Debre Berhan University

College of Business and Economics

Economics Program
Model Exit-Exam Question II
Quantitative Methods in Economic with Application Thematic Questions
1. One is not true about econometrics:
A. It establishes a cause-effect relationship between economic variables for the
purposes of testing economic theories.
B. It assumes exact relationship between cause and effect variables.
C. It provides numerical values.
D. It helps to testify or nullify economic theories
ANSWER: B
2. Mathematical model is different from econometric model since mathematical model
A. Has deterministic nature
B. Has its own testing technique
C. Involves stochastic term
D. Provides numerical values for parameters
ANSWER: A
3. Which of the following questions cannot be answered by statistics
A. What is the average salary of Dashen Bank employees?
B. How does the wage of average worker change if income tax is reduced?
C. At what age women have first child?
D. To measure the correlation between inflation and unemployment
ANSWER: B
4. Which of the following is not a reason for incorporating disturbance/error term in the
econometric model
A. Some of the factors may not even known by a person
B. To consider the aggregation or measurement errors
C. Randomness in human behavior
D. To represent the explicitly specified independent variables in the model
ANSWER: D
5. Which is incorrect about the goal of econometrics?
A. It is important for testing economic theories
B. It provides relevant information for policy analysis
C. It is important for forecasting/predicting future values of the outcome variable
D. It provide insight only about the existing economic environment of an
economy
ANSWER: D
6. An econometric evaluation criterion that evaluates the size and sign of the
parameters and validity of the assumption are ________ and ________,
respectively;
 A. A priori criterion and statistical criterion
B. Econometric and statistical criterion
C. A priori criterion and econometric criterion
D. Statistical and econometric criterion
ANSWER: C
7. A data type that is collected from identical subjects for several period of
times is called :
A. Time series data C. Cross -sectional data
B. Longitudinal data D. Repeated cross sectional data
ANSWER: B
8. Which statement is true about correlation and regression
A. Correlation helps to identify cause-effect relationships between economic variables.
B. Regression only shows the closeness of the two economic variables.
C. Regression helps to establish cause and effect relationships between economic variables
D. Both regression and correlation has similar concept in measuring the association between
economic variables.
ANSWER: C
9. Estimation of the model using Ordinary Least square (OLS) is
A. Calculating the value of the parameters for which residual sum of square is maximized
B. Calculating the value of the parameters for which likelihood function is minimized
C. Calculating the value of the parameters for which residual sum of square is minimized
D. Calculating the value of the parameters for which likelihood function is maximized
ANSWER: C
10. Which statement is incorrect about the classical linear regression assumption
A. Mean of the error term is zero.
B. Variance of the error term is constant.
C. The sum of error square is assumed to be zero.
D. No multicollinearity between explanatory variables.
ANSWER: C
11. If the student t-calculated value of a parameter is 2.5; and the student t distribution
table value at 1% and 5% significance level is 2.7 and 2.3, respectively. Then which is
true about the parameter?
A. We should reject the null hypothesis that the parameter is statistically significant at 5%
significance level
B. We should reject the null hypothesis that the parameter is statistically significant at 1%
significance level
 C. We should not reject the null hypothesis that the parameter is statistically insignificant at
5% significance level
D. The parameter is statistically significant in both 1% and 5% significance level
ANSWER: A

12. What would happen (other things being equal) to a confidence interval if you
calculated a 95% confidence interval rather than a 99% confidence interval?
A. It will become wider
B. It will not change
C. It will be narrower
D. The sample size will increase
ANSWER: C
13. Imagine you run an OLS regression of y on x and a constant and get an estimate of the
coefficient of x equal b. Now, you switch the two variables and run a new regression of x
on y and a constant and get another coefficient b*. Under what conditions b=b*?
A. When the mean of x and mean of Y are equal
B. When the sum of x square and the sum of Y square are equal
C. When x and y has inverse relationships.
D. When product of x and y greater than the sum of x square
ANSWER: B
14. Which is true about adjusted and unadjusted R square
A. Both increases when you add more explanatory variables in the model
B. Their gap increases when sample size increases
C. Their gap declines when explanatory variable in the model increases
D. Their gap increases both the sample size and explanatory variable increases
ANSWER: A
15. Which one of the following reveals the advantage of 2SLS over ILS estimation
techniques of a simultaneous equation model?
A. It provides multiple estimates of parameters for over identified equations.
B. It cannot be applied in the case of exactly identified equations.
C. It results identical estimates like ILS in case of an over identified equations.
D. It offers an economical method for solving models involving a large number of equations.
ANSWER: D
16. Which one is true about the consequences of near perfect multicollinearity
A. OLS estimates no longer retain BLUE property
B. Variances of parameter estimates becomes overestimated
 C. The coefficient of determination (R2) becomes too small
D. Parameter estimates becomes sensitive to small changes in the data
ANSWER: D
17. If there is a perfect positive autocorrelation exists in our model, the Durbin-Watson test
statistics will close to
A. Zero B. One C. Two D. Four
ANSWER: A
18. One causes the OLS estimates to become biased
A. Existence of hetroscedastcity problems
B. Correlation between error term and explanatory variables
C. Autocorrelation problems
D. Near to perfect Multicollinearity problems
ANSWER: B
19. Which statement is true about probability estimation methods
A. Probit regression has a flatter distribution than logistic regression.
B. Linear probability model has constant marginal effects and hetroscedastic variance of
error term
C. Both probit and logit regression models follow the same standard normal distributions
D. All models (Linear probability model, probit and logit model) has fixed marginal effects
for different independent variable values.
ANSWER B

Consider the following model:

̂ 𝟐 𝟐 𝟐
P-Value (0.000) (0.0002)
Where:

20. The appropriate interpretation for the above regression outcome is

A. For a unit change in the sex of a college professor from male to female, on average the mean
monthly salary of a college professor changes by 2,575.25 birr.
B. For a unit change in the sex of a college professor from female to male, on average the mean
monthly salary of a college professor changes by 2,575.25 birr.
C. On average the mean monthly salary of a male college professor is higher than female college
professor by 2575.25 birr.
D. On average female college professors receive a mean monthly salary of 12,467.70 birr.
ANSWER: C
21. Identify the incorrect one
A. If t and t , then t t

B. If t then t t

C. If t 1 and t 2 , then t t t 2 , where 1 2

D. If t and t , then t t t , where

ANSWER: D
22. Identify the correct statement
A. The order condition for identification is a sufficient condition for identification
B. The rank condition for identification is a necessary condition for identification
C. We cannot estimate under identified equation unless we introduce additional equations
D. Retrieving the structural coefficients from the reduced form coefficients is always possible
ANSWER: C

23. Suppose that you are given information on the estimated value of variance of disturbance term (δ2 =
10), slope coefficients (𝜷𝟏 𝟎 𝒂𝒏𝒅 𝜷𝟐 −𝟎 𝟐 & their standard errors [𝒔𝒆 𝜷𝟏
𝟎 𝟐 𝒂𝒏𝒅 𝒔𝒆 𝜷𝟐 𝟎 𝟎𝟔𝟐 ] for a 28 sample firms. Consider the model as a multiple linear
regression model: 𝛃𝟎 𝛃𝟏 𝐗 𝟏 𝛃𝟐 𝐗 𝟐 𝐔 . Based on this information, what is the calculated
value of t-statistics for slope coefficient β2 is:

A. 3.75 B. 4 C. 12 D. 1.25
ANSWER: B

24. Find the

A.

B. −

C. −

D.

ANSWER: A
25. Assume that y is defined implicitly as a differentiable function of x by the equation −
Find at (−2, 1).
A. 9 B. -5/3 C. 2 D. 5/3
ANSWER: B
26. Find the maximum and minimum values of the function − on the
interval −2 x 2.
A. Max is 14, min is -10.
B. Max is -10, min is -13
C. Max is 14, min is -13
D. No max, min is -13
ANSWER: D
27. Let f be a function whose derivative, − −
The function has
A. A relative maximum at x = −2 and a relative minimum at x = 5
B. A relative maximum at x = 5 and a relative minimum at x = −2
C. Relative maxima at x = 1, x = −2 and a relative minimum at x = 5
D. A relative maximum at x = 5 and relative minima at x = 1, x = −2
E. A relative maximum at x = 1 and relative minima at x = −2, x = 5
ANSWER: A
28. ∫
A.
B.
C. 1/2
D. −
ANSWER: A
29. The function − has how many critical points?
A. None
B. Two
C. Three
D. More than three
ANSWER: B
dy
30. The definite solution of the equation + 4y = 12, y (0) = 0.
dt
A. y(t )  3e 4t  3
B. y(t )  e 4t  3
C. y(t )  3e 3t  3
D. y(t )  3e 4t  3
ANSWER: A
31. Find the solution of the difference equation yt 1  2 y1  0 . The initial value is unspecified
simply represented by y 0 .
A. C.
B. D.
ANSWER: A

Basic Macroeconomic Thematic Questions

32. Given the following national income mode; Y = C+ I 0 + G 0 , C = 50 + 0.6 (Y-T), T = 30

+ 0.3Y, I 0 = 20 and G 0 = 15. Equilibrium level of national income is
A. 111.5 B. 67 C. 80.51 D. 64.65
ANSWER: A
33. Suppose a firm produces an output Q using labor L and capital K with production
function Q  10 K 0.5 L0.5 . If the output is restricted to 200 units, price of labor is 10 birr per
unit, the price of labor is 10 birr per unit and Price of capital is 40Birr per unit, and then
determines the amount of L and K that should be employed at minimum cost. What is the
minimum cost?
A. 800 B. 400 C. 600 D. 450
ANSWER: A

34. For a hypothetical economy, let us name it Utopian economy, characterized by being a
closed and self-sufficient, if the marginal propensity to save (MPS) is 0.34, then the tax
multiplier of the economy approximately is:
A. 1.52 B. -1.52 C. 1.95 D. -1.95
ANSWER D
35. Ethiopian government is being advised by the International Monetary Fund to further
devaluate its currency. What is the main reason for this advice in relation to the current
exchange rate status of Ethiopian Birr and net export?
A. Birr is undervalued, which makes Ethiopian exports expensive and imports cheap
B. Birr is overvalued, which makes Ethiopian exports cheap and imports expensive
C. Birr is undervalued, which makes Ethiopian exports cheap and imports expensive
D. Birr is overvalued, which makes Ethiopian exports expensive and imports cheap.
ANSWER D
36. What is the impact of the increase in money supply on the IS-LM model
A. The IS curve shifts outwards to the right.
B. The LM curve shifts to the left and to a lesser position.

7
 C. The LM curve shifts to the right and into higher position.
D. The IS curve shifts to the left.
ANSWER: C
37. What is the impact of a cut in defence spending by the government of Ethiopia on the
trade balance and real exchange rate of the economy?
A. Trade balance increases, while real exchange rate decreases.
B. Trade balance remains constant, while real exchange rate decreases.
C. Trade balance decreases, while real exchange rate increases.
D. Trade balance decreases, while real exchange rate remains constant.
ANSWER: A
38. Which of the following statement is correct?
A. An economy with balanced trade has a zero net capital outflow.
B. An economy has balanced trade, when export is greater than import.
C. An economy is in trade deficit when saving is greater than investment.
D. An economy with trade deficit has a positive net capital outflow.
ANSWER: A
39. Which of the following statement best describes the relationship between interest rate and
real money supply in the IS-LM model for closed economy?
A. If interest rate decreases, then the money supply will decrease.
B. If the central bank increases the money supply, then interest rate will rise.
C. If the central bank decreases the money supply, then interest rate will rise.
D. If interest rate rises, then the money supply will decrease.
ANSWER: C
40. What is the present consensus among economists about the shape of the Aggregate supply
curve?
A. AS is horizontal in the long run
B. AS is upward sloping in the long run
C. AS is upward sloping in the short run
D. There is no consensus
ANSWER: C
41. Which one is incorrect about classical school of thought?
A. All markets including labor market always clear
B. Economic agents do have unstable expectations
C. Market mechanism operate quickly and efficiently to restore full equilibrium.

8
 D. No government intervention is needed to ensure conducive environment
ANSWER: B
42. The income that a consumer receives on hand after paying his/her income tax and uses for
saving or consumption is known as
A. Personal income
B. National income
C. Disposable income
D. Rental income
ANSWER: C
43. A phase of the business cycle where the economy is at its lowest level is known as
A. Boom
B. Recovery
C. Recession
D. Through
ANSWER: D
44. Which of the following will lead to a decrease in the country’s money supply?
A. An increase in reserve requirements.
B. A decrease in income tax rate.
C. A decrease in the discount rate.
D. An open market purchase of government bonds by the Central Bank.
ANSWER: B
45. If the Federal Reserve increases the minimum reserve ratio that private banks are required
to hold, which of the following will occur:
A. The banks can make more loans and the money supply decreases
B. The banks can make more loans and the money supply increases.
C. The banks can make fewer loans and the money supply decreases
D. The banks can make fewer loans and the money supply increases.
ANSWER: C
46. In solow growth model an increase in investment rate holding everything else constant
leads to -----------------------at the new steady state?
A. A decrease in capital stock per worker.
B. An increase in output per worker
C. An ambiguous effect of output per worker
D. An ambiguous effect of capital per worker

9
ANSWER: B
47. If the monetary base is $1000 billion, the reserve deposit ratio is 0.2 and currency-deposit
ratio is 0.6; calculate the money supply.
A. $2000
B. $1888
C. $900
D. $1000
ANSWER: A
48. If consumers have rational expectation and follow the permanent income hypothesis, their
current consumption will increase when:
A. previously announced tax reductions are implemented
B. they receive an anticipated raise
C. they receive an unexpected inheritance
D. they make the last payment on their automobile loan
ANSWER: C
49. according to life cycle hypothesis what is the reason for average propensity to consume is
constant in long run
A. Both rich and poor have the same average propensity to consume
B. Every consumer consumes all of his/her income over a life time, so average
propensity to consume is constant.
C. income and wealth tend to grow together over time
D. Consumption is affected only by current income level.
ANSWER: C
50. the stock-out avoidance motive for holding inventories suggests that:
A. Firm hold inventories in order to produce more output
B. when sales are low, firms produce more than they sell and put the extra goods in
inventories
C. Firms hold inventories to avoid losing sales
D. when a product is only partly completed, its component are counted as part of firms
inventory
ANSWER: C
51. A time in consistency problem in macro economy policy can occur when the policy
maker:
A. is made to follow a strict & an inflexible rule

10
 B. has discretion to act as it seems best in each situation based on his or her own
knowledge and experience
C. has discretion in the short run but follows a rule in the long run
D. Has no discretion
ANSWER: B
52. Other things being equal, the neoclassical model of investment predicts that net
investment will increase when:
A. Marginal productivity of capital falls
B. Real interest rate falls
C. Depreciation rises
D. Relative price of capital goods rises
ANSWER: B
53. In Irving fisher’s two period model, the income effect of an increase in interest rate in the
first period for a saver is:
A. decrease in the relative price of second period consumption
B. additional income earned on first period saving
C. decrease in relative price of first period consumption
D. additional income earned on second period saving
ANSWER: B
54. Which one of the following is the concern of international trade?
A. The effects of trade restriction/ protection
B. Balance of payment adjustment
C. The foreign exchange markets
D. Policies that influence national income.
ANSWER: A
55. The mercantilists believe that,
A. Labour productivity difference is the reason for trade.
B. Factor endowment difference is the reason for trade.
C. Desire to accumulate wealth is the reason for trade.
D. Comparative cost difference is the reason for trade.
ANSWER: C
56. Assuming that a nation 1 has absolute advantage in both line of production compared to
nation 2, then,
A. Mutually beneficial trade is possible based on the absolute advantage principle.

11
 B. Mutually beneficial trade is not possible based on the comparative advantage
principle.
C. Mutually beneficial trade is possible based on the comparative advantage principle
D. Mutually beneficial trade is possible based on both the absolute and comparative
advantage principles.
ANSWER: C
57. If the total capital and labor available in Ethiopia is 100 unit and 200 unit respectively and
the capital and labor available in Kenya is 50 and 40 respectively, then
A. Ethiopia is capital abundant nation.
B. Kenya is capital abundant nation.
C. Kenya is labor abundant nation.
D. Both nations are capital abundant.
ANSWER: B
58. According to the H-O model, the source of comparative advantage is a country’s
A. Technology
B. Taste and preference
C. Factor endowments
D. Human Capital
ANSWER: C
59. The Leontief Paradox refers to,
A. The finding that U.S. exports were more labor intensive than its imports.
B. The finding that U.S. exports were more capital intensive than its imports.
C. The finding that the U.S. produces outside its PPF.
D. The fact that world exports do not equal world imports.
ANSWER: A
60. Suppose that the Ethiopian government imposes a tariff on vehicle products of 20,000
Birr per vehicle plus 12 percent of the vehicle's value. This is an example of a (an)
A. Specific tariff
B. Ad valorem tariff
C. Compound tariff
D. Effective tariff
ANSWER: C

12
61. According to the ______ argument for protection, tariffs can shield new industries from
import competition until they have grown strong and efficient enough to withstand the
competition by foreign producers.
A. Defence argument.
B. Infant industry argument.
C. Self-sufficiency argument.
D. Product diversification argument.
ANSWER: B

The following graph presents a partial equilibrium analysis of the effect of import tariff. Use
the figure to answer the questions that follow.

62. ____ is an area which is not taken by any of economic actors (i.e. consumer, government
and producer)?
A.
B.
C.
D.
ANSWER: B
63. Static gains from trade could result from
A. The stimulus of additional investment spending as markets open
B. Economies of large scale production as markets open
C. Additional competition made possible by the opening of markets
D. Improved welfare following openness of a market

13
ANSWER: B
64. One of the following is not the objective of WTO.
A. To promote trade restrictions
B. To coordinate international trade policies
C. To ensure optimal use of world resource
D. To develop more viable and durable multilateral trading system.
ANSWER: A
65. Forms of economic integration which allows the free movement of labor and capital
among member nations is _________.
A. Preferential trade arraignment
B. Free trade area
C. Custom union
D. Common market
ANSWER: D
66. Form of economic integration that harmonize or unify the monetary and fiscal policies of
member states is ________.
A. Common market
B. Economic union
C. Free trade area
D. Custom union
ANSWER: B
67. The demand for foreign currency arises from the following economic transactions,
except.
A. Tourists visit another country
B. A domestic firm wants to import from other nations
C. An individual wants to invest abroad
D. A domestic firm wants to export to other nations
ANSWER: D
68. Assume that Debre Berhan Blanket Factory anticipates receiving one million US dollar
for its export in three months. Given current exchange rate of Birr 20 = $1 the company’s
anticipated receipt in terms of Birr is 20,000,000. However if exchange rate appreciates
over three month period to Birr 15 = $1 the company receipt will be just 15,000,000
which is Birr 5,000,000 lower than the company’s anticipation. To cover this foreign
exchange risk the company signed a contract to sell its dollar receipt in a forward market

14
 at today’s forward rate. Which one of the following term best describes the above
transaction?
A. Foreign exchange arbitraging
B. Speculation
C. Hedging
D. Not known
ANSWER: C
69. Which one of the following is true about purchasing power parity theory?
A. Purchasing power parity does not work over a long period of time
B. Purchasing power parity will hold for non-tradable goods.
C. Purchasing power parity will not hold in the short run.
D. Purchasing power parity will not hold in the medium run.
ANSWER: C
70. The relative PPP theory states that exchange rate tends to appreciate/depreciate at a rate
equal to the difference between foreign and domestic ____.
A. Interest rate
B. Income
C. Inflation
D. Exchange rate
ANSWER: C
71. Which one of the following is not a credit transaction?
A. Export of goods and service
B. Income received from investment abroad
C. Investment in Ethiopia by overseas residents
D. Overseas investment by Ethiopian residents
ANSWER: D
72. According to the J-curve effect, when the exchange value of a country’s currency
devaluates, the country’s trade balance:
A. First moves toward surplus, then later toward deficit.
B. First moves toward deficit, then later toward surplus.
C. Moves into deficit and stays there.
D. Moves into surplus and stays there.
ANSWER: B

15
73. According to the monetary approach to the balance of payment the long run effect of
currency devaluation will be;
A. Increased national income.
B. Increased price level.
C. Reduced money supply.
D. Reduced unemployment.
ANSWER: B
74. In an open economy with perfect capital mobility and floating exchange rate,
A. The impact of monetary policy on output is ambiguous
B. Fiscal policy is more effective in influencing the economy
C. Monetary policy is more powerful in effecting output
D. Domestic interest rate is irresponsive to change in money supply
ANSWER: C
75. In a small open economy with perfect capital mobility, a higher domestic interest rate
than the foreign interest rate implies,
A. The greater the capital inflow
B. The less the capital inflow
C. The greater the capital outflow
D. Inconclusive
ANSWER: A
76. Which one of the following is not the cause for the African debt crises?
A. Oil price shock
B. Bad macroeconomic management
C. Rising interest rate
D. Favorable trade policies
ANSWER: D
77. A "good" (or ideal) international monetary system should provide
A. Liquidity, elasticity, and flexibility.
B. Elasticity, sensitivity, and reliability.
C. Liquidity, adjustments, and confidence.
D. Liquidity, sensitivity, and flexibility.
ANSWER: C
78. Rostow's economic stages are

16
 A. The traditional society, the preconditions for takeoff, the takeoff, the drive to
maturity, and the age of creative destruction.
B. The traditional society, the preconditions for consumption, the replication, the drive
to maturity, and the age of high mass consumption.
C. The traditional society, the preconditions for takeoff, the takeoff, the drive to
maturity, and the age of high mass consumption.
D. The traditional society, the learning curve, the age of high mass consumption, post-
take-off, and the drive to maturity.
ANSWER: C
79. The Head Count Ratio of income poverty refers to
A. The number of people below the poverty line
B. The proportion of people below the poverty line
C. The number of adults below the poverty line
D. The proportion of adults below the poverty line
ANSWER: B
80. Which of the following is not true?
A. Economic development is hardly possible without economic growth.
B. Economic growth is both a necessary and sufficient condition of economic
development.
C. Economic development is a necessary condition to provide people with basic needs.
D. Economic growth is possible without economic development.
ANSWER: C
81. In new growth theory,
A. Diminishing marginal returns to capital investments is assumed.
B. Technological change is determined outside the model.
C. Externalities play no role.
D. Increasing returns to scale in aggregate production is permitted.
ANSWER: D
82. Which of the following is odd?
A. Significant dependence on the exports of manufactured product.
B. Low levels of living standard
C. Low levels of Productivity
D. High population growth rate
ANSWER: A
17
83. The neocolonial dependence model is most closely aligned with which sort of thinking?
A. Classical economic thought
B. Neoclassical economic thought
C. Keynesian economic thought
D. Marxist economic thought
ANSWER: D
84. According to the Kuznets hypothesis,
A. Income inequality falls as per capita income rises.
B. Income inequality first falls then rises as per capita income rises.
C. Income inequality first rises then falls as per capita income rises.
D. Income inequality rises as per capita income rises.
ANSWER: D
85. Which of the following is not characteristic of modern economic growth?
A. Limited international spread of economic growth.
B. Low rate of structural & sectorial change.
C. High rates of per capita output.
D. High rate of rise in total factor productivity.
ANSWER: B
86. The functional distribution of income refers to the distribution of income between
A. Individuals or households.
B. The factors of production
C. Rural individuals or households.
D. Urban individuals or households.
ANSWER: B
87. Which of the following is not the component of economic growth according to traditional
approach?
A. Capital accumulation
B. Institutions
C. Population
D. Technological progress
ANSWER: B
88. From the following alternatives which is not true about microeconomics household theory
of fertility
A. Demand for children is inversely related with the price of children

18
 B. Demand for children is inversely related with tastes for other goods relative to
children.
C. Demand for children is inversely related with the price of all other good
D. Demand for children is directly related with the price of all other good
ANSWER: C
89. The amount of education demanded is not determined by
A. The wage or income differential
B. The probability of success in finding modern-sector employment
C. The direct private costs of education
D. The indirect private costs of education

ANSWER: D
90. The social benefit of education will be large at
A. Tertiary
B. Secondary
C. Primary
D. At all level the benefit is the same
ANSWER: C
91. Identify the incorrect statement about Rural-urban interaction, migration, and
unemployment.
A. First city bias may be caused by large share of public investment and incentives for
private investment relative to second city.
B. Promoting income and employment opportunities in the informal sector may reduce
urban unemployment problem.
C. The motivation of the informal sector may be usually to obtain sufficient income for
survival.
D. The formal sector may depend on the informal sector for cheap inputs and wage for
workers.
ANSWER: B
92. Which one of the following statement is correct about Rural-urban interaction, migration,
and unemployment?
A. Migration may proceed in response to urban-rural differences in actual earnings
rather than expected income.
B. Urban gigantism is the consequences of dictators’ efforts to remain in power.

19
 C. Migration is an individual rational decision
D. Cities are formed because they provide cost reducing advantages to producers and
consumers
ANSWER: A
93. Increasing the demand for industrial products and thus necessitating the expansion of the
secondary and tertiary sectors is
A. Market Contribution.
B. Factor contribution
C. Product contribution
D. All
ANSWER: A
94. Which one of the following is not true about international trade and economic
development
A. In the case of primary products, the income elasticity of demand is relatively low.
B. If the demand for exports is inelastic, then a change in the average price of exports
will lead to a greater proportional change in the demand for them.
C. Manufactured goods, income elasticity is relatively high.
D. Outward-Looking Strategies shift the focus from import substitution and domestic
markets towards manufacturing for exports to foreign markets
ANSWER: B
95. Most of the African or LDCs country term of trade is deteriorated because of
A. The fall of export price relative to import price
B. The fall of import price relative to export price
C. It is not depend on price differential of import and export
D. Expanding export volume
ANSWER: A
96. Which one of the following statement is not true about Foreign aid, debt, financial reform
and development
A. Visible items which include all types of physical goods exported and imported.
B. Removal of food shortage is one of the roles of foreign trade.
C. Foreign aid can be defined as all transfers of capital to developing countries.
D. Concessional term is terms for the extension of credit that are more favourable to
the borrower than those available through standard financial markets.
ANSWER: C
20
97. One of the following is the disadvantage of multinational corporation
A. Causing economic growth
B. Raising funds for public spending
C. Receive investment credits and are exempt from tariffs
D. Facilitating industrialization
ANSWER: C
98. Why is money market securities usually more widely traded than longer-term securities in
the financial markets? Because they______
A. Tend to be a good store of wealth than the long term securities
B. Have higher interest rates in the long run
C. They are not more liquid
D. Have smaller fluctuations in prices
ANSWER: D
99. Among the following actors of the money supply process one is NOT correctly matched
with its function. Which one is it?
A. The central bank - accept deposits from individuals and make loans
B. Depositors- individuals or institutions that hold deposits in financial institutions
C. Depository institutions- financial intermediaries
D. Borrowers -individuals and institutions that borrow from financial institutions
ANSWER: A
100. Of the following, one is NOT among the factors that determine the money multiplier.
Which one is that?
A. Required reserve ratio, r
B. The excess reserve ratio, e
C. The monetary base, MB
D. The currency ratio, c
ANSWER: C
101. Why are financial intermediaries and indirect finance so important in financial
markets?
A. Because they reduce economies of scale
B. Because they reduce liquidity services
C. Because they facilitate adverse selection
D. Because they facilitate asset transformation
ANSWER: D
21
102. Among the following one is NOT among the money market instruments. Which one
is it?
A. Banker’s Acceptances
B. Repurchase Agreements
C. Treasury Bills
D. Government Securities
ANSWER: D
103. Of the following, one is NOT associated with Contractual savings institutions.
A. They tend to invest their funds primarily in long-term securities
B. The liquidity of assets is not as important a consideration for them
C. The Credit Unions are the best examples of contractual saving institutions
D. The insurance companies and pension funds are their best
ANSWER: C
104. The name High-Powered Money is another name given to___________.
A. The money multiplier
B. The monetary base
C. The required reserve
D. The excess reserve
ANSWER: B

Basic Microeconomic Thematic Questions

105. All of the following are features of risk averse individual except
A. Risk averse prefers a certain income to a risky income with the same expected value.
B. The slope of the utility function gets flatter and flatter as wealth increases
C. The utility from a given amount of wealth (income) is greater than the expected
utility.
D. The Marginal utility of income increase as wealth increase.
ANSWER: D
106. According to ordinal utility theory there are different conditions that have to be
fulfilled for the consumer to maximize his/her utility. One of the following is not among
them?
A. The ratio of the marginal utilities of the two goods has to be equal to the ratio of the
respective prices.

22
 B. The slope of the budget line has to be equal to the lowest possible indifference
curve.
C. The consumer has to spend her/his entire budget on the two goods.
D. The marginal rate of the substitution for the two goods has to be equal to the ratio of
their respective prices.
ANSWER: B

107. Assume Lula consumes only good x. At the present the marginal utility that Lula gets
is greater than the price she pays. What do you advice Lula to do to maximize her utility?
A. Consume more quantities of good x
B. Reduce the consumption of good x
C. Substitute good x with other good
D. Negotiate with the seller to reduce price
ANSWER: A
108. When there is an increasing returns to scale, then
A. The distance between successive multiple isoquants decreases
B. Doubling inputs will decrease output.
C. There are diseconomies of scale in costs.
D. Output and input will change by the same proportion.
ANSWER: A

109. Which of the following is/are incorrect about cost curves?

A. Marginal cost crosses both average variable cost and average cost curves at their
minimum points.
B. If marginal cost is below average cost, then average cost rises.
C. The minimum of average variable cost curve is to the left of the minimum of the
average cost curve.
D. The vertical distance between the average total cost and average variable cost curves
decreases as output increases.
ANSWER: B
110. The short run supply curve of a perfectly competitive firm is
A. The decreasing part of MC curve to the left of AVC curve

B. The rising part of its MC curve above the minimum of AFC curve

23
 C. The increasing part of its MC curve above the minimum of AC curve

D. The increasing part of its MC curve above the minimum of AVC curve

ANSWER: D
111. Which one of the following is correct about how a monopolist firm can maximize
revenue when it is selling the output in the two markets?
A. If marginal revenue in the first market is greater than the second market, then sell
less in the first market and more in the second market

B. If marginal revenue in the first market is less than the second market, sell more in
the first market and less in the second market

C. Revenue can be maximized when the marginal revenue in the two markets is
equal with the marginal cost.

D. Revenue can be maximized when the marginal revenue is greater than the
marginal cost in the two markets.

ANSWER: C
112. Assume cement producing firms form a cartel. Which one of the following will be
true about price, output and profit distribution by the central agency of the cartel?
A. High cost firms will charge high price while low cost firms will charge low price.
B. Output share of the firms will be determined by their respective marginal revenue.
C. Firms with marginal cost curve closer to the price axis will get the lowest share of
the industry profit.
D. High cost firms will get the highest portion of the market profit while the low cost
firms will get the lowest share.

ANSWER: C
113. Horizontal summation of individual demand for labour force is misleading while
generating aggregate labour demand in the market. And this is because
A. It will result in overestimation of labour demand.
B. It will result in underestimation of labour demand.
C. The labour market is imperfect.
D. The labour market is perfect.

ANSWER: A

24
114. If we compare the market for a car where it is marketed in a Cournot oligopoly,
perfectly competitive and monopoly market
A. Equilibrium output will be the lowest in Cournot oligopoly market.
B. Equilibrium price will be the highest in perfectly competitive market.
C. Social welfare will be the lowest in monopoly market.
D. Social welfare will be the highest in the Cournot oligopoly market

ANSWER: C
115. Assume a short run firm operating under perfectly competitive factor and product
market has a value marginal productivity of labour greater than the market wage rate.
Which one of the following action should the firm undertake in order to maximize its
profit?
A. Reduce the output price C. Reduce employed labour force
B. Increase labour employment D. Increase the wage rate

ANSWER: B
116. For a monopolistically competitive firm, marginal revenue is
A. Always equals with price. C. less than the price.
B. Greater than the price. D. unrelated with the price

ANSWER: C

117. Which one of the following is true about consumption contract curve in two firms,
two consumers and two product economic model?
A. Points outside the curve are Pareto efficient.
B. Pareto improvement is possible along the curve.
C. All points along the curve are affordable by both consumers.
D. Along the curve, marginal rate of substitution between the two commodities is the
same for both consumers.

ANSWER: D
118. What is the impact of adverse selection on economic efficiency in a market?
A. Adverse selection will increase economic efficiency.
B. Adverse selection does not have any impact on economic efficiency in a market.
C. Adverse selection will reduce economic efficiency.
D. Consumer wants will shift toward the goods left in the market.

25
 ANSWER: C
119. Assume in a certain market there are only two firms selling car. If they are going to
make a price competition by cutting the price low, which one of the following games can
better represent their interaction.
A. Battle of chickens C. Battle of Wits
B. Prisoners’ dilemma D. Zero sum game

ANSWER: B
120. In a production Edge worth box, the length and width of the box represents
A. Amount of good X and good Y produced.
B. Amount of good X’s and good Y’s market covered.
C. Amount of labour and capital used.
D. Amount of Labour and Capital market covered.

ANSWER: C

121. Which one of the following is true statement about Stackelberg oligopoly model?
A. Stackelberg equilibrium point is found closer to the quantity axis of the
sophisticated firm.
B. At the equilibrium the slope of reaction curve of the sophisticated firm will be
equal with the slope of the isoprofit curve of the Cournot firm.
C. Both firms will generate a profit level greater than the Cournot equilibrium point.
D. The equilibrium will be where the reaction curve for the two firms crosses each
other.
ANSWER: A
122. Which of the following may not be the direct/indirect benefit of a project in economic
analysis?
A. Generating profit
B. Creation of job opportunities
C. Better health and reduced infant mortality
D. Better nutrition and reduced incidence of disease
ANSWER: A
123. Which of the following statement is not correct about a project?
A. It is an investment activity that financial resources are expended to create capital assets
that produce benefits over an extended period of time

26
 B. It is a complex set of activities where resources are used in expectation of return and
which lends itself to planning, financing and implementing as a unit.
C. It may not has limited life span
D. It has a narrow objectives than a program
ANSWER: C
124. _____________ is the direct/tangible results in terms of goods and services that the
project delivers
A. Impact C. Activity
B. Outcome D. Output
ANSWER: D
125. In the project cycle, one of the following stage is to be conducted at the very early
phase of the project
A. Implementation C. Identification
B. Feasibility D. Project appraisal
ANSWER: C
126. Debre Berhan University is conducting a road project that links the main campus with
Asrat Woldeyes Health campus. What is the negative impact of this project on the nearby
community?
A. The community can get transport service easily.
B. The community have invested high abatement cost.
C. The road will reduce the traffic congestion of the main road.
D. The road has high aesthetic value.
ANSWER: B
127. In the financial analysis of projects, the project analyst uses the current market price.
This prices can be distorted due to all factors except
A. Government intervention
B. Existence of public goods
C. Nonexistence of price controls
D. Existence of externalities
ANSWER: C
128. The main difference between financial and economic analysis is
A. Economic analysis is concerned with maximizing the profit of individuals while in
financial analysis the main objective is to maximize social welfare

27
 B. Financial analysis take into account externalities in cash flow analysis while economic
analysis does not
C. Both use adjusted market prices to measure values of costs and benefits of a project
D. Economic analysis take in to consideration both the implicit and explicit costs and
benefits while financial analysis takes into account only the explicit costs and benefits
ANSWER: D
129. In which of the following project life cycle the project plan is carried out and the
expected benefits realized?
A. Identification D. Evaluation
B. Implementation ANSWER: B
C. Appraisal
130. How taxes, subsidies are treated in financial analysis?
A. Taxes are direct costs measured in market prices
B. Subsidies are transfer payments measured in shadow prices
C. Taxes are transfer payments measured in market prices
D. Subsidies are direct costs measured in shadow prices
ANSWER: A
131. In approaches of measuring economic costs and benefits of a project, which of the
following statement is a correct statement?
A. In UNIDO approach economic benefits and costs may be measured at world prices
using consumption as numiraire with adjustment of market prices
B. In Little-Mirrlees approach benefits and costs may be measure at domestic price to
reflect true opportunity cost of out puts and inputs using public saving as numiraire
C. In UNIDO approach the adjusted domestic price will be multiplied by the shadow
exchange rate to make domestic resources comparable with foreign resources
D. In Little- Mirrlees approach the project accounts are necessarily expressed in foreign
currency
ANSWER: D

28
29