3.

Economics
Q-1. The two dominant supermarket chains in the area are attempting to increase their
market share by moving to 24-hour service instead of closing at 9 p.m. every night. The
strategic outcomes and payoff matrix that arise from their actions are depicted in the
diagram (with the shaded sections representing payoffs for Chain 2).

According to Nash equilibrium, the best strategy is for:

A. both chains to open for 24 hours.
B. only Chain 2 to open for 24 hours.
C. both chains to close at 9 p.m.

Q-2. A producer's supply function is given by the equation

Q=-55+26Ps+1.3Pa
Where Q is the quantity of steel supplied by the market, Ps is per unit price of steel, and
Pa is the per unit price of aluminum. If the unit price of aluminum is 10, the slope of the
supply curve is closest to:
A. 0.04.
B. 1.30.
C. 26.00.

Q-3. Assume that an economy is composed of two products, X and Y, with the following
details:
Quantity Quantity Product Product
Product Produced Produced Unit Prices Unit Prices
in 2012 in 2013 in 2012 in 2013
X 351.0 352.0 13.3 13.8
Y 179.0 182.5 unknown 11.1
Assuming 2012 is the base year for measuring GDP and the GDP deflator for the

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 economy in 2013 is 102.4, the unit price of Y in 2012 is closest to:
A. 11.2.
B. 11.5.
C. 10.8.

Q-4. The current spot rate for the USD/EUR is 0.7500. The forward rate for the
EUR/Australian dollar (AUD) is 1.4300, which represents a 400 point forward premium
to the spot rate (scaled up by four decimal places). The USD/AUD spot rate is closest to:
A. 1.0296.
B. 1.0425.
C. 1.1154.

Q-5. Long-term sutainbale growth of an economy is least likely to result from growth in:
A. Output per unit of labor
B. The supply of labor
C. Capital per unit of labor

Q-6. An increase in both aggregate demand and supply occurs, with aggregate supply
increasing more than aggregate demand. The most likely result is a decrease in the:
A. real GDP.
B. participation rate.
C. price level.

Q-7. Assuming all other factors remain unchanged, which of the following changes would
most likely cause a simultaneous increase in the participation ratio and a decrease in
the unemployment rate?
A. An increase in the number of people included in the labor force.
B. A decrease in the total population of working age people.
C. A decrease in the number of unemployed people.

Q-8. Assume economic activity is accelerating, inflation is increasing modestly, and

unemployment is low. The economy is most likely in which phase of the business cycle?
A. Peak
B. Early expansion
C. Late expansion

Q-9. In an effort to influence the economy, a central bank conducted open market activities
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 by selling government bonds. This action implies that the central bank is most likely
attempting to:
A. expand the economy through a lower policy interest rate.
B. contract the economy through a lower policy interest rate.
C. contract the economy by reducing bank reserves.

Q-10. In the short run, a firm operating in a perfectly competitive market will most likely
avoid shutdown if it is able to earn sufficient revenue to cover which of the following
costs?
A. Marginal
B. Fixed
C. Variable

Q-11. A country's international transactions accounts data for last year are presented in its
domestic currency:
Transaction Amount
Exports of goods and services 10,000
Import of goods and services 14,216
Investment income payments made to foreigners 2,519
Investment income received from foreigners 3,409
Net change in assets owned abroad 1,548
Net change in foreign-owned assets domestically 4,989
Unilateral current transfers received 346
Unilateral current transfers paid 1,107
Statistical discrepancy 646
The current account balance is closest to:
A. –4,216.
B. –4,345.
C. –4,087.

Q-12. Suppose three countries produce bananas and pencils with output per worker per day
in each country as follows:

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 Bananas Pencils

Mexico 20 40

Brazil 30 90

Canada 40 160

Which country has the greatest comparative advantage in the production of bananas?
A. Brazil.
B. Mexico.
C. Canada.

Q-13. A large country can:

A. not benefit from any trade restriction
B. benefit with an export subsidy.
C. benefit by imposing a tariff.

Q-14. The different disadvantage of the N-Firm Concentration Ratio relative to the
Herfindahl-Hirschmann Index is that the Ratio:
A. is difficult to compute.
B. fails to reflect low barriers to entry.
C. fails to reflect the effect of mergers in the industry.

Q-15. A country’s year-end consumer price index over a 5-year period is as follows:
Year 1 106.5
Year 2 114.2
Year 3 119.9
Year 4 124.8
Year 5 128.1
The behavior of inflation as measured by this index is best described as:
A. Hyperinflation.
B. Deflation.
C. Disinflation.

Q-16. The current spot rate for the British pound in terms of U.S.dollars is 1.533 and the
180-day forword rate is 1.508. Relative to the pound ,the dollar is trading closest to a
180-day forward:
A. Premium of 1.66%
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B. Discount of 1.66%

C. Discount of 1.63%

Q-17. A liquidity trap is most closely associated with:

A. an inelastic demand for money.

B. Deflation

C. a positive nominal central bank policy rate.

Q-18. How the demand for a given product will most likely to change if the price of its
substitutes decrease?
A. remain unchanged.
B. decrease.
C. increase.

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 3. Economics
Q-1. Solution: A.
Each company will consider the other’s reaction in selecting its strategy. Using the following
summary, it is best for both chains to provide 24-hour service.
Chain Consideration Best Decision
If it opens for 24 hours, it will see a higher payoff
regardless of what Chain 2 does.
Chain 2 Chain 2
1 Open for 24 hours
Closes at 9 p.m. Opens for 24 hours
Chain 1 earns 540 Chain 1 earns 108
instead of 180 instead of 55
If it opens for 24 hours, it will see a higher payoff
regardless of what Chain 1 does.
Chain 1 Chain 1
2 Open for 24 hours
Closes at 9 p.m. Opens for 24 hours
Chain 2 earns 592 Chain 2 earns 140
instead of 290 instead of 75

Economics, The Firm and Market Structures, Characteristics of Oligopoly.

Q-2. Solution: A.
The slope coefficient of Q. in the inverse supply function is 0.04.
Start with the supply equation : Q=-55+26Ps+1.3Pa
Insert Pa=10; =-55+26Ps+1.3Pa
=-42+26 Ps
Solve for Ps: Ps=1.6+0.04Q (the inverse supply function)

Economics, Topics in Demand and Supply Analysis, Demand curve and supply curve.

Q-3. Solution: A.
Quantity Quantity Product Unit Product Unit
Product Produced in Produced in Prices in Prices in =(2)×(4)
2012 (1) 2013 (2) 2012 (3) 2013 (4)
X 351.0 352.0 13.3 13.8 4,857.6
Y 179.0 182.5 11.1 2,025.8
Nominal GDP in 2013 equals the sum of the last column: 6,883.4
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RealGDP2013  NominalGDP2013 100 / GDPdeflator  6883.4 100 /102.4  6722.1
RealGDP2013  P x 2012  Q x 2013  P y 2012  Q y 2013
6722.1  (13.3  352.0)  P y 2012 182.5
6722.1  4681.6  P y 2012 182.5
P y 2012  11.2

Economics, Aggregate Output, Prices and Economic Growth, GDP.

Q-4. Solution: B.
B is correct.
Find the spot rate for the EUR/AUD
Step 1
Spot = Forward rate – Points Spot=1.4300− 400/10,000=1.3900
Calculate cross-rate
Step 2: USD USD EUR USD
* =0.7500*1.3900=1.0425
AUD EUR AUD AUD

Economics, Currency Exchange Rates, Basic concept and calculation.

Q-5. Solution:C.
C is correct. The sustainable rate of economic growth is a measurement of the rate of increase in
the economy’s productive capacity. An economy’s sustainable rate of growth depends on the
growth rate of the labor supply and the growth rate of labor productivity. Due to diminishing
marginal productivity, an economy generally cannot achieve long-term sustainable growth
continually increasing the stock of capital relative to labor.

Economics, Aggregate Output, Prices and Economic Growth, Economic Growth.

Q-6. Solution: C.
If both aggregate demand (AD) and aggregate supply (AS) increase, real GDP will increase but the
impact on inflation is not clear unless we know the magnitude of the changes because an
increase in AD will increase the price level, whereas an increase in AS will decrease the price level.
If AD increases more than AS, the price level will increase. If AS increases more than AD, as
depicted in the graph to the right, the price level will decline.

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Economics, Aggregate Output, Prices and Economic Growth, Effect of combination of AD and AS.

Q-7. Solution: A.
The participation ratio (or activity ratio) is the ratio of the labor force to total population of
working age and the unemployment rate is the ratio of the number of unemployed to the labor
force. Labor force is the numerator in the participation ratio and denominator in the
unemployment rate. Therefore, assuming all else remains unchanged, an increase in the number
of people included in the labor force would cause the participation ratio to increase and
unemployment rate to decrease.

Economics, Understanding Business Cycle, Unemployment.

Q-8. Solution: C.
The late expansion phase is characterized by acceleration of growth rate, decreasing of
unemployment rate, and increasing of inflation rate.
Early Expansion Late Expansion Peak
Gross domestic product (GDP),
industrial production, and Activity measures Activity measures
Economic
other measures of economic show an accelerating show decelerating
Activity
activity turn from decline to rate of growth. rate of growth
expansion.
Layoffs slow (and net
Business begins full
employment turns positive), Business slows its rate
time rehiring as
but new hiring does not yet of hiring; however,
Employment overtime hours rise.
occur and the unemployment the unemployment
The unemployment
rate remains high. At first, rate continues to fall.
rate falls to low levels.
business turns to overtime and

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 temporary employees to meet
rising product demands.
Inflation remains moderate Inflation picks up Inflation further
Inflation
and may continue to fall. modestly. accelerates.
A is incorrect because the peak phase is characterized by deceleration of growth rate.
B is incorrect because the early expansion phase is not characterized by low unemployment.

Economics, Understanding Business Cycle, Economic Indicators.

Q-9. Solution: C.
C is correct. Selling government bonds results in a reduction of bank reserves and reduces their
ability to lend, causing a decline in money growth through the multiplier mechanism and hence
leads to a contraction in the economy.
A is incorrect. Central bank selling of bonds is not expansionary.
B is incorrect. Central bank selling of bonds will reduce the money supply through its impact on
bank reserves, which will result in a higher, not lower, interest rate.

Economics, Monetary and Fiscal Policy, Monetary policy tools.

Q-10. Solution: C.
Shutdown is defined as a situation in which the firm stops production but still confronts the
payment of fixed costs in the short run. In the short run, a business can operate at a loss as long
as it covers its variable costs even though it is not earning sufficient revenue to cover fixed costs.
If variable costs cannot be covered in the short run (P < AVC), the firm will shut down operations
and simply absorb the unavoidable fixed costs.

Economics, Topics in Demand and Supply Analysis, Breakeven point and shutdown point.

Q-11. Solution: C.
C is correct. Current Account Amounts with Signs and Grouped Appropriately:
Transaction Amount Totals
Export of goods and services and income receipts 13,409
Export of goods and services 10,000
Investment income received from foreigners 3,409
Import of goods and services and income payments –16,735
Import of goods and services –14,216

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 Investment income payments made to foreigners –2,519
Net unilateral current transfers –761
Unilateral current transfers received 346
Unilateral current transfers paid –1,107
Current account balance –4,087

Economics, International Trade and Capital Flows, The balance of payment accounts.

Q-12. Solution: B.
B is correct. Mexico has the lowest opportunity cost to produce an extra banana. The opportunity
cost is 2 pencils per banana in Mexico, 3 pencils per banana in Brazil, and 4 pencils per banana in
Canada.

Economics, International Trade and Capital Flows, Comparative Advantage and Absolute
Advantage.

Q-13. Solution: C.
C is correct. By definition, a large country is big enough to affect the world price of its imports
and exports. A large country can benefit by imposing a tariff if its terms of trade improve by
enough to outweigh the welfare loss arising from inefficient allocation of resources.

Economics, International Trade and Capital Flows, Trade Restrictions.

Q-14. Solution: C.
C is correct. Both of our simple concentration measures does not reflect low barriers to entry that
may restrict the market power of companies currently in the market. Furthermore, the N-Firm
Concentration Ratio may be relatively insensitive to mergers of two firms with large market
shares.

Economics, The Firm and Market Structures, Concentration measures.

Q-15. Solution:C.
C is correct. The yearly inflation rate is as follows:
Year 2 (114.2-106.5)/106.5=7.2%
Year 3 (119.9-114.2)/114.2=5.0%
Year 4 (124.8-119.9)/119.9=4.1%
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Year 5 (128.1-124.8)/124.8=2.6%

Economics, Understanding Business Cycles, Inflation

Q-16. Solution:A.
A is correct. To calculate a percentage forward premium or discount for the U.S. dollar, we need
the dollar to be the base currency. The spot and forward quotes given are U.S. dollars per British
pound (USD/GBP), so we must invert them to GBP/USD. The spot GBP/USD price is
1/1.533=0.6523 and the forward GBP/USD price is 1/1.508=0.6631. Because the forward price is
greater than the spot price, say the dollar is at a forward premium of 0.6631/0.6523-1=1.66%.

Economics, Currency Exchange Rates, Basic Concept and Calculation

Q-17. Solution:B.
B is correct. A liquidity trap arises when the demand for money is infinitely elastic because
individuals elect to hold additional money balances rather than respond to stimulative rate cuts
by spending. As a result, weakening consumption leads to deflation.
A is incorrect. Because a liquidity trap is associated with an infinitely elastic (rather than inelastic)
demand for money.
C is incorrect. Because a liquidity trap arises in the extreme instance under which the monetary
authority has cut nominal interest rates to zero to stimulate the economy and cannot cut rates
any further.

Economics, Monetary and Fiscal Policy, Limitation of money policy.

Q-18. Solution:B.
B is correct. A decrease in the price of a substitute resource would encourage producers to use
the substitute resource thus reducing demand for the resource in question.
C is incorrect. A decrease in the price of a substitute good would induce consumers to use the
substitute good, reducing demand for the good in question.
A is incorrect. A decrease in the price of a substitute good would induce consumers to use the
substitute good, reducing demand for the good in question.

Economics, Topics in Demand and Supply Analysis, Substitution and Income Effects.

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