ECO401 – Economics Midterm Solved Papers(Mega File)


ECO401 – Economics Midterm Solved Papers

ECO401 Midterm Solved Papers MCQs

Question No: 1 ( Marks: 1 ) – Please choose one
An individual whose attitude towards risk is known as:
► Risk averse.
► Risk loving.
► Risk neutral.
► None of the given options

Question No: 2 ( Marks: 1 ) – Please choose one
The concept of a risk premium applies to a person that is:
► All of the given options.
► Risk averse.
► Risk neutral.
► Risk loving

Question No: 3 ( Marks: 1 ) – Please choose one
A normative economic statement:
► Is a statement of fact.
► Is a hypothesis used to test economic theory.
► Is a statement of what ought to be, not what is.
► Is a statement of what will occur if certain assumptions are true.

Question No: 4 ( Marks: 1 ) – Please choose one
Economics is different from other social sciences because it is primarily concerned with the study of ________, it is similar to other social sciences because they are all concerned with the study of ________.
► Limited resources, market behavior.
► Scarcity, human behavior.
► Social behavior, limited resources.
► Biological behavior, scarcity.

Question No: 5 ( Marks: 1 ) – Please choose one
Because of the relationship between a perfectly competitive firm’s demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as:
► P = MR.
► P = AVC.
► AR = MR.
► P = MC.

Question No: 6 ( Marks: 1 ) – Please choose one
A welfare loss occurs in monopoly where:
► The price is greater than the marginal cost.
► The price is greater than the marginal benefit.
► The price is greater than the average revenue.
► The price is greater than the marginal revenue.

Question No: 7 ( Marks: 1 ) – Please choose one
If the cross price elasticity of demand between two goods X and Y is positive; it means that
goods are:
► Independent.
► Complements.
► Substitutes.
► Inferior.

Question No: 8 ( Marks: 1 ) – Please choose one
Which of the following best expresses the law of demand?
► A higher price reduces demand.
► A lower price reduces demand.
► A higher price reduces quantity demanded.
► A lower price shifts the demand curve to the right.

Question No: 9 ( Marks: 1 ) – Please choose one
Which of the following would most likely shift the production possibilities curve for a
nation outward?
► A reduction in unemployment.
► An increase in the production of capital goods.
► A reduction in discrimination.
► An increase in the production of consumer goods.

Question No: 10 ( Marks: 1 ) – Please choose one
The maximum price that a consumer is willing to pay for a good is called:
► The reservation price.
► The market price.
► The first-degree price.
► The block price.

Question No: 11 ( Marks: 1 ) – Please choose one
Third-degree price discrimination involves:
► Charging each consumer the same two part tariff.
► Charging lower prices the greater the quantity purchased.
► The use of increasing block rate pricing.
► Charging different prices to different groups based upon differences in elasticity of demand.

Question No: 12 ( Marks: 1 ) – Please choose one
A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing:
► First-degree price discrimination.
► Second-degree price discrimination.
► Third-degree price discrimination.
► All of the given options.

Question No: 13 ( Marks: 1 ) – Please choose one
An electric power company uses block pricing for electricity sales. Block pricing is an example of:
► First-degree price discrimination.
► Second-degree price discrimination.
► Third-degree price discrimination.
► Block pricing is not a type of price discrimination.

Question No: 14 ( Marks: 1 ) – Please choose one
A firm never operates:
► At the minimum of its average total cost curve.
► At the minimum of its average variable cost curve.
► On the downward-sloping portion of its average total cost curve.
► On the downward-sloping portion of its average variable cost curve.

Question No: 15 ( Marks: 1 ) – Please choose one
Marginal profit is equal to:
► Marginal revenue minus marginal cost.
► Marginal revenue plus marginal cost.
► Marginal cost minus marginal revenue.
► Marginal revenue times marginal cost.

Question No: 16 ( Marks: 1 ) – Please choose one
If current output is less than the profit-maximizing output then which of the following must be TRUE?
► Total revenue is less than total cost.
► Average revenue is less than average cost.
► Marginal revenue is less than marginal cost.
► Marginal revenue is greater than marginal cost.

Question No: 17 ( Marks: 1 ) – Please choose one
In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive but can be resold and are therefore an example of:
► A fixed cost.
► A variable cost.
► An implicit cost.
► An opportunity cost.

Question No: 18 ( Marks: 1 ) – Please choose one
Costs determine all of the following EXCEPT:
► Demand for a product.
► Firm’s behaviour.
► How firms should expand?
► Firm’s profitability.

Question No: 19 ( Marks: 1 ) – Please choose one
The rate at which a firm can substitute capital for labour and hold output constant is the:
► Law of diminishing marginal returns.
► Marginal rate of substitution.
► Marginal rate of factor substitution.
► Marginal rate of production.

Question No: 20 ( Marks: 1 ) – Please choose one
If a simultaneous and equal percentage decrease in the use of all physical inputs leads to a larger percentage decrease in physical output, a firm’s production function is said to exhibit:
► Decreasing returns to scale.
► Constant returns to scale.
► Increasing returns to scale.
► Diseconomies of scale.

Question No: 21 ( Marks: 1 ) – Please choose one
Aslam spends all of his money on racquetballs and food. What would happen to Aslam’s budget line if his income increased by 10 percent holding prices constant?
► It would shift inward.
► It would rotate about the axis for food.
► It would rotate about the axis for racquetballs.
► It would shift outward.

Question No: 22 ( Marks: 1 ) – Please choose one
According to the utility model of consumer demand, the law of diminishing marginal utility indicates that the demand curve is:
► Vertical.
► U-shaped.
► Upward-sloping.
► Downward-sloping.

Question No: 23 ( Marks: 1 ) – Please choose one
Cross-price elasticity measures whether:
► Goods are normal or inferior.
► Two goods are substitutes or complements.
► Demand is elastic or inelastic.
► Supply is steeper than demand or vice versa.

Question No: 24 ( Marks: 1 ) – Please choose one
Suppose your local public golf course increases the greens fees for using the course. If the demand for golf is relatively inelastic, you would expect:
► A decrease in total revenue received by the course.
► An increase in total revenue received by the course.
► No change in total revenue received by the course.
► An increase in the amount of golf played on the course

Question No: 25 ( Marks: 1 ) – Please choose one
Aslam decides to stay at home and study for his exam rather than going out with his friends to a movie. His dilemma is an example of:
► The economic perspective.
► Marginal analysis.
► Allocative efficiency.
► Opportunity cost.

Question No: 26 ( Marks: 1 ) – Please choose one
Land is best described as:
► Produced factors of production.
► “Organizational” resources.
► Physical and mental abilities of people.
► “Naturally” occurring resources.

Question No: 27 ( Marks: 1 ) – Please choose one
In pure capitalism, the role of government is best described as:
► Significant.
► Extensive.
► Nonexistent.
► Limited.

ECO401 Midterm Subjective Solved Papers

What is meant by non price competition?

Non price competition means competition amongst the firms based on factors other than price, e.g. advertising expenditure, product differentiation etc

What is meant by exchange rate? Also give example of exchange rate

The price of one country’s currency expressed in another country’s currency. In other words, the rate at which one currency can be exchanged for another. For example, the higher the exchange rate for one Dollar in terms of one r=Rupee, the lower the relative value of the Rupee

Why government needs to revalue its currency?

Revaluation of Currency is the act of increasing the price (exchange rate) of one nation’s currency in terms of other currencies. Government revalues its currency to raise the price of the country’s exports and lower the price of foreign imports.

Procedure for revaluation is for the government to buy the nation’s currency and/or sell foreign currencies through the foreign exchange market.

Write the key variables for macro economic model

The key variables for a macroeconomic model are:
Y = Income
C = Consumption
S = Savings
I = Investment
T = Taxes
G = Government Expenditures
M = Imports
X = Exports

Circular flow of goods and income for firms and households

Circular flow of income describes the movement of money throughout the economy between producers and consumers. It is a continuous flow of production, income and expenditures. Circular flow of income producers receive the amount what consumers spend. All expenditures from consumers/individuals become the income of the producers, and the expenditures of the producers become the income of the consumers/individuals.

What is the reason of poverty in developing countries according to Prebisch-Singer hypothesis?

Reason of poverty in developing countries according to Prebisch-Singer hypothesis

  • They were stuck in the production of primary products
  • Lack of human, social and public capital
  • Very fast rising populations
  • Lack of natural resources (like oil, gold, gas, iron, copper etc.)

Discuss the components on the assets and liabilities side of the balance sheet of a central bank

Assets side of SBP’s balance sheet,
(1) The country’s foreign exchange reserves (foreign currencies, gold and silver reserves; either held domestically or invested abroad)
(2) Credit to government: this would include any SBP lending to government, including in the form of any outstanding (i.e. yet to mature) treasury bonds and bills lying with the SBP
(3) Credit to banks: this would include any advances (another name for loans) extended by SBP to commercial banks.
Liabilities side of SBP’s balance sheet,
4) Notes and coins in circulation (i.e. M0). Note that for a currency-issuer (SBP in our case), the currency is a liability, not an asset;
(5) Government or banks’ deposits: these would include any positive account6 balances held by commercial banks and/or the government;
(6) Outstanding liquidity paper issued: this would include any bills issued by the central bank for the purpose of mopping up liquidity from the financial system.

Why Marginal Revenue and price are equal under perfect competition?

In perfect competition a firm that changes the quantity they sell does not affect price, therefore marginal revenue is equal to price.

On what factors steady state growth rate of real GDP depends? (3)

The steady-state growth rate of real GDP depends on n and t, the exogenous rates of growth of population and technology

When does real wage unemployment occur in an economy? (3)

Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level. This is often as a result of government intervention, as with the minimum wage, or unions

MPC = 0.84 and tax rate = 0.27 then find tax-adjusted multiplier
Tax multiplier = 1/ (1- MPC (1 – t))
Tax multiplier = 1/ (1- 0.84 (1 – 0.27))
Tax multiplier = 1/ (0.16 (0.73)
Tax multiplier = 1/ 0.1168
Tax multiplier = 8.57

Difference between Residential Investment and Inventory Investment

Residential investment includes the purchase of new housing both by people who plan to live in it themselves and by landlords who plan to rent it to others.
Inventory investment, the goods that businesses put aside in storage, is at the same time negligible and of great significance.

Fiscal policy under flexible exchange rate

With flexible exchange rates, the output level is determined in the money market where the interest rate is set equal to the world interest rate. Any change in government policy will only affect the exchange rate.

Define fiscal policy

The Government income and expenditures policy is known as fiscal policy

Differentiate between expansionary and contractionary fiscal policy

Expansionary fiscal policy:

An increase in government spending and decrease in taxes is called expansionary fiscal policy. According to policy higher government spending /decrease tax will increase aggregate demand.
Its simply the increase in government spending and reduce taxes.

Contractionary fiscal policy

A decrease in government spending and increase in taxes is called contractionary fiscal policy.
An active policy tries to stabilize output by using monetary and/or fiscal policy. A passive policy does not.
Its simply the increase in taxes and reduce government spending

It is said that growth is an important macroeconomic issue. Why? Discuss.

Growth is an important macroeconomics issue because every country wants to achieve higher growth rate. Higher growth rate indicates the better living standards and high national income.
Growth can be attained through trade e.g. a developing country who have specialization in a good and also have comparative advantage. By exporting these goods developing country can increase its national income and also attract foreign investment.

Explain the difference between current account and capital account.

Current Account:
Current account is one of the two components of balance of payments. Current account shows the difference between a nation’s total exports of goods, services and transfers, and its total imports.
Capital Account:
The capital account generally provides a direct picture of the net asset position of a country vis-à-vis the rest of the world. The capital account contains foreign direct investment (FDI), portfolio investment and other investments, plus changes in the reserve account. The capital account and the current account together comprise a nation’s balance of payments

What is the basic theme of both these strategies? Discuss.

Some economists suggest “growth through resource transfer” and “growth through stabilization and reforms” strategies to tackle the problem of poverty of under developed countries.

Answer :
Growth through resource transfer strategy states that money funds should be given to poor countries and this money should also be utilized properly. Through this process, private capital flows and foreign direct investment can also be made. When foreign firms came in the local market, they will bring skill and capital with themselves which will promote local market. But the problem with this strategy is that aid flows causes heavy debt burden for the poor countries.
Growth through stabilization and reforms strategy states that there should be privatization and liberalization policies adopted in developing countries. Good governance and administrative reforms should be implemented. International Monetary Fund (IMF) and the World Bank (WB) became involved in macroeconomic stabilization and structural reform.

Explain the difference between Gross National Product (GNP) and Net National Product (NNP) with the help of their formulas.

Gross National Product (GNP)
Gross national product (GNP) is the value, at current market prices, of all final goods and services produced during a year by the factors owned by the citizens of a country
GNP = GDP + Net factor incomes from abroad
Net National Product (NNP)
Mathematically, national income is net national product (NNP). It is GNP adjusted for depreciation.
NNP = GNP – Depreciation allowance

Why is taxation necessary? What are the principles of taxation?

Taxation is necessary because government collects taxes are to get the revenue needed to finance public goods and pay administrative expenses.
Without taxes, the government would not be able to deliver services like law and order, public administration, national defense, free or subsidized health and education etc
Equity principle
Equity represents that principle of taxation which emphasizes fairness or just sacrifice, i.e. everyone should pay tax according to his/her ability
Vertical equity principle

Progressive taxation, in which the tax rate increases as income increases, is an application of the vertical equity principle
Horizontal equity principle
A less controversial principle relates to horizontal equity which says: identically well-off people should be taxed identically, i.e. no discrimination due to race, gender, caste, religion etc.

Interest parity condition
a) What is interest parity condition?
Interest parity shows the relationship between the currency exchange rates of two countries and their local interest rates, and the essential role that it plays in foreign exchange markets.
b) When does this condition hold?
This condition holds if there are no incentives to move the capital from one country to another country as the difference between them
c) What is the equation of this condition?
iD ≈ iF + ΔEe
Domestic interest rate = Foreign interest rate + Expected depreciation

What are the different components of aggregate demand? Discuss briefly

Aggregate demand (AD) is the total planned or desired spending (expenditure) in the economy during a given period. Components of AD are: consumption, investment, government spending and net exports (i.e. exports minus imports)

Differentiate between final goods and intermediate goods with the help of examples.

Final goods
Final goods are meant for direct use by the end consumer rather than for further processing.

  • Car sold is the final good
  • flour used by a household is a final good

Intermediate goods

Intermediate goods are those that are intended for further processing

  • Parts of car are the intermediate good.
  • Flour used by a baker is an intermediate good

Why could the world as a whole not experience a problem of a current account balance of payments deficit?

The world as a whole not experience a problem of a current account balance of payments deficit because every import to one country is an export from another, and every outflow of investment income or transfer of money from one country is an inflow to another. Thus when all the current account deficits and current account surpluses of all the countries of the world are added up, they must all cancel each other out.

Differentiate between real exchange rate and nominal exchange rate.

Nominal exchange rate means the number of units of the domestic currency that can purchase a unit of a given foreign currency.
For example, 100 Pakistani rupees can purchase one US dollar. If 100 Pakistani rupee can buy two US dollar then we can say there nominal appreciation of the currency.
The real exchange rate means how many of a good or service in one country can be traded for one of that good or service in another country.
For example, a real exchange rate might state how many Pakistani fans can be exchanged for one US fan.

Differentiate between fixed exchange rate and floating exchange rate.

Floating Exchange Rate
A floating is one where currencies are allowed to move freely up and down according to changes in demand and supply. A currency that uses a floating exchange rate is known as a floating currency
Fixed Exchange Rate
Exchange rate under which the government or central bank fixed the official exchange rate to another country’s currency. Also known as pegged exchange rate.

Difference b/w demand push inflation and cost push inflation?

Cost push inflation
Cost push inflation is a phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.
Demand pull inflation
Demand pull inflation is that occurs when price levels raise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly offsets the aggregate supply, prices increase. Economists will often say that demand-pull inflation

Differentiate b/w actual GDP and potential GDP

Potential GDP
The potential GDP of a country is the ideal or maximum possible GDP for that country if unemployment is at a minimum and operating at maximum possible output
Actual GDP
The actual GDP of a country is the real, or actual, value of all goods and services produced.
GDP gap = (Actual GDP − potential GDP) / Potential GDP
The percentage GDP gap is the actual GDP minus the potential GDP divided by the potential GDP.

What does the 45 degree line in expenditure-income space represent?

It represents all the points at which the economy is in equilibrium, i.e. the expenditure on domestic goods and services is equal to the supply of domestic goods and services is equal to the incomes distributed to actors used in the production of those goods and services

Functions of Central Bank:
Monetary policy is just one of the functions of the central bank. There are at least three more functions central banks serves:
1-As lender of last resort, it must bail (or help) out commercial banks facing temporary liquidity shortfalls;
2- as supervisor of the financial system, it must ensure its good health by monitoring commercial banks’ lending (risk-taking), capital adequacy, and liquidity positions. The central bank is also a monitor of the management and governance of financial institutions and of any other threats to the stability of the financial system;

3-As the biggest intervener in the foreign exchange market (and/or setter of the exchange rate), it is responsible for exchange rate policy and the balance of payments, per se.

Discount rate: the central bank sometimes extends credit to commercial banks on their request to meet their exigent liquidity needs.7 Such borrowing is called borrowing from the discount window and the rate the central bank lends at the discount window is called the discount rate

How the growth rate of output is determined in the exogenous growth model?

Growth rate of output is determined by the growth rate of population which is exogenously given and Government can not do anything about it.

Differentiate between international trade and international finance.

International trade is the exchange of goods and services between different countries and International finance is concerned with, among other thing, the mobility of financial capital across countries, and the problems and opportunities this mobility presents individual countries with.

How can a current account, which is in deficit, be restored to balance under fixed exchange rate regimes?

Current account is very much important in order to maintain the long term sustainability of the balance of payment.
Current account deficit = Private sector resource deficit + Government budget deficit
Devaluation can help in reducing current account deficit. Devaluation causes an increase in exports and decrease in imports leading to reduction in current account deficit. Economic deflation is another solution to this problem under fixed exchange rate regime.

Mention the transactions that cause the demand for dollars to increase in the foreign exchange market.

  • Pakistani imports of US goods.
  • Pakistani travelers traveling to the US.
  • Pakistani students paying for study in US universities.
  • profits send back to US by US firms operating in Pakistan

Differentiate between transaction motive and precautionary motive of holding money.

Transactions demand/Motive: People hold money to buy stuff.
Precautionary demand/Motive: People hold money for emergencies

What are the major weaknesses of exogenous growth theory? Which theory was developed in against of exogenous growth theory?

Exogenous growth theory suffered from three major weaknesses:
i. It could not explain why the gap between the poor and rich countries had widened (anticatch up),
ii. It could not explain why some countries in East Asia had apparently grown consistently on the back of higher saving rates, and
iii. It modeled technology as exogenous, and beyond the influence of policy
Endogenous growth theory or new growth theory was developed in against of exogenous growth theory

World Bank suggests some structural reform policies for the poor countries to grow. Discuss those policies briefly

World Bank has given 4 types of liberalization policies as an ingredient.
1. Liberalization of prices: Removal of price control and wage controls.
2. Liberalization of trade: Removal of tariffs and export taxes.
3. Liberalization of capital account means movement of capital from inside and outside the country.
4. Financial liberalization i.e. financial sector should be opened both to foreign participation and also banks should be allowed to set their own interest rate rather than government dictating what the interest level should be.