November 2003 FBSM exam question paper

Examination
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Answer Book
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Foundation Level
Economics for Business
3a
FECB
17 November 2003
Monday 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. 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 – 9).
Answer the THREE questions in section B (these are on pages 10 – 16).
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 contact ID anywhere on this booklet.
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© The Chartered Institute of Management Accountants 2003
Total
One
Two
Three
Four
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
The cost of one product, measured in terms of what must be given up to produce it, is called the
A
real cost.
B
opportunity cost.
C
total cost.
D
potential cost.
1.2
Which ONE of the following would be most likely to raise economic welfare in a country in the long
run?
A
An increase in the country’s trade surplus.
B
An expansion of the country’s social welfare provision.
C
A rise in the rate of growth of labour productivity in the country.
D
An equal reduction in taxation and public spending.
Total
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1.1
1.2
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November 2003
1.3
All of the following would lead to an inward shift (to the left) in a country’s production possibility frontier
(curve) EXCEPT ONE.
Which ONE is the EXCEPTION?
A
A rise in unemployment.
B
A decrease in the size of the labour force.
C
A reduction in the level of business investment.
D
A slower rate of technological progress.
1.4
Which ONE of the following is a supply side policy designed to promote long-term economic growth?
A
Regional aid to reduce structural unemployment.
B
Increasing the rate of growth of the money supply.
C
Tax incentives for business investment.
D
Raising aggregate demand to encourage firms to expand their supply of goods and services.
1.5
Conventional measures of national income fail to give an accurate indication of sustainable economic
welfare because they
A
do not allow for inflation.
B
do not allow for improvements in the quality of goods and services.
C
do not allow for increases in productivity.
D
do not exclude defensive expenditure to offset environmental damage.
1.6
Which ONE of the following would be the outcome of a market economy operating with a high degree
of competition?
A
The interaction of demand and supply would ensure that resources are equally distributed.
B
Companies would produce only those goods that are desirable for society since only such goods can
be sold at a profit.
C
Large differences in incomes would be avoided.
D
Producers would respond to changes in demand and consumers would respond to changes in supply.
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Total
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1.3
1.4
1.5
1.6
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1.7
If the demand for a good has a price elasticity of demand of –2 then
A
a fall in price will lead to a fall in demand.
B
a rise in price will lead to a larger than proportionate fall in sales volume.
C
the good must have no effective substitutes.
D
a fall in price will lead to a fall in total revenue from sales.
1.8
What will be the effect of a rise in the price of cars on the demand curve for petrol?
There will be
A
a leftward shift in the demand curve for petrol.
B
a movement down along the demand curve for petrol.
C
a rightward shift in the demand curve for petrol.
D
a movement upward along the demand curve for petrol.
1.9
If the imposition of a congestion charge on the use of cars in cities does not significantly reduce the
use of cars for travelling to and from work (commuting), this must be because
A
there are no substitutes for cars.
B
the demand for commuting by car is price inelastic.
C
the supply of alternative means of transport is price elastic.
D
what matters is the marginal cost of driving and this will not be affected.
1.10 Which ONE of the following, in a competitive labour market, would explain differences in wages
between occupations in the long run?
A
There is geographical immobility of labour.
B
In the long run, everyone has to accept the wage levels determined by the market.
C
The skill and knowledge content of some occupations acts as a barrier to entry.
D
In some occupations, wages may rise above the equilibrium level.
Total
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1.7
1.8
1.9
1.10
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1.11 Which ONE of the following statements about prices is true?
A
An increase in demand will lead to higher prices only if supply is price inelastic.
B
A shortage of goods can occur if prices are above the equilibrium level.
C
The imposition of a minimum price for a good will always lead to a surplus of output over demand.
D
If prices are flexible, there can be no market surpluses or shortages in the long run.
1.12 Oligopolistic competition is often characterised by the avoidance of price competition. Which ONE of
the following is the best explanation for this?
A
Profit margins are too small to allow price cuts.
B
Most oligopolies are cartels that fix prices.
C
The expectation that rival companies will always reduce prices in response to a price cut.
D
Price reductions would encourage the entry of new competitors into the industry.
1.13 Assuming that pollution reduces economic welfare, which ONE of the following would be most likely to
raise long-term economic welfare?
A
A total ban on all polluting activities.
B
A tax on all products whose production involves pollution.
C
A tax on the emission of pollutants.
D
Allowing the free market to find the optimal level of pollution.
1.14 Railway companies offering off-peak services at reduced prices must ensure that, in the short run,
these reduced prices cover at least
A
the variable cost of providing the service.
B
the fixed costs of production.
C
overhead costs.
D
the average cost of providing the service.
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Total
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1.11
1.12
1.13
1.14
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1.15 Goods whose production involves net social costs greater than private costs are normally
A
under-produced by the private sector relative to the optimal level of output.
B
over-produced by the private sector relative to the optimal level of output.
C
not produced in the private sector because it would be unprofitable to do so.
D
produced at the optimal level by the private sector.
1.16 Normal profit is the
A
average level of profit earned in an industry.
B
level of profit earned by firms in the long run.
C
level of profit required to keep the business operating in an industry.
D
reward to capital as a factor of production.
1.17 In comparing perfect competition with monopoly, which ONE of the following statements is true?
A
Monopolies always earn profits; perfectly competitive firms rarely do.
B
In the short run, firms in both monopoly and perfect competition attempt to minimise average fixed
costs.
C
In the long run, firms in both monopoly and perfect competition produce where average costs are
lowest.
D
Profits in perfect competition will be reduced in the long run by the entry of new firms, but long-run
monopoly profits are protected by entry barriers.
1.18 A country’s gross national product (GNP) will be greater than its gross domestic product (GDP) when
A
there is a net inflow of factor incomes.
B
exports of goods exceed imports of goods.
C
there is a surplus on the balance of payments current account.
D
the government is running a budget surplus.
Total
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1.15
1.16
1.17
1.18
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1.19 Each of the following is a source of funds for capital investment for business enterprises
EXCEPT ONE.
Which ONE is the EXCEPTION?
A
The central bank.
B
The stock market.
C
Internally-generated funds.
D
Commercial banks.
1.20 All of the following are effects on a business of a reduction in interest rates EXCEPT ONE.
Which ONE is the EXCEPTION?
A
Increased credit-based sales.
B
A lower net present value of investment projects.
C
A fall in the cost of servicing bank debts.
D
An increased incentive to undertake investments.
1.21 Other things being equal, which ONE of the following is a typical feature of the recovery phase of the
trade cycle?
A
A slow down in employment growth.
B
An improvement in the trade balance.
C
A stable rate of growth of GDP.
D
Increased inflationary pressures.
1.22 A significant fall in stock market values in a country will be likely to contribute to a contraction of the
circular flow of income because
A
the circular flow is one of individual wealth of which shares are a part.
B
reductions in consumer wealth will encourage lower consumption and higher saving.
C
the buying of shares is an injection into the circular flow, and falling share prices will discourage the
buying of shares.
D
outflows from the economy increase as investors switch savings to overseas stock markets.
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Total
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1.19
1.20
1.21
1.22
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November 2003
7
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1.23 All of the following would occur in an economy which experienced a fall in the general level of prices
EXCEPT ONE.
Which ONE is the EXCEPTION?
A
Some consumer expenditure would be postponed.
B
The international competitiveness of the business sector would tend to increase.
C
The real burden of business debts would fall.
D
Government indirect tax revenues would tend to decline.
1.24 The comparative advantage theory of international trade shows that countries can benefit from trade
because
A
countries can export their surplus output.
B
all countries have an absolute advantage in the production of some goods and services.
C
they can profit by running a trade surplus with the rest of the world.
D
countries can acquire imported goods at a lower opportunity cost than from domestic production.
1.25 A multinational company may wish to locate production in a number of countries for all of the following
reasons EXCEPT ONE.
Which ONE is the EXCEPTION?
A
To secure economies of scale in production.
B
To avoid transport costs.
C
To avoid tariff barriers in overseas markets.
D
To secure a variety of sources of supply of components.
Total
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1.23
1.24
1.25
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8
November 2003
1.26 If a group of countries forms a regional trading bloc, the long-run economic welfare benefits gained will
be smaller if the bloc
A
allows the free movement of labour within the bloc.
B
encourages companies to change their location within the bloc.
C
abolishes all internal barriers to trade in goods and services.
D
maintains a high external tariff.
(Total = 52 Marks)
End of section A
Section B starts on the next page
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Total
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1.26
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November 2003
9
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SECTION B – 48 MARKS
ANSWER ALL THREE QUESTIONS
IMPORTANT
MARKS ARE AWARDED FOR 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 shows the long-run average total cost curve (LRAC) for a business.
Average
total costs
LRAC
A
B
C
Output
Using your knowledge of economics and the diagram, answer the following:
Required:
Do not write in these
columns below
(a)
Marks
available
For use
by the
first
marker
For use
by the
second
marker
(i) Define, in the shaded area below, the term "economies of scale"
(ii)
Maximum 25 words
With reference to the diagram, state, in the shaded boxed below,
which part of the long-run average cost curve (A, B or C) refers to
each of the following:
Description
2
Section of the long-run
average cost curve (A, B or C)
Decreasing returns to scale
1
Increasing returns to scale
1
sub-total:
4
Question Two continues on page 11
FECB
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November 2003
Question Two continued
Required:
Do not write in these
columns below
(b) In the shaded boxes below, give an example of each one of the scale
effects that a business might experience.
(Maximum 15 words each)
Marks
available
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by the
first
marker
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second
marker
A technical economy of scale
1
A commercial economy of scale
1
A managerial economy of scale
1
A diseconomy of scale
(c)
sub-total:
Indicate with a cross (X) in the appropriate box whether each of the
following is TRUE or FALSE?
TRUE FALSE
Statement
Economies of scale limit the number of firms in an
industry by acting as a barrier to entry.
1
4
1
Even if a firm experiences economies of scale in
the long run, its short-run average cost curve will
always be U-shaped because of diminishing
marginal returns.
1
If a business’s long-run cost curve is falling, it can
always increase total profits by raising output.
1
The main source of economies of scale is
technological change because this reduces costs
over the long run.
1
sub-total:
4
(d) Fill in the gaps in the following statements (Maximum 3 words per gap)
(i) Economies of scale tend to lead to
industries; here there are a few large firms and competition is often
by
methods.
2
(ii) For a business, the
is the level of
output where almost all economies of scale have been secured. If
this is large relative to the total market, a
is likely to emerge.
sub-total:
2
4
(Total for Question Two = 16 Marks)
TURN OVER
November 2003
11
FECB
Question Three
The following is a list of types of unemployment:
•
Structural unemployment;
•
Cyclical unemployment;
•
Real wage (classical) unemployment;
•
Frictional unemployment;
•
Seasonal unemployment.
Using your knowledge of economics and the list given above, answer the
following.
Do not write in these
columns below
Required:
(a) Match ONE of the above types of unemployment to each of the
following definitions.
Marks
available
Definition of unemployment
For use
by the
first
marker
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by the
second
marker
Type of
unemployment
1
Unemployment associated with industries or
regions where the demand for labour and
wage rates regularly rise and fall over the
year.
Unemployment that occurs in particular
industries and arises from long-term
changes in the pattern of demand or supply.
Unemployment that occurs as a result of
imperfect information in the labour market
resulting in time spent unemployed between
jobs
Unemployment caused by a general fall in
aggregate demand in the economy.
1
1
1
sub-total:
4
(b) Indicate with a cross (X) in the appropriate box whether each of the
following is TRUE or FALSE.
Statement
Unemployment and inflation tend to rise and fall
together over the trade cycle.
TRUE
FALSE
1
In a recession, most businesses face falling sales,
but this is especially true for those whose
products have a high income elasticity of demand.
1
Rising real wages will cause most unemployment
when the demand for the product of the business
is highly price inelastic.
1
Changes in real wage costs have least effect on
employment in those industries that are relatively
capital intensive.
1
sub-total:
4
Question Three continues on page 13
FECB
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November 2003
Required:
Do not write in these
columns below
(c) For each of the following events, indicate with a cross (X) in the
appropriate box below whether the direct effect for the economy as a
whole would be raise the level of unemployment, lower the level of
unemployment or to leave the level of unemployment unchanged.
Event
Raise
unemployment
Lower
employment
Marks
available
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by the
first
marker
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by the
second
marker
Leave
unemployment
unchanged
The imposition of a
legal national
minimum wage
below the equilibrium
wage rate.
1
Monetary policies
leading to a rise in
the real exchange
rate for the country’s
currency.
1
A reduction in the
level of real interest
rates.
1
A downturn in
economic activity in
the country’s trading
partner countries.
1
Sub-total:
4
(d) Fill in the gaps in the following (maximum of 3 words per gap).
A Keynesian approach to unemployment would emphasise the need
to raise
1
by increasing public
expenditure or reducing the level of taxation. Subsequent budget
deficits would be financed by
.
In contrast, the
approach
1
1
would focus on reducing both direct taxes and unemployment
benefits to make employment more attractive, and on the removal of
imperfections in the
market
1
arising from regulations and from the activity of trade unions.
Sub-total:
4
(Total for Question Three = 16 Marks)
Section B continues on page 14
TURN OVER
November 2003
13
FECB
Question Four
The following diagram shows the demand and supply for US dollars on the foreign exchange market and the
exchange rate with the Euro.
D1
D2
S1
Exchange
rate Euros
per $
Demand for and supply of dollars
Required:
Using the diagram above and your knowledge of economic theory, answer
the answer the following:
Do not write in these
columns below
(a)
Marks
available
For use
by the
first
marker
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by the
second
marker
(i) State whether the shift in demand curve for dollars from D2 to D1 will
cause the dollar exchange rate to appreciate or depreciate relative to
the Euro.
1
(ii) Indicate with a cross (X) in the appropriate box what the effect on the
dollar exchange rate will be an increase in imports from Europe into
the USA:
The demand curve for dollars will
shift to the left.
be unchanged.
1
shift to the right.
The supply curve for dollars will
shift to the left.
be unchanged.
1
shift to the right.
The exchange rate for dollars will
rise.
be unchanged.
1
fall.
sub-total:
4
Question Four continues on page 15
FECB
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November 2003
Question Four continued:
Required:
Do not write in these
columns below
(b) Indicate with a cross (X) in the appropriate box whether each of the
following processes would lead to a shift in the demand curve for
dollars from D1 to D2
Process
An increase in the level of capital inflows into the
USA.
YES
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available
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marker
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NO
1
A rise in exports of US services to eurozone
countries.
1
A higher level of exports of capital from the USA
1
A reduction in demand in the USA for overseas
holidays.
1
sub-total:
4
(c) There is a variety of exchange rate systems. These include
Dirty floating
Free floating
Adjustable peg
Fixed
Managed floating
Exchange rate band
Joint float
Match each of the following to ONE of the above types.
Description
Name of exchange
rate system
The government has no exchange rate
target, but intervenes in the foreign
exchange market to prevent excessively
large changes in the exchange rate.
1
The government allows the currency to
float, but intervenes to achieve an
exchange rate target.
1
The government pegs the exchange rate
permanently to another currency and
intervenes in the foreign exchange market
to maintain that rate of exchange.
1
The government allows the currency to
float between an upper and lower
exchange rate, but intervenes to prevent
the currency moving outside of these limits.
1
sub-total:
4
Question Four continues on page 16
TURN OVER
November 2003
15
FECB
Question Four continued:
Do not write in these
columns below
Required:
(d) Assume that the US economy recovers strongly from the recent
recession and inflationary pressures begin to emerge. As a result, the
US monetary authorities raise US interest rates.
For each of the following statements, indicate with a cross (X) in the
appropriate box, whether they would result from the action of the US
monetary authorities in raising interest rates.
TRUE
FALSE
Statement
There would be increased outflows of capital from
the USA to other countries.
European businesses would experience increased
competition from US businesses because the
dollar would tend to depreciate relative to the
Euro.
Interest rates would tend to rise in other countries.
US national income would be lower than otherwise
thus reducing the potential market for European
exporters.
Marks
available
For use
by the
first
marker
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by the
second
marker
1
1
1
1
sub-total:
4
Total for Question Four = 16 Marks
End of Question Paper
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3a
FECB
Economics for Business
Monday morning
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