CH 2 Economics 6MHQO4KN43 PDF

Level
I of the CFA® 2022 Exam

Questions - Economics
Offered by AnalystPrep
Last Updated: Oct 7, 2022
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Table of Contents
8 - Topics in Demand & Supply Analysis 3

9 - The Firm & Market Structures 21
10 - Aggregate Output, Prices and Economic Growth 33
11 - Understanding Business Cycles 54
12 - Monetary & Fiscal Policy 65
13 - International Trade and Capital Flows 87
14 - Currency Exchange Rates 97
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© 2014-2022 AnalystPrep.
Reading 8: Topics in Demand & Supply Analysis
Q.168 What is the price elasticity of soybeans, given that if the price goes up by 40%, the quantity
demanded goes down by 15%?
A. 0.3750
B. 0.6250
C. 2.6667
Q.169 T he price of a good has decreased from $100 to $45 in one year. Over that time, the demand
for the good has also decreased from 10,000 units per day to 8,000 units per day. How would you best
describe the price elasticity?
A. Elastic.
B. Inelastic.
C. Unitary elasticity.
Q.649 How will the demand for air travel be affected if the prices of train travel increase?
A. T he demand for air travel will increase due to a leftward shift in the demand curve.
B. T he demand for air travel will increase due to a movement along the demand curve.
C. T he demand for air travel will increase due to a rightward shift in the demand curve.
Q.650 At equilibrium; supply = demand

T he supply function is given by Qs = 400 + 75P and the demand function is given by Qd = 2,000 -
125P. At price P = 10, the excess supply is closest to:
A. 0.
B. 400.
C. 600.
3
Q.655 How is the supply curve represented when its slope is 1?
A. A vertical line.
B. A horizontal line.
C. A 45-degree line.
Q.657 If the cross-price elasticity is 1.5, then the goods are:
A. substitutes with elastic cross-price elasticity.
B. substitutes with inelastic cross-price elasticity.
C. complimentary with inelastic cross-price elasticity.
Q.665 If the income of a consumer is 120, the price of good X is 20, and the price of good Y is 15,
then which of the following best describes the change in the slope of the budget line if the price of
good X suddenly moves to 10?
A. T he slope of the budget line would change from -4/3 to -2/3.
B. T he slope of the budget line would change from 3/4 to 3/2.
C. T he slope of the budget line would change from -3/4 to -3/2.
Q.669 If the price of good Y decreases, the quantity consumed also decreases. T herefore, we can
say that for good Y:
A. the negative substitution effect overpowers the positive income effect. It is a Giffen
good.
B. the negative substitution effect overpowers the positive income effect. It is a normal
good.
C. the positive income effect overpowers the negative substitution effect. It is a Giffen
good.
4
Q.672 At equilibrium, abnormal profits are:
A. Accounting profit - Normal profit = 0.
B. Accounting profit + Normal profit > 0.
C. Accounting profit - Normal profit < 0.
Q.674 Why is the marginal revenue always less than the price for firms facing imperfect
competition?
A. T he marginal revenue (MR) is not always less than the price.
B. T his happens because the average revenue (AR) is always decreasing.
C. T his happens because the price equals the average revenue (Price = AR).
Q.677 What is the implication of the marginal cost (MC) curve intersecting the average variable
costs (AVC) and the average total cost (AT C) curves from below? I. AT C and AVC are "U"-shaped.
II.When MC is below AT C or AVC, both AT C and AVC are decreasing.
A. I only.
B. II only.
C. Both I and II.
Q.678 If the price elasticity coefficient of the demand curve for paper clips is equal to 1.2, demand
is:
A. elastic.
B. inelastic.
C. unit elastic.
5
Q.679 When the average revenue (AR) is greater than or equal to the average variable cost (AVC)
but less than the total average cost (AT C), what should most likely happen to a firm in a perfectly
competitive industry?
A. T he firm should shut down.
B. T he firm is at the break-even point where economic profit is 0.
C. T he losses are smaller than the losses that the firm would have incurred if production
stopped.
Q.680 Profit maximization condition for firms under imperfect competition is:
A. Marginal revenue (MR) > Marginal cost (MC); Total revenue (T R) = Total costs (T C).
B. Marginal revenue (MR) = Marginal cost (MC); Total revenue (T R) - Total cost (T C) is at
its maximum.
C. Marginal revenue (MR) = Marginal cost (MC); Total revenue (T R) - Total cost (T C) is at
its minimum.
Q.681 What does each point on the long-run average total cost (LRAT C) curve represent?
A. T he minimum efficient scale.
B. T he various minimum average total costs.
C. T he minimum long-run average total cost.
Q.682 T he downward sloping segment of the long-run average total cost (LRAT C) curve represents:
A. economies of scale, increasing returns to scale.
B. economies of scale, decreasing returns to scale.
C. diseconomies of scale, increasing returns to scale.
6
Q.1378 What will be the impact on the consumption of a good if the substitution effect of that good is
positive and the income effect of the good is negative but smaller than the substitution effect?
A. Consumption of that good increases.
B. Consumption of that good decreases.
C. Consumption of that good can either decrease or increase.
Q.1379 A good that has a positive income effect whose consumption increases with a fall in price is
known as a/an:
A. normal good.
B. inferior good.
C. Veblen good.
Q.1381 Which of the following goods will have an upward sloping demand curve?
A. Giffen good.
B. Veblen Good.
C. Both Giffen and Veblen goods.
Q.1382 Which of the following terms is most appropriate for a good for which demand increases as
the price increases?
A. Giffen good.
B. Veblen Good.
C. Inferior good.
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Q.1390 T he demand function for tea is QD = 650 - 3P. Describe the price of tea as a function of
demand.
A. Price of tea = 216.67 - 3QD.
B. Price of tea = 650 - 0.33QD.
C. Price of tea = 216.67 - 0.33QD.
Q.1392 T he demand function of wheat is Qd = 274 - 1.5P. If the quantity demanded is 100, then the
price of wheat is closest to:
A. 116.
B. 122.
C. 137.
Q.1395 Ferries and tramways are substitutes for one another. What effect will the increase in the
price of ferry tickets have on the demand for tramway tickets?
A. A shift of the demand curve to the left.
B. A shift of the demand curve to the right.
C. An increase in demand for ferry tickets.
Q.1417 Given the demand function of smart T Vs Qd = 200,000 - 8,000P, calculate the price elasticity
of smart T Vs at a price P = 4.
A. -0.97
B. -0.19
C. 1.19
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Q.1419 Sisli Holdings is a home improvement company with revenues of $410 million for the current
year. Assuming salaries of 10% of revenues, Selling, General and Administrative Expenses (SG&A) of
23%, and interest costs of 40% of revenues, calculate the accounting profit for Sisli Holdings.
A. $110.7 million.
B. $117.07 million.
C. $210.7 million.
Q.1420 Which of the following return measures considers the implicit cost or opportunity cost of
resources supplied to the firm by the owners?
A. Total revenue.
B. Economic profit.
C. Accounting profit.
Q.1421 Which of the following costs is least likely considered in the calculation of accounting profit?
A. Sales commission expense
B. Interest expense
C. Payment to firm's equity owner
Q.1422 Mr. Jan earned an accounting profit of INR 690,000 in the first fiscal year of his firm ABC
Start-Up. He left his marketing job for this business which previously paid him IRN 150,000 per
year. He also invested his property as a warehouse for his business which could have been rented
out for INR 170,000 per year. Considering the provided information, Mr. Jan's economic profit is
closest to:
A. INR 370,000.
B. INR 540,000.
C. INR 520,000.
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Q.1423 A payment to a resource above the minimum payment required for the resource is called
a/an:
A. economic rent.
B. opportunity cost.
C. Maintenance cost.
Q.1424 Taksim Inc. is a solar panel manufacturing firm with an accounting profit of $9 billion. If the
cost of equity capital is $2.5 billion, the firm's normal profit is closest to:
A. $2.5 billion.
B. $6.5 billion.
C. $11.5 billion.
Q.1426 A firm that has a horizontal demand curve is called a:
A. price taker.
B. price maker.
C. price searcher.
Q.1430 T he vertical distance between the average variable cost and the average total cost is equal to
which of the following costs?
A. Marginal cost.
B. Average fixed cost.
C. Average marginal cost.
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Q.1431 In which of the following perfect competition situations will a firm shut down in the long
run?
A. T he average revenue is greater than the average variable cost and the average total cost.
B. T he average revenue is less than the average variable cost but greater than the average
total cost.
C. T he average revenue is greater than the average variable cost but less than the average
total cost.
Q.1432 A firm reported revenue of $1.9 million for the year. Assuming that the average variable cost
is $1.7 million and the fixed cost is $3.6 million, the firm should most likely :
A. shut down in the short run.
B. continue to operate in the short run.
C. shut down in the short-run and re-open in the long-run.
Q.1433 In which of the following perfect competition situations will a firm shut down in the short
run?
A. T he average revenue is less than the average variable cost.
B. T he average revenue is less than the average variable cost but greater than the average
total cost.
C. T he average revenue is greater than the average variable cost but less than the average
total cost.
Q.1434 T he downward sloping segment of the long-run average total cost curve indicates:
A. economies of scale.
B. diseconomies of scale.
C. the minimum efficient scale.
11
Q.1436 T he breakeven quantity of production under perfect competition is the quantity for which:
A. Price = Total revenue.
B. Price = Average total cost.
C. Total revenue = Marginal revenue.
Q.1437 Which of the following industries have a downward-sloping supply curve?
A. Constant cost industries.
B. Increasing cost industries.
C. Decreasing cost industries.
Q.1438 If the marginal product of capital is 90, the cost of capital is 9, the marginal product of labor
is 85, and the cost of labor is 7, then:
A. conditions for cost minimization exist.
B. conditions for cost minimization do not exist.
C. conditions for cost minimization can occur if the cost of labor is 9.
Q.2455 If the average total cost of production is $10 per unit and the marginal cost is $11, then it is
likely that:
A. the firm is operating at the lowest average cost output level.
B. the firm is operating above the minimum average cost output level.
C. the firm is operating below the minimum average cost of production level.
12
Q.2458 T he demand curve for a good is given by:
Q = 1, 000 − 10P
If the price, currently at $50, increases by 5%, the percent change in demand is closest to:
A. -5%.
B. -3.3%.
C. 6.7%.
Q.2464 Suppose that the price elasticity of demand for movie tickets is -1.2. All else equal, if the
theater increases the price per ticket, then:
A. the revenues from ticket sales will increase.
B. the revenues from ticket sales will decrease.
C. the revenues from ticket sales will remain unchanged.
Q.2465 In the current market for LB cell phones, marginal revenue is greater than marginal cost. In
this situation, LB should:
A. increase the output of cell phones.
B. decrease the output of cell phones.
C. make no change to the output quantity of cell phones.
13
Q.3123 T he demand curve for cinema tickets is given by the equation:
QdC = 20, 000 − 1500P Cinema − 200P P opcorn
Where P Cinema and P P opcorn indicate the prices of cinema tickets and popcorn sold at the snack bar,
respectively.
If the current demand is equal to 4,000 tickets and the price of popcorn is 5.0, then the cross-price
elasticity of demand for cinema tickets, with respect to the price of popcorn, is closest to:
A. -3.75.
B. -0.25.
C. 0.25.
Q.3124 T he demand curve for Pepsi at a convenience store is given by the equation:
QP eps i = 40– 1.5P P eps i + 1.8P Coke + 0.5I
Where P P eps i and P Coke indicate the prices of Pepsi and Coke, respectively, and I indicates the
average annual income (in thousands of dollars) of people living in the region. Moreover, the
quantities of the beverages are given in thousands.
T he average annual income in the region is $42 thousand per year. If the price of Pepsi is $1.25
while Coke costs $1.30, then the elasticity of demand for Pepsi, with respect to the price of Coke, is
closest to:
A. 0.038.
B. 0.25.
C. 0.42.
Q.3125 T he (theoretical) Giffen good is best explained as:
A. a normal good for which the income effect is larger than the price effect.
B. a normal good for which the income effect is smaller than the price effect.
C. an inferior good for which the income effect is larger than the price effect.
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Q.3126 An inferior good is best defined as a good for which:
A. the income elasticity is negative.
B. the own-price elasticity is negative.
C. the demand curve is upward sloping.
Q.3127 Which of the following measures indicates a normal good?

I. Income elasticity equals -0.2.
II. Own price elasticity equals -0.2.
III. Income elasticity equals 0.2.
A. III only.
B. II only.
C. I & II only.
Q.3128 Which of the following measures indicates an inferior good?
A. Income elasticity equals -0.2.
B. Income elasticity equals 0.2.
C. Own price elasticity equals -0.2.
Q.3129 Steve White typically buys 10 cups of coffee each week from the local coffee shop at a
price of $3.95. T he shop recently reduced the price to $3.30. At that price, he purchased 12 cups.
T his best demonstrates:
A. the income effect.
B. the substitution effect.
C. the marginal propensity to consume.
15
Q.3130 A manufacturer doubles the number of workers on the production line and increases output
by only 40 percent. T his demonstrates:
A. the increasing marginal cost of labor.
B. the constant returns to capital additions.
C. the diminishing marginal returns to labor.
Q.3131 At a fruit packing plant, a 5 percent increase in the number of worker hours per week yields
a 4.5 percent increase in the quantity of output. However, a 20 percent increase in the number of
worker hours yields only a 12 percent increase in output. T his indicates that at current output
levels:
A. there is insufficient capital employed in the plant.
B. there are diminishing returns to labor in the plant.
C. there are increasing returns to scale in the plant.
Q.3132 You have been provided a firm's cost structure:
Q T FC T VC AFC AVC TC AT C MC
0 8,500 0 - - 8, 500 - -
1 8,500 4,000 8,500 4,000 12, 500 12,500 4,000
2 8,500 8,800 4,250 4,840 17, 300 8,650 4,800
3 8,500 14,520 2,833 4,400 23, 020 7,673 5,720
4 8,500 21,296 2,125 5,324 29, 796 7,449 6,776
5 8,500 29,282 1,700 5,856 37, 782 7,556 7,986
6 8,500 38,652 1,417 6,442 47, 152 7,859 9,370
Given the cost structure in the table above, the firm should shut down in the short run if the
marginal revenue (market price per unit, for a firm in a perfectly competitive industry) is less than:
A. 4,000.
B. 4,800.
C. 7,673.
16
Q.3133 You have been provided a firm's cost structure:
Q T FC T VC AFC AVC TC AT C MC
0 8,500 0 - - 8, 500 - -
1 8,500 4,000 8,500 4,000 12, 500 12,500 4,000
2 8,500 8,800 4,250 4,840 17, 300 8,650 4,800
3 8,500 14,520 2,833 4,400 23, 020 7,673 5,720
4 8,500 21,296 2,125 5,324 29, 796 7,449 6,776
5 8,500 29,282 1,700 5,856 37, 782 7,556 7,986
6 8,500 38,652 1,417 6,442 47, 152 7,859 9,370
Given the cost structure in the table above, if the per-unit market price is at 7,400 or less, the firm
should most likely :
A. shut down in the long run.
B. shut down in the short run.
C. operate profitably by producing 4 units.
Q.3134 A firm is operating at the breakeven level of output if:
A. the selling price per unit equals the marginal revenue.
B. the selling price equals marginal cost and is above the average total cost.
C. the selling price equals the sum of average fixed cost and average variable cost.
Q.3135 If the selling price is greater than the average variable cost but less than average total cost,
the firm will most likely :
A. shut down in the short run.
B. shut down in the long run.
C. continue operating at a profit.
17
Q.3136 A perfectly competitive firm should shut down immediately if it is operating such that:
A. the selling price is less than the marginal cost.
B. the selling price is less than the average variable cost.
C. the selling price is less than the average total cost but greater than the average variable
cost.
Q.3137 An analyst notes that there are a large number of automobile assembly plants throughout the
United States of America, and they have become very similar in size and operations. T his most likely
indicates that the plants are operating in:
A. an output range of increasing returns to scale.
B. an output range of decreasing returns to scale.
C. an output range that minimizes long-run average costs.
Q.3138 A manufacturer operating at the minimum of its short-run average cost curve is suddenly
facing an unexpected increase in demand. At least in the short run, to meet this demand, the
manufacturer is more likely to:
A. incur higher average costs due to increasing returns to scale.
B. incur lower average costs due to increasing returns to scale.
C. incur higher average costs due to decreasing returns to scale.
Q.3139 In a single firm industry for which economies of scale continue well beyond all estimates of
total market demand for the product, it is likely that if a new firm enters the market, the:
A. average total costs will rise as a consequence of returns to scale.
B. average total costs for the product will fall as a consequence of returns to scale.
C. average total costs will fall as both firms will operate below the previous output level.
18
Q.3270 T he demand curve for electricity is given by the equation:
QElec = 20– 15P Elec + 2P Gas + 0.2I
Where P Elec and P Gas indicate the prices of electricity and natural gas, respectively, and I indicates
the average annual income (in thousands of dollars) of people living in the region.
T he unit price of electricity is $0.25 and gas costs $0.18 per unit. Given that the average annual
income in the region is $50 thousand per year, the elasticity of electricity demand, with respect to
its own price, is closest to:
A. -3.27.
B. -0.14.
C. 1.5.
Q.3271 T he demand curve for Pepsi at a convenience store is given by the equation:
QP eps i = 40– 1500P P eps i + 1800P Coke + 5I
Where P P eps i and P Coke indicate the prices of Pepsi and Coke, respectively, and I indicates the
average annual income (in thousands of dollars) of people living in the region.
T he average annual income in the region is $42 thousand per year. If the price of Pepsi is $1.25 and
Coke costs $1.30, then the elasticity of demand for Pepsi, with respect to its own price is closest to:
A. -2.62.
B. 0.25.
C. 3.27.
19
Q.3272 T he demand curve for cinema tickets is given by the equation:
QdC = 20, 000 − 1500P C inema − 200P P opcorn + 40I
Where P Cinema and P P opcorn indicate the prices of cinema tickets and popcorn sold at the snack bar,
respectively, and I indicates the average annual income (in thousands of dollars) of people living in
the region.
If the current demand is equal to 6,200 tickets and the price of popcorn is $5.00 while cinema
tickets cost $10.00, then the elasticity of demand for cinema tickets, with respect to income, is
closest to:
A. -3.75.
B. -0.35.
C. 0.35.
Q.3828 Suppose that for a manufacturer their total costs are currently greater than their total
revenue. In the short run, the manufacturer should:
A. shut down.
B. shut down if fixed cost is greater than marginal revenue.
C. shut down if marginal cost is greater than marginal revenue.
Q.3829 T he market demand function for item A is a function of its price, income, and the price of
item B.
Own-price elasticity of demand for item A −0.5

Income elasticity of demand for item A 0.4
Cross-price elasticity of demand for item A 0.8
with respect to the price of item B
Given this information, which of the following statements is most accurate?
A. Item A is an inferior good.
B. Demand for item A is elastic.
C. Items A and B are substitutes.
20
Reading 9: The Firm & Market Structures
Q.174 Which of the following statements is least likely accurate?
A. If a quota is greater than what would normally be produced, prices should rise.
B. Due to fewer exchanges between buyers and sellers, taxation creates a deadweight loss.
C. T he incidence of taxes will tend to fall on the side of the market that has the lowest
elasticity.
Q.684 In a monopolistic competition, the firm will most likely expand its output until:
A. Average revenue (AR) = Average cost (AC).
B. Marginal revenue (MR) = Marginal cost (MC).
C. Marginal revenue (MR) = Average total cost (AT C).
Q.685 A market structure where the competitive firm decreases its price as compared to the
dominant firm will result in:
A. an increase in the demand of the competitive firm in the short run.
B. an increase in the market share of the dominant firm in the long run.
C. both A) and B).
Q.687 Which of the following is least likely a characteristic of an oligopoly?
A. All firms have identical products
B. A few firms take higher shares of the market.
C. Each firm faces a downward-sloping demand curve.
21
Q.688 At present time, the firm's Output = 800, Price = 0.22, Total cost (T C) = 600, and Marginal
cost (MC) = 0.20. We can say that the firm is:
A. maximizing profit.
B. making positive marginal profit.
C. making negative marginal profit.
Q.689 Which of the following is the name given to the demand curve in an oligopolistic pricing
strategy?
A. Vertical demand curve.
B. Kinked demand curve.
C. horizontal demand curve.
Q.690 In the case of the Cournot model, firms most likely :
A. do cooperate and collude.
B. compete in output quantities.
C. compete on product differentiation.
Q.691 A kinked demand curve in an oligopoly indicates which of the following?
A. A decrease in price by one firm will be followed by its competitors.
B. An increase in price by one firm will be followed by its competitors.
C. Both increase and decrease in price by one firm will be followed by its competitors.
Q.693 Which of these is least likely a feature of a monopolistic market?
A. No pricing power.
B. One supplying firm.
C. High barriers to entry.
22
Q.694 A pharmaceutical company is a monopoly with high barriers of entry with the demand function
defined as:
QD = 60 − 0.2P
Where P is the price.

T he slope of the marginal revenue curve is closest to:
A. -10.
B. -8.
C. -5.
Q.695 In the case of collusion, firms agree to:
A. share technologies.
B. share profits/losses.
C. produce an agreed quantity of output.
Q.1439 A firm has a perfectly horizontal demand curve. Which of the following would best describe
the market structure of this industry?
A. Monopoly.
B. Perfect competition.
C. Monopolistic competition.
Q.1440 In which of the following forms of market structures is it most important for a firm to
consider price moves and other firms' strategies?
A. Oligopoly.
B. Monopoly.
23
Q.1441 T he main differentiating characteristic between perfect competition and monopolistic
competition is the:
A. taxation.
B. pricing power.
C. number of firms.
Q.1444 In which of the following conditions can a firm in a perfectly competitive market maximize
its profit?
A. Demand = Price = Marginal cost.
B. Demand = Price > Marginal revenue.
C. Demand = Price = Marginal revenue < Marginal cost.
Q.1445 Soybeans Corp. operates in a perfectly competitive market. What is the most likely impact
on the equilibrium price and quantity if the market demand decreases?
A. T he equilibrium price and quantity will decrease.
B. T he equilibrium price and quantity will increase.
C. T he equilibrium price will decrease while the equilibrium quantity will increase.
Q.1446 Which of the following is the definition of downsizing?
A. Decreasing the prices to reduce economic losses.
B. Decreasing the plant size to reduce economic losses.
C. Decreasing the quantity supplied to reduce economic losses.
24
Q.1448 Which of the following characteristics is least likely to describe monopolistic competition?
A. High barriers to entry.
B. Large number of independent seller.
C. Differentiated and innovative products.
Q.1449 Which of the following is an assumption of price movements in the kinked demand curve of
an oligopoly?
A. Decreases and increases in prices will be followed by other firms.
B. An increase in price will be followed by other firms, but a decrease in prices will not be
followed by other firms.
C. A decrease in price will be followed by other firms, but an increase in prices will not be
followed by other firms.
Q.1450 T he Cournot model of oligopoly assumes that the number of firms in the oligopoly is:
A. 1.
B. 2.
C. 3.
Q.1451 Which of the following is least likely to be used as a pricing strategy in a monopoly?
A. Single price strategy.
B. Interdependent pricing.
C. Discriminating pricing strategy.
25
Q.1452 Utopia Railways is a monopolist rail service in Canada. To apply an effective discriminating
pricing strategy, which of the following assumptions is least likely to be considered?
A. All consumers have the same elasticities of demand.
B. Utopia Railways faces a downward-sloping demand curve.
C. T here are measures preventing customers from reselling to other customers at higher
prices.
Q.1453 Which of the following oligopolistic models assumes that there is one significant firm in the
market by its greater market share and scale and all other firms follow the price set by the
significant firm?
A. Sweezy's model.
B. Cournot's model.
C. Stackelberg's model.
Q.1454 Which of the following market structures has a defined short-run supply curve?
A. Monopoly.
B. Perfect competition.
Q.1455 Earth, Sun, Moon, and Star firms have market shares of 28%, 22%, 15%, and 10%
respectively. T he 4-firm Herfindahl-Hirschman Index is closest to:
A. 0.1593.
B. 0.1609.
C. 0.1871.
26
Q.1456 Earth, Sun, Moon, Star and Mars firms have market shares of 28%, 22%, 15%, 10% and 4%
respectively. T he 4-firm Herfindahl-Hirschman Index after the merger of the firms Moon and Star is
closest to:
A. 0.1625.
B. 0.1790.
C. 0.1909.
Q.1457 In which of the following forms of market structures does a firm make output and pricing
decisions based on the anticipated actions of its competitors?
A. Oligopoly.
B. Monopoly.
C. Perfect competition .
Q.2466 For a firm operating in a perfectly competitive market, the optimal output quantity will be
selected such that:
A. marginal cost is less than market price.
B. marginal cost is less than marginal revenue.
C. marginal cost is equal to marginal revenue.
Q.2468 If banking is a competitive industry in which all banks are operating in ranges where they are
facing substantial economies of scale, then we will most likely see:
A. mergers and industry consolidation.
B. more competitive pricing from smaller banks.
C. less attention to customer service in smaller banks.
27
Q.2469 In a segment of the software market, the three top firms have 40 percent, 15 percent and 10
percent of the market. T he Herfindahl-Hirschmann index for the top three firms is closest to:
A. 0.19.
B. 0.63.
C. 0.75.
Q.3140 Leonardo's Pizza Palace is the only restaurant in the entertainment district of a large city
serving pizza. T his restaurant would most likely be best described as operating in an industry that is:
A. monopolistic.
B. perfectly competitive.
C. perfectly monopolistic.
Q.3141 In an industry with no barriers to entry or exit in which there are zero economic profits, we
are likely to also find firms operating in an environment such that:
A. marginal cost is equal to marginal revenue but less than price.
B. products are highly differentiated, and non-price competition is typical.
C. there is equality between price, marginal revenue, marginal cost, and average cost.
Q.3142 T he toothpaste manufacturing industry in the U.S., where only a few large manufacturers
such as Proctor & Gamble produce somewhat differentiated, but arguably quite similar products, is
best described as:
A. oligopoly.
B. monopoly.
C. perfectly competitive.
28
Q.3143 Within an industry, each firm selects an output level such that marginal revenue equals
marginal cost. T his decision process is optimal for:
A. all firms, independent of industry structure.
B. all industrial structures except for monopolies.
C. all industrial structures except for monopolies and oligopolies.
Q.3144 For monopolies:
A. marginal revenue is equal to the market price, and demand is perfectly elastic.
B. marginal revenue is less than the price because the demand curve is downward sloping.
C. economic rents may be obtained, but marginal cost is greater than average cost at the
profit maximizing quantity.
Q.3145 For perfectly competitive firms to remain in the industry:
A. they must become larger than their competitors.
B. they will operate at the minimum average cost point.
C. they must operate below the minimum average cost for the industry.
Q.3146 For monopolies to maximize the benefit of being able to set the market price, they should:
A. be in an industry with highly elastic demand.
B. be in an industry facing unitary elastic demand.
C. be in an industry that has an inelastic demand curve.
29
Q.3147 Oligopolies are likely to:
A. lower prices to steal market share from their competitors.
B. engage in non-price competition to avoid mutually destructive price wars.
C. set prices such that marginal revenue is slightly below marginal cost but above average
total cost.
Q.3148 An unregulated monopolist is operating in a market where the elasticity of demand is -1.2.
Increasing the selling price by 10 percent will:
A. increase revenue but lower economic profit.
B. allow the monopolist to earn even greater economic rents.
C. result in the monopolist receiving less revenue than before.
Q.3150 A pharmaceutical company has been awarded a patent given it monopoly rights to produce a
prescription drug for which there are no competing drugs. During the life of the patent, if the
company is trying to maximize profits, it will:
A. be unlikely to increase prices above marginal cost.
B. choose an output level such that price equals marginal cost.
C. choose a price corresponding to a demand such that marginal cost equals marginal
revenue.
Q.3151 A manufacturer of plastic drainage tile, operating in a perfectly competitive environment,

will have a short-run supply curve determined by:
A. the portion of its marginal cost which lies above the average total cost.
B. the portion of its marginal cost curve which lies above the average variable cost.
C. the portion of its marginal revenue curve that lies above the minimum fixed cost.
30
Q.3152 A firm operating in a perfectly competitive industry sets output by equating marginal
revenue and marginal cost. It will then:
A. choose a price above the marginal cost to ensure a profit.
B. set a price just below the market price to increase market share.
C. accept the market price as given and choose output accordingly.
Q.3153 In the long run, firms operating in a perfectly competitive industry will most likely :
A. set prices just above marginal cost to control competition.
B. use product differentiation and innovation to gain market share.
C. operate at the minimum average cost on their long-run average cost curves.
Q.3154 In a monopolistically competitive market, the long-run equilibrium will be at prices that are:
A. set as a monopolist would choose.
B. determined as the consequence of a kinked demand curve.
C. similar to the outcome of a perfectly competitive market structure.
Q.3155 For a monopolist, in the long run:
A. inefficiencies and high prices can prevail.
B. the competition will lead to greater efficiency and lower prices.
C. inefficiencies and high prices will be eliminated by the desire to maximize profits.
Q.3156 For an oligopoly, in the long run, the pressure of competition on prices:
A. is of less importance than non-price competition.
B. drives the oligopoly to the same equilibrium as perfect competition.
C. as with perfectly competitive industries, eliminates monopolistic pricing decisions.
31
Q.3157 T he use of concentration ratios to estimate whether a potential merger should be blocked
due to the potential of increasing monopolistic behavior:
A. may overstate the risk if there are low barriers to entry.
B. may overstate the risk if the industry is too broadly defined.
C. may understate the risk if the products are highly differentiated.
Q.3159 T he Herfindahl-Hirschman Index is a concentration ratio which:
A. is often employed by regulators to adjust for the demand elasticity concern of such ratios.
B. uses the squares of the market shares of the largest firms but does not consider demand
elasticity.
C. uses the squares of the market shares of the largest firms and addresses the problem of
demand elasticity.
Q.3161 In order to encourage the development of new drugs and to maximize innovation in the
pharmaceutical industry, it would be best if government regulations designed to:
A. force an oligopolistic structure on the industry to increase competition.
B. allow monopolies to temporarily capture economic rents from new drugs.
C. prevent any mergers that would permit the new firm to control more than 10 percent of
the market.
Q.3830 An industry has 5 firms, whose market shares are respectively 52%, 15%, 13%, 12% and 8%.
Using the Herfindahl-Hirschman Index (HHI), this industry would have an equivalent number of
equal-sized firms that is closest to:
A. 2.0111
B. 3.0248
C. 4.8524
32
Reading 10: Aggregate Output, Prices and Economic Growth
Q.178 Aggregate supply is best defined as:
A. the total supply of goods and services all firms plan on selling during a period of time.
B. the potential output level at each labor force.
C. the effect of prices input on goods output.
Q.179 Which of the following will cause a rightward shift of the aggregate demand curve?
A. A decrease in taxes
B. A stock market crash
C. Newly introduced taxation on financial capital
Q.696 Real GDP measures of the economy ignore:
A. inflation.
B. base year prices.
C. output quantity.
Q.697 Unemployment benefits and disability benefits are part of:
A. personal income.
B. personal disposable income.
C. both A) and B).
33
Q.698 What will most likely happen if the interest rates decrease in a conventional monetary policy
environment?
A. Savings (S) will increase.
B. Investments (I) will decrease.
C. Savings minus investments (S - I) will decrease.
Q.699 In which of the following cases will the money market be in equilibrium?
If the money demand increases:
A. due to an increase in prices.
B. due to a change in patterns of consumer behavior.
C. with an increase in income.
Q.700 T he liquidity-money (LM) curve shifts when:
A. there is an increase in prices.
B. there is a change in the real money supply.
C. there is a shift in money demand.
Q.701 What does the intersection of the investment/saving (IS) and the liquidity-money (LM) curves
most likely represents?
A. T he equilibrium of the goods market.
B. T he equilibrium of the money market.
C. Simultaneous equilibrium between the goods and the money markets.
34
Q.703 T he aggregate supply curve:
A. is perfectly inelastic in the short run.
B. is perfectly inelastic in the long run.
C. is perfectly elastic.
Q.704 What will happen to the aggregate demand (AD) curve if the government cuts taxes?
A. T he AD curve will shift leftward.
B. T here will be an upward movement along the AD curve.
C. T he AD curve will shift rightward.
Q.705 When aggregate demand (AD) decreases, it results in a recessionary gap. Which of the
following is the most likely response?
A. T he government uses contractionary fiscal policy to boost economic growth.
B. A technological upgrade.
C. T he SRAS shifting to the right as workers accept lower nominal wages.
Q.706 What happens to the prices in the long run when the aggregate demand increases and the
economy recovers from an inflationary gap (classical approach)?
A. T he prices increase.
B. T he prices decrease.
C. T he prices remain the same as the economy comes back to equilibrium.
Q.707 What happens when the aggregate demand (AD) increases in the short run?
A. Unemployment increases and real GDP increases
B. Unemployment decreases and real GDP increases
C. Unemployment decreases and real GDP decreases
35
Q.997 A population of students has a class average of 68. To find the probability of selecting 25
students with grades greater than or equal to 70 given a standard deviation of 4, the most appropriate
test to use is;
A. z-test.
B. t-test, two tails.
C. t-test, one tail.
Q.1458 Which of the following is the measure of the total market value of goods and services
produced in a country over a specific period of time?
A. GNP
B. GDP
C. PDI
Q.1460 In which of the following expenditure methods is GDP calculated by adding the additional
value created at each stage of production and distribution?
A. Income approach
B. Value of final output method
C. Sum of value-added method
Q.1461 Samuel Lopez wants to calculate the GDP of a specific country without considering
inflation's effect on prices. Which of the following is the most appropriate GDP measure Lopez
should use?
A. Nominal GDP
B. Real GDP
C. GDP based on current prices
36
Q.1463 T he nominal GDP of Normandia is $780 billion for the current year. If the GDP deflator is
117, then the real GDP of Normandia is closest to:
A. $912.6 billion.
B. $0.76 trillion.
C. $666.67 billion .
Q.1464 Which of the following is the most appropriate equation for calculating real GDP using the
expenditure approach?
A. Consumption + Investment + Government spending + Net exports
B. Consumption + Investment + Government spending - Net exports
C. Consumption + Investment + Government spending + Statistical discrepancy
Q.1465 Which of the following is the most appropriate term for the adjustment of the differences
between the GDP calculated using the income approach and GDP calculated using the expenditure
approach?
A. Capital consumption allowance
B. Statistical discrepancy
C. T ransfer payments
Q.1466 Which of the following is least likely a component of national income?
A. Interest Income
B. Rent
C. Net exports
37
Q.1467 Which of the following is the most appropriate equation for personal disposable income
(PDI)?
A. PDI = National income + T ransfer payments to household - Indirect taxes - Corporate

taxes - Undistributed corporate profits
B. PDI = National income + T ransfer payments to household - Indirect taxes - Corporate

taxes - Undistributed corporate profits - Personal taxes
C. PDI = Personal income + Personal taxes
Q.1468 Which of the following equations represents the fiscal balance?
A. Government spending - Taxes
B. Export - Imports
C. Consumption + Savings + Taxes
Q.1469 If savings are $400 billion, investments are $200 billion, and net exports are -$165 billion,
then the fiscal balance is closest to:
A. a fiscal deficit of $365 billion.
B. a fiscal surplus of $35 billion.
C. a fiscal surplus of $365 billion.
Q.1470 What will be the impact of a decrease in real interest rates on the investments/savings (IS)
curve?
A. A decrease in the aggregate income
B. An increase in the aggregate income
C. A decrease in the investment
38
Q.1471 On the very short-run aggregate supply (VSRAS) curve, it is assumed that all the prices or
input costs like wages, raw material, etc.:
A. are variable.
B. are fixed.
C. vary with the lag.
Q.1472 Which of the following is perfectly inelastic?
A. Very short-run aggregate supply curve (VSRAS)
B. Short-run aggregate supply curve (SRAS)
C. Long-run aggregate supply curve (LRAS)
Q.1474 T he impact of a pessimistic view of declining future sales in Iraq will most likely :
A. shift the Iraqi aggregate curve to the right.
B. create a movement upward along the Iraqi aggregate demand curve.
C. shift the Iraqi aggregate demand curve to the left.
Q.1476 Which of the following is most accurate regarding expansionary monetary policies?
A. Money supply decreases while aggregate demand increases.
B. Money supply increases and aggregate demand also increases.
C. Money supply increases while aggregate demand decreases.
39
Q.1477 What will be the impact on the aggregate supply curve of Canada if the government decides
to increase taxes and decrease the maximum labor hours per day (holding the wages and labor
constant)?
A. Decrease in the aggregate supply
B. Increase in the aggregate supply
C. Both decisions have different impacts on aggregate supply
Q.1478 In the long run, equilibrium prices are at $240. What would be the economic term used for a
situation where short-term prices are at a disequilibrium at $220?
A. Recessionary gap
B. Inflationary gap
C. Expansionary gap
Q.1479 Which of the following conditions will put upward pressure on prices?
A. Recessionary gap
B. Inflationary gap
C. Long-run prices gap
Q.1480 Which of the following is the appropriate measure when investors are expecting a decrease
in the aggregate demand?
A. Increase investment in defensive firms
B. Increase investment in cyclical companies
C. Decrease investment in long-maturity fixed income securities
40
Q.1481 High unemployment and increased inflation due to an unexpected sharp decrease in the
aggregate supply is called:
A. deflation.
B. stagflation.
C. recession.
Q.1482 Which of the following describes a situation where the short-run real GDP is less than the
full employment GDP on the long-run aggregate supply (LRAS)?
A. Recessionary gap
B. Expansionary gap
C. Inflationary gap
Q.1483 Which of the following functions describes the relationship between aggregate output, labor,
capital, and productivity?
A. Supply function
B. Factors of production
C. Production function
Q.1484 Which of the following is the most appropriate definition of the total factor productivity
(T FP)?
A. It is a multiplier that quantifies the amount of output growth that an increase in capital and
labor cannot explain.
B. It describes the relationship between aggregate demand and labor, capital, and productivity.
C. It is the modified version of the production function.
41
Q.1486 Assume that the labor's percentage share in national income is 65% for a specific country. If
the growth in technology, labor, and capital are 1%, 2%, and 3% respectively, then the growth in
potential GDP is closest to:
A. 6%.
B. 3.35%.
C. 4.5%.
Q.1487 Which of the following measures would most likely be necessary for a country with a ''high
capital per labor'' to increase the growth in its GDP?
A. Increased growth in technology
B. Increased capital
C. Increased productivity
Q.2470 US Presidential candidate, Donald T rump, has promised to build a wall across the US-Mexico
border and to deport all illegal workers currently living in the country. In terms of the aggregate
supply dynamics, the most likely result of this policy in the current economic environment would
be:
A. a leftward shift in the US aggregate supply curve resulting in a higher price level.
B. a leftward shift in US aggregate demand resulting in a lower price level.
C. a rightward shift in aggregate supply resulting in higher real output.
42
Q.3162 You have been provided the following table:
20X8 20X9
Nominal GDP 1, 602, 309 1, 601, 210
Real GDP (Constant 20X2 dollars) 1, 324, 222 −
Implicit GDP Price deflator 121 119
Based on the information presented, which of the following statements is correct when comparing
20X9 to the previous year?
A. Nominal GDP decreased, while real GDP decreased by a smaller amount.
B. Nominal GDP decreased, in part because of deflation, while real GDP rose.
C. Nominal GDP decreased while real GDP fell slightly due to inflation.
Q.3163 If real GDP decreased from one year to the next, it must be the case that:
A. prices rose more than output increased.
B. prices decreased more than the output decreased.
C. the actual quantity of goods produced decreased.
Q.3164 If nominal GDP decreased, then it must be the case that:
A. prices fell, and actual output either increased or decreased.
B. real GDP must have also decreased.
C. real GDP may have changed little, increased or decreased.
Q.3165 In Canada, real GDP fell by 6 percent for the year 2000. If nominal GDP decreased by 7
percent, then it must be that:
A. the implicit GDP deflator also decreased by about 1 percent.
B. the implicit GDP deflator increased by about 1 percent.
C. the implicit GDP deflator decreased by 8 about percent.
43
Q.3166 A small island nation has a nominal GDP equal to 100 million. Real GDP is reported as 95
million. T he implicit GDP deflator for this country is approximately equal to:
A. 105.3.
B. 95.0.
C. 104.1.
Q.3167 T he tiny island nation of Barbados has a fixed exchange such that its currency, the Barbados
dollar, is held at a value of B$2 = US$1. T his means that any change in the real GDP of Barbados
must:
A. be explained by changes in domestic output.
B. be a result of changes in the implicit US GDP deflator and local real GDP.
C. be a result of changes in domestic prices only.
Q.3168 T he national accounts of a small economy contain the following information (in millions of
R$):
Consumer spending on final goods and services 700

Gross private domestic investment 300
Government spending on final goods and services 270
Exports 35
Imputed income from owner-occupied housing 2
Net Exports −10
T he GDP of this economy is closest to:
A. R$1,302 million.
B. R$1,303 million.
C. R$1,260 million.
44
Q.3169 In Canada, national income and GDP are distinguished on the following basis:
A. GDP = National income + Statistical discrepancy
B. National income = GDP + Statistical discrepancy + Capital consumption allowance
C. GDP = National income + Capital consumption allowance + Statistical discrepancy
Q.3170 In Canada, personal disposable income equals:
A. personal income minus indirect business taxes minus personal income taxes.
B. personal income minus personal taxes.
C. personal income minus housing costs and personal taxes.
Q.3171 Given the following representations:

S = domestic savings
I = investment
G = government expenditures on goods and services
T = taxes
X = exports
M = imports
C = Consumption
Which of the following three statements is correct?
A. S = I + (G-T ) + (X-M)
B. S = C + I + (G-T ) + (X-M)
C. C = S + I – (G-T ) – (X-M)
45
S = domestic savingsI = investment
G = government expenditures on goods and services
T = taxes
X = exports
M = imports
F = transfer payments
A. S = C + I +F + (G-T ) + (X-M)
B. C = S + I + F – (G-T ) – (X-M)
C. S = I + (G-T ) + (X-M)
Q.3173 Economists distinguish between the long-run and short-run aggregate supply curves, to
distinguish between:
A. the (short-term) one-year planning horizon and the longer-term future.
B. the short term in which capital is fixed versus the time over which capital is variable.
C. the short term over which workers cannot adjust to wage changes versus the longer-term
over which expectations and wages can reach equilibrium.
Q.3174 In 2007, housing prices dropped almost overnight as a result of what some economists
referred to as a correction from prices that formed in a market bubble. Financial assets also dropped
in value. T he subsequent changes in GDP could be best explained as:
A. a movement along the aggregate demand (AD) curve to a lower price level and less output.
B. a shift in the aggregate supply (AS) curve, such that supply decreased at all price levels.
C. a leftward shift in the aggregate demand (AD) curve as a consequence of reduced wealth.
46
Q.3175 Capacity utilization is at very high levels, nearing 90 percent, and companies are
experiencing an inability to meet order delivery deadlines. In light of this, we would expect:
A. a rightward movement along the aggregate supply curve to meet the demand.
B. a rightward shift in the aggregate demand curve as firms increase investment spending.
C. a leftward shift in the aggregate demand curve as consumers reduce spending due to higher
price levels.
Q.3176 All else equal, an increase in income taxes will cause a:
A. leftward movement along the aggregate demand curve as consumers reduce spending.
B. rightward shift in the aggregate demand curve as businesses adjust by passing along any tax
consequences in the form of higher prices.
C. leftward shift in aggregate demand since consumption spending will be diverted to paying
taxes.
Q.3177 Increasing the money supply is most likely to:
A. increase output in the near term but serve only to increase prices in the longer term.
B. have no immediate effect on output but only decrease prices since there is more money
circulating in the economy.
C. simply increase the rate of inflation with no effect on the level of output.
Q.3178 As the Chinese economy grows, we would expect that it would cause:
A. the US aggregate demand to shrink as domestic goods are replaced by Chinese goods.
B. the Japanese aggregate demand to shift right as Chinese consumers import more Japanese
goods.
C. Australian exports to shrink and Australian aggregate demand to shift left.
47
Q.3179 All else equal, an increase in the training and skill of the available labor force will:
A. shift the aggregate demand curve to the right.
B. shift the aggregate supply curve to the right.
C. cause a movement along the aggregate supply curve.
Q.3180 An increase in aggregate demand will most likely :
A. raise real GDP, lower the unemployment rate, and lower the aggregate price level.
B. raise real GDP, lower the unemployment rate, and raise the aggregate price level.
C. raise real GDP, raise the unemployment rate, and lower the aggregate price level.
Q.3181 A decrease in aggregate supply will most likely:
A. lower real GDP, lower the unemployment rate, and lower the aggregate price level.
B. lower real GDP, lower the unemployment rate, and raise the aggregate price level.
C. lower real GDP, raise the unemployment rate, and raise the aggregate price level.
Q.3182 A rightward shift in both aggregate demand and aggregate supply will most likely :
A. raise real GDP and lower the aggregate price level.
B. raise real GDP and raise the aggregate price level.
C. raise real GDP and have an indeterminate effect on the aggregate price level.
Q.3183 A decrease in aggregate supply will most likely :
A. raise real GDP and lower the aggregate price level.
B. lower real GDP and raise the aggregate price level.
C. lower real GDP and lower the aggregate price level.
48
Q.3184 If the economy is currently experiencing very low unemployment, an upward pressure on
prices accompanied by some shortages in production and supply commitments being met by depleting
inventories, then the economy is currently best characterized as:
A. at its long-run full employment equilibrium.
B. experiencing a short-run recessionary gap.
C. experiencing a short-run inflationary gap.
Q.3186 An economy is currently experiencing a combination of very low, or possibly negative

growth, and a rising price level. T his economy is best characterized as being:
C. experiencing short-run stagflation.
Q.3187 An economy is currently operating below its potential output level. T his economy is best
characterized as being:
C. experiencing a short-run inflationary gap.
Q.3188 Suppliers in an economy are meeting demands for their products by reducing inventories of
finished goods and running overtime shifts. T he resulting economy is best characterized as:
A. operating at its full employment equilibrium.
B. operating at a short-run equilibrium in excess of the long-run full employment level.
C. operating at a long-run equilibrium in excess of the long-run full employment level.
49
Q.3189 Suppliers in an economy are facing reduced demands for their products. Consequently, they
are accumulating inventories of finished goods and or reducing employee hours. T he resulting
economy is best characterized as:
A. operating at its full employment equilibrium.
B. operating at a short-run equilibrium below the long-run full employment level.
C. operating at a long-run equilibrium below the long-run full employment level.
Q.3190 Economic growth is most likely defined as measuring the percentage change in:
A. real GDP.
B. per capita real GDP.
C. real GDP or per capita real GDP.
Q.3191 Improvements in educational and training attainment within a country are most likely to:
A. increase aggregate demand.
B. increase productive efficiency and real GDP per capita.
C. reduce aggregate supply due to demands for higher wages.
Q.3192 Increases in capital investments are likely to:
A. increase aggregate demand.
B. increase productive efficiency and real GDP per capita.
C. reduce aggregate supply due to demands for higher wages.
Q.3193 Increases in immigration to a country are likely to result in:
A. reductions in aggregate demand.
B. reduced aggregate supply and reduced real GDP per capita.
C. increased aggregate supply and growth in real GDP.
50
Q.3194 Relatively small increases in capital investment in developing economies with large
populations, such as China in the 1990s, are most likely to produce:
A. large percentage increases in real GDP.
B. very large percentage increases in GDP per capita growth rates in the long term.
C. very large nominal increases in GDP per capita.
Q.3196 Sustained growth in real GDP per capita requires:
A. continuous large additions to the capital stock and to the population.
B. continuous large additions to the capital stock.
C. continuous technological improvements to increase factor productivity.
Q.3197 T he sustainable GDP per capita growth rate in a developing economy:
A. will always exceed that of a developed country due to its low capitalization.
B. will, in the long run, be the same as that of a developed economy.
C. exceed the short run growth rates typically achieved by adding to their capital stock.
Q.3198 Sustainable growth rates in GDP:
A. cannot exceed the rate of growth of total factor productivity.
B. can increase dramatically with the development of technological improvements.
C. can be increased by additional increments to capital and labor.
51
Q.3263 In Mexico, real GDP rose by 6 percent for the year 20X5. If nominal GDP increased by 7
percent, then it must be that:
A. the implicit GDP deflator also decreased by about 1 percent.
B. the implicit GDP deflator increased by about 1 percent.
C. the implicit GDP deflator increased by about 8 percent.
Q.3264 You have been given the following table:
20X5 20X6
Nominal GDP 1,373,845 1,450,647
Real GDP (Constant 2002 dollars) 1,248,950 1,283,758
Implicit GDP Price deflator - -
Based on the information presented, the implicit price deflators for 20X5 and 20X6 are closest to:
A. 91 and 88, respectively.
B. 89 and 92, respectively.
C. 110 and 113, respectively.

S = domestic savings I = investment
G = government expenditures on goods and services T = taxes
X = exports M = imports
F = transfer payments
A. C = S + I +F + (G-T ) + (X-M)
B. C = S + I + F + (G-T ) – (X-M)
C. S = I + (G-T ) + (X-M)
52
Q.3269 You have been given the following table:
20X7 20X8
Nominal GDP 1, 530, 600 1, 602, 309
Real GDP (Constant 2002 dollars) 1, 308, 205 1, 324, 222
Implicit GDP Price deflator - -
Based on the information presented, the implicit price deflator for 20X7 and 20X8 are closest to:
A. 117 and 121, respectively.
B. 113 and 115, respectively.
C. 110 and 113, respectively.
53
Reading 11: Understanding Business Cycles
Q.180 Which one of the following is least likely a stage of the business cycle?
A. Peak.
B. Growth.
C. Contraction.
Q.181 An economy in deflation is most likely :
A. An economy where inflation decreases over time.
B. An economy with consistently negative inflation growth.
C. an economy with slow economic growth occurring simultaneously as high rates of

inflation.
Q.182 Which of the following statements is least likely accurate?
A. T he employment rate is the percentage of the labor force that is employed.
B. T he labor force is comprised of all of the members of a particular population who are able
to work.
C. If the labor force participation rate declines and the number of people unemployed
remains unchanged, the unemployment rate will decrease.
Q.1012 T he key indicators of the current phase of the business cycle is most likely :
A. Unemployment and GDP.
B. Inventory levels and GDP.
C. Unemployment and inventory levels.
54
Q.1013 When the economy bounces back from a prolonged period of contraction, the inventory
turnover ratio of most companies will most likely :
A. Start to increase.
B. Start to decrease.
C. Remain unchanged.
Q.1014 Which of the following is least likely an effect of hyperinflation?
A. Borrowers gain at the expense of lenders.
B. T he public transfers wealth to the government.
C. Reduction in the amount of real private and public debt.
Q.1015 If a country's domestic currency appreciates relative to foreign currencies, exports will
most likely :
A. Increase.
B. Decrease.
Q.1016 What happens during the peak of the business cycle?
A. Inflation increases; consumer spending and investment increase at an increasing rate.
B. Inflation increases; consumer spending and investment increase at a decreasing rate.
C. Inflation decreases; consumer spending and investment increase at an increasing rate.
55
Q.1018 An aircraft technician in Morocco resigned from his job 6 months ago and has been looking
for a new job ever since. T he technician has handed his resume to 4 other aircraft maintenance
firms. T his situation most likely refers to:
A. Cyclical unemployment.
B. Frictional unemployment.
C. Structural unemployment.
Q.1020 You have been provided the following table:
Price 20X5 Price 20X6 Quantity (in million)

Onion 2 3 200
Potato 1 2.5 50
Wheat 3 4 100
T he consumer price index (CPI) is closest to:
A. 25.44
B. 129.44
C. 150.00
Q.1021 When expected wage inflation is high in the short term, output will most likely :
A. Increase.
B. Decrease.
C. Remain unchanged/no direct effect.
Q.1022 Which of the following is a leading economic indicator?
A. Consumer price index.
B. Average weekly hours worked in manufacturing.
C. Employment creation in non-agricultural sectors.
56
Q.1023 In the long run, when money supply increases, real GDP most likely :
A. Increases.
B. Decreases.
C. Remains unchanged.
Q.1525 In which of the following phases of the business cycle is economic growth most likely slow
but positive?
A. Peak
B. T rough
C. Expansion
Q.1526 T he business cycle phase which is followed by the recovery phase is most likely known as:
A. T rough.
B. Expansion.
C. Contraction.
Q.1527 When inventories start to accumulate, the inventories-to-sales ratio reaches its above-
normal level. Which phase of the business cycle is most likely associated with an increased
inventories-to-sales ratio?
A. Peak
B. T rough
C. Expansion
57
Q.1529 T he school of thought where economists believe the economy has a high tendency to
perform at its full-employment equilibrium and where business cycles are short-term deviations
from the long-term full employment is most likely known as:
A. Monetarist school.
B. T he Keynesian school.
C. T he Neoclassical school.
Q.1530 In which of the following phases of the business cycle is inflation most likely decreasing with
a lag?
A. Peak.
B. Recovery.
C. Contraction.
Q.1531 Which of the following schools of economists applies the utility theory and argues that the
government should not counteract business cycles?
A. Real business cycle theory.
B. Neoclassical and Austrian schools.
C. Keynesian and monetarist schools.
Q.1533 Price levels in Greece have decreased consistently over the past four years from 108 to
102. What is the most appropriate term for the changes in price levels in Greece?
A. Deflation
B. Disinflation
C. Hyperinflation
58
Q.1534 Which of the following is most likely brought about by technological changes that make the
job skills of many workers obsolete?
A. Cyclical unemployment.
C. Structural unemployment.
Q.1536 Which of the following price indexes measures most likely excludes energy and food items
from the basket for calculation purposes?
A. Core inflation.
B. Headline inflation.
C. Wholesale price index.
Q.1537 Products used in the calculation of the price index are often improved. As the quality
increases, the prices of these products also increase, thus causing an upward bias in the index.
Which of the following techniques can most likely be used to adjust the index for the quality bias?
A. Fisher index
B. Hedonic pricing
C. Headline inflation
Q.1538 Russia's supply of food products has decreased because of the increasing wage rates, input
prices, and duties on imported raw materials. T his shortage of supply has increased the prices of
goods in Russia. Which of the following is most likely associated with the increase in prices due to
the shortage in supply?
A. Cost-pull inflation.
B. Cost-push inflation.
C. Demand-push inflation.
59
Q.1539 T he basket used for the price index in Tomorrowland was 100 burgers and 150 pizzas last
year. T his year, the basket has increased to 150 burgers and 200 pizzas. Prices for burgers and pizzas
last year were $5 and $6 respectively, while in the current year, the prices have increased to $8 and
$7 respectively.
T he Paasche index for the current year is closest to:
A. 133.33%
B. 152.84%
C. 185.71%
Q.1540 Macedonia is a country where an increase in money supply, government spending, consumer
spending, and a high GDP growth rate has shifted the aggregate demand curve to the right of the full
employment GDP curve. T hus, increased demand has increased the price level of goods.
Which of the following is the most appropriate term for changes in price levels in Macedonia?
A. Cost-push inflation
B. Demand-pull inflation
C. Demand-push inflation
Q.1541 Which of the following is most likely a coincident economic indicator?
A. T he Consumer Price Index (CPI)
B. T he Consumer Confidence Index® (CCI)
C. Personal income minus transfer payments
Q.1542 Which of the following is least likely a leading economic indicator?
A. S&P 500 prices.
B. Building permits.
C. T he change in the Consumer Price Index for services.
60
Q.2471 Suppose that the economy is at or very near the full employment level. An increase in
government expenditure for goods and services most likely :
A. Result in stagflation.
B. Result in a short-run equilibrium above the full employment level.
C. Result in a new equilibrium at the full employment level and a higher price level.
Q.2472 From 1930 to 1933, the price of bread fell from $0.32/kg to $0.30/kg. T his most likely
represents a period of:
A. Inflation.
B. Deflation.
C. Disinflation.
Q.2473 For 1981, 1982, and 1983, the year-to-year changes in the Canadian CPI were 10.0, 12.5, and
10.9 percent, respectively. For 1984 and 1985, although prices continued to rise, the year-to-year
changes declined to 5.8 and 4.3 percent, respectively.
T he 1984 and 1985 changes most likely indicate a period of:
A. Deflation.
B. Stagflation.
C. Disinflation.
Q.2474 Recovery from a recession is most likely to be preceded by:
A. A reduction in building permits issued and manufacturer's new orders for capital goods.
B. An increase in average weekly hours and a reduction in average weekly unemployment

insurance claims.
C. A reduction in the average duration of unemployment and a reduction in consumer credit

outstanding to personal income.
61
Q.3199 An analyst wishing to assess if the economy is moving out of a recession and into the
expansion phase is most likely looking for:
A. A deceleration in the rate of inflation.
B. An upturn in expenditures for housing and consumer durables.
C. A decline in average consumer expectations for business and economic growth.
Q.3200 An analyst wishing to assess whether the economy has reached the peak of the business
cycle would most likely be best advised to look for indications that:
A. Businesses have slowed their rate of hiring.
B. Businesses have begun to purchase heavy equipment.
C. T he economy is showing moderate or possibly falling rates of inflation.
Q.3201 During a recession in a developing country, the national government capitalized a significant
number of infrastructure projects using deficit spending. Which of the following school of economic
thought is most likely to be appropriate in explaining the actions of this government?
A. Keynesian school
B. Monetarist school
C. Neoclassical school
Q.3202 T he monetarist view of Milton Friedman would most likely assert that Keynes view
overlooked the important aspect that:
A. Government spending would invariably result in lower interest rates.
B. T he money supply would automatically adjust to compensate for fiscal policy.
C. Any government action would likely occur too late, ultimately making the situation worse.
62
Q.3203 T he monetarist view of Milton Friedman in comparison to the Keynesian view, most likely ,
has:
A. More emphasis on government spending and carefully allocating spending to winners.
B. A greater reliance on markets, and a fear that government is more likely to make things
worse.
C. a reluctance to wait for markets to correct and more emphasis on government actions to
correct imbalances.
Q.3204 T he fundamental monetarist prescription for limiting a recession would most likely be to:
A. Continue to expand the money supply at predictable rates.
B. T ighten credit, reduce M2, and increase government spending.
C. Focus on lowering interest rates and wait for the market to self-correct.
Q.3205 T he closure of a large steel plant in a medium-sized city will lead to unemployment best
described as:
A. Seasonal unemployment.
C. Long-term or structural unemployment.
Q.3207 An economy that had inflation rates above 40 percent enters a period during which the
inflation rate drops to only 10 percent. T his economy most likely experienced:
A. Deflation.
B. Disinflation.
C. Hyperinflation.
63
Q.3208 Criticisms of the Laspeyres price index, used to estimate inflation rates, include:
A. An upward bias is due to the quality bias.
B. A downward bias due to the new product bias.
C. A downward bias due to the substitution effect.
Q.3209 Inflation, caused by a supply shock such as that experienced when oil supplies are suddenly
restricted, would be described as:
C. Demand-pull inflation.
Q.3210 A rapid increase in demand results in a general rise in prices and, subsequently, in workers
asking for wage increases to compensate for the higher cost of living. T his is most likely known as:
C. Demand-pull inflation.
Q.3211 Which of the following would most likely provide the basis for an index of leading indicators if
an economy were expected to begin an economic expansion?
A. Average duration of unemployment
B. Employees on nonagricultural payrolls
C. Average weekly hours for manufacturing workers
64
Reading 12: Monetary & Fiscal Policy
Q.865 Which of the following is least likely an effect of an expansionary monetary policy?
A. Price levels decrease.
B. Bonds, equities, and asset prices increase.
C. Banks' short-term lending rates decrease.
Q.866 A decrease in the inter-bank lending rate will most likely cause:
A. T he domestic currency to depreciate.
B. An increase in inflation and a decrease in employment.
C. A decrease in inflation and an increase in employment.
Q.867 What is the most likely policy response to a high inflation rate due to supply shocks?
A. An expansionary monetary policy.
B. A contractionary monetary policy.
C. T here is no exact policy prescription.
Q.868 Given that unexpected inflation is a situation where expected inflation and actual inflation
differ, which of the following is least likely an effect of unexpected inflation?
A. Risk premia in borrowing rates and the prices of other assets.
B. Constant changes in the advertised price of goods and services.
C. Less reliable information about the demand and supply from a change in prices.
65
Q.869 What is the most likely effect of a contractionary monetary policy at the same time as an
expansionary fiscal policy?
A. Both aggregate demand and interest rates increase.
B. Both aggregate demand and interest rates decrease.
C. Aggregate demand increases while interest rates decrease.
Q.870 Which of the following will most likely occur if the government increases taxes?
A. T he aggregate demand curve will shift to the left.
B. T he aggregate demand curve will shift to the right.
C. T here will be upward movement along the aggregate demand curve.
Q.871 Short-term repurchase agreements are most likely included in:
A. M3 money supply.
B. M2 money supply.
C. M1 money supply.
Q.872 What would happen to money demand if the Reserve Bank of India announces an increase in
interest rates from next year onwards? Which type of money demand would be associated with it?
A. An increase in money demand is associated with transaction demand.
B. A decrease in money demand is associated with speculative demand.
C. An increase in money demand is associated with speculative demand.
66
Q.873 An hypothetical economy has the following deposits in three different banks:
Money deposited in bank A=$10,000; and reserve ratio=25%.
Money deposited in bank B=$8,000; and reserve ratio=20%.
Money deposited in bank C=$5,000; and reserve ratio=20%.
Find the total money created from this data.
A. $105,000
B. $115,000
C. $120,000
Q.874 All else being equal, a larger money supply most likely :
A. Raises market interest rates.
B. Lowers market interest rates.
C. Has no effect on market interest rates.
Q.875 If the money supply curve shifts to the left, interest rates will most likely :
A. Increase.
B. Decrease.
Q.876 What is the primary objective of most central banks?
A. Controlling inflation.
B. Maintaining price stability.
C. Controlling unemployment.
67
Q.1490 When a central bank increases the supply of money and credit in an economy, it is referred
to as a (an):
A. Contractionary policy.
B. Restrictive monetary policy.
C. Expansionary monetary policy.
Q.1491 Which of the following is least likely a function of money?
A. Store of value.
B. Collateral for a loan.
C. Medium of exchange.
Q.1492 According to European Central Bank (ECB), debt securities with a maturity of up to two
years are part of which of the following aggregate categories of money?
A. M1
B. M2
C. M3
Q.1493 Calculate the money multiplier of King's bank that has excess reserves of $5 million if the
reserve requirement by the central bank is 15%.
A. 4x
B. 6.67x
C. 33.34x
68
Q.1494 All else being equal, estimate the changes in price levels if the money supply increases by
7%.
A. Price levels will increase by 7%.
B. Price levels will decrease by 7%.
C. Price levels will increase by more than 7%.
Q.1495 T he belief that inflation can be controlled with the money supply since real variables are not
affected by monetary variables is most likely associated with:
A. Money velocity.
B. Money neutrality.
C. Accommodative policies.
Q.1496 Individuals and businesses hold money for many purposes which, in turn, moves the demand
for money. Which of the following is least likely a reason for holding money?
A. Held to defend inflation.
B. Precautionary demands.
C. Need for undertaking transactions.
Q.1497 What will most likely be the preference for individuals and companies if interest rates have
recently been increased?
A. Demand to hold money will increase.
B. Demand to hold money will decrease.
C. Demand to hold money will not be affected.
69
Q.1498 What is the most likely impact on money supply if interest rates are above the equilibrium
interest rate?
A. Excess supply.
B. Excess demand.
C. Decreased supply.
Q.1499 T he real interest rate if the nominal interest rate is 11% and inflation is 3.5% is most likely ?
A. 7.5%
B. 13.5%
C. 14.5%
Q.1500 Which of the following assumes that real rates are static and changes in nominal interest
rates are due to changes in price levels?
A. Fisher effect.
B. Paasche index.
C. Money neutrality.
Q.1501 Which of the following is least likely the role of a central bank?
A. Lender of last resort.
B. Conductor of monetary policy.
C. Setting tax rates on interest on savings.
70
Q.1502 In India, the price index was 116 last year, and the price level index this year is 123. If the
real interest rate in India is 5.5%, then the nominal interest rate is closest to:
A. 8%.
B. 11.5%.
C. 12.5%.
Q.1503 T he 'shoe leather cost' is related to costs appearing from:
A. Inflation.
B. Deflation.
C. Disinflation.
Q.1507 T he Central Bank of Lalalinia wants to increase the supply of money. Which of the following
policies will most likely increase the supply of money in the economy?
A. Increasing the policy rate.
B. Decreasing the reserve requirement.
C. Selling securities on the open market.
Q.1508 Identify a monetary policy tool that will most likely decrease the money supply in the
economy.
A. Selling securities in the open market.
B. Decreasing the reserve requirement.
C. Buying securities on the open market.
71
Q.1509 What will most likely happen to financial asset prices if the central bank decides to increase
rates?
A. Prices will increase.
B. Prices will decrease.
C. Prices will remain unaffected.
Q.1510 Identify the set of qualities that are most likely essential for central banks to succeed in their
inflation-targeting policies.
A. Independence, secrecy, and credibility.
B. Independence, transparency, and credibility.
C. Interdependence, transparency, and authority.
Q.1511 Determine the most likely impact on domestic exports of a country through its transmission
mechanism if its interest rates decrease?
A. Exports will increase.
B. Exports will decrease.
C. Exports will remain unaffected.
Q.1512 Which of the following is the most commonly used inflation target?
A. 1%
B. 2%
C. 3%
72
Q.1513 Which of the following is the most widely used mechanism for making monetary policy
decisions?
A. Interest rate targeting.
B. Inflation rate targeting.
C. Exchange rate targeting.
Q.1514 Identify the most appropriate equation for a neutral interest rate.
A. Neutral interest rate = Real trend rate for economic growth + Inflation.
B. Neutral interest rate = Long-term sustainable growth rate + Policy rate.
C. Neutral interest rate = Real trend rate for economic growth + Long-term sustainable
growth rate.
Q.1515 Determine the most likely state of the monetary policy in a country if the interest rate is
above the neutral interest rate?
A. Expansionary policy.
B. Contractionary policy.
C. Easing monetary policy.
Q.1516 Investors that see future money supply growth as inflationary and believe that future asset
prices will make long-term bonds unattractive and will increase the long-term interest rates are
called:
A. Hedgers.
B. Regulators.
C. Bond Market vigilantes.
73
Q.1517 Which of the following is least likely an objective of fiscal policy?
A. Liquidity trap.
B. Controlling inflation.
C. Increasing industrial or agricultural output.
Q.1518 Bob Jarislowsky bought wine for his birthday party at a price of $200 + $20 VAT. VAT is an
example of which of the following fiscal policy tool?
A. Direct taxation: Spending tool
B. Direct taxation: Revenue tool
C. Indirect taxation: Revenue tool
Q.1520 If the marginal propensity to consume is 60% and taxes are 30%, the fiscal multiplier is most
likely :
A. 1.72
B. 1.90
C. 3.33
Q.1521 T he time governments take to discuss, vote and enact fiscal policies is most likely called:
A. Action lag.
B. Impact lag.
C. Recognition lag.
74
Q.1522 A country in which the government is enacting an expansionary fiscal policy which will
reduce private investments and the aggregate demand simultaneously may result in:
A. Crowding out.
B. A liquidity trap.
C. A supply shortage.
Q.2456 Most central banks routinely redeem existing treasury securities and originate new ones. If
the central bank decreases its net sales of T reasury securities, this is most likely a(n):
A. Contractionary fiscal policy.
B. Expansionary monetary policy.
C. Contractionary monetary policy.
Q.2459 T he capacity of a central bank to successfully implement expansionary monetary policy may
be limited by:
A. Current high levels of interest rates.
B. An excess of foreign exchange reserves.
C. T he absence of a liquid market for the country's T reasury securities.
Q.2460 Most central banks consider it the primary role of the bank to most likely be:
A. Ensuring financial stability.
B. Ensuring stable growth in GDP
C. Managing the security of those making deposits in bank accounts.
75
Q.2461 If the central bank reduces the reserve requirements and increased net redemptions
(purchases) of T reasury securities, then:
A. Interest rates would rise, and bank lending activities would decrease.
B. Banks would increase lending activities, and the money supply would increase.
C. Banks would decrease the acceptance of deposits, and the money supply would decrease.
Q.2475 An expansionary fiscal policy may most likely include:
A. Reductions in government expenditures and reductions in taxes.
B. Increases in government expenditures and increases in tax credits.
C. Reductions in interest rates and Increases in government expenditures.
Q.2476 In a high inflation environment, it is most likely to be profitable to:
A. Borrow money and purchase real assets.
B. Lend money to those wishing to buy real assets.
C. Borrow money and purchase real assets if nominal interest rates are less than the real
rate of interest plus the rate of inflation.
Q.2477 Primary objectives of fiscal policy are most likely to:
A. Control inflation and unemployment.
B. Ensure stable prices and low-interest rates.
C. Manage the economy through the government's ability to influence GDP.
76
Q.3212 Fiscal policy is best described as:
A. Government activities centered on alleviating the unequal distribution of wealth.
B. Government targeting interest rates and extensions of credit to affect the economy.
C. Government actions through the adjustment of expenditures and taxes to influence the
economy.
Q.3213 T he quantity of M1 money in an economy is most likely :
A. Limited to the value of the gold backing the currency.
B. Expanded by banks within a fractional reserve system.
C. Controlled by the central bank solely by adjusting the quantity being printed.
Q.3214 In an economy with a 15 percent reserve requirement, a new deposit of $3,000 will create
money in the amount of:
A. $450.
B. $3,450.
C. $20,000.
Q.3215 In an economy with a 20 percent reserve requirement, a new deposit of $180,000 will
create money in the amount of:
A. $36,000
B. $144,000
C. $900,000
77
Q.3216 Under the quantity theory of money, if money neutrality holds, then a change in the quantity
of money would have the following effect(s):
A. Real output is unaffected, and only the price level will change.
B. Real output will increase in response to the stimulus of additional money.
C. Money will circulate through the economy more rapidly, and prices will be unaffected.
Q.3217 T he quantity theory of money gave rise to a group of economists known as monetarists, who
held the view that:
A. T he growth rate of the money supply should be used to adjust the velocity of money.
B. T he price level, or inflation, could be controlled simply by adjusting the money supply.
C. Increasing the money supply would simply increase output, with no effect on inflation.
Q.3218 T he Fisher effect facilitates the explanation as to why wise investors won't necessarily
move their savings deposits to the country that pays the highest interest rate. Which of the following
is most accurate with regard to the Fischer effect?
A. Investors seek the highest nominal rate of interest since they want the highest nominal
ending value.
B. Provided investors know the nominal rate of interest, they will also know the inflation
rate that will occur over the investment horizon.
C. Investors are seeking the highest real ending value, which means they require a high real
return, plus compensation for the expected rate of inflation, in selecting the nominal return.
Q.3219 An investor notes that savings accounts in Brazil are earning 12 percent, whereas Canadian
savings accounts are paying only 0.5 percent. In this case, the investor should:
A. Borrow money in Canada, convert it to Brazilian reais, and deposit it in Brazil in order to
generate a near-riskless profit.
B. Borrow money in Brazil and deposit it in Canada after converting to Canadian dollars to
generate a near-riskless profit.
C. Determine the real rate of interest expected, after adjusting for expected inflation in both
countries, before any further analysis or action.
78
Q.3220 An investor is contemplating relocating to one of countries A, B, or C. A, B, and C have the
nominal interest rates on savings accounts of 5, 8, and 10 percent, respectively. He also notes that
the expected inflation rates in A, B, and C are 1, 3, and 7 percent, respectively. On this basis, if the
investor were to rank the attractiveness of placing deposits in the three countries from best to
worst, (s)he should most likely rank them as:
A. C, B, A.
B. A, B, C.
C. B, A, C.
Q.3221 Most central banks are most likely responsible for:
A. Depositor protection and as a bank for the government.
B. T he regulation of financial services and as lenders of last resort to banks.
C. Being guardians of the payment system and supervisors of the banking system.
Q.3222 Nearly all central banks most likely have an explicitly stated role to:
A. Ensuring financial stability.
B. Preserve confidence in the financial system.
C. Facilitate a sustainable growth rate in GDP and the money supply.
Q.3223 Central bankers focus on controlling the price level, or inflation, because high levels of
inflation:
A. Will necessitate higher nominal interest rates reducing the central bank's ability to
control the money supply when necessary.
B. Will cause workers to demand higher wage settlements and investors to demand higher
rates of return on investment, reducing potential GDP.
C. Are also likely to coincide with greater volatility of inflation which makes it more
probable that economic agents will bear higher costs of unexpected inflation rates.
79
Q.3224 T he central bank of the UK was set out to make changes to be fully transparent by publishing
its money targets well in advance. In this way, if the plan had worked:
A. T he unanticipated part of the inflation rate was intended to be zero.
B. T he inflation rate was intended to be zero, making business decision-making simpler.
C. T he government could then take advantage of inflation rate surprises as a means of

creating a hidden tax.
Q.3225 T he central bank has many tools with which it can influence the macroeconomy. One of the
primary tools is most likely to employ:
A. Direct adjustments to the prime rate of interest offered by commercial banks.
B. Controlling access to the payment system by nonbanks and commercial enterprises.
C. Open market operations to adjust the quantity of government securities held by investors.
Q.3226 T he central bank has many tools with which it can influence the macroeconomy. One of the
primary tools it is most likely to employ is:
A. Adjusting the refinancing rate.
B. Direct adjustments to the prime rate of interest offered by commercial banks.
C. Regulating the activities of investment banks as an alternative to depository accounts.
Q.3227 T he central bank announces an intention to increase the official interest rate. In terms of
effects on the economy, which of the following is most likely to occur?
A. Consumers are likely to view the increase as a positive signal and make more purchases in
light of their revised expectations.
B. Domestic exporters are likely to see a decline in profits as the currency is likely to
appreciate making exports less attractive to foreign buyers.
C. T he increase in rates is likely to increase the growth rate of the economy since investors
will seek to take advantage of the higher interest rate environment.
80
Q.3228 Which of the following are most likely to be affected by a change in the central bank's policy
rate?
A. Exchange rates.
B. Interest rate expectations.
C. Exchange rates and interest rate expectations.
Q.3229 Which in the following is most likely a characteristic of a successful central bank?
A. Close affiliation with the national government.
B. T ransparency and independence from the government.
C. Capacity and the ability to act without revealing their intentions in advance.
Q.3230 Some central banks have focused on exchange rate targeting by managing the domestic
currency to maintain an acceptable exchange rate with a reference currency, rather than focusing
on inflation. In such cases, the central bank is most likely able to take this approach:
A. Because inflation in the country is already low and simply not a priority.
B. Because it is in essence handing over control of inflation to the central bank controlling
the reference currency.
C. Because this typically occurs only in large economies that already have strong economic
ties to the currency selected as the target.
Q.3231 Many central banks focus on achieving set targets for inflation close to 2 percent. A target of
zero percent is not typically considered because:
A. Inflation rate targeting is not a precise science, and there is a fear of creating persistent
deflation that is difficult to correct.
B. People have become accustomed to getting wage increases or increased prices for their
goods and services over time, so a target of zero would not be credible.
C. Inflation has a positive effect on consumer confidence that supports growth in the
economy since supply must expand to meet the growing increases in demand.
81
Q.3232 When a central bank elects to lower interest rates, the expected consequences include an
increased likelihood of:
A. An increased economic growth, potentially higher inflation, and depreciation of the

domestic currency.
B. An increased economic growth, potentially higher inflation, and appreciation of the

domestic currency.
C. A decreased economic growth, potentially higher inflation, and depreciation of the

domestic currency.
Q.3233 When the central bank of a small economy elects to set a target value for the exchange rate:
A. T he money supply becomes more stable.
B. Domestic interest rates and inflation become more stable.
C. T he domestic money supply and interest rates can become more volatile.
Q.3234 T he neutral rate is most likely :
A. Easily pinpointed as the rate which would neither cause a contraction or an expansion.
B. Higher than the rate that would cause a contraction and lower than the rate which would
stimulate economic expansion.
C. Often difficult to specify precisely, but specified in theory as lying between low,
expansionary interest rates and the high, contractionary rates.
Q.3235 Central banks can utilize inflation rate targeting and other actions to manage the money
supply, inflation, and interest rates. Which of the following characterizations would most likely
apply?
A. Inflation rate targeting is simple to manage, but the money supply may be challenging to
measure and stabilize.
B. Most central banks have the ability to set interest rates with great precision, which in the
process means that inflation rate targeting is easily managed.
C. Achieving inflation targets is more art than science and the market operations needed are
vulnerable to countervailing actions by bond market participants.
82
Q.3236 Central banks may find limitations in terms of the effectiveness of monetary policy in which
of the following situations?
A. Environments where interest rates are modest, and inflation rates are low.
B. Environments where interest rates are near zero and consumers simply hold onto any
additional infusions of money.
C. Environments where interest rates are near zero and consumers rapidly spend any
additional infusions of money to purchase more consumption goods.
Q.3237 Expansionary fiscal policy measures may include:
A. Reducing personal income taxes and buying new aircraft for the military.
B. Easing interest rates and buying treasury bonds to encourage economic activity.
C. Reducing the regulatory burden by reducing or eliminating environmental regulations.
Q.3238 Which of the following is most likely a reasonable argument to support using a fiscal deficit
as a tool to stimulate an expansion?
A. If unemployment is high, then the crowding out effect is of less concern.
B. Additional taxes to offset the deficit at future points could be distortionary.
C. Fiscal policy is set by the government and may be manipulated solely for political gain.
Q.3239 Which of the following statements about the size of the national debt relative to GDP is most
likely a reasonable and truthful statement?
A. In the end, the central bank can print more money to pay the debt.
B. Over the long run, the crowding-out effect may have a significant negative effect on
capital accumulation.
C. For countries such as Canada and South Korea, most of the debt is held by foreigners, so
the burden of the debt carrying costs is more severe than for countries such as the USA.
83
Q.3240 Changes to existing taxes or the introduction of new taxes are fiscal policy tools available to
governments. Which of the following statements is most likely a reasonable statement of fact?
A. Increases in income tax rates could arguably cause a large enough disincentive to labor
that tax revenue actually falls.
B. Income taxes in countries such as Canada and the USA are highly regressive and,
therefore, are easily criticized in terms of fairness.
C. Converting to a flat income tax would improve fairness since such a structure would
proportionately transfer a much greater tax burden from the poor to the wealthy.
Q.3241 Which of the following is least likely a true statement about using fiscal policy tools to
regulate the business cycle?
A. It may take considerable time to recognize that the economy is slowing. Consequently, any
fiscal policy actions may be too late.
B. Once a need for an expansionary action is recognized, it may take considerable time to put
a plan, such as a capital expenditure program, into action.
C. Increases in government spending will move the economy smoothly to the full
employment level without the inflationary risks presented by monetary adjustments.
Q.3242 Which of the following is most likely an example of an expansionary fiscal policy action
available to the government?
A. T he introduction of higher taxes on alcohol and tobacco.
B. Lowering the official interest rate through the repurchase agreements market.
C. Making available federal money for “shovel ready” capital improvement projects.
Q.3243 Under the assumption that wages and prices are rigid, which of the following statements is
most likely correct if the government implements a contractionary fiscal policy in combination with
an expansionary monetary policy?
A. T he public sector will shrink as a percentage of GDP.
B. T he private sector will shrink as a percentage of GDP.
C. T his strategy will set a low-interest rate environment without affecting GDP.
84
Q.3244 Under the assumption that wages and prices are rigid, which of the following statements is
most likely correct if the government implements a contractionary fiscal policy in combination with
a contractionary monetary policy?
A. Aggregate demand will decline.
B. T he public sector will shrink as a percentage of GDP.
C. T he private sector will shrink as a percentage of GDP.
Q.3267 T he central bank has many tools with which it can influence the macroeconomy. Which of
the following is least likely to be used by most central banks in developed countries due to its
potentially disruptive effects on banks?
A. Open market operations.
B. Adjusting the official policy rate.
C. Adjusting reserve requirements.
Q.3831 Debora Eaton is analyzing money supply and demand in the nation of Nigeria. Based on her
preliminary findings, Eaton has determined that the interest rate where there will be no excess
money balances is 6.5%. Holding all else constant, if bonds offer an interest rate of 6.2%:
A. Bond prices will increase.
B. Bond supply will increase.
C. Individuals will decrease their money holdings.
Q.3832 T he Moroccan government authorities have launched a program whereby they intend to
enhance spending on public infrastructure and develop schools and hospitals. To offset the effects of
the fiscal policy, the country’s central bank is reducing the money supply. What are the most likely
implications of the two policies on Morocco’s economy?
A. Interest rates will be reduced.
B. Reduction in private sector demand.
C. Growth in private and public sectors.
85
Q.3836 If the money supply curve shifts to the left, interest rates will most likely :
A. Increase.
B. Decrease
C. Remain unaffected in the short-run.
86
Reading 13: International Trade and Capital Flows
Q.185 In short terms, gross national product (GNP) is most likely :
A. T he market value of all the goods and services produced in one year by the citizens of a
country.
B. T he market value of all the goods and services consumed in one year by the citizens of a
country.
C. T he market value of all the goods and services produced in one year by the citizens of a
country minus the market value of all the goods and services consumed in one year by the
citizens of a country.
Q.190 A country has the following:
Exports of goods and services $6, 000, 000

Investment income received from foreigners $1, 000, 000
Imports of goods and services $3, 000, 000
Investment income payment made to foreigners $2, 000, 000
T he country's account balance is closest to:
A. $0.
B. $2,000,000.
C. $12,000,000.
Q.877 Income from capital owned by foreigners invested within a country is most likely ?
A. Not included in both the GDP and the GNP.
B. Included in the GNP but not included in the GDP.
C. Included in the GDP but not included in the GNP.
87
Q.878 T he following table shows the number of hours necessary to produce one unit of electronics
in both England and India:
Country Ipads Personal Computers

England 200 170
India 160 150
Which country most likely has an absolute advantage in producing Ipads and personal computers?
A. India has an absolute advantage in producing both iPads and personal computers.
B. England has an absolute advantage in producing both iPads and personal computers.
C. England should specialize in the production of personal computers and exchange them for
iPads produced in India.
Q.879 T he slope of the production possibility frontier is most likely ?
A. Does not represent the opportunity cost at all.
B. T he opportunity cost of goods on the X axis in terms of goods on the Y axis.
C. T he opportunity cost of goods on the Y-axis in terms of goods on the X-axis.
Q.882 What most likely happens to the consumer surplus of the importing country when tariffs are
imposed?
A. T he consumer surplus increases.
B. T he consumer surplus decreases.
C. T here is no change in the consumer surplus.
Q.883 Which of the following concerning trade restriction is most likely to be correct?
A. If a country is small, it can benefit by imposing a tariff.
B. T he imposition of tariffs will reduce government revenues.
C. T he imposition of tariffs by a government will increase its revenue.
88
Q.885 What is the most likely effect of export subsidies on the domestic country?
A. A decrease in prices and a decrease in consumer surplus.
B. An increase in prices and a decrease in consumer surplus.
C. An increase in prices and an increase in consumer surplus.
Q.886 Capital restrictions are most likely ?
A. Not beneficial in the long run as well as in the short run.
B. Beneficial in the long run and may or may not be beneficial in the short run.
C. Not beneficial in the long run and may or may not be beneficial in the short run.
Q.887 In the Utopian Union, all members have established a common institution and economic policy.
Furthermore, all barriers to import and export of goods and services have been removed between
participating countries, and all barriers to the movement to labor and capital have also been removed.
T he Utopian Union is an example of:
A. A free trade area.
B. A monetary union.
C. An economic union.
Q.888 Income receipts are most likely a part of:
A. T he capital account.
B. T he current account.
C. T he financial account.
89
Q.1543 Which of the following most likely measures the total goods and services produced by labor
and capital of a country’s citizens?
A. National income.
B. Gross national product (GNP).
C. Gross domestic product (GDP).
Q.1544 A citizen of Lithuania is operating a printing business in T urkey where he earns €5,000/year.
In which of the following will his earnings be measured?
A. GNP of T urkey.
B. GDP of Lithuania.
C. GNP of Lithuania.
Q.1545 A country that can produce a good at a lower cost or use fewer resources than another
country is said to have a/an:
A. Absolute advantage.
B. Resources advantage.
C. Comparative advantage.
Q.1546 Rhajib Ismail is a Pakistani citizen living and working in India with an annual income of
800,000 Rupees. In which of the following will his earnings most likely be measured?
A. GDP of India.
B. GNP of India.
C. GDP of Pakistan.
90
Q.1549 In Canada, the cost of producing one kilogram of cheese and yogurt is $30 and $45, while the
cost of producing one kilogram of the same items in the United States is $50 and $40, respectively.
Calculate the opportunity cost of producing yogurt in terms of cheese in Canada.
A. 0.67
B. 1.125
C. 1.5
Q.1550 How many factors of production does the Heckscher-Ohlin model of trade most likely
consider?
A. 1
B. 2
C. 3
Q.1551 In contrast to the Heckscher-Ohlin model of trade, the Ricardian model considers only one
factor of production. Identify the factor that the Ricardian model considers.
A. Labor.
B. Capital.
C. Raw material
Q.1552 Which of the following is least likely a reason for a government to impose trade restrictions?
A. To protect new or infant industries.
B. To avoid comparative advantage over other countries.
C. To protect goods that are crucial to a country's defense.
91
Q.1555 Which of the following is least likely associated with the imposition of capital restrictions?
A. To maintain fixed exchange rates.
B. T he prohibition of foreign investments in certain domestic industries.
C. Providing domestic capital to foreign investors to invest in the domestic country.
Q.1556 Which of the following is least likely a strategy used by governments to protect domestic
goods?
A. Licenses.
B. Import quotas.
C. A decrease in tariffs.
Q.1557 Which of the following most likely exhibits the least level of integration among members?
A. Customs union.
B. Free trade area.
C. Economic union.
Q.1558 Which of the following is most likely a trade agreement in which barriers on the movement
of labor and capital goods among members are removed, but members do not adopt common
economic policies?
A. Monetary union.
B. Economic union.
C. Common markets.
92
Q.1559 Which of the following is least likely included in the current account in the balance of
payments (BOP)?
A. Sales and purchase of non-financial assets.
B. Receipts of raw material and manufactured goods exported.
C. Foreign income from dividends on stock holdings and debt securities.
Q.1560 T he account of the balance of payments (BOP) of Canada which includes Canadian
government-owned assets abroad is most likely the:
A. Capital account.
B. Current account.
C. Financial account.
Q.1561 Which of the following situations will most likely result in a current account surplus?
A. Imports are lower than exports.
B. Exports are lower than imports.
C. Lower rate of private saving, higher government deficit, and higher rate of domestic
investments
Q.1562 Which of the following is most likely an international organization that aims to reduce
poverty?
A. World bank.
B. World T rade Organization.
C. International Monetary Fund.
93
Q.3245 Which of the following statements is most accurate?
A. GNP includes net exports, which GDP excludes.
B. Countries with large numbers of citizens working abroad will have large differences
between GDP and GNP.
C. GNP includes and GDP excludes the value of intermediate goods such as automobile parts
transferred from the USA to subsidiary assembly plants in Canada.
A. T rade liberalization will lead to the elimination of most domestic firms due to foreign
competition.
B. T rade liberalization provides more consumer choice and improved opportunities for many
exporters.
C. T rade liberalization will result in all job opportunities moving to highly populated countries
such as China.
Q.3247 A worker in Fuscalia can produce either 5 guitars or 10 baseball caps per day. A worker in
Westonia can produce 4 guitars or 20 baseball caps per day. Which of the following is correct?
A. Westonia has a comparative as well as an absolute advantage in producing guitars.
B. Fuscalia has a comparative as well as an absolute advantage in producing baseball caps.
C. Westonia has an absolute advantage in producing baseball caps, and Fuscalia has a
comparative advantage in producing guitars.
A. T he Hecksher-Ohlin model attributes differences in comparative advantage to differences

in labor productivity.
B. T he Ricardian model would attribute differences in comparative advantage to differences

in labor productivity.
C. T he Ricardian model would attribute differences in comparative advantage to differences

in factor endowments.
94
Q.3249 In Barbados, foreigners are not generally permitted to own land. Although there are many
exceptions made, the more obvious being the presence of major hotels from the USA and other
countries dotting the beachfront, these restrictions are classified as:
A. Import quotas.
B. Capital restrictions.
C. Domestic content provisions.
Q.3250 Which of the following conditions would least likely need to be present for a large country to
increase its welfare by imposing a tariff?
A. Its trading partner does not retaliate.
B. T he exporter reduces the price of its goods.
C. T he deadweight loss from the tariff is smaller than the benefit of its terms of trade.
Q.3251 T he introduction of an import quota on German manufactured automobiles would:
A. Generate the same revenue as a tariff for the country’s government.
B. Make the consumers of the importing country better off by sheltering their car
manufacturers from foreign competition.
C. Limit the importation of cars and permit the German auto importers to fully offset the
expected loss in sales by raising the prices of their cars.
Q.3252 T he welfare improving benefits of trading blocs and common markets are best explained by
which of the following?
A. T rade creation.
B. T rade diversion.
C. T rade creation and trade diversion.
95
Q.3253 T he reasons for countries imposing capital restrictions are most likely to include which of
the following?
A. To protect strategic or military interests.
B. To prevent domestic investors from gaining higher rates of return abroad.
C. To ensure foreigners cannot unduly influence the election of government officials.
96
Reading 14: Currency Exchange Rates
Q.187 All else being equal, if the Australian dollar goes from USD 0.8 to USD 0.9, goods produced in
Australia and consumed in the United States will usually be:
A. cheaper for Americans.
B. more expensive for Americans.
C. the same price as before for Americans.
Q.940 Which of the following must most likely happen for the balance of trade to improve?
A. savings must increase.
B. domestic production must decrease.
C. investments must be greater than savings.
Q.942 Currency depreciation will most likely have a large effect on a country's trade balance if:
A. goods exported and imported have close substitutes.
B. goods exported and imported have less elastic demand.
C. goods imported represent a larger proportion of overall expenditure.
Q.943 An investor is interested in earning a risk-free profit on 100 United Arab Emirates Dirham
(DUB) by venturing into the Canadian market. He finds out that the DUB/CAD exchange rate is 0.4,
and the futures exchange rate DUB/CAD one year from today is 0.45. Given that the risk-free
interest rate in Canada is 5%, and the risk-free rate in the United Arab Emirates is only 2%, the
amount of risk-free profit earned in terms of DUB is closest to:
A. 12.5.
B. 16.125.
C. 18.125.
97
Q.945 If in 2001, Dollar/Euro=3.67, and in 2002, Dollar/Euro=4.67, we most likely would say that:
A. T he Euro has depreciated.
B. T he dollar has depreciated.
C. T he dollar has appreciated.
Q.946 Appreciation of a country's currency would most likely means that:
A. T rade deficits would increase.
B. T rade deficits would decrease.
C. T rade deficits are not affected.
Q.947 All things being equal, inflation in a country would most likely lead to:
A. Depreciation in its currency.
B. Appreciation in its currency.
C. No effect on real exchange rates.
Q.948 What would most likely happen to the real exchange rate if the nominal exchange rate of
Dollar/Euro decreases and the inflation remains the same?
A. T he exchange rate would decrease.
B. T he exchange rate would increase.
C. T he exchange rate will remain unchanged.
Q.949 Real money accounts are most likely on which side of the market?
A. T he broker.
B. T he sell-side.
C. T he buy-side.
98
Q.950 What can we say about a country's imports when foreign currencies depreciate?
A. Imports get cheaper.
B. Imports get more expensive.
C. T here is no effect on imports.
Q.1564 T he CPIs of India and Pakistan are 132 and 121, respectively. If the nominal exchange rate is
1.32 PKR/INR, then the real exchange rate for India is closest to:
A. 0.69.
B. 0.83.
C. 1.44.
Q.1565 If the exchange rate of Euros in terms of dollars has increased from 1.12 USD/EUR to 1.24
USD/EUR, then the most likely impact on prices of goods denominated in Euros is that:
A. Euro-denominated goods cost less in terms of USD.
B. Euro-denominated goods cost more in terms of USD.
C. Euro-denominated goods cost the same in terms of USD.
Q.1566 If the real exchange rate of USD/JPY decreases, which of the following is the most likely
correct?
A. US exports are cheaper for Japanese clients.
B. Japanese exports are more expensive to US clients.
C. US exports are more expensive to Japanese clients.
99
Q.1568 Which of the following is most likely a sell-side participant in the forex market?
A. Large banks
B. Individual retail accounts
C. Privately held companies
Q.1569 Due to the upcoming elections in the U.S., the CAD/USD currency exchange rates have risen
from 1.17 to 1.31. T he percentage change in the value of the USD in terms of CAD is closest to:
A. -10.68%
B. 11.96%
C. 10.68%
Q.1570 T he exchange rates AUD/NZD has fallen from 1.01 to 0.90 in 1 year. Calculate the
percentage change in the value of the AUD in terms of NZD.
A. -12.12%
B. -10.89%
C. 12.12%
Q.1571 T urkey and Russia are two countries with a high level of bilateral trade relationships. Due to
recent economic crises in Russia, the exchange rate has gone from 19.10 RUB/T RY to 23.15
RUB/T RY. Which of the following is most accurate regarding this change in exchange rates?
A. T he T urkish Lira has depreciated.
B. T he T urkish Lira has appreciated.
C. T he Russian Ruble has appreciated.
100
Q.1572 If the currency exchange rate between the U.S.A. and Europe is 1.11 USD/EUR, and the
rates between the U.A.E. and the U.S.A. is 3.30 AED/USD, then the current exchange rate of AED
per EUR is closest to:
A. 0.34
B. 2.97.
C. 3.66.
Q.1574 T he USD/GBP spot exchange rate is 0.6985. Assuming a 1-year forward rate quoted as +9.5
point, the 1-year forward USD/GBP rate is closest to:
A. 0.6995.
B. 0.6976.
C. 10.20
Q.1575 T wo hypothetical currencies, ABC and XYZ, are trading at the spot rate of 1.60 ABC/XYZ. If
the interest rate in ABC's country is 7% and 5% in XYZ's country, and the actual 1-year forward rate
is 1.62, which of the following is most accurate?
A. Arbitrage profit opportunity does not exist.
B. Arbitrage profit can be earned by buying the forward contract at 1.62.
C. Arbitrage profit can be earned by selling the forward contract at 1.62.
Q.1576 T he CHF/USD spot exchange rate is currently trading around 0.9500 on major FOREX
exchanges. Assuming a 1-year forward rate quoted as -25 points, the 1-year forward CHF/USD rate is
closest to:
A. 0.9475.
B. 0.9525.
C. -24.05.
101
Q.1577 T wo hypothetical currencies – ABC and XYZ – are trading at a spot rate of 1.60 ABC/XYZ. If
the interest rate in ABC and XYZ's countries is 7% and 5%, respectively, the arbitrage-free forward
rate ABC/YXZ is closest to:
A. 1.6000.
B. 1.5701.
C. 1.6304.
Q.1578 LeGrandia is a newly formed country that does not have its currency. Which of the following
is least likely option available for LeGrandia?
A. Crawling peg.
B. Monetary union.
C. Formal dollarization.
Q.1579 In which of the following exchange rate strategies can a country most likely make an explicit
commitment to exchange its domestic currency for a specified foreign currency at a fixed rate?
A. Target zone.
B. Fixed peg arrangement.
C. Currency board arrangement.
Q.1580 T he exchange rate strategy in which the domestic currency is permitted to fluctuate
between the horizontal bands +1% and -1% against a single or a basket of foreign currencies is most
likely called a:
A. target zone.
B. crawling peg.
C. fixed peg arrangement.
102
Q.1581 Which of the following is the most appropriate statement about the Marshall-Lerner
condition?
A. Depreciation of the domestic currency will decrease the trade deficit.
B. Appreciation of the domestic currency will decrease the trade deficit.
C. Depreciation of the foreign currency will decrease the trade deficit.
Q.1582 Which of the following statements is most appropriate about the J-curve?
A. If the domestic currency depreciates, there will be a short-term increase in deficit

followed by a long-term decrease in the deficit.
B. If the domestic currency appreciates, there will be a short-term decrease in deficit

followed by a long-term increase in the deficit.
C. If the domestic currency depreciates, there will be a short-term decrease in deficit

followed by an increase in the deficit in the long term.
Q.3254 If the exchange rate quote for the euro (USD/EUR) changes from 1.3500 to 1.2600, then in
approximate terms:
A. the euro depreciated by 6.7%, and the dollar appreciated by 7.1%.
B. the dollar depreciated by 6.7%, and the euro appreciated by 7.1%.
C. the euro appreciated by 6.7%, and the dollar depreciated by 7.1%.
Q.3256 If the euro is quoted in US dollar terms as 1.4225 (USD/EUR), and the peso is quoted as
0.079 (USD/MXN), then the cross rate of MXN/EUR must be closest to:
A. 11.21
B. 25.61
C. 18.01
103
Q.3257 T he exchange rate regime adhered to by Canada, the USA, and the United Kingdom would be
best described as:
A. A target zone.
B. A managed float.
C. An independent float.
Q.3258 T he exchange rate regime adhered to by China, Bolivia, and Iraq, would be best described as:
A. A crawling peg.
B. A managed float.
C. An independent float
Q.3259 Some countries such as Ecuador and Panama have adopted the currency of another country.
Such a regime would be best described as:
A. dollarized.
B. a crawling peg.
C. an independent float.
Q.3260 Categories of participants on the buy side of foreign exchange markets would least likely
include:
A. Leveraged accounts and retail accounts.
B. Corporate accounts and real money accounts.
C. Large banks such as Citigroup and Deutsche Bank.
104
Q.3262 T he Canadian dollar is quoted in US dollar terms as 1.2025 (CAD/USD), and the peso is quoted
as 12.4500 (MXN/USD). T he cross rate of MXN/CAD must be closest to:
A. 16.9095.
B. 10.3534.
C. 11.5000.
Q.3265 If the exchange rate quote for the Brazilian real (BRL/USD) changes from 3.1625 to 3.5000,
then in approximate terms:
A. the real depreciated by 9.6%, and the dollar appreciated by 10.7%.
B. the dollar depreciated by 9.6%, and the real appreciated by 10.7%.
C. the dollar appreciated by 9.6%, and the real depreciated by 10.7%.
Q.3266 If the exchange rate quote for the Mexican peso (MXN/USD) changes from 11.9500 to
12.4000, then in approximate terms:
A. the peso depreciated by 3.8%, and the dollar appreciated by 3.6%.
B. the dollar depreciated by 3.8%, and the peso appreciated by 3.6%.
C. the dollar appreciated by 3.8%, and the peso depreciated by 3.6%.
Q.3833 If the market demand for a product always responds positively to an increase in price
resulting in a positively sloped demand curve, the product is most likely classified as:
A. Giffen
B. Normal
C. Inferior
105
Q.3834 T he CPIs of India and Pakistan are 132 and 121, respectively. If the nominal exchange rate is
1.32 PKR/INR, then the real exchange rate for India is closest to:
A. 1.78
B. 1.44
C. 1.12
106

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8 - Topics in Demand & Supply Analysis 3

Q.650 At equilibrium; supply = demand

Q.657 If the cross-price elasticity is 1.5, then the goods are:

A. substitutes with elastic cross-price elasticity.

B. substitutes with inelastic cross-price elasticity.

C. complimentary with inelastic cross-price elasticity.

A. T he slope of the budget line would change from -4/3 to -2/3.

B. T he slope of the budget line would change from 3/4 to 3/2.

C. T he slope of the budget line would change from -3/4 to -3/2.

A. Accounting profit - Normal profit = 0.

B. Accounting profit + Normal profit > 0.

C. Accounting profit - Normal profit < 0.

A. T he marginal revenue (MR) is not always less than the price.

B. T his happens because the average revenue (AR) is always decreasing.

C. Both I and II.

A. T he firm should shut down.

B. T he firm is at the break-even point where economic profit is 0.

A. T he minimum efficient scale.

B. T he various minimum average total costs.

C. T he minimum long-run average total cost.

A. economies of scale, increasing returns to scale.

B. economies of scale, decreasing returns to scale.

C. diseconomies of scale, increasing returns to scale.

A. Consumption of that good increases.

B. Consumption of that good decreases.

C. Consumption of that good can either decrease or increase.

C. Both Giffen and Veblen goods.

A. Price of tea = 216.67 - 3QD.

B. Price of tea = 650 - 0.33QD.

C. Price of tea = 216.67 - 0.33QD.

A. A shift of the demand curve to the left.

B. A shift of the demand curve to the right.

C. An increase in demand for ferry tickets.

A. Sales commission expense

C. Payment to firm's equity owner

Q.1426 A firm that has a horizontal demand curve is called a:

B. Average fixed cost.

C. Average marginal cost.

A. shut down in the short run.

B. continue to operate in the short run.

C. shut down in the short-run and re-open in the long-run.

A. T he average revenue is less than the average variable cost.

C. the minimum efficient scale.

A. Price = Total revenue.

B. Price = Average total cost.

C. Total revenue = Marginal revenue.

Q.1437 Which of the following industries have a downward-sloping supply curve?

A. Constant cost industries.

B. Increasing cost industries.

C. Decreasing cost industries.

A. conditions for cost minimization exist.

B. conditions for cost minimization do not exist.

C. conditions for cost minimization can occur if the cost of labor is 9.

A. the firm is operating at the lowest average cost output level.

A. the revenues from ticket sales will increase.

B. the revenues from ticket sales will decrease.

C. the revenues from ticket sales will remain unchanged.

A. increase the output of cell phones.

B. decrease the output of cell phones.