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TEST CODE 02216010
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F'ORM TP 2016195 MAY/JUNE 2OI6
CARIBBE.AN EXAMINATIONS COUNCIL
CARIBBEAN ADVANCED PROFICIENCY EXAMINATION@
ECONOMICS

Unit2-Paper0l
t hour 30 minutes

06 JUNE 2016 (a.m.)

READ THE FOLLOWING INSTRUCTIONS CAREFULLY.

l. This test consists of 45 items. You will have I hour and 30 minutes to answer them.
2. In addition to this test booklet, you should have an answer sheet.

3. Do not be concerned that the answer sheet provides spaces for more answers than there are
items in this test.

4. Each item in this test has four suggested answers lettered (A), (B), (C), (D). Read each item
you are about to answer and decide which choice is best.

5. On your answer sheet, find the number which corresponds to your item and shade the space
having the same letter as the answer you have chosen. Look at the sample item below.

Sample Item

Prime cost is calculated by adding direct factory expenses

to the costof Sample Answer

(A) goodsused @@O@

(B) goods bought
(C) materials used
(D) materials produced

The best answer to this item is "materials used", so (C) has been shaded.

6. If you want to change your answer, erase it completely before you fill in your new choice.
7. When you are told to begin, turn the page and work as quickly and as carefully as you can.
If you cannot answer an item, go on to the next one. You may return to that item later.
8. You may do any rough work in this booklet.
I 9. You may use a silent, non-programmable calculator to answer questions.
T
DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO.
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I- Copyright @ 2014 Caribbean Examinations Council
I
All rights reserved.
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 _) _

1 Which of the following statements BEST t. According to classical economists, why

describes the underground economy? will the labour market always maintain
equilibrium?
(A) The production of intermediate
goods (A) Prices, including wage rates, are
(B) Economic activities that foster flexible.
growth (B) The market is not allowed to
(C) Economic activities that are operate freely.
heavily taxed (c) Financial institutions have excess
(D) Economic activities that are funds.
hidden from the government (D) Commercial banks have a shortage
offunds.

2 Which of the following phrases BEST

defines'real national income'? 6 Which of the following concepts BEST
explains why, in the classical model, all
(A) The actual CDP in any given year unemployment is voluntary?
(B) The money value of national
income (A) Business cycle
(c) National income adjusted for (B) Spare capacity
inflation (C). Wage and price flexibility
(D) CDP minus net property income (D) 'Compensating differentials
from abroad

7 "Supply creates its own demand." This

3 In any given year, an increase in nominal statement represents
CDP means that
(A) Say's law
(A) output has fallen and prices have (B) Goodhart's law
increased (C) the law of supply
(B) output has increased or prices (D) the law of demand
have increased
(c) output has increased while'prices
remain constant 8 Gross domestic product is the market value
(D) prices have increased while output of all
remains constant
(A) transactions in an economy during
a one-year period
4. Inthe classical model oftheeconomy, which (B) goods and services exchanged in
ofthe following conditions MUSTexist for an economy during a one-year
continuous equilibrium to be achieved? period
(C) final goods and services produced
I. Price flexibility in a domestic economy during a
II. Wage flexibility one-year period
III. Downward stickiness (D) intermediate goods and services
produced in a domestic
(A) I and II only economy during a one-year
(B) I and III only period
(c) II and III only
(D) l, II and III

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[em tlrefersto the followingdiagram which Item 11 refers to the following graph which
shows two aggregate supply curves of an shows aggregate demand curves for an
economy. economy.

ASt
AS,
Price
level

Price
level
+

AI)

Output ADt

National Income

9 Which of the following situations would

result in a shift from AS, to AS,? 11 The movement from AD, to AD, is MOST
likely caused by an increase in
(A) An increase in wage rates
(B) A decrease in labour productivity (A) inflation
(C) A rise in the cost of raw materials (B) taxation
(D) An increase in labour productivity (C) interest rates
(D) government spending

Item 10 refers to the following diagram

which shows the income-expenditure t2 Classical theorists believe that the
model. underlying cause of unemployment is

(A) cyclical
Aggregate E
erpenditure (B) seasonal
cr9 (c) structural
(D) voluntary
R

ot,
0
Yf Y.
Output

10. What does RS represent?

(A) The inflationary gap

(B) The deflationary gap
(C) Autonomous saving
(D) Autonomous investment

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Items 13-14 refer to the following diagram Item 15 refers to the following diagram.
which shows the aggregate demand (AD)
and aggregate supply (AS) curves in an
I
economy. The economy is initially in
equilibrium at AD, and AS,. Consumption 2

ASz
d

Price 0
Ievel
a2 r Income ($)
4 An2
ADt 15. Which of the following segments BEST
represents dissavings?
Yr Y2 Output
(A) bc
13 Suppose there is technological advancement (B) QQ'
in this econorny, at which point will the new (c) Q,Q
equilibriurn occur? (D) 0eafd

(A) I
(B) 2 16. Which of the following measures is an
(c) 3 example of fiscal policy?
(D) 4
(A) A relaxation of credit controls
(B) A reduction in value-added tax
14. Ifthe country experiences a decrease in the (C) The alteration of the foreign
cost of its imported raw materials then the exchange rate
new equilibrium position will be at (D) A change in the required reserve
. ratios of banks
(A) I
(B) 2
(c) 3 17. The statement "Too much money chasing
(D) 4 too few goods" refers to

(A) economic boom

(B) cost-push inflation
(C) economic recession
(D) demand-pull inflation

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18. Which ofthe following demands formoney 21. A fiscal surplus is BEST defined as the
is MOST sensitive to changes in interest
rates? (A) sum of income collected by the
government
(A) General (B) amount of money spent by the
(B) Speculative government on social welfare
(c) Transaction benefits
(D) Precautionary (C) excess of total govemment
expenditures over total
government revenues
19. Increased bomowing by the government (D) excess of
total government
results in higher interest charges and this revenues over total government
leads to less private investment expenditure. expenditures

The situation above is an example of

22 When a central bank determines the stock
(A) funding of money that remains constant despite
(B) inflation changes in interest rates, the money supply
(C) crowding out curve is
(D) the accelerator
(A) . upward sloping
(B) perfectly elastic
Item 20 refers to the following graph which (C) perfectly inelastic
shows a liquidity preference curve. (D) downward sloping

Rate of 23. If the marginal propensity to save is 0.4,

interest
then the simple multiplierwill be

(A) 2.0
(B) 2.5
(c) 3.0
(D) 4.5
L(Md)
24 In a situation of inflation, diagnosed as
o Money balances caused by excess demand, which of the
following policies will be MOST effective
20. A rightward shift of the liquidity in controlling the risO in prices?
preference curve is the result of
(A) The imposition of import controls
(A) an increase in the rate of interest (B) A reduction in the level of interest
(B) expectation of a fall in share prices rates
(C) an increase in the level of national (C) An increase in the level of direct
income taxation
(D) expectation of a depreciation of (D) An increase in the public sector
the exchange rate borrowing requirement

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25. The quantity theory of money may be 29. The demand for money is determined by the
expressed as
I. rate ofinterest
(A) V=PT+P ll. level of income
(B) V:M+P III. levelof taxation
(C) MT = PV
(D) MV = PT (A) I and II only
(B) I and III only
(c) II and III only
Item 26 refers to the fo I lowing information. (D) I, III and III

Joan sees little or no point in keeping her

money in the commercial banks since 30 The debt service ratio for Country Y fell
interest rates are very low. She is also from 80 per cent to 70 per cent between
purchasing the United States (US) dollar 2012 and 2013. This means that
with the hope that this currency would be
able to hold more value. (A) new loans were taken out in 2012
(B) there was a devaluation of the
26. Joan is engaged in exchange rate
(c) some loans due for repayment
(A) speculation were repaid
(B) money hoarding (D) there was a fall in the expenditure
(C) money laundering on imports between 2012 and
(D) curency substitution 2013

27 Which ofthe following expressions BEST

defines a price index?

(A) A continuous increase in the

. overall price level
(B) A decrease in the overall price
level of all goods producod in a
country
(C) A measurement showing how the
average price of a basket of
goods changes over time
(D) A measurement showing the cost
of goods at a particular point in
time

28 The relationship between inflation and

unemployment is that as unemployment
falls, inflation

(A) falls
(B) rises
(c) remains unchanged
(D) either falls or remains unchanged

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Item 31 refers to the following diagram Item 33 refers to the following graph which
which shows the US market for US$. shows the demand for imports of a particular
good into Country B (assuming a perfect
elasticity world supply).
Rate ($)
Sg
1.0 Price
0.t
0.6
0.4 &
D$
0.2

Dollars ($) ws

31 Which of the following situations BEST

describes the situation if the exchange rate
:
were at $l f,0.4? Quentity

(A) The dollar would be overvalued.

(B) The dollar would be undervalued. 33 How does an imposition ofquota at S, affect
(c) Demand would be less than price and quantity imported?
supply.
(D) The market would be in (A) Price increases; quantity decreases
equilibrium. (B) Price increases; quantity increases
(C) Price decreases; quantity increases
(D) Price decreases; quantity decreases
32. Which ofthe fol lowing wou ld be the MOST
likely cause of an increase in a country's
foreign currency resources? 34. Sustainable development refers to a siiuation
where
(A) An increase in the domestic rate
. of inflation (A) non-ieceivable resources are fully
(B) An improvement in the country's employed
trade balance (B) a high value is placed on
(C) An increase in the prices of the conservation for its own sake
country's most price elastic (C) an improvement in people's
exports welfare can be maintained
(D) Government intervention on the indefinitely without depleting
foreign exchange market to resources
prevent a depreciation (D) there is a constant increase in real
GDP per capita over a number
ofyears

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35. Which of the following is NOT a component 39. One advantage of a floating exchange rate
of the human development index? system is that it

(A) Reat GDP per capita (A) forces the govemmentto constantly
(B) Increases in job security monitor its value
(C) Education and literacy rates (B) reduces the uncertainties caused
(D) Life expectancy at birth, in years by fluctuating import and export
prices
(C) provides an automatic solution to
36 The governmentofCountry X has a persistent balance of payments problems
current account surplus. To eliminate this (D) requires the strong support of
surplus, the government should government to maintain its value

(A) decrease import tariffs

(B) devalue exchange rates 40. Country Y had an inflation rate of 8%o and
(C) subsidize domestic exports a nominal growth rate of 7o/o. This means
(D) introduceprotectionistpolicies that Country Y experienced

(A) positive growth

37. The primary purpose of World Bank funds is to (B) negative real growth
(C) little growth in the economy
(A) foster regional development in (D) ' both nominal growth and real
agriculture growth
(B) promote env i ronmental development
of developing countries
(c) finance temporary balance of 4t Caribbean countries can maximize the
payments problems of developing benefits of globalization by
countries
(D) finance infrastructure development advertising and exporting
on a long-term basis in developing indigenous goods to the world
countries II ensuring that multinational
corporations hire workers at all
levels including management
38. Which of the following phrases defines III. investing locally and employing
'economic growth'? only domestic labour and other
resources
(A) The increase in real per capita output
over time (A) I and II only
(B) An increase in the standard of living (B) I and III'only
over time (C) II and III only
(C) The meeting of two production (D) I,lI and III only
possibi I ity boundaries
(D) A representation of the maximum
recovery of existing resources
over time

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42. Which of the following measures are characteristics of multinational corporations?

l. Repatriation of profits
II. Foreign direct investment
III. Employs expatriate workers

(A) I and II only

(B) I and III only
(c) II and III only
(D) I, II and III

43. One LIKELY negative impact of globalization on the Caribbean is

(A) higher prices for goods

(B) reduced variety of goods
(C) loss of preferential markets
(D) increasedtransportationcosts

44 To which of the following concepts does "equity, sustainability, productivity and empowerment"
apply?

(A) Growth
(B) Development
(c) Liberalization
(D) Economic integration

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 -t0-
Item 45 refers to the following diagram showing the demand and supply of the pound (€).

sus/f
s

2
J M
I --l

0
I0 l2 l4 l6 Quantity of f (billions)

45. Assuming a floating exchange rate regime, before the United States increased their desire for
exports from the United Kingdom, the initial equilibrium was'

(A) J
(B) K
(c) L
(D) M

END OF TEST

rFYOU FINISH BEFORE TIME rS CALLED, CHECK YOUR WORK ON THrS TEST.

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