Eco - Nov 2002

Examination Question and Answer Book Write here your full examination number Centre Code: Hall Code: Desk Number:

Foundation Level

Economics for Business

3a

FECB 18 November 2002 Day 1 – morning

INSTRUCTIONS TO CANDIDATES Read this page before you look at the questions THIS QUESTION PAPER BOOKLET IS ALSO YOUR ANSWER BOOKLET. Sufficient space has been provided for you to write your answers, and also for workings where questions require them. For section B questions, you must write your answers in the shaded space provided. Blank pages are included within this booklet if you require more space for notes or workings. Please note that you will NOT receive marks for your notes or workings. Do NOT remove any sheets from this booklet: cross through neatly any work that is not to be marked. Avoid the use of correction fluid. You are allowed two hours to answer this question paper. All questions are compulsory. Answer the ONE question in section A (this has 26 sub-questions and is on pages 2-7) Answer the THREE questions in section B (these are on pages 8-13) You are advised to spend 10 minutes reading through the paper before starting to answer the questions. You should spend no more than 55 minutes on answering the ONE question in section A, which has 26 sub-questions. You should spend no more than 55 minutes on answering the THREE questions in section B. Hand this entire booklet to the invigilators at the end of the examination. You are NOT permitted to leave the examination hall with this booklet. Do NOT write your name or your student registration number anywhere on this booklet.

© The Chartered Institute of Management Accountants 2002

SECTION A — 52 MARKS ANSWER ALL TWENTY-SIX SUB-QUESTIONS – 2 MARKS EACH

Each of the sub-questions numbered from 1.1 to 1.26 inclusive, given below, has only ONE correct answer. REQUIRED: Place a circle “O” around the letter A, B, C or D that gives the correct answer to each sub-question. If you wish to change your mind about an answer, block out your first answer completely and then circle another letter. You will NOT receive marks if more than one letter is circled. Please note that you will NOT receive marks for any notes or workings to these sub-questions.

Question One 1.1

In economics, the term opportunity cost refers to

A

the monetary cost of a good or service.

B

the cost of producing the goods measured in money terms.

C

the monetary cost of acquiring a factor of production.

D

the value of a good or service forgone.

1.2

The importance of saving in promoting economic growth is because of the relationship between savings and

A

present consumption.

B

future consumption.

C

investment.

D

interest rates.

1.3

Economic growth is desirable because it makes all of the following possible EXCEPT which ONE?

A

The elimination of the economic problem.

B

Higher living standards.

C

Increased private and public consumption.

D

Increased leisure.

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1.4

All of the following policies would promote export-led economic growth EXCEPT which ONE?

A

A reduction in the country's tariffs on imports.

B

A restrictive domestic monetary policy.

C

The removal of taxes on employing labour.

D

An appreciation in the country’s foreign exchange rate.

1.5

Economic growth in developed economies tends to be associated with

A

a reduction in the output of the industrial sector in the economy.

B

a rise in the importance of the service sector in the economy.

C

a reduction in the dependence on imports.

D

a rise in the number of workers in the primary sector.

1.6

Economies of scale are best described as the process by which

A

large, dominant firms can secure higher profits.

B

large firms can better organise their factors of production.

C

large-scale production permits the use of new technology.

D

large-scale production leads to lower costs per unit of output.

1.7

Which ONE of the following will tend to make the demand for a company’s product LESS price elastic?

A

A rise in consumer incomes.

B

A rise in the price of complementary goods.

C

A fall in the number of substitute goods.

D

A lower price for the good.

1.8

Which ONE of the following does NOT restrict the number of firms in an industry?

A

Low levels of product differentiation.

B

Significant economies of scale.

C

Barriers to entry.

D

The use of capital-intensive technology in the industry.

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1.9

A profit-seeking company may engage in advertising to achieve any of the following outcomes EXCEPT which ONE?

A

To increase the cross elasticity of demand for the product.

B

To shift the demand curve for the company's product to the right.

C

To make the demand curve for the product more price inelastic.

D

To increase total sales revenue.

1.10 All of the following are features of oligopoly EXCEPT which ONE? A

Non-price competition.

B

Interdependence in decision making.

C

Entry barriers.

D

A large number of firms.

1.11 A policy of price discrimination by a monopolist may involve all of the following EXCEPT which ONE? A

Charging different prices to different customers.

B

Charging different prices in different markets.

C

Charging different prices for products of differing quality.

D

Charging different unit prices for different quantities purchased.

1.12 Which ONE of the following is an example of an external social cost? A

Bad weather reducing the output of the farm sector.

B

Possible illness caused to owners of mobile phones as a result of excessive use.

C

Smoke emissions by a factory causing health problems for nearby residents.

D

Cost increases caused by rising prices of imported raw materials.

1.13 If, in the long run, a business doubles all the inputs it uses, but total output less than doubles, it is experiencing A

diminishing returns.

B

decreasing returns to scale.

C

diminishing marginal utility.

D

market saturation.

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1.14 If a business sells a product with a high income elasticity of demand, A

its sales will fall steeply if it raises its prices.

B

its sales will fall only slightly if there is a fall in consumer income.

C

its sales will be unaffected by changes in the prices of substitutes and complements.

D

its sales will rise steeply when consumer income is rising rapidly.

1.15 In a market economy, prices perform all of the following functions EXCEPT which ONE? A

A means of allocating resources between competing uses.

B

A means of ensuring a fair distribution of incomes.

C

A signal to consumers.

D

A signal to producers.

1.16 The minimum condition for a business to continue to operate in the short run is that A

its revenue is sufficient to cover variable costs.

B

its revenue is at least equal to its total costs.

C

its marginal revenue is equal to its marginal cost.

D

it is making normal profits.

1.17 The government may discourage horizontal mergers in manufacturing industry because A

by controlling the sources of supply, the merged firms will have unfair advantages over rivals.

B

the merged firms will be unable to secure economies of scale.

C

consumers may lose out if the merged firm acquires market dominance.

D

multi-product firms tend to become inefficient.

1.18 The main function of the money market is to A

enable businesses and government to obtain liquidity.

B

encourage saving.

C

permit the efficient buying and selling of shares.

D

deal in credit instruments of more than one year maturity.

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1.19 The effects of low real interest rates include all of the following EXCEPT which ONE? A

Credit-based sales will tend to be high.

B

Nominal costs of borrowing will always be low.

C

Business activity will tend to increase.

D

Investment will be encouraged.

1.20 The recession phase of the trade cycle A

is often caused by excessive consumer expenditure.

B

is normally characterised by accelerating inflation.

C

is most prolonged when the country has high levels of imports.

D

is usually caused by falling aggregate monetary demand.

1.21 Supply side policy is designed to A

raise the level of aggregate monetary demand in the economy.

B

manage the money supply in the economy.

C

improve the ability of the economy to produce goods and services.

D

reduce unemployment by limiting the supply of labour.

1.22 All of the following are direct taxes EXCEPT which ONE? A

Corporation tax.

B

Value added tax.

C

Income tax.

D

National insurance (social security tax).

1.23 Two countries, Northland and Southland, both produce two goods, X and Y. Northland has a comparative advantage in the production of good X if A

less of good X must be given up to produce one unit of Y than in Southland.

B

less of good Y must be given up to produce one unit of X than in Southland.

C

less labour is required to produce one unit of X than in Southland.

D

less labour and capital are required to produce one unit of X than in Southland.

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1.24 All of the following are examples of international factor mobility EXCEPT which ONE? A

The migration of skilled labour from one country to another.

B

A business investing in a new factory in another country.

C

The switching of cash from a bank account in one country to an account in another country.

D

A company sending managers to work in its subsidiary in another country.

1.25 If a country were to join a free trade area, its business sector would gain because A

it could get tariff-free raw materials from countries inside the free trade area.

B

there would be exchange rate stability between the member countries.

C

prices of competitors from countries not in the free trade area would rise.

D

there would be fewer barriers to establishing subsidiaries in other countries in the free trade area.

1.26 All of the following are features of globalisation EXCEPT which ONE? A

Rising trade ratios for countries.

B

Increased international capital flows.

C

Improved terms of trade for all countries.

D

Reduced barriers to international factor movements.

(Total = 52 Marks)

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SECTION B – 48 MARKS ANSWER ALL THREE QUESTIONS IMPORTANT MARKS ARE AWARDED FOR CORRECTLY COMPLETING THE SHADED BOXES WITH THE CORRECT ANSWER WHERE A MARK IS INDICATED IN THE RIGHT-HAND COLUMN. DO NOT WRITE IN THE MARGINS NOR IN THE COLUMNS FOR USE BY MARKERS.

Question Two The following diagram refers to the demand and supply for a good.

Price

D0

S0

D1

D0

S0

D1 Quantity

Required: Use BOTH your knowledge of economic theory AND the diagram (where appropriate) to answer the following:

(a)

With reference to the diagram, state whether the following are true or false as possible explanations for the shift in the demand curve from D0 to D1. (circle the correct answer in the shaded boxes below)

Do not write in these columns below

Marks available

(i) There has been a rise in consumer

TRUE

FALSE

1

(ii)

TRUE

FALSE

1

TRUE

FALSE

1

TRUE

FALSE

1

TRUE

FALSE

1

TRUE

FALSE

1

(iii) (iv) (v) (vi)

income. There has been a fall in the price of substitutes. A price rise has led to an increase in supply. Consumers expect prices to rise in the future. The price of complementary goods has fallen. The good has a very low price elasticity of demand.

For use by the first marker

For use by the second marker

sub-total: 6

Parts (b) and (c) of Question Two are on page 9 FECB

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Required: Use BOTH your knowledge of economic theory AND the diagram (where appropriate) to answer the following:

(b) (i)

Do not write in these columns below

Complete the following statement with no more than three words in each gap: An outward shift in the supply curve would lead to in price and the change in price will be greatest when the demand for the good is .

1

1

(ii) An outward shift in the market supply curve could occur for either or both of the following two reasons:

(in no more than 15 words for each reason in the shaded areas below) Reason 1

2

Reason 2

2 sub-total: 12

(c) (i)

Complete, in no more than two words in each gap, the following statements In the diagram, the effect of a government subsidy for the production of this good would be to shift the supply curve to the causing a in its price.

2

(ii) The government may wish to subsidise a good or service if there are external social

in either

the production or good or service.

of the

Total Marks for Question Two =

2 sub-total: 4 16

Total for Question Two = 16 Marks

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Question Three The following data refer to an economy for the period 1994 to 2000. Year

Exchange rate

Interest rate

1994 1995 1996 1997 1998 1999 2000

Note (1) 89·2 85·1 86·3 100·6 104·2 104·3 104·6

Note (2) 6·1% 6·5% 6·0% 6·3% 7·0% 7·5% 7·4%

Note (1) Note (2) Note (3)

Balance of payments current account Note (3) - $3·8 billion - $5·9 billion - $1·1 billion + $12·3 billion - $1·0 billion - $15·5 billion - $21·0 billion

Effective exchange rate, 1990 = 100. Bank base rate. Balance of payments, current account balance for the year.

Required: Use BOTH your knowledge of economic theory AND the data above to answer the following.

(a)

Do not write in these columns below

(i) Explain, in no more than 20 words in the shaded area below, what is meant when it is said that a currency has appreciated.

Marks available

For use by the first marker

For use by the second marker

2

(ii) State in the shaded box below whether this currency appreciated or depreciated between 1994 and 2000.

1

(iii) State, in no more than 20 words in the shaded area below, what the data suggest is the reason for the change in the exchange rate.

1

(iv) State, in no more than 15 words in the shaded area below, what

the data suggest is the result of the change in the exchange rate.

1 sub-total: 5

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(b)

Company ZZZ operates in this economy. It imports its raw materials and exports a high proportion of its output. The company has a high level of borrowing. From the data above, and with reference to the period 1996-2000, state, in no more than 15 words in each of the shaded areas below, three effects on the company of the changes in the variables shown. Effect (i)

Marks available

For use by the first marker

For use by the second marker

2

Effect (ii)

2

Effect (iii)

2 sub-total: 6

(c)

State whether the following are TRUE or FALSE. (circle the correct answer in the shaded boxes below)

(i) The real rate of interest is the difference (ii) (iii) (iv) (v)

between the nominal rate of interest and the rate of inflation. Higher interest rates reduce the level of business investment only when that investment is financed by borrowing. With flexible exchange rate systems, the trading sector of an economy cannot become uncompetitive. Under a fixed exchange rate system, the exchange rate has to be managed by government policy. It is desirable for a country to have a balance of payments current account surplus because this shows that it is trading at a profit with the rest of the world.

TRUE

FALSE

1

TRUE

FALSE

1

TRUE

FALSE

1

TRUE

FALSE

1

TRUE

FALSE

1

Total Marks for Question Three =

sub-total: 5 16

Total for Question Three = 16 Marks

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Question Four Aggregate monetary demand (AMD) is the total demand for goods and services in an economy over a period of time. The components of AMD are consumption, investment, government expenditure and net exports. Any change in AMD is likely to have an impact on some of the important variables in the economy.

Required: Do not write in these columns below

(a)

In the following table, state whether the change (fall or rise) in aggregate monetary demand would, other things being equal, lead to a rise or fall or have no effect on the stated variable. Write either rise or fall or no effect in the each of the shaded boxes below

Economic variable

A fall in AMD

Marks available

For use by the first marker

For use by the second marker

A rise in AMD

The rate of inflation.

1

The level of structural unemployment.

1

The level of cyclical unemployment.

1

The deficit on the current account of the balance of payments.

1

The surplus on the government budget.

1 sub-total: 5

(b)

In no more than two words each, fill in the gaps in the following statements.

(i) A fall in AMD will have a large effect on company sales if the demand for the product is

.

(ii) Governments can raise AMD by

1 1

the level of taxation.

(iii) The level of AMD will be stable when injections into the circular flow

1

(iv) A fall in the exchange rate for a country’s currency tends to lead to

1

are equal to

.

in the level of AMD.

(v) A fall in business investment will cause a larger fall in AMD because of the operation of the

.

1 sub-total: 5

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Required: Do not write in these columns below

(c) (i)

Complete each of the following statements, in no more than 15 words, in the shaded areas below

Marks available

For use by the first marker

For use by the second marker

Cost-push inflation can be defined as

2

(ii)

The Phillips curve shows

2

(iii) Frictional unemployment can be defined as the unemployment which occurs

2

Total Marks for Question Four =

sub-total: 6 16

Total for Question Four = 16 Marks

End of Question Paper

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