Certificate in Accounting and Finance Stage Examination

The Institute of 5 September 2019

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) Briefly explain why the production possibility curve is downward sloping and concave
to the origin. (03)

(b) What do you understand by the term ‘Market economy’? What are its main features?
Also state any four drawbacks of market economy. (05)

Q.2 (a) Describe the concept of long-run equilibrium of a firm under monopolistic
competition with the help of a diagram. (08)

(b) With the drop in price of smartphones from Rs. 80,000 to Rs. 70,000, the quantity
demanded by the consumers, in a particular market, increases from 20,000 phones to
30,000 phones per month. Calculate the elasticity of demand under percentage
method and identify the type of elasticity. (02)

Q.3 (a) What do you understand by ‘Reserve price’? Describe any six factors which may
influence the reserve price of a seller. (07)

(b) Show a graphical interaction of marginal cost, average variable cost, average fixed
cost and average total cost curves. (Explanation of the graph is not required) (02)

Q.4 Briefly describe the following diagram and the concept it depicts: (08)
 Introduction to Economics and Finance Page 2 of 4

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 one of the following statements is NOT true for a planned economic system?
(a) Productive resources are state owned (b) Auto-adjusted price mechanism
(c) Full employment is possible (d) Less duplication of resources

(ii) A movie theatre may be regarded as an example of:

(a) public goods (b) private goods
(c) demerit goods (d) club goods

(iii) Which one of the following assumptions does NOT confer to the law of demand?

(a) There is no change in the income of consumers

(b) There is no substitute for the good
(c) The prices of related goods are unstable
(d) The size of population is stable

(iv) Which one of the following assumptions is related to the law of variable proportion?
(a) Continuous improvement in techniques of production
(b) All factors of production are proportionately varied
(c) There is no scarcity of the factors of production
(d) The factors are able to be combined to make a product

(v) Which one of the following is NOT a feature of perfect competition?

(a) Firms are price makers
(b) Perfect factor mobility
(c) Free entry and exit of firms in the market
(d) Products are homogenous

(vi) Which one of the following defines the economic growth rate?
(a) Increase in real investment (b) Increase in GDP
(c) Increase in real GDP (d) Increase in GDP deflator

(vii) Which one of the following statements is NOT true?

(a) High interest rates makes it less expensive to borrow

(b) Low interest rates discourage saving
(c) High interest rates would result in lower disposable income
(d) Low interest rates encourage consumption

(viii) A expansionary fiscal policy combined with a restrictive monetary policy would result
in:
(a) budget deficit to decrease (b) taxes to increase
(c) government expenditure to decrease (d) interest rates to increase

(ix) Which one of the following is NOT an outcome of the central bank’s expansionary
monetary policy?
(a) Increase of money supply in the economy
(b) Decrease in market rate of interest
(c) Increase in exchange rate
(d) Increase in aggregate demand
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(x) Which one of the following is NOT part of the country’s current account?
(a) Export of goods (b) Foreign direct investment flows
(c) Unilateral transfers to other countries (d) Imports of services

(xi) Which one of the following is NOT a cause of cost push inflation?
(a) Increase in the price of raw material
(b) Fall in interest rates
(c) Increase in firm’s profit margins
(d) Exchange rate depreciation

(xii) What would be the velocity of circulation of money in an economy in which the
average price level is 1.8, real GDP is Rs. 260 billion and the nominal money supply is
Rs. 117 billion?
(a) 4.0 (b) 3.2 (c) 4.8 (d) 0.8

(xiii) The use of exchange control to overcome balance of payment deficit results in:
(a) decrease in imports (b) decrease in exports
(c) decrease in price level (d) decrease in national income

(xiv) Under which of the following circumstances, the value of the multiplier would be
higher?
(a) When both marginal propensity to consume and marginal propensity to import
are low
(b) When marginal propensity to consume is low and marginal propensity to import
is high
(c) When marginal propensity to consume is high and marginal propensity to
import is low
(d) When both marginal propensity to consume and marginal propensity to import
are high

(xv) Which one of the following will NOT be the result of devaluation of domestic
currency on the foreign exchange market?
(a) Export becomes less expensive in terms of foreign currency
(b) Imports become more expensive in terms of domestic currency
(c) Export volumes will increase
(d) Import volumes will increase

Section B

Q.6 (a) From the following data, compute GDP, GNP and NNP at market price:

Rs. in billion
Domestic consumption 290
Taxes on expenditures 76
Government expenditures 57
Capital formation 65
Exports 89
Imports 83
Subsidy 18
Net property income from abroad 11
Capital depreciation 25 (04)

(b) Describe three different types of Injections and Withdrawals from the Circular Flow
of Income. (06)
 Introduction to Economics and Finance Page 4 of 4

Q.7 (a) What is ‘Demand-pull inflation’? Briefly describe how fiscal and monetary stimulus
may cause demand-pull inflation. (05)

(b) Briefly describe any four determinants of savings. (05)

Q.8 (a) What do you understand by ‘Liquidity preference theory’? Describe the influence of
the motives identified by Keynes, on the liquidity preference of an individual. (07)

(b) Describe any three short-run factors which may affect marginal efficiency of capital
and investment. (03)

Q.9 (a) Describe any three benefits of economic growth. (03)

(b) The importance of public finance can be easily understood by its functions. Describe
any two main functions of public finance as emphasized by Musgraves. (04)

(c) Assume in a closed economy with no government intervention, Rs. 1 billion increase
in investment results in Rs. 5 billion increase in consumption. Compute the value of
marginal propensity to consume. (03)

Q.10 (a) Briefly describe any three tools which are available to the Central bank for controlling
money supply in an economy. (06)

(b) There are different types of financial instruments that can be classified as money. State
four types of money categorised by its liquidity. (04)

Q.11 (a) Describe the concept of ‘Deflationary gap’ with the help of a diagram. (04)

(b) Briefly describe the term ‘Derivatives’ and state the main objective of exchange traded
derivatives. (03)

(c) State three advantages and three disadvantages of direct taxation. (03)

Q.12 (a) What is ‘Balance of payment’? Describe any five causes due to which a country may
have a deficit in balance of payments. (07)

(b) Briefly describe the monetary measures which may be taken by the government to
correct balance of payments deficit. (03)

(THE END)