~~EC2020 ZA d0

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON EC1002 Part I ZB

EC1002Q ZB

BSc degrees and Diplomas for Graduates in Economics, Management, Finance

and the Social Sciences, the Diplomas in Economics and Social Sciences and
Access Route

Introduction to Economics

Wednesday, 6 May 2015 : 14:30 to 16:00

This is Part I (Section A) of the examination, which consists of Multiple Choice

Questions.

You have 90 minutes and you should attempt to answer ALL the questions.

Each question has FOUR possible answers (a-d). There is only ONE correct answer to
each of the questions.

Please mark the correct answer in the special multiple choice answer sheet
provided using an HB pencil.

Part I is worth 50% of the marks for the entire examination.

PLEASE TURN OVER

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SECTION A

1. An economy produces only agricultural products (x) and manufactured goods (y). A quarter of
the land in the country is arid and not suitable for agricultural products. Therefore, if half of the
arid land is not used at all:

(a) The economy could be productively efficient when the opportunity cost of x (agricultural
products) is infinite;
(b) The economy could be productively efficient when the opportunity cost of y (manufactured
goods) is zero;
(c) The economy could be productively inefficient with infinite opportunity cost for the
production of x (agricultural products);
(d) The economy could be productively inefficient with infinite opportunity cost for the
production of y (manufactured goods).

2. Consider the following economy:

600

A
400

B
250

300 450 600 x

If the economy is producing efficiently 500 units of y and the international price of x is 1.2 units
of y per x. The economy will:

(a) Specialise in x and move to produce at point B in the above diagram;

(b) Specialise in y and move to produce at point B in the above diagram;
(c) Specialise in x and move to produce at point A in the above diagram;
(d) Specialise in y and move to produce at point A in the above diagram.

Note: Specialisation is the production of goods not for the purpose of their direct consumption.

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3. In a world of two goods (say, x and y) an increase in the price of x which is accompanied by
money compensation for the income effect alone will lead to:
(a) A fall in quantity demanded of x and a fall in well-being;
(b) A fall in the quantity demanded of x and no change in well-being;
(c) No change in quantity demanded of x and no change in well-being;
(d) No change in quantity demand for x and a fall in well-being.

4. If good x is a normal good and y is its gross substitute then:

(a) Income elasticity of the demand for x is less than zero and so is the cross price
elasticity;
(b) Income elasticity of the demand for x must be greater than zero and cross price
elasticity must be less than zero;
(c) Income elasticity of the demand for x must be less than zero and cross price elasticity
greater than zero;
(d) Income elasticity of the demand for x must be greater than zero and so must be the cross
price elasticity.

5. An increase in wages will lead to a long-run expansion path with:

(a) A lower capital to labour ratio;
(b) An unchanged capital to labour ratio;
(c) A higher capital to labour ratio;
(d) A changed capital to labour ratio but the nature of the change is uncertain..

6. When long-run average costs are rising, short-run and long-run marginal costs:
(a) Intersect above average costs;
(b) Intersect below average costs;
(c) Intersect at the level of average costs;
(d) Never intersect.

7. Short-run equilibrium in a perfectly competitive market (where the number of firms is not as it
would be in the long run) is consistent with:
(a) Price equals average cost, profits are normal and the outcome is efficient;
(b) Price equals marginal cost which is greater than average cost, profits are above normal
and the outcome is inefficient;
(c) Price equals marginal cost which is greater than average cost, profits are normal and the
outcome is efficient;
(d) Price equals marginal cost which is greater than average cost, profits are above normal
and the outcome is efficient.

8. In a small country, the supply of land is perfectly inelastic. A tax on the land will:
(a) Be borne by consumers alone only if price elasticity of demand is less than unity;
(b) Be borne by owners of land alone regardless of price elasticity of demand;
(c) Be shared by consumers and owners of land equally if price elasticity of demand is unity;
(d) Be shared by consumers and owners of land regardless of price elasticity of demand.

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9. The monopolists marginal revenue is different from the one facing a firm in perfect competition
because:
(a) The price elasticity he faces is less than unity;
(b) The price elasticity he faces is equal to unity;
(c) The price elasticity he faces is less than infinity;
(d) The price elasticity approaches infinity.

10. A lump-sum tax levied on a monopolist will:

(a) Have no effect on the choice of output or price but could reduce the inefficiency created by
the monopolist depending on what the government is doing with the tax revenues;
(b) Have no effect on the choice of output or price and cannot have any effect on the
inefficiency created by the monopolist;
(c) Cause a fall in output and an increase in price which would make the inefficiency worse;
(d) Cause a fall in output and an increase in price which would reduce the inefficiency.

11. A firm in monopolistic competition faces, in the long run, a demand with price elasticity of
-2 (, = 2) and a cost function of: () = 400 + 4 . Long-run equilibrium is where:
(a) = 8; = 200 and profits are above normal;
(b) = 4; = 100 and profits are normal;
(c) = 8; = 100 and profits are normal;
(d) = 8; = 100 and profits are above normal.

12. In a market where two firms interact strategically, the total demand they face is given by:
() = 1,000 3 The cost of production is given by: () = 100
(a) Deadweight loss will be 20,000;
(b) Deadweight loss will be 10,000;
(c) Deadweight loss will be 5,000;
(d) Deadweight loss will be 15,000.

13. In a world of two goods (x and y) technological improvements in the production of x will lead
to:

(a) A fall in the relative price of x (a decrease in ) but not necessarily an expansion of the

x industry;
(b) A fall in the relative price of x with a necessary expansion of the x industry;
(c) An increase in the relative price of x with a necessary expansion of the x industry;
(d) An increase in the relative price of x but not necessarily an expansion in the x industry.

14. The contract curve is the collection of points where:

(a) Offer curves (Price-Consumption Curves) are tangent to each other;
(b) Indifference curves are tangent to each other;
(c) Offer curves are tangent to indifference curves;
(d) Indifference curves intersect offer curves.

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15. In an economy there are two goods which are produced by labour. The wage level is 10 and the
marginal product of labour in the x industry is 10 units of x; the marginal product of labour in the
y industry is 5 units of y. A unit of labour employed in x produces 2 units of a substance Z, each
unit of which destroys a unit of y. Markets are competitive.
1
(a) Market price of x in units of y is a unit of y per x ( = 2) which is the same as the

social cost;
3
(b) Market price of x in units of y is 3/5 a unit of y per x ( = 5) which is greater than the

social cost (which is units of y per x);
1
(c) Market price of x in units of y is a unit of y per x ( = 2) which is smaller than the

social cost (which is 3/5 units of y per x);
3
(d) Market price of x in units of y is 3/5 a unit of y per x ( = 5) which is the same as the

social cost.

16. An unplanned increase in stocks will occur at the following level of national income in the
diagram below:

AE

AE ( r0 )

y
y1 y0 y2

(a) At 0 because planned investment is greater than actual investment;

(b) At 1 because planned investment is greater than planned savings;
(c) At 2 because planned investment is lower than planned savings;
(d) At none of these because actual investment always equals actual savings.

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17. The only change which happened between the previous and the current year is that while in the
previous year all of the 100 million worth of imports were used for consumption, now all imports
are directed exclusively to investment . Therefore this will affect the national account of the
current year by:
(a) A decrease in consumption by a 100 million and an increase in investment by 100 million;
(b) A decrease in consumption by 100 million times the multiplier and an equivalent increase
in investment;
(c) A decrease in consumption by 100 million times the multiplier and an increase in
investment by 100 million;
(d) No change at all.

18. The following information (in billions) about an economy is given: Net taxation = 600;
Government spending = 400; Private consumption = 800; Imports = 200 and
private savings = 300:
(a) National income will be 1,500 and if investment equals 300, exports must be equal to 200;
(b) National income will be 1,700 and if investment equals 300, exports must be equal to 400;
(c) National income will be 2,000 and if investment equals 300, exports must be equal to 300;
(d) National income will be 1,800 and if investment equals 300, exports must be equal to 400.

19. In an economy, the marginal propensity to consume is 0.8. The government balances the
budget by adjusting the proportional tax level to the required government spending. An increase
by 10 million in government required spending will lead to an increase in equilibrium level of
national income by:
(a) 10
(b) 50
(c) 20
(d) 30

20. Eliminating all charges for the use of cash withdrawal machines will:
(a) Increase demand for liquid assets and reduce the price of bonds;
(b) Reduce demand for liquid assets and increase the price of bonds;
(c) Reduce the supply of liquid assets and reduce the price of bonds;
(d) Increase the supply of liquid assets and increase the price of bonds.

21. An increase in income will:

(a) Reduce demand for liquid assets;
(b) Increase demand for liquid assets;
(c) Have no effect on the demand for liquid assets;
(d) Only have a direct effect on the supply of liquid assets.

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22. The money base is equal to 40 billion, the total amount of loans equals to 120 billion. Therefore,
with a reserve ratio of 20% the supply of liquid assets will be equal to:
(a) 160 billion
(b) 140 billion
(c) 180 billion
(d) 120 billion

23. Consider the following diagram:

LM ( M 0 , P2 ) LM ( M 0 , P1 )
r
C
r2 LM ( M 0 , P0 )
r1 B

r0 A IS (' )

IS ()
Y
p SAS ( w1 )
SAS ( w0 )
C
p2
p1 B

p0 A

AD (' )

AD ()
Y
Y0 Y1
Which of the following could have triggered on its own the changes depicted in this diagram (the
move from A to C)?
(a) An increase in the autonomous element of government spending;
(b) An increase in the supply of liquid assets;
(c) A reduction in the rate of a proportional tax;
(d) A fall in the marginal propensity to consume.

24. In an open economy with no capital mobility and a fixed exchange rate, an increase in the
marginal propensity to import will:
(a) Reduce equilibrium level of national income and reduce the interest rate;
(b) Increase equilibrium level of national income and have no effect on the interest rate;
(c) Reduce equilibrium level of national income and have no effect on the interest rate;
(d) Reduce equilibrium level of national income and increase the interest rate.

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25. In an open economy, if only the demand for consumption and imports are dependent on income
and the marginal propensity to consume is the same as the marginal propensity to import, the
multiplier will be:
(a) Equal to 1 if there is lump-sum tax and less than 1 if the tax is proportional;
(b) Equal to 1 if there is a proportional tax and greater than 1 if there is a lump-sum tax;
(c) Equal to 1 if there is a lump-sum tax and greater than 1 if the tax is proportional;
(d) Equal to 1 if there is a proportional tax and less than 1 if there is a lump-sum tax.

26. An increase in the rate of a proportional tax will affect the IS schedule (relative to the current
position) in the following way:
(a) Shift to the left and become flatter;
(b) Shift to the left and become steeper;
(c) Shift to the right and become steeper;
(d) Shift to the right and become flatter.

27. There is a fixed exchange rate regime. Assuming that all accounts are balanced in the balance
of payments, a sale of a local enterprise to a foreign buyer will create:
(a) A surplus in the capital account which will lead to an increase in reserves;
(b) A surplus in the capital account which will lead to a fall in reserves;
(c) A deficit in the capital account which will lead to a surplus in the current account;
(d) A deficit in the capital account which will lead to a fall in reserves.

28. When there are expectations that there will be inflation and expectations are rational, the long-
run equilibrium will be:
(a) Where the actual rate of inflation is lower than the expected rate;
(b) Where the actual rate of inflation is higher than the expected rate;
(c) When the actual rate of inflation is the same as the expected rate;
(d) There cannot be equilibrium when there are expectations of inflation.

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29. The possible effects of a fall in the international interest rate are depicted in the diagram below
for an open economy with perfect capital mobility:

r
LM ()

LM (' )

A
r0 r0 * BOP

B C
r1 * BOP

IS ()
IS (' )
Y
Y1 Y0

If the economy has a flexible exchange rate, the economy will end up at point:

(a) A
(b) B
(c) C
(d) D

30. An increase in international prices in an open economy with perfect capital mobility and a
flexible exchange rate will:
(a) Lead to an increase in long-run output without a long run change to the interest rate;
(b) Lead to a fall in long-run output without a long run change to the interest rate;
(c) Lead to no change in output or interest rate in the long run;
(d) Lead to no change in long-run output but a long run increase in interest rate.

END OF PART I

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