CARIBBEAN EXAMINATIONS COUNCIL ADVANCED PROFICIENCY EXAMINATION

SPECIMEN PAPER MULTIPLE CHOICE QUESTIONS FOR ECONOMICS

UNIT 2 90 minutes

READ THE FOLLOWING INSTRUCTIONS CAREFULLY. Each item in this test has four suggested answers lettered (A), (B), (C), (D). Read each item you are about to answer and decide which choice is best. Sample Item Prime cost is calculated by adding direct factory expenses to the Sample Answer (A) (B) (C) (D) cost of goods sold sale of fixed assets sale of finished goods cost of materials used A B C D

The best answer to this item is cost of materials used, so answer space (D) has been shaded.

Copyright 2008 Caribbean Examinations Council . All rights reserved.

02216010/SPEC 2008

-21. In Keynesian analysis, if the economy is at full employment then an increase in aggregate expenditure will lead to (A) (B) (C) (D) a fall in economic growth an increase in the price level a fall in government spending an increase in the exchange rate Item 4 refers to the following diagram showing the relationship between National Income (NI) and Saving/Investment (SI).
S.I.

Items 2 - 3 refer to the following diagram showing consumption and income.

10, 600 10, 000

I1 I

30, 000 36, 000

.I.

Consumption

4.
d

The diagram shows that national income has increased from $30 000 million to $36 000 million. What is the marginal propensity to consume? (A) (B) (C) (D) 0.1 0.9 0.29 10

Q2

Q Q1 Income

2.

What function does line 2 represents? (A) (B) (C) (D) Savings Investment Consumption Government expenditure 5.

If consumption increases by 0.6% of the change in national income, then the multiplier is (A) (B) (C) (D) 0.4 0.6 1.6 2.5

3.

What does line 1 represent? (A) (B) (C) (D) The 45o line National income Investment spending Autonomous savings

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-3Item 6 refers to the following diagram of a two-sector closed economy.

E=Y

Item 8 - 9 refer to the diagram below showsing a consumption function AC1.

E=

Expenditure

B
C+I S
Expenditure

C1
D

A
0 Y1 Y2 ational income

6.

In the diagram, R S represents (A) (B) (C) (D) an inflationary gap a deflationary gap money saved by firms in the banks interest payments on investment loans

F ational Income

8.

What does

DF represent? BF

Item 7 refers to the following demand and supply curve.

AS

(A) (B) (C) (D)

Autonomous consumption Total induced consumption Marginal propenstity to consume Average propensity to consumers

9.

When national income is at OF, what does DE represent? (A) (B) (C) (D) Induced consumption Autonomous consumption Consumption minus savings Average propenstity to consumer

AD1 AD

AD/AS

7.

Which of the following factors may cause AD to shift to AD1? (A) (B) (C) (D) Government imposing taxes on citizens The Central Bank increasing interest rates An increase in government expenditure Increased speculation in the stock market GO ON TO THE NEXT PAGE

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-4Item 10 refers to the diagram below showing a consumption function. Item 11 refers to the following diagram showing the consumption function C1 in country X.
C
C F D E

Expenditure

($bn)

C2 C1

ational Income

10.

Which of the following represents the marginal propensity to consume?

Y ($bn)

11.

(A) (B) (C) (D)

FE AB FE AB
OB - AB DE + EF

What causes the consumption function to shift upwards from C1 to C2? (A) (B) (C) An increase in direct taxation An increase in interest rates The anticipated increase in the proportion of income saved by households The expectation of an increase in the rate of value added tax

(D)

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-5Items 12 - 15 refer to the diagram below showing equilibrium level of national income.
Y F 9600 8400 7200 Aggregate Expenditure (AE) $ 3600 2400 G 1200 Full employment 0 1200 2400 3600 4800 6000 7200 8400 9600 Real ational Income $ 6000 4800 E X

12.

What is the equilibrium level of income? (A) (B) (C) (D) $3 600 $4 000 $6 000 $8 400

14.

How much is autonomous expenditure? (A) (B) (C) (D) $1 200 $2 400 $3 600 $3 800

13.

Which of the following responses correctly identifies the lines labelled Y and X respectively? (A) (B) (C) (D) Income line and 45o line 45o line and consumption function Income line and consumption function 45o line and aggregate expenditure line

15.

By how much would aggregate desired expenditure have to be increased to close the output gap? (A) (B) (C) (D) $ 0 $1 200 $2 400 $6 000

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-616. A worker uses money to pay cash for a dress which costs $200. Which of the following functions of money are being addressed in the above statement? (A) (B) (C) (D) A medium of exchange and a store of value A unit of account and a standard for deferred payments A standard for deferred payments and a store of value A medium of exchange and a unit of account 19. The Central Bank sells government securities using open market operations. What effect will this have on the interest rate and the money supply? (A) (B) (C) (D) Interest rate falls, money supply rises. Interest rate falls, money supply falls. Interest rate rises, money supply falls. Interest rate rises, money supply rises.

20.

Which of the following fiscal prescriptions would Keynes MOST likely have increased to alleviate unemployment? (A) (B) (C) (D) Taxes Interest rates Aggregate supply Government expenditure

17.

Which of the following is a monetary policy measure? (A) (B) (C) (D) Fall in taxation Fall in government spending Rise in government spending An increase in the reserve ratio

21.

What is the role of automatic stabilizers in economic development? (A) (B) (C) (D) Reduce inflation in a country Protect and insulate the economy from internal shocks Boost and develop the economy as it so needs Help to stabilise a countrys balance of payments

18.

Which of the following activities undertaken by the Central Bank BEST defines open market operations? (A) Issues long-term securities and fewer short-term securities, thereby reducing the banks liquid assets Sells government securities, reducing the banks liquid assets and raising interest rates Sets an upper limit on the volume of bank lending, reducing banks liquid assets and rasing interest rates Issues compulsory loans that are demanded from the banks thereby reducing their liquid assets

(B)

22.

(C)

If a government borrows to finance the budget deficit by selling treasury bills, what is the likely effect on the economy? (A) (B) (C) (D) Inhibits private sector investment Exchange rate will depreciate Money supply will expand Interest rates will fall

(D)

23.

The national debt will be a burden to a country if it is (A) (B) (C) (D) owed to foreigners held in domestic currency owed to citizens of the country rescheduled to repay at a later period

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-724. According to the monetarists, inflation is caused by an increase in (A) (B) (C) (D) taxes the money supply aggregate demand the cost of production 28. If a government wishes to reduce unemployment by increasing demand, what type of monetary policy should it adopt? (A) (B) (C) (D) Lower the interest rate Sell fewer treasury bills Increase the interest rate Sell more government securties

25.

If there is a positive change in real GDP ceterus paribus, what would be the effect on money demand, interest rates and money supply? (A) (B) The demand for money falls, interest rates fall, money supply falls. The demand for money remain the same, interest rates fall, money supply rises. The demand for money rises, interest rates rise, money supply remains the same. The demand for money rises, interest rates remain the same, money supply remains the same.

29.

The money multiplier is the (A) (B) number of times money changes hands in an economy change in money supply multiplied by the change in deposit that brought it about change in money supply divided by the change in deposit that brought it about amount by which a currency has to be multiplied to find the value of another currency

(C)

(C)

(D)

(D)

30.

Which of the following BEST defines the governments budget? (A) (B) The spending plans of government in an economy in a year The annual report of the allocation of government spending among sectors A yearly statement of governments plans for spending and tax revenues The amount of income government has to spend in a year

26.

Using the quatity theory of money, what is the velocity of circulation if the money supply is $50 000, the average price is $200 and the number of transactions in the economy for a given year is 10 000? (A) (B) (C) (D) 25 40 50 100

(C)

(D)

27.

Which of the following is an example of qualitative controls that a Central Bank may use in executing its monetary policy? (A) (B) (C) (D) Moral suasion Adjusting the bank rate Open market operations Variation of the liquidity ratio

31.

Which of the following changes is the BEST indicator of sustained economic growth in a developing country? (A) (B) (C) (D) A decrease in unemployment An increase in the use of capital A movement within the production possibility frontier An outward shift in the production possibility frontier

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-8-

32.

The table below shows the ability of two countries to produce two commodities.

34.

Developing countries may attempt to increase their levels of exports by setting up I. II. III. IV. (A) (B) (C) (D) Trade Barriers Custom Unions Common Markets Free Trade Areas I, II and III only I, II and IV only I, III and IV only II, III and IV only

Country Barbados Trinidad

Production of tiles per person 500 750

Production of drums per person 1000 1000

Which of the following statements correctly represents the information in the table? (A) Barbados has a comparative advantage in drums and Trinidad has an absolute advantage in tiles. Barbados has an absolute advantage in drums and Trinidad has an absolute advantage in tiles. Barbados has an absolute advantage in drums and Trinidad has a comparative advantage in tiles. Barbados has a comparative advantage in tiles and Trinidad has an absolute advantage in drums. 35.

The data in the table below refer to the balance of payments of a country.

(B)

Item Import of goods Export of goods Invisible balance Investment and other capital flows

$ Millions 10,000 8,000 +600 +100

(C)

(D)

What is the Current Account Balance? 33. Which of the following are structural characteristics of Caribbean economies? I. II. III. IV. (A) (B) (C) (D) Economic independence The chronic shortage of capital The lack of a diversified production base The lack of openness in the economy I and II only I and IV only II and III only III and IV only (A) (B) (C) (D) $2 700 m $2 600 m -$1 400 m -$1 300 m

36.

Which of the following measures would BEST rectify a deficit on a countrys Balance of Payments Account? (A) (B) (C) (D) Revaluing the currency Lowering tariff barriers Deflationary fiscal policy Relaxing exchange controls

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-937. One MAJOR advantage of a floating exchange rate over a fixed exchange system is that it (A) (B) (C) (D) is determined by the Central Bank helps to reduce inflation in a country can lead to unstable currency value provides certainty in international trade
Price D

Item 40 refers to the following diagram representing the demand for imports of Good A into Country B.

S1

P1

38.

What is the MAIN function of the World Trade Organisation? (A) (B) (C) (D) To promote trade with the large countries of the world To set maritime boundaries for member countries To settle disputes amongst members To set rules for the global trading system

P D 0 Q1 Q

WS World Supply

Quantity

40.

Assuming a perfectly elastic world supply. What are the effects on price and quantity imported should government impose a quota at S1? (A) Price decreases; quantity demanded decreases. Price decreases; quantity demanded increases. Price increases; quantity demanded increases. Price increases; quantity demanded decreases.

39.

Which of the following policies may frustrate a governments attempt to stimulate growth in an economy? (A) (B) (C) (D) Increasing Government spending Reducing direct and indirect taxes Increasing the rate of interest Increasing the money supply 41.

(B) (C) (D)

Which of the following BEST describes a Customs Union? (A) Member countries act as a single market with free movement of labour and capital. Member countries face no trade barriers between themselves while external tariffs and quotas are common. Member countries face no trade barriers between themselves and try to implement a common language. Member countries have similar trading patterns and attempts are made to have similar trade unions.

(B)

(C)

(D)

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- 10 42. Which of the following is MOST likely to cause a Balance of Payments Surplus in a country? (A) A decrease in the domestic inflation rate relative to other trading countries Increased confidence in the particular economy by the international community An increase in the domestic inflation rate relative to other trading countries Lack of confidence in the particular economy by the international community Item 45 refers to the diagram below

A1 A* A2 A3
* A is a large firm producing cars in Metro Pole. The managers of A* have set up plants A1, A2 and A3 in three foreign countries. The operations of A* can BEST be described as that of

(B)

(C)

45.

(D)

43.

The foreign exchange market refers to the market in which (A) (B) (C) (D) one good can be exchanged for another the rate of interest is determined buyers determine the price of goods one currency can be traded for another

(A) (B) (C) (D)

globalisation economic integration a multinational company an internal financial organization

44.

Which of the following BEST describes the term globalisation? (A) (B) (C) The free movement of goods and services across national borders The free movement of capital and labour across national borders The increase in trade, communication, travel and information flows across countries The independence of countries to produce goods and services and trade freely

(D)

IF YOU FINISH BEFORE TIME IS CALLED, CHECK YOUR WORK ON THIS TEST.

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CARIBBEAN

EXAMINATIONS

COUNCIL

SECONDARY EDUCATION CERTIFICATE EXAMINATION

ECONOMICS - UNIT 2
SPECIMEN PAPER 2008

Item o. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Key
B C A A D C C D A B D C D D C D D B C D B A A

Item o. 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

Key
B C B A A C C D A C D C C B D C D B A D C C