Certificate in Accounting and Finance Stage Examinations

The Institute of 9 March 2017

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Introduction to Economics and Finance

Instructions to candidates:
(i) All the Questions from Section A are compulsory.
(ii) Attempt any FIVE out of SEVEN Questions from Section B.

Section A

Q.1 (a) What do you understand by the term ‘Factors of production’? What types of factors
of production are used by a school? (03)

(b) Briefly describe any four core features of Islamic economic system. (04)

Q.2 Describe the Law of ‘Diminishing marginal utility’. Support your answer with the help of a
schedule and a diagram. (07)

Q.3 (a) Define the concept of ‘Price elasticity of supply’ and how it may be calculated.
Identify the factors which would increase the price elasticity of supply. (05)

(b) What do you understand by ‘Reservation price’? Briefly describe three factors which
may affect the reservation price. (05)

Q.4 (a) Define the term ‘Economies of scale’? Describe any four ways by which a firm may
achieve internal economies of scale. (06)

(b) What is meant by ‘Oligopoly’? List any four advantages and disadvantages of
Oligopolies. (05)

Q.5 Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions (MCQs). Each MCQ carries ONE mark.

(i) Which of the following concepts is NOT illustrated by the production possibility
curve?
(a) Efficiency (b) Opportunity cost
(c) Equity (d) Trade-off

(ii) An industry is a group of firms:

(a) located in the same geographical area
(b) producing similar products
(c) which supply the various inputs needed to produce a final product
(d) owned by a corporation

(iii) With 50 units of labour, a firm can produce 1,800 units of output. With 60 units of
labour the firm can produce 2,100 units of output. The marginal product of labour is:
(a) 0.33 (b) 3 (c) 30 (d) 300
 Introduction to Economics and Finance Page 2 of 4

(iv) Which one of the following will NOT shift the demand curve for a normal good to
the left?
(a) A fall in consumers incomes
(b) A rise in the price of a complementary good
(c) A fall in the price of the substitute good
(d) A rise in the price of the normal good

(v) Which one of the following is NOT a barrier to entry into a monopoly market?
(a) Significant economies of scale
(b) Heavy potential advertising costs
(c) Large capital requirements
(d) Constant returns to scale

(vi) The inverse relationship between rate of interest and level of investment is shown
by:
(a) supply curve
(b) the marginal efficiency of capital curve
(c) demand curve
(d) indifference curve

(vii) Which of the following is an objective of fiscal policy?

(a) Zero inflation
(b) Reduced money supply
(c) Low exchange rates
(d) Stable economic growth

(viii) Slow economic growth and high unemployment refers to:

(a) Stagflation (b) Hyper inflation
(c) Wage spiral inflation (d) Deflation

(ix) Murad pays a tax of Rs. 100 on his income of Rs. 1000 while Sohail pays a tax of
Rs. 200 on his income of Rs. 800. Identify the tax system prevailing in the country.
(a) Progressive (b) Regressive
(c) Proportional (d) Equitable

(x) The Phillips curve indicates that there is a trade-off between the objectives of:
(a) inflation and economic growth
(b) inflation and unemployment
(c) inflation and balance of payments
(d) inflation and exchange rate

(xi) Monetary policy can be effective if:

(a) the money supply reacts to changes in the interest rate
(b) money demand reacts to changes in the interest rate
(c) planned investment reacts to changes in the interest rate
(d) government spending reacts to changes in the interest rate

(xii) The Current Account of the Balance of Payments consists of:

(a) Trade in goods and services (b) Investment income
(c) Transfers (d) All of the above

(xiii) The protective measure of a government where only a fixed amount may be
imported into a country refers to:
(a) Import tariff (b) Export tariff
(c) Quota (d) Import substitution
 Introduction to Economics and Finance Page 3 of 4

(xiv) Whenever a commercial bank’s desired reserve ratio exceeds its actual reserve ratio
the bank will:
(a) call in loans and reduce reserves
(b) call in loans and increase reserves
(c) make additional loans and reduce reserves
(d) make additional loans and increase reserves

(xv) Which of the following is most likely to result from revaluation of a country’s
exchange rate?
(a) Exports will become less competitive
(b) Imports will become more expensive
(c) Inflation will rise
(d) Export volumes will rise

Section B

Q.6 (a) Illustrate the concepts of ‘Nominal interest rate’ and ‘Real interest rate’. (05)

(b) Illustrate the process through which the central bank may reduce the level of
aggregate demand in the economy using open market operations. (05)

Q.7 (a) What is inflation? Briefly state any four harmful effects of inflation on the economy. (05)

(b) Explain the concept of ‘Natural rate of unemployment’ with the help of a diagram. (05)

Q.8 (a) What is meant by ‘Economic growth’? Briefly describe the benefits of economic
growth. (08)

(b) In an open economy, the marginal propensity to consume is 0.7 and the proportion
of additional income that is spent on imported goods is 20%. National income is
Rs. 100,000,000 and the current account is in balance. What would be the new
equilibrium of national income if the government increases its expenditure by
Rs. 50,000,000? (02)

Q.9 (a) Define ‘Money market’. Briefly describe any two marketable instruments traded on
money markets. (04)

(b) Identify and describe the functions of money. (04)

(c) Compute the velocity of circulation of money in an economy using the Quantity
Theory of Money, where the average price level is 1.8, real GDP is Rs. 28,726
billion and the nominal money supply is Rs. 12,926 billion. (02)

Q.10 (a) ‘Income method measures the national income after it has been distributed and
appears as income earned or received by individuals of the country’.

List the items which are excluded from the computation of national income under
the income method. (03)

(b) Explain with the help of a diagram, the equilibrium of aggregate supply (AS) and
aggregate demand (AD) under neo-classical approach. (07)
 Introduction to Economics and Finance Page 4 of 4

Q.11 (a) Briefly describe the main functions of ‘Public finance’ as stated by Musgrave. (06)

(b) Explain any two limitations of fiscal policy. (04)

Q.12 What do you understand by ‘J curve’? Explain with the help of a ‘J curve’, how in the
short-run the current account deficit may get worse before improving. (10)

(THE END)