ECO401 - ECONOMICS_ FINALTERM_FALL 2007

FINALTERM EXAMINATION

FALL 2007 Marks: 60

ECO401 - ECONOMICS (Session - 3 ) Time: 150min

	StudentID/LoginID: Student Name: Center Name/Code: Exam Date: Wednesday, March 12, 2008

Please read the following instructions carefully before attempting any question:

· Write your student ID, Name and Centre Name / Code on the question paper as well as on answer sheet; Failure to do so will result in paper cancellation.

· All questions are compulsory.

· This exam consists of 15 Multiple Choice Questions (MCQs) carrying 01 mark each, 05 True / False carrying 01 mark each, 05 Fill in the blanks carrying 01 mark each, 03 short questions carrying 05 marks each and 02 descriptive long questions carrying 10 marks each.

· For each MCQ, read the choices available carefully and “ENCIRCLE” (don’t tick mark) one which you consider is the most suitable answer. Zero marks will be given if more than one option is “ENCIRCLED”.

· Write only one most suitable answer for fill in the blanks. More than one answer will be marked zero.

· Cutting and overwriting in objective type questions (MCQs, Fill in the blanks and True/ False) is not allowed; if done so, that particular question will be marked zero.

· Attempt all MCQs, True/False and Fill in the blanks on the question paper, Objective questions attempted on the answer sheet will not be considered for marking and will be graded zero.

· If you believe that some essential piece of information is missing in any of the

questions, make an appropriate assumption and use it to solve the problem.

· While solving your descriptive part on the answer sheet, question numbers must be written in accordance with the number specified for each question in the question paper to avoid any inconvenience.

· Use of lead pencil is strictly prohibited.

· Writing irrelevant/immoral material will be severely penalized.

· This examination is closed book, closed notes and closed neighbors.

· Use of mobile phones is strictly prohibited; switch it off if it is in your custody.

· Failure to comply with the Supervisor’s directions will result in your exam paper being cancelled. Please comply with supervisor’s instructions to avoid any unpleasant event.

· Non-compliance of any of the instructions will be dealt severely.

	For Teacher's use only

Question	1	2	3	4	5	6	7	8	9	10	Total
Marks
Question	11	12	13	14	15	16	17	18	19	20
Marks
Question	21	22	23	24	25	26	27	28	29	30
Marks

Question No: 1_ ( Marks: 1 )_ - Please choose one

Scarcity can be avoided by making: 4 Needs unlimited. 4 Wants unlimited. 4 Resources limited. 4 Wants and needs limited.

Question No: 2 ( Marks: 1 ) - Please choose one
If the price of Pepsi decreases relative to the price of Coke and 7-Up, the demand for:
4 4 4 4	Coke will decrease. Coke and 7-Up will increase. 7-Up will decrease. Coke and 7-Up will decrease.
Question No: 3 ( Marks: 1 ) - Please choose one
An increase in price will result in an increase in total revenue if:
4 4 4 4	The percentage change in quantity demanded is less than the percentage change in price. The percentage change in quantity demanded is greater than the percentage change in price. Demand is elastic. The consumer is operating along a linear demand curve at a point at which the price is very high and the quantity demanded is very low.
Question No: 4 ( Marks: 1 ) - Please choose one
Which of the following is NOT a characteristic of a “price taker”?
4 TR = P x Q
4 4 4	Negatively-sloped demand. AR = Price Marginal Revenue = Price
Question No: 5 ( Marks: 1 ) - Please choose one
The competitive firm maximizes profit when it produces output up to the point where:
4 4 4 4	Price equals average variable cost. Marginal revenue equals average revenue. Marginal cost equals total revenue. Marginal cost equals marginal revenue.
Question No: 6 ( Marks: 1 ) - Please choose one
Karachi Electric Supply Corporation (KESC) is an example of which type of market structure?
4 4 4 4	Perfect competition Monopoly Oligopoly Monopolistic competition
Question No: 7 ( Marks: 1 ) - Please choose one
The demand curve for the product sold by a firm in a perfectly competitive market
is: 4 Downward sloping 4 Upward sloping 4 Vertical 4 Horizontal
Question No: 8 ( Marks: 1 ) - Please choose one
Under monopoly,
4 4 4 4		Price is equal to marginal revenue. Price is greater than marginal revenue. Price is less than marginal revenue. Price is equal to marginal cost.
Question No: 9 ( Marks: 1 ) - Please choose one
Street lights and footpaths are examples of:
4 4 4 4		Normal goods Inferior goods Giffen goods Public goods
Question No: 10 ( Marks: 1 )			- Please choose one
“Inflation is always and everywhere a monetary phenomenon” is the notion of:
4 4 4 4	Classical school of thought Keynesian school of thought Monetarists school of thought Rational expectations school of thought
Question No: 11 ( Marks: 1 ) - Please choose one
----------------------- states that all the people who are identical in terms of their economic conditions should be taxed identically.
4 4 4 4	Horizontal equity Progressive taxation Vertical equity Regressive taxation
Question No: 12 ( Marks: 1 )			- Please choose one
Gross National Product = Gross Domestic Product + ------------------------------------ .
4 4 4 4	Depreciation Inflation Net factor incomes from abroad Factor cost

Question No: 13 ( Marks: 1 ) - Please choose one
Gross Domestic Product can be measured by which of the following methods?
4 Value added approach 4 Expenditure approach 4 Factor income approach 4 All of the given options
Question No: 14 ( Marks: 1 ) - Please choose one
Price of one unit of foreign currency in terms of domestic currency is known as:
4 4 4 4		Inflation rate Interest rate Exchange rate Discount rate
Question No: 15 ( Marks: 1 )				- Please choose one
A “quota” can best be described as:
4 A law which limits the quantity of a good that can be imported. 4 A government payment to producers of an exportable good. 4 A tax imposed on an imported good.
4	A tax imposed on an exported good.
Question No: 16 ( Marks: 1 ) - Please choose one
If the supply curve is vertical, it means that price elasticity of supply is infinity.
4 4	True False
Question No: 17			( Marks: 1 )	- Please choose one
The optimal consumption decision will be made at the point where:
MRS = - PX PY
Where, MRS = Marginal Rate of Substitution, PX = Price of good X, PY = Price of good Y
4 4	True False
Question No: 18			( Marks: 1 )	- Please choose one
“Supply creates its own demand” is the notion of Keynesian economics.
4 4	True False
Question No: 19			( Marks: 1 )	- Please choose one
As the income of a person increases, the proportionate amount of tax also increases. This is known as progressive taxation.
4 True
4 False
Question No: 20 ( Marks: 1 ) - Please choose one
In the IS-LM framework, monetary policy would be more effective if LM curve is flatter.
4 4	True False
Question No: 21 ( Marks: 1 )
If cross price elasticity of two goods is +2, it means that the two goods are ------------------
----------- .
Question No: 22			( Marks: 1 )
Q = AKα L1-α is ------------------------------------------------ production function.
Question No: 23 ( Marks: 1 )
---------------------------- economics is the branch of economics which deals with the normative issues of the economy.
Question No: 24 ( Marks: 1 )
Construction of houses is an example of ------------------------------------------------- investment.
Question No: 25 ( Marks: 1 )
People who are not working at their full potential are known as --------------------------------------------------------------------------------------------------------------------------------- .
Question No: 26 ( Marks: 5 )
Differentiate among the income effect, substitution effect and price effect. (Marks: 1.5+1.5+2)
Question No: 27 ( Marks: 5 )
Define Laffer curve. Also explain it with the help of diagram.					(Marks: 2.5+2.5)

Question No: 28__ ( Marks: 5 )

According to Keynes, equilibrium analysis can also be done using the injections-leakages approach i-e when withdrawals or leakages (W) are equal to injections (J) in the economy. Keeping in view this notion, assume that

Investment (I) = 100, Savings (S) = 120, Exports (X) = 40, Imports (M) = 30, Taxes (T) = 40, Government Expenditures (G) = 50

a. Point out the leakages and injections functions.

b. Find out the Keynesian equilibrium (W=J) in the economy.

(Marks: 2+3)

(A) Discuss the limitations of indifference curve approach.

(B) If Marginal Propensity to Consume (MPC) = 0.8 and net income tax rate (t) = 0.2 then Find out the value of tax adjusted multiplier (k*).

(Marks:5+5)

Question No: 30__ ( Marks: 10 )

(A) State Bank of Pakistan (SBP) issues new notes of Rs. 10. Person A receives this note and deposits it in Muslim Commercial Bank (MCB). Let required reserve ratio of MCB is 10% and the initial balance sheet is as follows:

Initial Balance Sheet of MCB
Assets	Liabilities
Loans = 90	Deposits = 100
Reserves = 10
Total Assets = 100	Total Deposits = 100

a. After the deposit of Rs. 10, what change would occur in the balance sheet of MCB?

b. If reserve ratio is 0.1 then what would be the value of money multiplier (MM).

c. If M0 = 10 and reserve ratio is 0.2 then what would be the total money supply (M2) in the economy?

(Marks: 2+2+2)

(B) Discuss the major weaknesses of exogenous growth model.

(Marks: 4)

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