Certificate in Accounting and Finance Stage Examination

The Institute of 24 September 2020

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

Introduction to Economics and Finance

Instructions to examinees:
(i) All the Questions from Section A are compulsory.
(ii) Attempt any FIVE out of SEVEN Questions from Section B.
(iii) Answer in black pen only.
(iv) Multiple Choice Questions must be answered in answer script only.

Section A

Q.1 (a) What is planned economy? State any three drawbacks of planned economy. (04)

(b) Define ‘Capital formation’ and explain the stages involved in the process of capital
formation. (04)

Q.2 (a) What is ‘Diminishing marginal utility’? Explain the law of diminishing marginal
utility with the help of a schedule and the diagram. (07)

(b) List any four factors which may determine price elasticity of demand. (02)

Q.3 (a) What do you understand by the term ‘Economies of scale’? Describe any four ways
by which a firm may achieve internal economies of scale. (06)

(b) State how a firm may increase its overall profitability by exercising price
discrimination. (06)

Q.4 Briefly describe the following diagram and the concept it depicts. (06)
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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 features is more related to free market economy as compared
to planned economy?
(a) An incentive to innovate
(b) An even distribution of wealth
(c) Full employment of labour
(d) Production of goods for the benefit of the society as a whole

(ii) Micro economics does NOT cover:

(a) consumer behaviour (b) factor pricing
(c) general price level (d) product pricing

(iii) Which of the following statements is NOT correct?

(a) The different combinations of goods can be shown in the form of a budget line
(b) To work out where to draw the budget line it is necessary to divide the price of
each good with consumer’s total income
(c) Any point to the left of the budget line is affordable
(d) The slope of budget line is representative of the relative price between the two
goods

(iv) Under perfect competition, the supply curve of a firm is equal to:
(a) MR curve (b) AR curve
(c) MC curve (d) AC curve

(v) Which of the following is NOT considered to be an assumption of the law of

diminishing marginal utility?
(a) Rational consumer (b) Continuous consumption
(c) No change in quality of goods (d) Ordinal measurement

(vi) In a business cycle, the stage which eventually leads the economy to the state of
inflation is:
(a) Boom (b) Down turn
(c) Recession (d) Trough

(vii) Which of the following is NOT a part of Adam Smith’s canon of taxation?

(a) Equality (b) Economy

(c) Objectivity (d) Convenience

(viii) A reduction in the demand for coal miners is likely to lead the economy to the
following type of unemployment:
(a) frictional (b) structural
(c) voluntary (d) cyclical

(ix) Which of the following would increase the value of multiplier?

(a) The propensity to spend extra income on domestic goods and services is high
(b) The marginal rate of tax on extra income is low
(c) The propensity to spend extra income rather than save is high and consumer
confidence is high
(d) All of the above
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(x) The crowding out effect is caused by a:

(a) rise in interest rates reducing private sector investment
(b) rise in interest rates reducing public sector investment
(c) fall in interest rates increasing savings
(d) fall in interest rates reducing consumption

(xi) The currency rate of exchange of a country will tend to increase, if:

(a) the demand for country’s goods and services increases in the foreign markets
(b) the value of the dominant reserve/transaction currency appreciates
significantly
(c) the supply of currency of that country in foreign exchange markets increases
(d) citizens of that country increase import of foreign goods and services

(xii) Which of the following instruments are NOT traded in the capital market?

(a) Corporate bonds (b) Mutual funds

(c) Mortgages (d) Shares

(xiii) In the Keynesian theory of demand for money, the transactions demand for money
is determined by:
(a) the rate of interest
(b) the level of consumers’ income
(c) expected changes in consumer prices
(d) the amount of money in circulation

(xiv) A country’s balance of payment position exhibits:

(a) whether the country saves enough to pay for its imports
(b) whether the country produces enough economic output to pay for its growth
(c) whether the country's currency value is appreciating or depreciating
(d) all of the above

(xv) Which of the following is a financial intermediary?

(a) Commercial bank (b) Federal Government
(c) State Bank of Pakistan (d) Stock exchange

Section B

Q.6 (a) Draw a diagram of the circular flow of national income in a two sector economy
clearly identifying the real flow and money flow. (04)

(b) List down any three factors which cause a shift in:
(i) aggregate demand curve. (03)
(ii) short-run aggregate supply curve. (03)

Q.7 (a) What do you understand by ‘Cost-push inflation’? Briefly describe any four causes of
cost-push inflation. (07)

(b) Describe any three limitations of multiplier. (03)

Q.8 Discuss the concept of inflationary gap in an economy with the help of a diagram. (10)
 Introduction to Economics and Finance Page 4 of 4

Q.9 (a) Briefly describe ‘Progressive tax’, ‘Regressive tax’ and ‘Proportional tax’. (03)

(b) State any four characteristics which are necessary for a good tax policy. (02)

(c) Identify and describe five main objectives of fiscal policy. (05)

Q.10 (a) Briefly describe any five roles which State Bank of Pakistan performs as banker to
the Government. (07)

(b) What do you understand by the ‘Quantity theory of money’? (03)

Q.11 (a) What is ‘Keynesian liquidity trap’? Identify any two policies which may help in
overcoming the liquidity trap. (03)

(b) What is meant by the term ‘Money market’? Briefly describe ‘Commercial paper’
and ‘Certificate of deposits’ which are traded on money market. (04)

(c) Describe the functions of money. (03)

Q.12 (a) State how a government may stop exchange rate from falling? Support your answer
with the help of a diagram. (06)

(b) Briefly discuss the constituents of capital/financial account. (04)

(THE END)