is best explained by the fact that

A all countries have an absolute advantage in the production of something.

B all countries have specialised in the production of certain goods and services.

C no country has an absolute advantage in the production of all goods and services.

D all countries have a comparative advantage in the production of something.




1.20 All of the following will encourage the process of the globalisation of productionEXCEPT which ONE?

A Reductions in international transport costs.

B Higher levels of tariffs.

C Reduced barriers to international capital movements.

D Increased similarity in demand patterns between countries.

1.21 Intra-industry trade occurs when a country

A exports and imports different products.

B exports and imports the same products.

C imports materials to be used by its domestic industry.

D exports materials for use in industries in other countries.

1.22 Which ONE of the following shows the lowest degree of international mobility?

A Unskilled labour.

B Financial capital.

C Technical knowledge.

D Management.

1.23 A deficit on a country’s balance of payments current account can be financed by asurplus

A of exports over imports.

B of invisible exports over invisible imports.

C on the capital account.

D of taxes over expenditure.

1.24 A fall in the exchange rate for a country’s currency will improve the balance of paymentscurrent account if

A the price elasticity of demand for imports is greater than for exports.

B the price elasticity of demand for exports is greater than for imports.

C the sum of the price elasticities for imports and exports is less than one.

D the sum of the price elasticities for imports and exports is greater than one.




1.25 All of the following are benefits which all countries will gain from the adoption of a singlecurrency such as the Euro, EXCEPT which ONE?

A Reduced transactions costs.

B Increased price transparency.

C Lower interest rates.

D Reduced exchange rate uncertainty.

1.26 Compared to a fixed exchange rate system, an economy will benefit from a flexibleexchange rate system because

A it enables businesses to vary their export prices.

B the government will not have to deflate the economy when balance of payments deficitsoccur.

C it reduces the cost of acquiring foreign exchange.

D it ensures that businesses never become uncompetitive in international markets.

(Total = 52 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 theprice in March 2000 reached $29. As a consequence of this price rise, somecommentators are worrying that the US economy may be facing an "oil price shock" similarto those in the 1970s and 1980s. Following these earlier shocks, the US economy saw itsgeneral price level rise while national output fell – a combination known as "stagflation". Isthe 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 asthey were in the second half of the 1980s. Also, the share of oil in GDP has fallen sharplysince the 1970s (shown by the lighter line) and so changes in oil prices have less effect onthe economy. The decreasing share of oil in the economy reflects both changes ineconomic structure and increased energy efficiency.

FECB November 20018

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) explain the meaning of the real price of oil;(2 marks)

(ii) describe the changes in the real price of oil since 1980.(2 marks)

(b) Using a simple aggregate demand (AD) and aggregate supply (AS) model, explain

(i) what is meant by the term stagflation;(2 marks)

(ii) how an oil price shock could cause stagflation.(4 marks)

(c) Discuss TWO reasons why oil has become less important in the US and developedeconomies.

(6 marks)

(Total = 16 marks)

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November 2001 FECB9

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 endangeredspecies, according to the Worldwide Fund for Nature (WWF), the conservation group. Itstressed that the crisis in the fishing industry was due to poor management and to over-fishing. 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 youngfish grow and develop. The WWF said that such a strategy would lead to increased fishstocks and a larger fishing catch for fishermen within five years. However, the problem maybecome 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 goodand, 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) the impact of falling stocks of fish on the prices and sales of fish;(2 marks)

(ii) 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 whichfish 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)



FECB November 200110

Question Four

The minimum efficient scale (MES) refers to that level of output for a business at which mosteconomies of scale have been gained and the long-run average cost curve is becominghorizontal.

The following data refers to the MES of factories for a variety of industries in the UK and theUSA, expressed as a percentage of the domestic market for the product. It also shows howmuch average costs (AC) would rise if factory size was only one third of the MES.

MES as a % of USmarket

MES as a % of UKmarket

% increase in AC

at 31 MES

Cement 1∙7 6∙1 26∙0

Steel 2∙6 15∙4 11∙0

Fibres 0∙2 1∙8 7∙6

Refrigerators 14∙1 83∙3 6∙5

Oil refining 1∙9 11∙6 4∙8

Cigarettes 6∙5 30∙3 2∙2

Shoes 0∙2 0∙6 1∙5


(a) Using the above table:

(i) identify one industry that exhibits strong economies of scale and one industry thatshows 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 thanof 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 fromthe size of the factory.

(3 marks)

(c) Using examples from the table, discuss how you would expect the number and size of firmsin those industries to vary.

(4 marks)

(Total = 16 marks)



November 2001 FECB11

Question Five

The following diagram is known as the economic diamond and is used to illustrate how well aneconomy is performing in terms of the major objectives of economic policy.

0

2 Inflation, %

4

6

8

4 2 0 -2 -4 10 8 6 4 2 0

2 Unemployment, %Current account, % ofGDP

4

6

8 Economic growth, %

10

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 overalleconomic performance.

(2 marks)

(b) Describe how, other things being equal, a rise in the rate of economic growth would affectthe 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 economicallybeneficial.

(4 marks)

(d) Explain how a typical business organisation would be affected if the government were toadopt a deflationary monetary policy.

(4 marks)

(Total = 16 marks)



FECB November 200112

Question Six

The following table shows some of the economic characteristics of a group of countries. Thedata shows total population, gross national product (GNP) and imports and exports. This datashows that the trade ratio (the ratio of exports or imports to GNP) varies considerably.

Population GNP Imports Exports(million) ($ billion) ($ billion) ($ billion)

USA 249 5,200 493 364

Germany 62 941 270 341

Japan 123 2,843 210 274

UK 57 839 198 152

Netherlands 15 223 104 108

China 1,111 422 58 52

Singapore 3 29 50 45

Brazil 144 338 20 34


(a) Explain what is meant by the term the trade ratio and identify the FOUR countries whichhave the lowest trade ratios.

(4 marks)

(b) (i) Using examples from the table, explain ONE reason why some countries have lowtrade 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 theimposition of tariffs on imports by the government of that country.

(8 marks)

(Total = 16 marks)

End of paper



ExaminationQuestion andAnswer Book

Write here your full examination number

Centre Code:

Hall Code:

Desk Number:


3a FECB20 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 questionsrequire 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 fornotes or workings. Please note that you will NOT receive marks for your notes or workings. Do NOTremove any sheets from this booklet: cross through neatly any work that is not to be marked. Avoid theuse 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 26sub-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 leavethe 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 Total One Two Three Four

Marks awarded (First marker) for each question

Marks awarded (Second marker) for each question




F



Q

1

A

B

C

D

1

A

B

C

D

1

A

B

C

D

FMM


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 circleanother 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.

ECB 2 May 2002

uestion One

.1 Which ONE of the following is NOT a factor of production?

Land.

Entrepreneurship.

Labour.

Money.

.2 All of the following government policies would tend to raise the long-term rate of economic growthEXCEPT 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.

.3 All of the following are features of modern economic growth in developed economies EXCEPT whichONE?

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.

or office use only Total 1.1 1.2 1.3

arks awarded (First marker) for each sub-questionarks awarded (Second marker) for each sub-question



May 2002 3 FECB

1.4 A country’s production possibility frontier (curve) would shift outwards if

A more resources became available.

B unemployment was reduced.

C aggregate demand for goods and services increased.

D labour productivity fell.

1.5 Which ONE of the following is true of the corporate form of business organisation?

A Owners do not share in the profits of the corporation.

B Corporations are, by definition, large companies.

C Owners always exercise day-to-day decision making.

D The liability of the owners for the debts of the corporation is limited.

1.6 A rise in the price of a good accompanied by a fall in the quantity sold would result from

A a decrease in supply.

B an increase in demand.

C a decrease in demand.

D an increase in supply.

1.7 If the demand curve for Good A shifts to the left when the price of Good B rises, we may conclude that

A the goods are substitutes.

B Good A is an inferior good.

C the goods are complements.

D the demand for Good A is price elastic.

TURN OVER

For office use only Total 1.4 1.5 1.6 1.7

Marks awarded (First marker) for each sub-questionMarks awarded (Second marker) for each sub-question



FECB 4 May 2002

1.8 The introduction of a national minimum wage will lead a business to reduce its number of employeesmost when

A the demand for its final product is price inelastic.

B wage costs are a small proportion of total costs.

C there is a high degree of substitutability between capital and labour.

D the supply of substitute factors of production is price inelastic.

1.9 All of the following will lead to an imperfect allocation of resources EXCEPT which ONE?

A There are some production costs that are not borne by the producer.

B Consumers only wish to buy a limited amount of the product.

C There are spillover benefits in consumption.

D Consumers have limited knowledge of market prices.

1.10 Constant returns to scale mean that as all inputs are increased,

A total output remains constant.

B long-run average cost rises at the same rate as inputs.

C long-run average cost remains constant.

D profits remain constant as output rises.

1.11 All of the following statements about oligopoly are true EXCEPT which ONE?

A Oligopolistic firms may make excess profits in the long run.

B Oligopolistic firms do not generally produce where average costs are lowest.

C Non-price competition is a normal feature of oligopolistic competition.

D Oligopolistic firms can never achieve lower long-run average costs than could competitive firms in thesame industry.

For office use only Total 1.8 1.9 1.10 1.11Marks awarded (First marker) for each sub-questionMarks awarded (Second marker) for each sub-question



May 2002 5 FECB

1.12 All of the following are benefits for firms participating in horizontal mergers EXCEPT which ONE?

A Control over sources of supply of inputs.

B Reduction of competition.

C Economies of scale.

D Sharing of technical knowledge.

1.13 Which ONE of the following would tend to increase the degree of monopoly power of a company?

A The ending of one of its patents.

B An increase in excess profits.

C A fall in the cross price elasticity of demand for its product.

D Diversification into a wider range of products.

1.14 Which ONE of the following forms of government intervention would be most appropriate for dealingwith a failure by the business sector to provide public goods?

A Taxes and subsidies.

B Government provision of goods and services.

C Legal controls.

D Price controls.

1.15 In a boom period in the economy, the demand for electrical goods will rise more rapidly than thedemand for groceries because

A the demand for groceries is price inelastic.

B the demand for electrical goods is income elastic.

C groceries are inferior goods.

D electrical goods are cheaper in booms than in recessions.

TURN OVER




FECB 6 May 2002

1.16 The best measure of the standard of living in a country is

A gross domestic product per capita.

B per capita personal consumption.

C gross national product per capita.

D personal disposable income.

1.17 If a consumer price index rises, it shows that

A the value of the currency has increased.

B real consumer income has fallen.

C all prices in the economy have risen.

D the purchasing power of money has decreased.

1.18 Which ONE of the following would lead a country’s balance of payments current account to movetowards a surplus?

A A rise in commodity imports.

B An inflow of foreign capital into the economy.

C An increase in foreign tourism into the country.

D An increase in government tax receipts.

1.19 All of the following would normally lead to a rise in the exchange rate for a country’s currency,EXCEPT which ONE?

A An increase in the country’s exports.

B An increased inflow of foreign direct investment into the country.

C A rise in interest rates in the country.

D An increase in the export of capital from the country.




May 2002 7 FECB

1.20 All of the following are benefits for a business from a depreciation (reduction) in the rate of exchangefor the country’s currency EXCEPT which ONE?

A The business could charge lower prices for its exports.

B Imported raw materials used by the business would be cheaper.

C The business could raise profit margins on exports without losing sales.

D In its home market, the business would face reduced competition from imports.

1.21 To maximise its gains from trade, a country should

A try to maximise net exports.

B export products in which it has an absolute advantage.

C protect domestic producers from competition from cheap imports.

D export products in which it has a comparative advantage.

1.22 Multinational companies locate production in more than one country for all of the following reasonsEXCEPT which ONE?

A The existence of trade barriers.

B High transport costs.

C Capital is internationally immobile.

D To increase market share.

1.23 All of the following are the likely consequences of increased international mobility of factors ofproduction EXCEPT which ONE?

A Narrower interest rate differentials between countries.

B Increased foreign exchange transactions.

C Increasing differences in average wages between countries.

D Increased flows of profits, dividends and factor earnings on balance of payments current accounts.

TURN OVER




FECB 8 May 2002

1.24 The terms of trade are defined as

A the ratio of export prices to import prices.

B the total value of exports minus the total value of imports.

C the change in volume of exports compared to changes in the volume of imports.

D the commercial conditions under which international trade takes place.

1.25 The balance of payments accounts are defined as

A the difference between the government’s receipts and its expenditure over the period of a year.

B the difference between the exports of goods and services and imports of goods and services over theperiod of a year.

C the surplus or deficit on a country’s international trade over a given period.

D a statement of the economic transactions between residents of a country and the rest of the worldover a given period.

1.26 All of the following statements are true EXCEPT which ONE?

A Import quotas tend to reduce prices.

B Trade protection tends to reduce consumer choice.

C Trade protection tends to reduce exports.

D Tariffs tend to reduce competition.

(Total = 52 Marks)

End of Section A

For office use only Total 1.24 1.25 1.26Marks awarded (First marker) for each sub-questionMarks awarded (Second marker) for each sub-question



May 2002 9 FECB


ANSWER ALL THREE QUESTIONS

IMPORTANTMARKS ARE AWARDED FOR CORRECTLY COMPLETING THE SHADED BOXES WITH THECORRECT 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:

Required:

Use your knowledge of economic theory and the diagram above to answerthe following:

Write your answers in the shaded boxes below Marksavailable

For useby thesecondmarker

For useby the

firstmarker

(a) Identify which of the periods A to E on the diagram correspond to:

(i) a recession; 1

(ii) a recovery phase of the trade cycle; 1

(iii) a boom phase of the trade cycle. 1

What is the average duration (length) of the trade cycle inthis economy? 1

Sub-total:4

Parts (b) and (c) of Question Two are on page 10TURN OVER

Do not write in thesecolumns below

GDP growth (% per year)

-3

-2

-1

0

1

2

3

4

5

6

1 3 5 7 9

11

13

15

17

19

21

23

25

27

Years (1 - 28)

GD

P g

row

th (

% p

er

an

nu

m)

C

D

E

BA



FECB 10 May 2002

Question Two continued

Required:

Use your knowledge of economic theory and the diagram on page 9 toanswer the following:

In the shaded boxes below, circle the correct answers.

Marksavailable


For useby the

firstmarker

(b) As the economy moves from A to E, other things being equal, wouldyou expect

(i) the level of unemployment to rise fall 1

(ii) the rate of inflation to rise fall 1

(iii) the trade balance to move towards surplus deficit 1

(iv) business investment to rise fall 1

Sub-total:4

(c) For each of the following, identify the effect on the level of economicactivity in the short to medium run of

(i)a fall in the average propensity tosave

Rise Fall Unchanged 1

(ii) a rise in interest rates Rise Fall Unchanged 1

(iii)a depreciation in the exchangerate


(iv)a reduction in the value of themultiplier


Sub-total:4

Part (d) of Question Two is on page 11


Space for workings and/or notes for question two



May 2002


Marksavailable


For useby the

firstmarker

(d) Complete the following sentences

If a government wishes to limit a bo m in the economy, it should shiftthe government budget towards a and

the growth of the

The effectiveness of fiscal policy inreduced by which

by uncertainty over the value of the

too much or too little fiscal stimulat

Secti


FOR FREE CIMA, ACCA & CA

o

money supply.
(one word in each shaded area)
preventing recessions is oftenlead to policy working too late, and

…….. which leads to

io(

o

T

11 FECB

n.one word in each shaded area) 4

Sub-total:4

Total for Question Two = 16 Marks

n B continues overleaf

TURN OVER

RESOURCES VISIT: http://kaka-pakistani.blogspot.com


FECB

Question Three

The following diagram shows the cost and revenue curves for a firm. The cost curves are of the normal Ushape. Assume the demand for the product is price elastic.

Required:

Use your knothe following.

Write your an

(a) Assum

(i) the equ

(ii) the equ

(iii) excess

(iv) the opt

(b) Using tareas b

(i) the firm

(ii) there w

Part

Price, revenue& costs

FOR

P1

12 May 2002

wledge of economic theory and the diagram above to answer

swers in the shaded boxes below Marksavailable


For useby the

firstmarker

ing the firm is a profit maximiser, identify from the diagram:

ilibrium level of output 1

ilibrium price 1

(abnormal) profits 1

imal level of output 1

Sub-total:4

he diagram, state (in no more than 10 words in the shadedelow) what would happen to the equilibrium price and output if

’s costs rose?

as a fall in the incomes of the firm’s customers?

2

2

s (c) to (d) of Question Three are on page 13 Sub-Total: 4


Q4Q3Q2 OutputQ1

P2

P3

P4

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


May 2002 13 FECB



For useby the

firstmarker

(c) Complete the following sentences:

(i) If this firm was operating in a perfectly competitive market, theequilibrium 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) 2Sub-total:

4

In the shaded boxes below, circle the correct answers.

(d) State whether the following are true or false.

(i) A discriminating monopolist can chargedifferent prices in different markets onlyif the price elasticity of demand in eachmarket is different.

TRUE FALSE1

(ii) If there are large economies of scale, amonopoly industry may produce moreoutput and charge lower prices thandoes a perfectly competitive industry.

TRUE FALSE 1

(iii) Vertical integration is a common sourceof monopoly power.

TRUE FALSE1

(iv) Natural monopolies occur when thesupply of raw materials is concentratedin one country.

TRUE FALSE 1

Sub-total:4

Total for Question Three = 16 Marks

Section B continues overleaf

TURN OVER



FECB 14 May 2002

Question Four

The following data refer to the public expenditure and taxation revenue of a government for the year2000/2001.

Tax Revenue $bn Expenditure $bn

Income tax 144 Social Security 155Social Security Contributions 89 National Health Service 81Excise Duties 56 Education 69Corporation Tax 51 Defence 35Value Added Tax 90 Debt Interest 42Business Rates 24 Law and Order 30Other 104 Housing and Environment 22

Industry and Agriculture 21Transport 15Other 88

Total 558 Total 558

Required:

Use your knowledge of economic theory and the data in the table above toanswer the following.



For useby the

firstmarker

(a) Identify from the above table ONE example of each of the following:

(i) indirect taxation 1

(ii) direct taxation 1

(iii)government purchase of goods andservices

1

(iv) transfer payments 1

Sub-total:4

(b)

(i)Complete (in a maximum of 15 additional words in the shaded boxbelow) the following sentence: A progressive tax is defined as onewhere

2

(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 1

A regressive tax 1

Sub-total:4

Parts (c) and (d) of Question Four are on page 15




May 2002 15 FECB

Required:

Use your knowledge of economic theory to answer the following.

In the shaded boxes below, circle the right answers.Marks

available


For useby the

firstmarker

(c) State whether each of the following is true or false.

(i) The burden of an indirect tax falls mostheavily on a business when the demandfor its product is price elastic.

TRUE FALSE 1

(ii) A reduction in income tax will raise thedemand for the products of a businessonly if the product has an incomeelasticity of demand exceeding +1∙0.

TRUE FALSE 1

(iii)If the government ran a budget deficit, itwould be necessary for it to borrowmoney from overseas to finance thatdeficit.

TRUE FALSE 1

(iv)The existence of automatic stabilisersmeans that in a recession an existinggovernment budget deficit wouldbecome larger.

TRUE FALSE 1

Sub-total:4

(d) Complete the following sentences:

(i) A public good is one where the sector will not

provide the good because of the problem.

(maximum of two words in each shaded area) 2

(ii) The state often provides goods since private

producers would supply less than the optimum amount because of theexistence of external social .

(one word in each shaded area) 2Sub-total:

4

(Total for Question Four = 16 Marks)

End of Question Paper

TURN OVER FOR ADDITIONAL SPACE FOR WORKINGS AND NOTES




FECB 16 May 2002

You may use this sheet for notes and workings(no marks are awarded for workings)



May 2002 17 FECB




FECB 18 May 2002




May 2002 19 FECB

DO NOT WRITE ON THIS SHEET



FECB 20 May 2002

3a

FECB

Economics for Business

Day 1 – morning




Write here your full examination numberCentre Code:Hall Code:Desk Number:



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 questionsrequire them. For section B questions, you must write your answers in the shaded space provided. Blankpages are included within this booklet if you require more space for notes or workings. Please note thatyou 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.












F

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

Q

1

A

B

C

D

1

A

B

C

D

1

A

B

C

D





ECB 2 November 2002

uestion One

.1 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.

.2 The importance of saving in promoting economic growth is because of the relationship betweensavings and

present consumption.

future consumption.

investment.

interest rates.

.3 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.




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

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

B A restrictive domestic monetary policy.

C The removal of taxes on employing labour.

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

1.5 Economic growth in developed economies tends to be associated with

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

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

C a reduction in the dependence on imports.

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

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

A large, dominant firms can secure higher profits.

B large firms can better organise their factors of production.

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

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

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

A A rise in consumer incomes.

B A rise in the price of complementary goods.

C A fall in the number of substitute goods.

D A lower price for the good.

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

A Low levels of product differentiation.

B Significant economies of scale.

C Barriers to entry.

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




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

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

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

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

D To increase total sales revenue.

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

A Non-price competition.

B Interdependence in decision making.

C Entry barriers.

D A large number of firms.

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

A Charging different prices to different customers.

B Charging different prices in different markets.

C Charging different prices for products of differing quality.

D Charging different unit prices for different quantities purchased.

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

A Bad weather reducing the output of the farm sector.

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

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

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

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

A diminishing returns.

B decreasing returns to scale.

C diminishing marginal utility.

D market saturation.




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

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

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

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

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

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

A A means of allocating resources between competing uses.

B A means of ensuring a fair distribution of incomes.

C A signal to consumers.

D A signal to producers.

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

A its revenue is sufficient to cover variable costs.

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

C its marginal revenue is equal to its marginal cost.

D it is making normal profits.

1.17 The government may discourage horizontal mergers in manufacturing industry because

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

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

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

D multi-product firms tend to become inefficient.

1.18 The main function of the money market is to

A enable businesses and government to obtain liquidity.

B encourage saving.

C permit the efficient buying and selling of shares.

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




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

A Credit-based sales will tend to be high.

B Nominal costs of borrowing will always be low.

C Business activity will tend to increase.

D Investment will be encouraged.

1.20 The recession phase of the trade cycle

A is often caused by excessive consumer expenditure.

B is normally characterised by accelerating inflation.

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

D is usually caused by falling aggregate monetary demand.

1.21 Supply side policy is designed to

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

B manage the money supply in the economy.

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

D reduce unemployment by limiting the supply of labour.

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

A Corporation tax.

B Value added tax.

C Income tax.

D National insurance (social security tax).

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

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

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

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

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




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

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

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

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

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

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

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

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

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

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

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

A Rising trade ratios for countries.

B Increased international capital flows.

C Improved terms of trade for all countries.

D Reduced barriers to international factor movements.

(Total = 52 Marks)




SECTION B – 48 MARKSANSWER ALL THREE QUESTIONS

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


Question Two

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

Price D0 D1 S0

S0D0 D1

Quantity

Required:

Use BOTH your knowledge of economic theory AND the diagram (whereappropriate) to answer the following:

(a) With reference to the diagram, state whether the following are trueor false as possible explanations for the shift in the demand curvefrom D0 to D1.

(circle the correct answer in the shaded boxes below) Marksavailable

For useby thefirst

marker


(i) There has been a rise in consumerincome.

TRUE FALSE 1

(ii) There has been a fall in the price ofsubstitutes.

TRUE FALSE 1

(iii) A price rise has led to an increase insupply.

TRUE FALSE 1

(iv) Consumers expect prices to rise in thefuture.

TRUE FALSE 1

(v) The price of complementary goods hasfallen.

TRUE FALSE 1

(vi) The good has a very low price elasticity ofdemand.

TRUE FALSE 1

sub-total:6

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





Required:

Use BOTH your knowledge of economic theory AND the diagram (whereappropriate) to answer the following:

(b) Complete the following statement with no more than three wordsin each gap:

(i) An outward shift in the supply curve would lead to in priceand the change in price will be greatest when the demand for thegood is .

1

1

(ii) An outward shift in the market supply curve could occur for eitheror both of the following two reasons:

(in no more than 15 words for each reason in the shaded areasbelow)

Reason 1

Reason 22

2

sub-total:12

(c) Complete, in no more than two words in each gap, the followingstatements

(i) In the diagram, the effect of a government subsidy for theproduction 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 thereare external social in either

the production or of thegood or service. 2

sub-total:4

Total Marks for Question Two = 16






Question Three

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

Year Exchange rate

Note (1)

Interest rate

Note (2)

Balance ofpayments

current accountNote (3)

1994 89·2 6·1% - $3·8 billion1995 85·1 6·5% - $5·9 billion1996 86·3 6·0% - $1·1 billion1997 100·6 6·3% + $12·3 billion1998 104·2 7·0% - $1·0 billion1999 104·3 7·5% - $15·5 billion2000 104·6 7·4% - $21·0 billion

Note (1) Effective exchange rate, 1990 = 100.Note (2) Bank base rate.Note (3) Balance of payments, current account balance for the year.

Required:

Use BOTH your knowledge of economic theory AND the data above toanswer the following.

(a)

Explain, in no more than 20 words in the shaded area below, whatis meant when it is said that a currency has appreciated.

Marksavailable

For useby thefirst

marker


(i)

2State in the shaded box below whether this currency appreciatedor depreciated between 1994 and 2000.

(ii)

1State, in no more than 20 words in the shaded area below, whatthe data suggest is the reason for the change in the exchangerate.

(iii)

1

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

(iv)

1sub-total:

5





(b)Company ZZZ operates in this economy. It imports its rawmaterials and exports a high proportion of its output. The companyhas 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 areasbelow, three effects on the company of the changes in thevariables shown.

Marksavailable

For useby thefirst

marker


Effect (i)

2

Effect (ii)

2

Effect (iii)

2sub-total:

6(c) State whether the following are TRUE or FALSE.

(circle the correct answer in the shaded boxes below)(i) The real rate of interest is the difference

between the nominal rate of interest andthe rate of inflation.

TRUE FALSE 1

(ii) Higher interest rates reduce the level ofbusiness investment only when thatinvestment is financed by borrowing.

TRUE FALSE 1

(iii) With flexible exchange rate systems, thetrading sector of an economy cannotbecome uncompetitive.

TRUE FALSE 1

(iv) Under a fixed exchange rate system, theexchange rate has to be managed bygovernment policy.

TRUE FALSE 1

(v) It is desirable for a country to have abalance of payments current accountsurplus because this shows that it istrading at a profit with the rest of theworld.

TRUE FALSE 1

sub-total:5

Total Marks for Question Three = 16





Question Four

Aggregate monetary demand (AMD) is the total demand for goods and services in an economy over a periodof 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) inaggregate monetary demand would, other things being equal, leadto 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 shadedboxes below

Marksavailable

For useby thefirst

marker


Economic variable A fall inAMD

A rise inAMD

The rate of inflation. 1

The level of structuralunemployment.

1

The level of cyclical unemployment. 1

The deficit on the current accountof the balance of payments.

1

The surplus on the governmentbudget.

1

sub-total:5

(b) In no more than two words each, fill in the gaps in the followingstatements.

(i) A fall in AMD will have a large effect on company sales if thedemand for the product is . 1

(ii) Governments can raise AMD by the level of taxation.

1

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

1

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

1

(v) A fall in business investment will cause a larger fall in AMD becauseof the operation of the .

1

sub-total:5





Required:

(c) Complete each of the following statements, in no more than 15words, in the shaded areas below

Marksavailable

For useby thefirst

marker


Cost-push inflation can be defined as(i)

2

The Phillips curve shows(ii)

2

Frictional unemployment can be defined as the unemploymentwhich occurs

(iii)

2sub-total:

6Total Marks for Question Four = 16

Total for Question Four = 16 Marks






Write here your full examination number

Centre Code:

Hall Code:

Desk Number:


3a FECB19 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 questionsrequire them. For section B questions, you must write your answers in the shaded space provided. Do notexceed the stated number of words. Do NOT remove any sheets from this booklet: cross through neatlyany work that is not to be marked. Avoid the use of correction fluid.












F



Q

1

A

B

C

D

1

A

B

C

D

1

A

B

C

D





ECB 2 May 2003

uestion One

.1 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.

.2 An increase in labour productivity in a business can be caused by all of the following EXCEPT whichONE?

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.

.3 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.



May 2003 3 FECB

1.4 Long term economic growth is encouraged by all of the following policies EXCEPT which ONE?

A The encouragement of research and development.

B An expansion of aggregate demand to increase the level of employment.

C The establishment of education and training centres to improve human capital.

D Tax allowances for business investment expenditure.

1.5 A slow down in economic growth in the US would be transmitted to the rest of the world by allEXCEPT which ONE of the following processes?

A A fall in US interest rates.

B A fall in the US demand for imports.

C A decline in the level of US capital flows to the rest of the world.

D Falling US stock market prices leading to similar falls in other countries.

1.6 An economy is usually described as a mixed economy when production

A is partly for the home market and partly for export.

B consists partly of capital goods and partly of consumer goods.

C takes place in all three sectors; agriculture, industry and services.

D is partly in the private sector and partly in the public sector.

1.7 What does the elasticity of supply measure?

A The time taken for supply to adjust to changes in price.

B The responsiveness of the quantity supplied to a change in demand.

C The responsiveness of the quantity supplied to a change in price.

D The change in the quantity supplied divided by the price.



FECB 4 May 2003

1.8 A business producing an inferior good will find that the demand for the good

A will not respond to a reduction in price.

B will fall when consumer incomes rise.

C has a very low price elasticity of demand.

D has a positive, but low, income elasticity of demand.

1.9 Which ONE of the following would lead the demand curve for a good to shift to the right?

A A rise in consumer income.

B A decrease in the supply of a complementary good.

C An increase in the supply of a substitute good.

D 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 all factors of production used in the production process can be varied.

B all factors of production used in the production process are fixed.

C at least one factor of production which is used in the production process is fixed.

D 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 itsproduction activity, then

A there will be a misallocation of resources because the price mechanism has been interfered with.

B the increase in costs will lead the business to produce more in order to maintain its profits.

C there will be no change in production and resource allocation because costs and prices will adjust.

D resource allocation will be improved since prices will more accurately reflect costs and benefits.



May 2003 5 FECB

1.12 All of the following are internal economies of scale for a firm EXCEPT which ONE?

A The firm is able to reduce administration costs per unit of output when it opens a second productionplant.

B The firm can buy raw materials from other firms at lower prices when it buys in bulk.

C TV advertising costs can be spread over a larger output.

D 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 The employment of salaried senior managers who do not have significant shareholdings in thecompanies that employ them.

B The increased rights and roles of employees in business organisations.

C The growth in government regulation and control of business through regulatory bodies.

D 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 thedemand for the good must

A be perfectly price elastic.

B be perfectly price inelastic.

C be of unitary elasticity.

D have a price elasticity of -1.

1.15 On scheduled airflights, airlines sell standby passenger tickets at discounted (lower) prices because

A the demand for seats is always price elastic.

B the marginal cost is low up to the point where all seats on the aeroplane are occupied.

C the average cost for standby seats is less than the marginal cost.

D this price discrimination raises marginal revenue.



FECB 6 May 2003

1.16 A perfectly competitive market has all of the following features EXCEPT which ONE?

A There are many buyers and sellers.

B Buyers and sellers have full information.

C Sellers can earn only normal profits in both the short and the long run.

D 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 ofthe following reasons EXCEPT which ONE?

A Rationalisation of production may permit economies of scale.

B The new company may be able to afford higher levels of research and development.

C The new company may be able to compete more effectively with an established large company.

D Increased control of the market by the company will limit the opportunities for overseas companies tocompete.

1.18 Which ONE of the following would lead to a fall in the value of the multiplier?

A A decrease in the marginal propensity to consume.

B A fall in the level of public expenditure.

C Consumers saving a lower proportion of their income.

D A decrease in the marginal propensity to import.

1.19 The weights used in an index of retail (consumer) prices take account of

A changes in the quality of goods.

B the redistribution of income that occurs when prices change.

C the relative importance of different goods in the pattern of consumer expenditure.

D seasonal variations in the prices of some goods.



May 2003 7 FECB

1.20 All of the following statements about the monetary system are true EXCEPT which ONE?

A Financial intermediation links net savers and net debtors.

B In developed economies cash and notes form only a very small part of the money supply.

C The capital market deals in long term financial assets.

D 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 whichONE?

A A fall in the level of government revenue from taxation.

B A rise in structural unemployment.

C A reduction in inflationary pressures.

D Lower levels of demand for imported goods.

1.22 Which ONE of the following would result from a reduction in interest rates?

A Lower levels of business investment.

B Increased business costs.

C Higher wage pressure resulting from lower unemployment.

D Reduced international competitiveness

1.23 If there is inflation caused by excess aggregate demand, which ONE of the following policies is likelyto be most effective in controlling the rise in prices?

A An increase in the level of direct taxation.

B The imposition of barriers to imports.

C A reduction in interest rates.

D A reduction in VAT and excise taxes.



FECB 8 May 2003

1.24 A progressive tax is defined as one where

A the amount paid in tax increases as income rises.

B the amount of tax revenue received by the government rises over time.

C the proportion of income paid in taxation increases as income rises.

D 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 forall of the following reasons EXCEPT which ONE?

A There is little cost for the company to move its capital and management to the other economy.

B Production costs may be lower in the other economy.

C There are tariff barriers in the other economy.

D There are significant transport costs.

1.26 The process of globalisation leads to all of the following EXCEPT which ONE?

A Increasing foreign competition in domestic markets.

B Decreasing interdependence of national economies.

C Greater international division of labour.

D Rising levels of international trade relative to national income.

(Total = 52 Marks)

End of Section A



May 200


ANSWER ALL THREE QUESTIONS

IMPORTANTMARKS ARE AWARDED FOR COMPLETING THE SHADED BOXES WITH THE CORRECTANSWER WHERE A MARK IS INDICATED IN THE RIGHT-HAND COLUMN.


Question Two

The following diagram is that of the kinked demand curve model for company ZZZ producing a consumergood in an oligopolistic market.

D

MC2

P1

MC1

MR1 D

0 q1 OutputRequired:

Use your knowledge of economics AND the diagram above to answer thefollowing:

(a) Complete the following (maximum of 8 words per gap).

Marksavailable

For useby thefirst

marker


(i) The kinked demand curve model shows that if company ZZZraises its prices from P1, then its competitors

a

1

(ii) I

a

(iii) Ba

a


Cos

ts, r

eve

nue

nd if company ZZZ reduces its prices from P1, its competitors

1

f company ZZZ is a profit maximiser, it will produce where1

nd its price will only rise if costs rise from MC1 to

1

3

ecause of the kinked demand curve, firms in oligopoly tend tovoid

nd de

1

FO

pend heavily on1

R FREE CIMA, AC

to compete.

9 FECB

sub-total: 6

CA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.com


FECB


Use your knowledge of economics AND the diagram opposite to answerthe following:

Required:

(a) Complete the following (maximum of 8 words per gap).

Marksavailable

For useby thefirst

marker


(iv) In oligopoly markets, companies making decisions on price andoutput must consider the

in

1

Using no more than 5 wofollowing on the demand ZZZ’s product.

(b)

Event

(i) A successful advertisingcampaign by one of ZZZ’scompanies.

(ii) The introduction of a newproduction technology whsignificantly reduces prodcosts for all firms in theindustry.

(iii) A fall in the price of a goowhich is complementary tZZZ’s product.

(iv) Significant rises in incomethe country which is ZZZ’market.

(c) State whether each of the

(i) Oligopolies are most likelsignificant barriers to entr

(ii) Excess profits may persislong run.

(iii) Collusion is rare in oligopdominant company has noperating with rivals.

(iv) Price leadership in oligopsets a price for the producallowed to charge more th


FOR FREE CIMA, AC

of rival companies. This is called

1

decision making.

10 May 2003

sub-total: 8

rds for each, describe the effects of thecurve (curve DD opposite) for company

The demand curve would

rival 1

ichuction 1

do 1

tax ins main 1

sub-total: 12

following is TRUE or FALSE.

y to occur where there arey.

1

t in oligopolies even in the 1

oly industries because theothing to gain from co- 1

oly occurs where one firmt and other firms are notan this.

1


CA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.com


May 2003 11 FECB

Question Three

The following diagram represents the aggregate demand curve (AD) and aggregate supply curve (AS) for aneconomy.

AS

P2

P1

AD2

AD1

O Y1 Y2

National output

Required:

Use your knowledge of economics AND the diagram above to answer thefollowing:

(a) With respect to the aggregate supply curve,

Marksavailable

For useby thefirst

marker


identify the effect on national output and on the price level of anegative supply shock (maximum of 5 words each);

Effect on output Effect on price

(i)

1

state whether each of the following would produce a negativesupply shock for an economy (YES/NO).

A steep rise in the price of oil imported into theeconomy.

1

An increase in labour productivity brought about bythe widespread application of information technology.

1

The introduction of strict regulations reducing thelength of the working week.

1

(ii)

Deregulation of the financial system producing asharp increase in the availability of credit.

1

sub-total: 5


Price

leve

l



FECB 12 May 2003

Required:

Use your knowledge of economics AND the diagram opposite to answerthe following:

(b)

Marksavailable

For useby thefirst

marker


With respect to the aggregate demand curve, identify the twomissing components of aggregate demand;

(i)

Privateconsumption

Businessinvestment

2

State whether each of the following could be a reason for the shiftin the aggregate demand curve from AD1 to AD2 (YES/NO).

A significant fall in the average propensity to save inthe economy.

1

An improvement (move towards surplus) in thecountry’s current account of the balance of payments.

1

An increase in the rate of income tax levied by thecountry’s government.

1

(ii)

A large rise in the rate of return expected by thebusiness sector on all new investment.

1

sub-total: 11

(c) Complete the following (maximum of three words per gap).

(i) An effective policy of improving the education and training ofunemployed workers would shift the

curve to the and, as a result, both

and the price level would fall.

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 higheras a disadvantage.

1

1





May 2003 13 FECB

Question Four

Anyland is a small economy with a high per capita income by world standards. It has a high trade ratio withboth imports and exports being a high proportion of gross domestic product. The most important exports aretextiles, consumer electronics and tourism. Imports are mainly raw materials, oil and engineering andtransport equipment. The economy is an open one with low trade barriers and no significant controls on theinternational movement of capital. The current and capital accounts of the balance of payments are currentlyin balance. Multinational companies are generally welcomed by Anyland.

Required:

Use your knowledge of economics and the information contained above toanswer the following:

(a) State whether, other things being equal, the direct effect onAnyland’s balance of payments current and capital accounts, ofeach of the following would be a MOVE TOWARDS SURPLUS, ora MOVE TOWARDS DEFICIT or would have NO EFFECT.

Marksavailable

For useby thefirst

marker


Economic process Currentaccount

Capitalaccount

A significant rise in consumerexpenditure in Anyland’s tradingpartners.

1

A large rise in interest rates inAnyland. 1

Investment by a multinational oilcompany in an offshore oilfield inAnyland.

1

Increased remittance of profits offoreign companies in Anyland backto their parent companies.

1

sub-total: 4

(b) Complete the following (maximum of 8 words per gap).

(i) Trade theory would suggest that the Anyland economy has

in the production of textiles and consumer electronics because ithas a

in the production of these goods.

1

1

(ii) The Anyland economy is vulnerable to changes in world economicactivity because it has a

1

(iii) The balance of exports and imports of goods for Anyland is knownas its balance of trade, while its terms of trade are the ratio of

1

sub-total: 8




FECB 14 May 2003

Required:

(c) State whether each of the following items would appear inAnyland’s balance of payments CURRENT ACCOUNT or CAPITALACCOUNT and state whether each item would be a CREDIT or aDEBIT.

Marksavailable

For useby thefirst

marker


Item Current orcapitalaccount?

Credit ordebit?

Interest paid to an Anyland residenton capital held in a bank account inthe USA.

1

Expenditure by an Anyland residenton an overseas holiday. 1

A financial gift by the Anylandgovernment to a developingcountry.

1

The sale of an airliner by the UScompany Boeing to AnylandInternational Airways.

1

sub-total: 12

(d) State whether each of the following are TRUE or FALSE.

(i) If Anyland adopted a fixed exchange rate systembusiness in Anyland could avoid transaction costswhen buying and selling foreign exchange.

1

(ii) Intra-industry trade is when a country imports andexports the same types of goods and services.

1

(iii) If a country adopted high trade barriers on the goodsproduced by companies based overseas, suchcompanies would be discouraged from locatingproduction there.

1

(iv) The imposition of trade barriers normally reduceseconomic welfare in the importing as well as theexporting country.

1







Write your full examination number,your contact ID and your name on adouble-sided card, which must beattached to this booklet here.



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 questionsrequire them. For section B questions, you must write your answers in the shaded space provided. Pleasenote that you will NOT receive marks for your notes or workings. Do NOT remove any sheets from thisbooklet: cross through neatly any work that is not to be marked. Avoid the use of correction fluid.


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).





Do NOT write your name or your contact ID anywhere on this booklet.

TURN OVER

For office use only Total One Two Three Four

Marks awarded (First marker) for each question

Marks awarded (Second marker) for each question




F

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

Q

1

A

B

C

D

1

A

B

C

D

FMM


REQUIRED:Place a circle "O" around the letter A, B, C or D that gives the correct answer to each sub-question.



ECB November 20032

uestion One

.1 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.

.2 Which ONE of the following would be most likely to raise economic welfare in a country in the longrun?

An increase in the country’s trade surplus.

An expansion of the country’s social welfare provision.

A rise in the rate of growth of labour productivity in the country.

An equal reduction in taxation and public spending.

or office use only Total 1.1 1.2arks awarded (First marker) for each sub-questionarks awarded (Second marker) for each sub-question



November 2003 FECB3

1.3 All of the following would lead to an inward shift (to the left) in a country’s production possibility frontier(curve) EXCEPT ONE.

Which ONE is the EXCEPTION?

A A rise in unemployment.

B A decrease in the size of the labour force.

C A reduction in the level of business investment.

D A slower rate of technological progress.

1.4 Which ONE of the following is a supply side policy designed to promote long-term economic growth?

A Regional aid to reduce structural unemployment.

B Increasing the rate of growth of the money supply.

C Tax incentives for business investment.

D Raising aggregate demand to encourage firms to expand their supply of goods and services.

1.5 Conventional measures of national income fail to give an accurate indication of sustainable economicwelfare because they

A do not allow for inflation.

B do not allow for improvements in the quality of goods and services.

C do not allow for increases in productivity.

D do not exclude defensive expenditure to offset environmental damage.

1.6 Which ONE of the following would be the outcome of a market economy operating with a high degreeof competition?

A The interaction of demand and supply would ensure that resources are equally distributed.

B Companies would produce only those goods that are desirable for society since only such goods canbe sold at a profit.

C Large differences in incomes would be avoided.

D Producers would respond to changes in demand and consumers would respond to changes in supply.

TURN OVER




FECB November 20034

1.7 If the demand for a good has a price elasticity of demand of –2 then

A a fall in price will lead to a fall in demand.

B a rise in price will lead to a larger than proportionate fall in sales volume.

C the good must have no effective substitutes.

D 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 a leftward shift in the demand curve for petrol.

B a movement down along the demand curve for petrol.

C a rightward shift in the demand curve for petrol.

D a movement upward along the demand curve for petrol.

1.9 If the imposition of a congestion charge on the use of cars in cities does not significantly reduce theuse of cars for travelling to and from work (commuting), this must be because

A there are no substitutes for cars.

B the demand for commuting by car is price inelastic.

C the supply of alternative means of transport is price elastic.

D 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 wagesbetween occupations in the long run?

A There is geographical immobility of labour.

B In the long run, everyone has to accept the wage levels determined by the market.

C The skill and knowledge content of some occupations acts as a barrier to entry.

D In some occupations, wages may rise above the equilibrium level.




November 2003 FECB5

1.11 Which ONE of the following statements about prices is true?

A An increase in demand will lead to higher prices only if supply is price inelastic.

B A shortage of goods can occur if prices are above the equilibrium level.

C The imposition of a minimum price for a good will always lead to a surplus of output over demand.

D 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 ofthe following is the best explanation for this?

A Profit margins are too small to allow price cuts.

B Most oligopolies are cartels that fix prices.

C The expectation that rival companies will always reduce prices in response to a price cut.

D 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 toraise long-term economic welfare?

A A total ban on all polluting activities.

B A tax on all products whose production involves pollution.

C A tax on the emission of pollutants.

D 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 the variable cost of providing the service.

B the fixed costs of production.

C overhead costs.

D the average cost of providing the service.

TURN OVER




FECB November 20036

1.15 Goods whose production involves net social costs greater than private costs are normally

A under-produced by the private sector relative to the optimal level of output.

B over-produced by the private sector relative to the optimal level of output.

C not produced in the private sector because it would be unprofitable to do so.

D produced at the optimal level by the private sector.

1.16 Normal profit is the

A average level of profit earned in an industry.

B level of profit earned by firms in the long run.

C level of profit required to keep the business operating in an industry.

D 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 Monopolies always earn profits; perfectly competitive firms rarely do.

B In the short run, firms in both monopoly and perfect competition attempt to minimise average fixedcosts.

C In the long run, firms in both monopoly and perfect competition produce where average costs arelowest.

D Profits in perfect competition will be reduced in the long run by the entry of new firms, but long-runmonopoly profits are protected by entry barriers.

1.18 A country’s gross national product (GNP) will be greater than its gross domestic product (GDP) when

A there is a net inflow of factor incomes.

B exports of goods exceed imports of goods.

C there is a surplus on the balance of payments current account.

D the government is running a budget surplus.




November 2003 FECB7

1.19 Each of the following is a source of funds for capital investment for business enterprisesEXCEPT ONE.


A The central bank.

B The stock market.

C Internally-generated funds.

D Commercial banks.

1.20 All of the following are effects on a business of a reduction in interest rates EXCEPT ONE.


A Increased credit-based sales.

B A lower net present value of investment projects.

C A fall in the cost of servicing bank debts.

D 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 thetrade cycle?

A A slow down in employment growth.

B An improvement in the trade balance.

C A stable rate of growth of GDP.

D Increased inflationary pressures.

1.22 A significant fall in stock market values in a country will be likely to contribute to a contraction of thecircular flow of income because

A the circular flow is one of individual wealth of which shares are a part.

B reductions in consumer wealth will encourage lower consumption and higher saving.

C the buying of shares is an injection into the circular flow, and falling share prices will discourage thebuying of shares.

D outflows from the economy increase as investors switch savings to overseas stock markets.

TURN OVER




FECB November 20038

1.23 All of the following would occur in an economy which experienced a fall in the general level of pricesEXCEPT ONE.


A Some consumer expenditure would be postponed.

B The international competitiveness of the business sector would tend to increase.

C The real burden of business debts would fall.

D Government indirect tax revenues would tend to decline.

1.24 The comparative advantage theory of international trade shows that countries can benefit from tradebecause

A countries can export their surplus output.

B all countries have an absolute advantage in the production of some goods and services.

C they can profit by running a trade surplus with the rest of the world.

D 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 followingreasons EXCEPT ONE.


A To secure economies of scale in production.

B To avoid transport costs.

C To avoid tariff barriers in overseas markets.

D To secure a variety of sources of supply of components.

For office use only Total 1.23 1.24 1.25Marks awarded (First marker) for each sub-questionMarks awarded (Second marker) for each sub-question




1.26 If a group of countries forms a regional trading bloc, the long-run economic welfare benefits gained willbe smaller if the bloc

A allows the free movement of labour within the bloc.

B encourages companies to change their location within the bloc.

C abolishes all internal barriers to trade in goods and services.

D 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 Total 1.26Marks awarded (First marker) for each sub-questionMarks awarded (Second marker) for each sub-question




SECTION B – 48 MARKSANSWER ALL THREE QUESTIONS

IMPORTANTMARKS ARE AWARDED FOR COMPLETING THE SHADED BOXES WITH THE CORRECTANSWER WHERE A MARK IS INDICATED IN THE RIGHT-HAND COLUMN.


Question Two

The following diagram shows the long-run average total cost curve (LRAC) for a business.

Averagetotal costs

LRAC

A B C

Output

Using your knowledge of economics and the diagram, answer the following:

Required:

(a)Marks

available

For useby thefirst

marker


Define, in the shaded area below, the term "economies of scale"(i)

Maximum 25 words 2(ii) 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 toeach of the following:Description Section of the long-run

average cost curve (A, B or C)Decreasing returns to scale 1

Increasing returns to scale 1

sub-total: 4

Question Two continues on page 11






Required:

(b) In the shaded boxes below, give an example of each one of the scaleeffects that a business might experience.

(Maximum 15 words each) Marksavailable

For useby thefirst

marker


A technical economy of scale

1A commercial economy of scale

1A managerial economy of scale

1A diseconomy of scale

1sub-total: 4

(c) Indicate with a cross (X) in the appropriate box whether each of thefollowing is TRUE or FALSE?Statement TRUE FALSEEconomies of scale limit the number of firms in anindustry by acting as a barrier to entry. 1

Even if a firm experiences economies of scale inthe long run, its short-run average cost curve willalways be U-shaped because of diminishingmarginal returns. 1

If a business’s long-run cost curve is falling, it canalways increase total profits by raising output. 1

The main source of economies of scale istechnological change because this reduces costsover the long run. 1

sub-total: 4(d) Fill in the gaps in the following statements (Maximum 3 words per gap)

(i) Economies of scale tend to lead toindustries; here there are a few large firms and competition is oftenby methods. 2

(ii) For a business, the is the level ofoutput where almost all economies of scale have been secured. Ifthis is large relative to the total market, a is likely to emerge. 2

sub-total: 4

(Total for Question Two = 16 Marks)

TURN OVER





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 thefollowing.

Required:

(a) Match ONE of the above types of unemployment to each of thefollowing definitions.

Marksavailable

For useby thefirst

marker


Definition of unemployment Type ofunemployment

Unemployment associated with industries orregions where the demand for labour andwage rates regularly rise and fall over theyear.

1

Unemployment that occurs in particularindustries and arises from long-termchanges in the pattern of demand or supply.

1

Unemployment that occurs as a result ofimperfect information in the labour marketresulting in time spent unemployed betweenjobs

1

Unemployment caused by a general fall inaggregate demand in the economy.

1

sub-total: 4(b) Indicate with a cross (X) in the appropriate box whether each of the

following is TRUE or FALSE.Statement TRUE FALSEUnemployment and inflation tend to rise and falltogether over the trade cycle. 1

In a recession, most businesses face falling sales,but this is especially true for those whoseproducts have a high income elasticity of demand. 1

Rising real wages will cause most unemploymentwhen the demand for the product of the businessis highly price inelastic. 1

Changes in real wage costs have least effect onemployment in those industries that are relativelycapital intensive. 1

sub-total: 4

Question Three continues on page 13





Required:


(c) For each of the following events, indicate with a cross (X) in theappropriate box below whether the direct effect for the economy as awhole would be raise the level of unemployment, lower the level ofunemployment or to leave the level of unemployment unchanged. Marks

available

For useby thefirst

marker


Event Raiseunemployment

Loweremployment

Leaveunemploymentunchanged

The imposition of alegal nationalminimum wagebelow the equilibriumwage rate. 1

Monetary policiesleading to a rise inthe real exchangerate for the country’scurrency. 1

A reduction in thelevel of real interestrates. 1

A downturn ineconomic activity inthe country’s tradingpartner countries. 1

Sub-total: 4(d) Fill in the gaps in the following (maximum of 3 words per gap).

A Keynesian approach to unemployment would emphasise the needto raise by increasing public 1

expenditure or reducing the level of taxation. Subsequent budgetdeficits would be financed by . 1

In contrast, the approach 1

would focus on reducing both direct taxes and unemploymentbenefits to make employment more attractive, and on the removal ofimperfections in the market 1

arising from regulations and from the activity of trade unions.Sub-total: 4

(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 theexchange rate with the Euro.

D1 D2 S1Exchangerate Eurosper $

Demand for and supply of dollars

Required:

Using the diagram above and your knowledge of economic theory, answerthe answer the following:

(a)

Marksavailable

For useby thefirst

marker


State whether the shift in demand curve for dollars from D2 to D1 willcause the dollar exchange rate to appreciate or depreciate relative tothe Euro.

(i)

1Indicate with a cross (X) in the appropriate box what the effect on thedollar exchange rate will be an increase in imports from Europe intothe USA:

shift to the left.be unchanged.

The demand curve for dollars will

shift to the right. 1

shift to the left.be unchanged.

The supply curve for dollars will

shift to the right. 1

rise.be unchanged.

(ii)

The exchange rate for dollars will

fall. 1

sub-total: 4

Question Four continues on page 15





Question Four continued:

Required:

(b) Indicate with a cross (X) in the appropriate box whether each of thefollowing processes would lead to a shift in the demand curve fordollars from D1 to D2 Marks

available

For useby thefirst

marker


Process YES NOAn increase in the level of capital inflows into theUSA. 1

A rise in exports of US services to eurozonecountries. 1

A higher level of exports of capital from the USA 1

A reduction in demand in the USA for overseasholidays. 1

sub-total: 4(c) There is a variety of exchange rate systems. These include

Dirty floatingFree floatingAdjustable pegFixedManaged floatingExchange rate bandJoint float

Match each of the following to ONE of the above types. Description Name of exchange

rate systemThe government has no exchange ratetarget, but intervenes in the foreignexchange market to prevent excessivelylarge changes in the exchange rate.

1

The government allows the currency tofloat, but intervenes to achieve anexchange rate target.

1

The government pegs the exchange ratepermanently to another currency andintervenes in the foreign exchange marketto maintain that rate of exchange.

1

The government allows the currency tofloat between an upper and lowerexchange rate, but intervenes to preventthe currency moving outside of these limits.

1

sub-total: 4

Question Four continues on page 16TURN OVER





Question Four continued:

Required:

Assume that the US economy recovers strongly from the recentrecession and inflationary pressures begin to emerge. As a result, theUS monetary authorities raise US interest rates.For each of the following statements, indicate with a cross (X) in theappropriate box, whether they would result from the action of the USmonetary authorities in raising interest rates.

Marksavailable

For useby thefirst

marker


Statement TRUE FALSEThere would be increased outflows of capital fromthe USA to other countries. 1European businesses would experience increasedcompetition from US businesses because thedollar would tend to depreciate relative to theEuro. 1Interest rates would tend to rise in other countries. 1

(d)

US national income would be lower than otherwisethus reducing the potential market for Europeanexporters. 1

sub-total: 4













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