ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44  October 2022 CPA Licensure Examination

MS-44I
MANAGEMENT SERVICES C. LEE  E. ARAÑAS  K. MANUEL

ECONOMICS
 The fundamental economic problem is SCARCITY; the fact that human wants and needs cannot be fully
satisfied with available limited resources reflects the definition of scarcity.
 Because available resources are never enough to satisfy human wants and needs, CHOICES are necessary.
 ECONOMICS is a social science that studies the choices individuals, business firms, and governments make
as they cope with scarcity; simply put, economics is the study of allocation of scarce economic resources.
 From a business perspective, economics is concerned with studying the production, distribution and
consumption of goods and services to maximize desired outcomes.
DIVISIONS OF ECONOMICS
The traditional domain of economics is divided between microeconomics (economics of individual actions) and
macroeconomics (economics of the entire nation). Due to the steadily increasing economic transactions among
countries, international economics has become a relevant area of study in economics.
A) MICROECONOMICS is the study of choices that individuals, households and business firms make, the way
these choices interact, and the influences that governments exert on these choices. Major areas of
microeconomics include (among others): demand and supply, prices and outputs, market structures
B) MACROECONOMICS is the study of the effects on the national economy and the global economy of the
choices that individuals, households, businesses, and governments make. Major areas of
macroeconomics include (among others): national income, aggregate supply and aggregate demand,
employment and inflation, governmental policies and regulation
C) INTERNATIONAL ECONOMICS is the study of economic activities that occur between nations and outcomes
that result from these activities. Major areas of international economics include (among others): balance
of payments, currency exchange rates, globalization
CAPITALISM: FREE-MARKET ECONOMY
 The nature of economic activity, at the microeconomic, macroeconomic and international levels, depends on
the political environment or ECONOMIC SYSTEM within which economic activities take place.
 CAPITALISM is a “free market” economic system where individuals & business firms determine production,
distribution and consumption of goods and services in an open or free market.
✓ Resources are privately owned rather than state-owned (as opposed to socialism).
✓ Economic decisions are made primarily by individuals and business firms rather than by the state.
✓ The price of goods and services is based on supply and demand in the general market (i.e., MARKET
ECONOMY) rather than through central planning (i.e., COMMAND ECONOMY).
 Advantages and disadvantages of Capitalism (source: Wikipedia)
“Critics of capitalism argue that it concentrates power in the hands of a minority capitalist class that exists through the exploitation
of the majority working class and their labor, prioritizes profit over social good, natural resources and the environment, is an engine of
inequality, corruption and economic instabilities, and that many are not able to access its purported benefits and freedoms, such as freely
investing.
Supporters argue that capitalism provides better products and innovation through competition, promotes pluralism (diversity) and
decentralization of power, disperses wealth to people who are able to invest in useful enterprises based on market demands, allows for a
flexible incentive system where efficiency and sustainability are priorities to protect capital, creates strong economic growth and yields
productivity and prosperity that greatly benefit society.”
 FACTORS of PRODUCTION are the scarce economic resources needed to produce goods and services. The
four (4) most common factors of production include:
1. LAND – refers to NATURAL resources such as land, water, mineral, timber
2. LABOR – refers to HUMAN resources such human works, human skills, human efforts
3. CAPITAL – refers to FINANCIAL resources (e.g., savings) and MAN-MADE resources (e.g., equipment)
4. ENTREPRENEURSHIP – refers to the human resource that organizes land, labor and capital
 To earn INCOME, individuals sell the services of the factors of production they own:
✓ Land earns rentals and royalties ✓ Capital earns interests, dividends and rentals
✓ Labor earns wages and salaries ✓ Entrepreneurship earns profit
DEMAND
 DEMAND is the relationship between the price of a good and the quantity demanded. It is also defined as the
schedule of quantities of a good that people are willing to buy at different prices.
 QUANTITY DEMANDED of a good is the amount that consumers plan to buy at a particular price.
 LAW OF DEMAND: “ceteris paribus, the higher the price of a good, the smaller the quantity demanded.”
 Higher prices decrease the quantity demanded for two reasons:
A) SUBSTITUTION effect – a higher relative price raises opportunity cost of buying a good; as a result, people
buy less of the good as there could be other available goods with a lower price.
B) INCOME effect – a higher relative price reduces the amount of goods people can afford to buy.
 DEMAND CURVE shows the inverse relationship between the quantity demanded and price, ceteris paribus.
Demand curves are negatively sloped.
DEMAND CURVE
Price
 A change in the price of product causes a
(Pesos) D1 D2
movement along the demand curve, also called a
5
CHANGE IN QUANTITY DEMANDED.
4
3  A shift in the demand curve is called a CHANGE
2 IN DEMAND. An increase in demand drives the
1 demand curve to shift rightwards (D1 to D2).
1 2 3 4 5 Quantity (Units)
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
ECONOMICS MS-44I
FACTORS affecting DEMAND EFFECT on DEMAND
Price of SUBSTITUTE goods DIRECT. Example: if the price of pork increases, the demand for beef may increase.
Price of COMPLEMENTARY INVERSE. Example: if the price of gasoline increases, the demand for cars tends
goods to decrease.
Expected future prices DIRECT. If the price of the good is expected to increase in the future, there will
be an increase in demand.
Consumer wealth/income DIRECT for NORMAL goods. As consumer income goes up, the demand for
many products (normal goods) increases.
Consumer wealth/income INVERSE for INFERIOR goods. Demand for inferior goods (e.g., instant noodle,
sardines) increases as consumer income decreases since consumers buy more
inferior goods when they are short of money.
Population growth DIRECT. An increase in population increases number of potential buyers.
Size of market DIRECT. As market size expands, demand for the product also increases.
Consumer tastes/preference INDETERMINATE. The effect depends on whether the shift in taste or preference
is favorable or unfavorable to the demand for the product.
 SUBSTITUTE GOODS are goods that can be used in place of another because they could perform the same
function. Examples: butter and margarine; pen and pencil.
 COMPLEMENTARY GOODS are goods that go hand in hand as one usually cannot function without the other.
Examples: whiteboard and marker; CPU and monitor.
 When an individual’s income declines, the individual buys less NORMAL goods and more INFERIOR goods.
 ELASTICITY OF DEMAND (ED) measures the sensitivity of quantity demanded to any change in price. Using
the Arc or mid-point method, the formula is:

ED = ∆% in Quantity Demanded ÷ ∆% in Price

Where: ∆% in Quantity Demanded = ∆ in Quantity Demanded ÷ Average Quantity

∆% in Price = ∆ in Price ÷ Average Price
Example: Day 1 - unit price was set at P 1.00 each, the sales reached 100 units.
Day 2 - unit price was increased to P 1.50 each, the sales decreased to 60 units.
Average Quantity = (100 + 60) ÷ 2 = 80* Average Price = (1 + 1.5) ÷ 2 = 1.25**
ED = [(100 - 60)/80*] ÷ [(1.5 - 1)/1.25*)] = 0.50 ÷ 0.40 = 1.25
✓ In the above example, the price increase of P 0.50 led to a decrease in total revenue from P 100 to P 90
(60 @ P 1.50). Since ED > 1 (ED = 1.25), demand is said to be elastic. Consider the following:
ED ELASTICITY QUANTITY DEMANDED (degree of reaction) EFFECT of PRICE INCREASE
>1 Elastic Reacts MORE proportionately to changes in Decrease in total revenue
price
=1 Unitary Reacts proportionately to changes in price No effect on total revenue
<1 Inelastic Reacts LESS proportionately to changes in price Increase in total revenue
=0 Perfectly inelastic Does not react to changes in price Increase in total revenue
✓ The demand for LUXURY goods tends to be more elastic than the demand for BASIC or STAPLE goods.
✓ The demand for badly needed goods like ‘maintenance’ medicine tends to be perfectly inelastic.
 The satisfaction derived from the acquisition or consumption of a particular good is called UTILITY. The more
goods an individual consumes, the more utility the individual receives. However, according to the LAW OF
DIMINISHING MARGINAL UTILITY, the marginal (additional) utility from consuming each additional unit
usually decreases. When various quantities of two commodities the give the same total utility are plotted on
a graph the result is an INDIFFERENCE CURVE.
 CONSUMPTION decisions depend on many factors but the main one is DISPOSABLE INCOME, which is the
amount of income consumers have after paying taxes to the government. When personal disposable income
goes up, consumers buy more.
✓ MARGINAL PROPENSITY TO CONSUME (MPC), a.k.a. marginal propensity to spend, describes how much
of each additional peso in personal disposable income that the consumer will spend.
✓ MARGINAL PROPENSITY TO SAVE (MPS) is the percentage of additional income that is saved.
✓ Since consumers can either spend or save money: MPC + MPS = 100%
Where: MPC = ∆ in Consumption ÷ ∆ in Disposable Income
MPS = ∆ in Savings ÷ ∆ in Disposable Income
SUPPLY
 SUPPLY is the relationship between the price of a good and the quantity supplied.
 QUANTITY SUPPLIED is the amount of a good that producers plan to sell at particular price.
 LAW OF SUPPLY: “ceteris paribus, the higher the price of a good, the greater is the quantity supplied.”
 SUPPLY CURVE shows the positive relationship between the quantity supplied and price, ceteris paribus.
Supply curves are positively sloped.

Price SUPPLY CURVE

(Pesos) S1 S2  A change in the price of product causes a
5 movement along the supply curve, also called a
4 CHANGE IN QUANTITY SUPPLIED.
3  A shift in the supply curve is called a CHANGE IN
2 SUPPLY. An increase in supply drives the supply
1 curve to shift rightwards (S1 to S2).
1 2 3 4 5 Quantity (Units)

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
ECONOMICS MS-44I
FACTORS affecting SUPPLY EFFECT on SUPPLY
Production costs INVERSE. As production costs go up, fewer products will be supplied at a
given price. If costs go down, more products will be produced.
Number of producers DIRECT. An increase in the number of producers will cause an increase in the
amount of goods supplied at a certain level of price.
Price of substitute goods INVERSE. If other products can be produced with greater returns, producers
will produce those goods.
Price of complementary goods DIRECT. A rise in the price of a complement in production increases supply
and shifts the supply curve rightward.
Expected future prices DIRECT. If it is expected that prices will be higher for the good in the future,
production of the good will increase.
Technology DIRECT. Technological advancement increases supply and thus shifts the
supply curve rightward.
Government subsidies DIRECT. Subsidies reduce the production cost of goods and, therefore,
increase the goods supplied at a given price.
Government tax and tariffs INVERSE. Increase in taxes would raise production costs, thereby decreasing
supply.
Special influences Government restrictions, weather conditions, and innovations or new method
may affect supply of goods. Example: unexpected storms may destroy farms,
decreasing the supply of certain crops.
EQUILIBRIUM
 EQUILIBRIUM is a state wherein the demand and supply are in balance.
EQUILIBRIUM
Price
(Pesos) D S  EQUILIBRIUM PRICE (P 6.00) is the price at which
10 the quantity demanded equal quantity supplied -
8 - the intersection of the demand curve and the
supply curve. This is also known as the market-
6 ● Equilibrium Point
clearing price.
4
2  EQUILIBRIUM QUANTITY (3 units) is the quantity
bought and sold at the equilibrium price.
1 2 3 4 5 Quantity (Units)

 Equilibrium is a MARKET-CLEARING situation where no surplus or shortage exists.

✓ MARKET SHORTAGE – actual price is less than the equilibrium price; therefore, quantity demanded
exceeds quantity supplied. Shortage can be caused by a PRICE CEILING, which is a maximum price that
a seller may charge for a good and is normally set below the equilibrium price.
✓ MARKET SURPLUS – actual price is more than the equilibrium price; therefore, quantity supplied exceeds
quantity demanded. Surplus can be caused by a PRICE FLOOR, which is a minimum price that a seller
may charge for a good and is normally set above the equilibrium price.
 GOVERNMENT INFLUENCES may change market equilibrium through various means like:
✓ TAXES – higher taxes increase product input costs causing the equilibrium price to be higher.
✓ SUBSIDIES – subsidies reduce production costs causing the equilibrium price to be lower.
✓ RATIONING – rationing is intended to curb demand causing equilibrium price to be lower.
✓ REGULATION – Government can affect price of commodity through price fiat by establishing an artificial
price ceiling or price floor.
 Another factor that causes inefficiencies in the pricing of goods in the market is the existence of
EXTERNALITIES -- damage to environment caused by production (e.g., pollution).
COSTS of PRODUCTION
 The analysis of PRODUCTION COSTS distinguishes analysis in the short run vs. analysis in the long run:
✓ In the short run, at least one input of production is fixed (e.g., plant depreciation).
✓ In the long run, no inputs are fixed -- all inputs are variable (e.g., additional plant can be built).
 While business firm can vary all inputs in the long run, they must nevertheless operate in the short run.
Hence, analysis of production costs tends to focus on the SHORT RUN where total production costs are
separated into fixed costs and variable costs:
COST FORMULA LEGEND
1 TC FC + VC (= ATC x Q) TC = Total Cost ATC = Average TC
2 VC TC – FC (= AVC x Q) FC = Fixed Cost AVC = Average VC
3 FC TC – VC (= AFC x Q) VC = Variable Cost AFC = Average FC
4 MC ∆TC ÷ ∆Q (= ∆ TVC ÷ ∆Q) MC = Marginal Cost Q = Quantity
5 ATC TC ÷ Q (= AFC + AVC) ∆TC = Change in Total Cost
6 AVC VC ÷ Q (= ATC – AFC) ∆Q = Change in Quantity
7 AFC FC ÷ Q (= ATC – AVC) ∆TVC = Change in Total Variable Cost
✓ AVC is initially constant until inefficiencies in a fixed-size facility would cause variable costs to rise.
✓ MC initially decreases but begins to increase due to inefficiencies.
✓ The cause of inefficiencies is known as the LAW OF DIMINISHING RETURNS -- an economic theory that
predicts that after some optimal level of capacity is reached, adding an additional factor of production will
actually result in smaller increases in output. Example: a factory employs workers to manufacture its products, and, at
some point, the company operates at an optimal level. With all other production factors constant, adding additional workers beyond
this optimal level will result in less efficient operations.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
ECONOMICS MS-44I
 LONG-RUN production costs are all variable costs. As the firm expands by increasing plant size, ATC tends
to fall at first because of the economies of scale, but as this expansion continues, ATC begins to rise because
of the diseconomies of scale:
✓ ECONOMIES OF SCALE (a decline in ATC) arise because of labor and management specialization, efficient
capital, and factors such as spreading advertising cost over an increasing level of output.
Example: If a firm increases labor hours by 10%, output increases by 50%. Hence, ATC decreases.
✓ DISECONOMIES OF SCALE arise primarily from the problems of inefficiently managing and coordinating
the firm’s operations as it becomes a large-scale producer, especially in the long-run.
Example: If a firm increases input by 60%, output increases by 3%. Hence, ATC increases.
✓ CONSTANT RETURNS TO SCALE refers to the range of output where long-run ATC does not change.
Example: A firm may double its production by doubling its production facility; so when production
increases, ATC remains constant.
PROFIT & MARKET STRUCTURES
 In the study of market structures, two concepts of profit are important:
✓ To an accountant: ACCOUNTING PROFIT = Total Revenue – Explicit Costs
✓ To an economist: ECONOMIC PROFIT = Total Revenue – Explicit Costs – Implicit Costs
✓ When economic profit is zero, the firm is said to have a NORMAL PROFIT (i.e., economic breakeven).
 EXPLICIT COSTS are expenses incurred or to be paid while IMPLICIT COSTS are opportunity costs associated
with a firm’s use of resources that it owns and do not involve actual payments.
 In economics, profit is maximized when marginal revenues = marginal costs. This is because any other level
of outputs leaves the possibility of increasing profits by raising revenue or decreasing costs.
 MARKET is any institution, mechanism, or situation which brings together the buyers and sellers. It is a
physical (e.g., grocery) or virtual (e.g., internet) place where sellers and buyers transact business.
 The four basic MARKET STRUCTURES are:
Market No. of Firms Products Price Control Ease of Entry Common Examples
PURE Identical or Very Easy
Very Many None Agricultural Products
COMPETITION Homogenous (No Barrier)
MONOPOLISTIC Similar but Fairly Easy
Many Limited Fast Food, Cosmetics
COMPETITION Differentiated (Low Barrier)
Standardized with Limited Appliances, Oil
OLIGOPOLY Few Hard
Differentiation or Wide Cars, Computers
PURE Government Franchise,
One Unique Wide Blocked
MONOPOLY Utility Companies
✓ COMPETITION denotes rivalry between among producers, each of which seeks to deliver a better deal to
buyers when quality, price and product information are all considered.
✓ In pure competition: the firm’s demand curve is PERFECTLY ELASTIC (horizontal). The firm can sell many
goods it can produce at the equilibrium price (i.e., very low sales at a higher price).
✓ In monopolistic competition: consumers go for a certain product based on DIFFERENTIATION.
✓ In pure monopoly: the firm has no or very little market incentive to innovate and control costs; hence,
pure monopolies are usually subject to GOVERNMENT REGULATION.
✓ Oligopoly is a competition among few; if left unregulated, oligopolists tend to establish CARTEL that
engage in price fixing through collusion.
 MONOPSONY is a market where only one buyer exists for all sellers.
 BLACK MARKET is an illegal market wherein people conduct transactions at prices (usually high) forbidden by
the government.
GROSS DOMESTIC PRODUCT
 GROSS DOMESTIC PRODUCT (GDP) is the market value of all the final goods and services produced by a
country within a given time period. Intermediate goods are not directly included in measuring GDP.
 FINAL GOOD is an item that is bought by its final user while an INTERMEDIATE GOOD is an item produced by
one firm, bought by another and used as a component of the final good.
 Two principal methods of calculating GDP:
EXPENDITURE (EXPENSE) approach INCOME approach

GDP = C + I + G + (X – M) GDP = Wages + Self-employment Income +

Where: C – Household Consumptions
I – Business Investments
Rent + Interest + Profits + Indirect Business
G – Government Spending Taxes (e.g., VAT) + Depreciation & Amortization
X – Exports M – Imports + Income of Foreigners
(X – M) – “Net Exports”

 GDP is measured either in current prices (nominal GDP) or in prices of a given year (real GDP):
A) NOMINAL GDP – the value of final goods and services produced by a domestic economy for a year at
current market prices.
B) REAL GDP – the value of final goods and services produced in a given year when valued at constant prices,
which is a price level adjustment that eliminates the effects of inflation on the measure.
 ECONOMIC GROWTH happens when there is an increase in real GDP in an economy.
 RECESSION happens when there is a decline in real GDP growth (i.e., negative GDP growth).
 GROSS NATIONAL PRODUCT (GNP) is the market value of all the final goods and services produced by citizens
of a country within a given time period – regardless of location (citizen’s country or abroad).

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
ECONOMICS MS-44I
BUSINESS CYCLES
 BUSINESS CYCLES refer to cumulative fluctuations in real GDP over a period of time.
 There are stages in one complete business cycle as illustrated by the graph:

Peak
Real GDP Peak

Trough
Recession Expansion

Time
One Business Cycle

✓ The highest point of the business cycle is called a PEAK while the lowest point is called a TROUGH.
✓ When an economy moves from peak to trough, real GDP is falling, and the economy is in RECESSION.
✓ When an economy moves from trough to peak, real GDP is rising, and the economy is in EXPANSION.
✓ Recession is a.k.a. CONTRACTION while expansion is a.k.a. BOOM or RECOVERY.
 DEPRESSION – is the prolonged form of recession; it is a major downsizing in the economy with conditions
similar to that of a recession, but more severe and long-lasting.
 Economists use ECONOMIC INDICATORS to forecast turns in the business cycle. Indicators may lead, lag or
coincide with economic activity. Common examples include:
✓ Leading indicators – building permits, new orders for consumer goods, stock prices
✓ Coincident indicators – level of retail sales, current unemployment rate, level of industrial production
✓ Lagging indicators – duration of unemployment, loans outstanding, ratio of inventories to sales
INFLATION and UNEMPLOYMENT
 INFLATION is a sustained increase in an economy’s average price level.
 The primary causes of inflation are:
✓ DEMAND-PULL inflation – happens when too much demand for certain goods and services are not met by
a corresponding increase in the supply (i.e., excess demand propels prices to go up)
✓ COST-PUSH inflation – happens when there is an increase in production costs either due to higher wages
(wage-push theory) or higher cost of raw materials and other inputs (supply-shock theory).
 The most common indices used to measure inflation are:
1) CONSUMER PRICE INDEX (CPI) measures price changes for goods & services purchased by consumers.
(CPI this year) – (CPI last year)
Inflation Rate = X 100
CPI last year
2) WHOLESALE PRICE INDEX (WPI) measures the price changes for goods at the wholesale level, specifically
finished goods, intermediate goods, and crude materials.
3) GDP DEFLATOR measures the changes in price for goods and services included in GDP.
Nominal GDP
GDP Deflator = X 100
Real GDP
 DEFLATION is the decrease in the average price level while DISINFLATION is the decline in inflation rate.
 When prices are falling, consumers delay purchase and businesses delay investments, both in anticipation of
lower future prices. These delays create further decrease in demand and prices. This phenomenon that
adversely affects the economy is called DEFLATIONARY SPIRAL.
 HYPERINFLATION is a very high rate of inflation while STAGFLATION occurs when an economy’s output (real
GDP) decreases and its price level rises -- production stagnates (as during a recession) while prices go up.
 There is an inverse relationship between inflation and unemployment rate:
Number of people unemployed
Unemployment Rate = X 100
Labor Force
✓ LABOR FORCE equals the sum of employed plus unemployed workers.
✓ When unemployment rate is low (high), inflation tends to increase (decrease).
✓ PHILLIPS CURVE shows a relationship between the inflation rate and the unemployment rate.
 The three (3) types of unemployment are:
✓ CYCLICAL unemployment – reflects changes in the business cycle; cyclical unemployment increases
during RECESSION and decreases during EXPANSION.
✓ FRICTIONAL unemployment – associated with the normal workings of an economy; new college graduates
or newly resigned employees who are looking for a job will fall into this category.
✓ STRUCTURAL unemployment – occurs when there is a ‘mismatch’ between the kind (location) of jobs
available and the skills (location) of those who are unemployed.

FISCAL POLICY vis-à-vis MONETARY POLICY

 FISCAL and MONETARY policies are created to effectively counter recessionary or inflationary tendencies.
 FISCAL POLICY refers to government actions, such as taxes, subsidies, and government spending, designed
to achieve economic goals. Examples are:
✓ Reduction of taxes increases personal disposable income, which will stimulate economic activity.
✓ Increase in government spending may also stimulate the economy through subsidies and other reliefs.
 An increase in deficit, either due to an increase in government spending or to a decrease in taxes, is called a
FISCAL EXPANSION while an increase in taxes to reduce a deficit is called FISCAL CONTRACTION.

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ECONOMICS MS-44I
 Taxes are levied by a government based on two general principles: (1) ability to pay (progressive income
tax), and (2) derived benefit (e.g., gasoline taxes used to pay for roads). The major types of taxes are:
✓ INCOME TAX - levied on taxable income.
✓ PROPERTY TAX - levied based on wealth (i.e., based on the value of property).
✓ SALES TAX - levied based on the amount of income spent. Sales taxes are viewed as regressive because
low-income individuals pay the same percentage rate as high-income individuals.
✓ VALUE-ADDED TAX (VAT) - levied on the increase in value in each product as it proceeds through
production and distribution process. Ultimately, the tax is paid by the final consumer. The VAT is thought
to encourage savings because it taxes consumption instead of earnings.
 If a government collects more in taxes than it spends, it has a BUDGET SURPLUS; if a government spends
more than it collects in taxes, it has a BUDGET DEFICIT.
 Changing interest rates and the money supply in the economy is called MONETARY POLICY; these actions are
usually under the control of the Central Bank like the BANGKO SENTRAL NG PILIPINAS (BSP):
✓ When economy is in recession, BSP might lower interest (discount) rates, buy back government securities
in open-market operations or decrease reserve requirements to inject money in the economy.
✓ To prevent inflation from increasing, BSP might increase interest (discount) rates, sell government
securities or increase reserve requirements to diminish the money supply in the economy.
 MONEY serves multiple functions in the economy, including:
1) MEDIUM OF EXCHANGE (without money, barter is necessary)
2) UNIT OF ACCOUNT (prices are measured in money)
3) STORE OF VALUE (money can be stored and exchanged at a later date – example: bank deposit)
 Money is conventionally viewed as paper currency and coins. In economics, money (M) is classified as:
✓ M1 – the most liquid (e.g., currency, demand deposits, current accounts and traveler’s checks)
✓ M2 – M1 money plus savings account, certificates of deposits, money market mutual funds, money market
deposit accounts, small-denomination time deposits.
✓ M3 – M2 money plus other less liquid form of money (e.g., large denomination time deposits)
 ECONOMIC THEORIES on the role of fiscal and monetary policies in an economy:
✓ CLASSICAL ECONOMIC THEORY – this theory holds that market equilibrium will eventually result in full
employment over the long run without government intervention. This theory does not support the use of
fiscal policy to stimulate the economy.
✓ KEYNESIAN THEORY – this theory holds that the economy does not necessarily move towards full
employment on its own. It focuses on the use of fiscal policy (e.g., reduction in taxes and government
spending) to stimulate the economy.
✓ MONETARIST THEORY – this theory holds that fiscal policy is too crude a tool for control of the economy.
It focuses on the use of monetary policy to control economic growth.
✓ SUPPLY-SIDE THEORY – this theory holds that bolstering an economy’s ability to supply more goods is
the most effective way to stimulate growth. A decrease in taxes (especially for businesses and individuals
with high income) increases employment, savings, and investments.
✓ NEO KEYNESIAN THEORY – this theory combines Keynesian and monetary theories. It focuses on using
a combination of fiscal and monetary policy to stimulate the economy and control inflation.

INTERNATIONAL TRADE & FOREIGN CURRENCY

 Common reasons for international trades:
✓ EXPANSION – To develop new markets for the sale of goods and service abroad
✓ OUTSOURCING – To obtain commodities not otherwise available domestically
✓ COST-CUTTING – to obtain goods and services at lower costs than available domestically
 COMPARATIVE ADVANTAGE exists when one country has the ability to produce a good or service at a lower
opportunity cost than the opportunity cost of the good or service of another country.
 OPPORTUNITY COST is the money value of benefits lost form the next best opportunity as a result of choosing
another opportunity.
 The value of exports minus the value of imports is called the BALANCE OF TRADE:
✓ TRADE SURPLUS – when a nation exports more than it imports.
✓ TRADE DEFICIT – when a nation imports more than it exports.
 Government restricts international trade to protect domestic industries from foreign competition by imposing
TARIFF (a tax on an imported product) and QUOTA (a restriction on the amount of a good that may be
imported during a period).
 FOREIGN EXCHANGE MARKET is the market in which the currency of one country is exchanged for the
currency of another. It is made up of importers, exporters, banks, foreign currency dealers/brokers.
 EXCHANGE RATE is the price of one currency unit expressed in units of another country’s currency.
✓ DIRECT exchange rate – the domestic price of one unit of foreign currency ($ 1 = P 50)
✓ INDIRECT exchange rate – the foreign price of one unit of domestic currency (P 1 = $ 0.02)
✓ SPOT exchange rate – exchange rate between currencies for immediate delivery (“on the spot”).
✓ FORWARD exchange rate – exchange rate between currencies for future exchange or delivery.
 APPRECIATION (DEPRECIATION) happens when a currency becomes stronger (weaker) since it takes less
(more) of that currency to buy another currency.
Effects of Currency Appreciation Effects of Currency Depreciation
Cheaper foreign goods Cheaper domestic goods
Downward pressure on inflation More domestic employments due to higher exports
Competition problems for domestic producers Higher cost of imported materials and other inputs

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
ECONOMICS MS-44I
MULTIPLE-CHOICE QUESTIONS – with suggested answers to selected items for ‘self-test’
(Sources: CMA/CIA/RPCPA/AICPA/Various test banks)

FUNDAMENTAL CONCEPTS in ECONOMICS

1. Scarcity in economics is based on the premise that human wants are (A) ____ while available resources are (B) ____.
a. (A) limited (B) limited c. (A) unlimited (B) limited
b. (A) limited (B) unlimited d. (A) unlimited (B) unlimited
2. The fundamental concept of Economics about resources is that resources are
C a. Equally distributed c. Scarce
b. Unequally distributed d. Unlimited
3. What will be the logical consequence(s) of a world without scarcity of resources?
D a. All prices would be zero c. Economics would no longer be a useful subject
b. Markets would be unnecessary d. All of the choices
4. What are the fundamental inputs (also called ‘factors of production’)?
D a. Land and labor c. Labor and capital
b. Land and capital d. Land, labor and capital
5. In economics, ‘labor’ as a factor of production is known as
a. Human resources c. Financial resources
b. Natural resources d. Man-made resources
6. It is an economic system in which the means of production are privately owned and operated for a profit.
A a. Capitalism c. Feudalism
b. Communism d. Socialism
7. Which of the following is not a characteristic of capitalism (i.e., market economics)?
a. Private ownership c. Government control of the economy
b. Pursuit of personal profit d. Competition and consumer sovereignty
8. Which of the following is not a characteristic of socialism (i.e., command economics)?
a. Government control of the economy c. Pursuit of collective goals
b. Collective ownership of property d. Consumer sovereignty

DEMAND & SUPPLY

9. When analyzing the impact of a variable on the economic system, the other variables
a. Must be kept constant c. Must not be taken into consideration
b. Must also be analyzed d. Are considered if the impact is material
10. The law of demand states that
a. Price and demand are directly related, ceteris paribus
b. Price and demand are inversely related, ceteris paribus
c. Price and quantity demanded are directly related, ceteris paribus
d. Price and quantity demanded are inversely related, ceteris paribus
11. A video store’s business sales increased by 20% after the movie theater raised its prices from P 200.00 to P 500.00.
Thus, relative to movie theater admissions, videos are
A a. Substitute goods c. Complementary goods
b. Superior goods d. Public goods
12. X and Y are substitute products. If the price of product X increases, what is the effect on product Y?
a. Price will increase
b. Quantity supplied will increase
c. Quantity demanded will increase
d. Price, quantity demanded, and supply will increase
13. All of the following are complementary goods, EXCEPT
A a. Margarine and butter c. VCR and video cassettes
b. Razor and razor blades d. Cameras and rolls of film
14. If a rise in the price of gasoline decreases the demand for cars,
D a. Cars are an inferior good
b. Gasoline is an inferior good
c. Gasoline and cars are substitutes in consumption
d. Gasoline and cars are complements in consumption
15. A decrease in the price of a complementary good will
a. Increase the price paid for a substitute good
b. Shift the supply curve of the joint commodity to left
c. Shift the demand curve of the joint commodity to the left
d. Shift the demand curve of the joint commodity to the right
16. Which of the following would cause the demand curve for a commodity to shift to the LEFT?
a. A rise in the population
b. A rise in average household income
c. A rise in the price of a substitute product
d. A rise in the price of a complementary commodity
17. If a group of consumers decide to boycott a particular product, what is the expected result?
A a. A decrease in the demand for the product
b. An increase in the product price to make up lost revenue
c. An increase in product supply because of increases availability
d. The demand for the product would become completely inelastic

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ECONOMICS MS-44I
18. A decline in the price of a good causes producers to decrease the quantity of goods supplied. This result illustrates
A a. The law of supply c. A change in supply
b. The law of demand d. The nature of an inferior good
19. A supply curve illustrates the relationship between
A a. Price and quantity supplied c. Price and quantity demanded
b. Price and consumer tastes d. Supply and demand
20. According to the law of supply,
a. Producers are willing to supply larger amounts of a good as its price increases
b. A direct relationship exists between the price of a good and the amount buyers choose to buy
c. An inverse relationship exists between the price of a good and the amount buyers wish to buy
d. An inverse relationship exists between the price of a good and the amount producers supply
21. Which of the following will cause a shift in the supply curve of a product?
a. Changes in number of buyers in the market
b. Changes in consumer tastes or preferences
c. Changes in price of the product
d. Changes in production taxes
22. Which of the following is NOT likely to affect the supply of a particular good?
a. Changes in technology c. Changes in production costs
b. Changes in government subsidies d. Changes in consumer income
EQUILIBRIUM
23. The equilibrium market price of a good is the
a. Price that maximizes profit for sellers
b. Price where shortages exceed surpluses
c. Price that buyers are willing and able to pay
d. Price where the quantity demanded equals the quantity supplied
24. An improvement in technology that leads to improved worker productivity would MOST likely result in
a. A shift to the right in the supply curve and a lowering of the price of the output
b. A shift to the left in the supply curve and a lowering of the price of the output
c. An increase in the price of the output if demand is unchanged
d. Wage increase
25. In any competitive market, an equal increase in both demand and supply can be expected to always
a. Decrease both price and market-clearing quantity
b. Increase both price and market-clearing quantity
c. Increase market-clearing quantity
d. Increase price
26. If there is a decrease in both the supply and demand for a good, which of the following will definitely occur?
D a. The price of the good will increase c. The equilibrium quantity will increase
b. The price of the good will decrease d. The equilibrium quantity will decrease
27. Price ceilings
B a. Result in persistent surpluses
b. Create prices below equilibrium prices
c. Create prices greater than equilibrium prices
d. Are illustrated by government price support programs in agriculture
28. If the government regulates a product in a competitive market by setting a maximum price below the equilibrium price,
what is the long-run effect?
a. A surplus c. A decrease in demand
b. A shortage d. No effect on the market
29. Which of the following market features is likely to cause a surplus of a particular product?
B a. A monopoly c. A price ceiling
b. A price floor d. A perfect market
30. If market price is HIGHER than equilibrium price, then
a. A surplus exists, followed by an increase in price until the surplus is eliminated
b. A surplus exists, followed by a decrease in price until the surplus is eliminated
c. A shortage exists, followed by an increase in price until the shortage is eliminated
d. A shortage exists, followed by a decrease in price until the shortage is eliminated
ELASTICITY
31. The price elasticity of demand measures the responsiveness of the
a. Quantity demanded to a change in the price of the good
b. Quantity supplied to a change in the price of the good
c. Price to a change in the quantity demanded of the good
d. Price to a change in the quantity supplied of the good
32. What is the formula for the price elasticity of demand?
B a. ∆% Quantity Demanded x ∆% Price c. ∆% Price x ∆% Quantity Demanded
b. ∆% Quantity Demanded ÷ ∆% Price d. ∆% Price ÷ ∆% Quantity Demanded
33. Which elasticity coefficient (ED) shall be interpreted as UNIT-ELASTIC?
a. ED > 1 c. ED = 1
b. ED < 1 d. ED = 0
34. If the elasticity of demand coefficient for a particular product is 3.00, the good is likely
a. A luxury good c. An inferior good
b. A shortage d. A necessity

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ECONOMICS MS-44I
35. Which of the following has the highest price elasticity coefficient?
D a. Rice c. Bread
b. Infant milk d. Ski boats
36. Demand for a product tends to be price INELASTIC if
D a. The product is considered a luxury item
b. The population in the market areas is large
c. Few good complements for the product are available
d. People spend a large share of their income on the product
37. In the pharmaceutical industry where a diabetic must have insulin no matter the cost and where there is no other
substitute, the diabetic’s demand curve is best described as
a. Perfectly elastic c. Elastic
b. Perfectly inelastic d. Inelastic
38. In which of the following situations would there be ELASTIC demand?
a. A 5% price increase results in a 4% increase in the quantity demanded
b. A 5% price increase results in a 4% decrease in the quantity demanded
c. A 4% price increase results in a 5% increase in the quantity demanded
d. A 4% price increase results in a 5% decrease in the quantity demanded
Elasticity = ∆% Quantity Demanded ÷ ∆% Price
Choices A,B → Elasticity = 4% ÷ 5% = 0.80 (inelastic) Choices C,D → Elasticity = 5% ÷ 4% = 1.20 (elastic)
39. If the demand for a product is INELASTIC, then increasing the price of the product will
a. Increase total revenue c. Increase competition
b. Decrease total revenue d. Have no effect on total revenue
40. If the demand for a product is ELASTIC, what is the effect of a decrease in the price of the product?
a. No change in total revenue
b. An increase in total revenue
c. A decrease in total revenue
d. A decrease in total revenue and the demand curve shifts to the left
41. As a business owner, you have determined that the demand for your product is INELASTIC. Based upon this assessment,
you understand that
B a. Increasing the price of the product will increase competition
b. Increasing the price of the product will increase total revenue
c. Decreasing the price of the product will increase total revenue
d. Increasing the price of the product will have no effect on total revenue
42. As the price for a product changes, the quantity of the product demanded changes based on the following schedule:
Total quantity demanded Price per unit
100 P 50
150 P 45
200 P 40
Using arc method, the price elasticity of demand for this product when the price decreases from P 50 to P 45 is:
D a. 0.20 c. 0.10
b. 10.00 d. 3.80
∆% Quantity Demanded: (150 – 100) ÷ [(150 + 100)/2] = 40% ∆% Price: (50 – 45) ÷ [(50 + 45)/2] = 10.525%
43. In economics, personal income minus personal taxes equals
D a. Net income c. Take home pay
b. Income after tax d. Disposable income
44. The marginal propensity to consume is calculated by
D a. Dividing consumption by disposable income
b. Dividing disposable income by consumption
c. Dividing the change in disposable income by the change in consumption
d. Dividing the change in consumption by the change in disposable income
45. An individual receives an income of P 3,000 per month and spends P 2,500. An increase in income of P 500 per month
occurs, an individual spends P 2,800. What is the marginal propensity to save (MPS)?
B a. 20% c. 60%
b. 40% d. 80%

COSTS of PRODUCTION
46. Marginal revenue is
D a. Greater than price in pure competition
b. Equal to piece in monopolistic competition
c. The change in total revenue associated with increasing prices
d. The change in total revenue associated with producing and selling one more unit
47. Marginal cost is
B a. The income foregone when the next best alternative is chosen
b. The additional cost of producing one additional item
c. The difference between relevant and sunk costs
d. A sunk cost
48. If the marginal profit is positive, as output increases
A a. Total profit must increase c. Average profit must increase
b. Total profit must decrease d. Average and total profit must increase
49. If profit is to rise as output expands, then marginal profit must be
C a. Falling c. Positive
b. Constant d. Rising

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50. In microeconomics, the distinguishing characteristic of the supply side in the long run is that
a. Firms are not allowed to enter or exit the industry
b. Only demand factors determine price and output
c. Only supply factors determine price and output
d. All inputs are variable
51. In the long run, a firm may experience increasing returns due to
a. Law of diminishing returns c. Comparative advantage
b. Opportunity costs d. Economies of scale
52. Because of the existence of economies of scale, business may find that
C a. As more labor is added to a factory, increases in output will diminish in the short run
b. Each additional unit of labor is less efficient than the previous unit
c. Increasing the size of a factory will result in lower average costs
d. Increasing the size of a factory will result in lower total costs
53. The law of diminishing marginal utility states that
A a. Marginal utility will decline as a consumer acquires additional units of a specific product
b. Total utility will decline as a consumer acquires additional units of a specific product
c. Declining utilities causes the demand curve to slope upward
d. Consumers’ wants will diminish with the passage of time
MARKET STRUCTURES
54. The measurement of the benefit lost by using resources for a given purpose is
B a. Economic efficiency c. Comparative advantage
b. Opportunity cost d. Absolute advantage
55. If an individual uses P 10,000 from savings account, which was paying 5% interest annually, to invest in saloon, then
opportunity cost of this investment would annually be:
A a. P 500 c. P 10,500
b. P 10,000 d. The dividend paid by the coffee shop
56. The definition of economic cost is:
D a. All peso costs employers pay for all inputs purchased
b. The opportunity cost of all inputs minus the peso cost of these inputs
c. The difference between all implicit and explicit costs of the business firm
d. The sum of all explicit and implicit costs (e.g., opportunity costs) of the business firm
57. Which type of economic market structure is composed of a large number of sellers, each producing an identical product,
and with no significant barriers to entry and exit?
a. Monopoly c. Perfect competition
b. Oligopoly d. Monopolistic competition
58. A market with many independent firms, low barriers to entry, and product differentiation is best classified as
a. A monopoly c. Monopolistic competition
b. A natural monopoly d. An oligopoly
59. Economic markets that are characterized by monopolistic competition have all of the following characteristics, EXCEPT
A a. One seller of the product c. Advertising
b. Economies or diseconomies of scale d. Heterogeneous products
60. Which type of economic market structure is characterized by a few large sellers of a product or service, engaging primarily
in nonprice competition?
a. Monopoly c. Perfect competition
b. Oligopoly d. Monopolistic competition
61. A natural monopoly exists because
D a. The firm holds patents
b. The firm owns naturals resources
c. The government is the only supplier
d. Economic and technical conditions permit only one efficient supplier
62. Which of these organizations would MOST LIKELY engage in public relations type advertising?
a. An airline c. A toy manufacturer
b. A hotel chain d. An electric utility company
63. Which of the following is NOT a key assumption of perfect competition?
D a. Firms sell a homogeneous product
b. Customers are indifferent about which firm they buy from
c. The level of a firm’s output is small relative to the industry’s total output
d. Each firm can price its product above the industry
64. Which of the following is NOT a characteristic of a purely competitive market?
A a. Differentiated products
b. A very large number of producing firms
c. No barriers to market entry for new firms
d. Lack of control over product price by individual firms
65. Which of the following is NOT a likely strategy for a firm in a purely competitive market?
D a. Lean manufacturing c. Supply chain management
b. Process reengineering d. Development of a brand name
66. What is the distinguishing characteristic of oligopolistic market?
D a. A single seller of a homogeneous product with no close substitutes
b. A single seller of a heterogeneous product with no close substitutes
c. Lack of entry and exit barriers in the industry
d. Mutual interdependence of firm pricing and output decisions

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
ECONOMICS MS-44I
67. Which of the following is typically an advantage of a monopoly from the viewpoint of the consumer?
A a. Costs of production may be lower because of quantities of scale
b. Prices charged to the public are lower because there is no need for advertising
c. Quantities produced are greater
d. Products produced are of higher quality
68. A profit-maximizing monopolist will produce at an output level where:
C a. Marginal revenue equals average total cost c. Marginal revenue equals marginal cost
b. Marginal cost equals average total cost d. Demand equals average total cost
69. Patents are granted in order to encourage firms to invest in the research and development of new products. Patents are
an example of
C a. Market concentration c. Entry barriers
b. Vertical integration d. Collusion

GROSS DOMESTIC PRODUCT

70. Gross domestic product (GDP) is the
C a. Total purchases by consumers, business, government, and foreign entities
b. Total amount of expenditures for consumer goods and investment for a period of time
c. Value of all final goods and services produced by the country by both domestic and foreign-owned
sources
d. Value of all goods and services produced by the country by domestic firms, excluding those produced
by foreign-owned companies.
71. Which one of the following would NOT be included in the calculation of the GDP?
a. Purchase of a new home c. A doctor’s fee
b. An automotive worker’s wages d. Purchase of common stock
72. The difference between GNP and GDP is that
a. GDP measures what is produced and earned by a nation’s people and property and GNP measures what
is produced and earned in the domestic economy
b. GDP emphasizes ownership and GNP emphasizes location
c. GNP measures what is produced and earned by a nation’s people and property and GDP measures what
is produced and earned in the domestic economy
d. GDP includes depreciation and GNP does not
73. The difference between nominal GDP and real GDP is that real GDP
a. Measures the level of output in constant prices, while nominal GDP includes price changes
b. Measures the level of output including price changes, while nominal GDP hold prices constant
c. Measures the price level and nominal GDP measures the level of output
d. Measures the level of output and nominal GDP measure the price level
74. The expenditures approach to measuring GDP is the sum of expenditures in all of the following categories, except
a. Gross private domestic investment
D b. Personal consumption expenditures
c. Government spending on goods and services
d. Transfer payments by the government
75. The income approach calculates GDP by considering all of the following, EXCEPT
D a. Interest c. Rent
b. Wages d. Investment
76. When the addition to capital goods in an economy exceeds the capital consumption allowance, the economy has
experienced
D a. Negative net investment c. Positive gross investment
b. Equilibrium investment d. Positive net investment
77. The two main variables that contribute to increases in a nation’s GDP are labor productivity and
D a. Definition of the labor force c. Quality of output
b. Inflation rate d. Total worker hours
78. If consumer confidence falls, the impact upon the economy is
A a. A downturn
b. An upturn
c. No change
d. Consumer confidence does not have an impact upon the economy
79. An upturn in economic activity is indicated by all of the following, EXCEPT
D a. Increased housing starts c. Reduction in the quantity of unemployment claims
b. Increase in personal travel d. Reduction in the amount of luxury purchases
80. In national income terms, aggregate demand is
D a. Demand for money by the community in a period of full employment
b. Total expenditure on capital goods by entrepreneurs during a period of full employment
c. Demand that is needed if a country’s economy is to operate at optimum level and the level of investment
is to be raised
d. Total expenditures on consumer goods and investment, including government and foreign expenditures,
during a given period
81. For a given level of tax collections, prices, and interest rates, a decrease in governmental purchases will result in a (n)
C a. Increase in aggregate demand c. Decrease in aggregate demand
b. Increase in aggregate supply d. Decrease in aggregate supply

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
ECONOMICS MS-44I
BUSINESS CYCLES
82. The term “business cycle,” as used by most economists, refers to
D a. Periods of price changes because of inflation or deflation
b. The evolution of small business firms into large companies
c. Change in output which occurs because of technological changes
d. Fluctuations in aggregate real income above or below its long-run growth path
83. Which is the proper order for the business cycle?
a. Peak, recession, trough, expansion c. Peak, expansion, trough, recession
b. Peak, trough, expansion, recession d. Peak, recession, expansion, trough
84. During the recessionary phase of a business cycle
a. The purchasing power of money is likely to decline rapidly
b. The natural rate of unemployment will increase dramatically
c. Potential national income will exceed actual national income
d. Actual national income will exceed potential national income
85. The trough in a business cycle is generally characterized by
a. Shortages of essential raw materials and rising costs
b. Increasing purchasing power and increasing capital investments
c. Rising costs and an unwillingness to risk new investments
d. Unused productive capacity and an unwillingness to risk new investments
86. Which is NOT a type of key economic indicators?
D a. Leading indicators c. Lagging indicators
b. Coincident indicators d. Contra indicators
87. An example of a lagging economic indicator is
a. Chronic unemployment c. Consumer expectations
b. Housing starts d. Orders for consumer and producer growth
88. Which of the following may provide a leading indicator of a future increase in GDP?
a. A reduction in the money supply
b. A decrease in the issuance of building permits
c. An increase in the timeliness of delivery by vendors
d. An increase in the average hours worked per week of production workers
89. The primary reason for allowing legal immigration into industrial nations is the immigrants’ potential
C a. Reduction of trade deficit c. Contribution to economic growth
b. Fulfillment of a trade agreement d. Fulfillment of a political agreement

INFLATION & UNEMPLOYMENT

90. A period of rising inflation
a. Increases the price level, which benefits those who are entitled to receive a specific amounts of money
b. Enhances the positive relationship between price level and purchasing power of money
c. Will not be affected by contracts that include the indexing of payments
d. Increases the price level, which is negatively related to the purchasing power of money
91. Which of the following is the best definition of the consumer price index (CPI)?
C a. It is a cost-of-living index c. It is a measure of the average change in prices
b. It is defined in absolute peso d. It compares intercity cost of living
92. Which of the following would tend to benefit from the effect of unanticipated inflation?
a. Borrowers c. Savers
b. Lenders d. Fixed-income recipients
93. Which is a positive effect of inflation?
C a. Uncertainty about future inflation may discourage investment and saving
b. Loss in stability in the real value of money and other monetary items over time
c. Mitigation of economic recessions and debt relief by reducing the real level of debt
d. Shortages of goods if consumers begin hoarding in anticipation of price increase in the future
94. Which of the following statements is true about deflation?
B a. It results in economic expansion c. It motivates consumers to borrow money
b. It results in very low interest rates d. It motivates businesses to make investments
95. Economies often experience inflation but seldom experience long period of deflation. Which of the following is true about
deflationary economy?
A a. Companies are hesitant to make investment
b. The lower prices encourage consumers to make major purchases
c. Interest rates tend to be high
d. Actual GDP is above potential GDP
96. In macroeconomics, a deflationary spiral is a situation where
a. Decreases in production lead to decreases in prices, which in turn lead to lower wages and demand
b. Decreases in prices lead to lower production, which in turn leads to lower wages and demand, which
leads to further decreases in prices
c. Decreases in prices lead to higher production, which in turn leads to higher wages and demand, which
results into increase in prices
d. Increases in prices lead to a vicious cycle, and a problem exacerbates its own cause
97. If the economy is at full employment,
D a. The entire population is employed
b. The entire labor force is employed
c. The only unemployment is frictional unemployment plus discouraged workers
d. Real GDP equals potential GDP

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98. In a competitive market for labor in which demand is stable, if workers try to increase their wage
A a. Employment must fall
b. Government must set a maximum wage below the equilibrium wage
c. Firms in the industry must become smaller
d. Product supply must decrease
99. Which of the following measures of unemployment would be of LEAST importance to management when trying to predict
the future state of the economy?
a. Structural unemployment c. Frictional unemployment
b. Cyclical unemployment d. Overall unemployment
100. The unemployment resulting from a recession is called
a. Structural unemployment c. Frictional unemployment
b. Cyclical unemployment d. Overall unemployment
101. The rate of unemployment caused by changes in the composition of unemployment opportunities over time is referred
to as the
a. Frictional unemployment rate c. Structural unemployment rate
b. Cyclical unemployment rate d. Full-employment rate
102. A country has an increasing rate of secondary school dropouts and declining standardized test scores might be expected
to experience an increase in
B a. Cyclical unemployment c. Frictional unemployment
b. Structural unemployment d. Productivity rates
103. The natural rate of unemployment, or total unavoidable unemployment, is equal to
D a. Cyclical unemployment c. Structural unemployment
b. Frictional unemployment d. Frictional plus structural unemployment

FISCAL & MONETARY POLICIES

104. The most effective fiscal program to help reduce demand-pull inflation would be to
a. Decrease the rate of growth of the money supply
b. Increase both taxes and government spending
c. Decrease taxes and increase government spending
d. Increase taxes and decrease government spending
105. If a government were to use only a fiscal policy to stimulate the economy from a recession, it would
a. Raise consumer taxes and increase government spending
b. Lower business taxes and government spending
c. Increase the money supply and increase government spending
d. Lower consumer taxes and increase government spending
106. An individual has taxable income of P 2.3 M per year and paid P 800,000. The individual’s taxable income then increased
to P 3 M per year resulting in a P 1 M income tax liability. The personal tax system in this case is:
B a. Marginal c. Progressive
b. Regressive d. Proportional
107. The government budget deficit is the
C a. Total accumulation of the government’s surpluses and deficits
b. Excess state, local, and spending over their revenues
c. Amount by which the government’s expenditures exceed its revenues in a given year
d. Amount by which liabilities exceed assets on the government’s balance sheet
108. The most liquid form of money is
A a. M1 c. M3
b. M2 d. Gold
109. Which of the following is NOT an instrument of MONETARY policy by which money supply is controlled?
a. Open-market operations c. Changing the discount rate
b. Changing the reserve ratio d. Manipulation of government spending
110. Which of the following instruments of monetary policy is the most important means by which the money supply is
controlled?
B a. Changing the reserve ratio c. Manipulation of government spending
b. Open-market operations d. Changing the discount rate
111. The BSP’s reserve ratio is
A a. The specified percentage of a commercial bank’s deposit-liabilities that must be deposited in the central
bank
b. The rate that the central bank charges for loans granted to commercial banks
c. The ratio of excess reserves to legal reserves that are deposited in the central bank
d. The specified percentage of a commercial bank’s demand deposits to total liabilities
112. The rate that central bank charges for loans to commercial banks is called
A a. Discount rate c. Inflation premium
b. Inflation rate d. Default premium
113. When interest rates increase, ceteris paribus, the demand for money
a. Increases c. Remains constant
b. Decreases d. May increase or decrease
114. Which of the following is a tool of monetary policy that a nation’s central bank could use to stabilize the economy during
an inflationary period?
a. Selling government securities c. Lowering bank discount rates
b. Lowering bank reserve requirements d. Encouraging higher tax rate

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
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115. The money supply in a nation’s economy will decrease following
C a. Open-market purchases by the nation’s central bank
b. A decrease in the discount rate
c. An increase in the reserve ratio
d. A decrease in the margin requirement
116. This theory holds that economy will eventually move towards full employment on its own and will not need fiscal or
monetary policies to stimulate the economy.
A a. Classical economic theory c. Monetarist theory
b. Keynesian theory d. Neo-Keynesian theory

INTERNATIONAL TRADE & FOREIGN CURRENCY

117. The economic reasoning dictating that each nation must specialize in the production of goods that it produces relatively
more efficiently than other nations and import those goods that are produced relatively more efficiently by other nations
is called the doctrine of:
D a. Efficient trade c. Relative competition
b. Diminishing returns d. Comparative advantage
118. In law of comparative advantage, the country which should produce a specific product is determined by
C a. Tariffs c. Opportunity costs
b. Profit margins d. Economic order quantities
119. When a country imports more than it exports, the country
B a. Has negative net imports c. Is suffering from inflation
b. Has negative net exports d. Is experiencing an income boom
120. Which of the following is a tariff?
a. Licensing requirements c. Consumption taxes on imported goods
b. Domestic content rules d. Unreasonable standards pertaining to product safety
121. Which one of the following groups would be the primary beneficiary of a tariff?
a. Domestic producers of export goods
b. Domestic producers of goods protected by the tariff
c. Domestic consumers of goods protected by the tariff
d. Foreign producers of goods protected by the tariff
122. Which of the following measures creates the most restrictive barrier to exporting to a country?
C a. Tariffs c. Embargoes
b. Quotas d. Exchange controls
123. Exchange rates are determined by
C a. Each industrial country’s government
b. The International Monetary Fund
c. Supply and demand in the foreign currency market
d. Exporters and importers of manufactured goods
124. A country’s currency foreign exchange rate is LEAST likely affected by the country’s
A a. Tax rate c. Inflation rate
b. Interest rate d. Political stability
125. The dominant reason countries devalue their currencies is to
a. Improve balance of payments
b. Discourage exports without having to impose controls
c. Curb inflation by increasing imports
d. Slow what is regarded as too rapid an accumulation of international reserves
126. If the value of US dollar in foreign currency markets changes from US $1 = 0.95 Euros to US $1 = 0.90 Euros,
a. US exports to Europe shall decrease
b. The Euro has depreciated against the dollar
c. Products imported from Europe to the U.S. will become more expensive
d. US tourists in Europe will find their dollars capable of buying more European products
127. If risk is purposely undertaken in the foreign currency market, the investor in foreign currency then becomes
B a. An exporter c. An arbitrageur
b. A speculator d. Involved in hedging
128. A Philippine importer of English clothing has contracted to pay an amount fixed in British pounds three months from
now. If the importer worries that the Philippine peso may depreciate sharply against the British pound in the interim, it
would be well advised to
a. Sell pounds in the forward exchange market c. Sell pesos in the futures market
b. Buy pounds in the forward exchange market d. Buy pesos in the futures market
129. An entity has a foreign currency denominated trade payable, due in 60 days. To eliminate the foreign currency exchange
rate risk associated with the payable, the entity could:
B a. Sell foreign currency forward today
b. Buy foreign currency forward today
c. Wait 60 days and pay the invoice by purchasing foreign currency in the spot market at that time
d. Borrow foreign currency today, convert it to domestic currency on the spot market, and invest the funds
in a domestic bank deposit until the invoice payment date
130. One of the major consequences of international trade between nations is
a. Higher prices for consumers
b. Decreased variety of consumer products
c. Possibility of total world output to increase
d. Reduced competition and quality for businesses

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