Skans Chapter Wise Economics Mcqs

Principles of Economics ICAP PAST PAPER MCQS PRC-3
CHAPTER # 1 c) equity.
d) trade-off
Which of the following is a measure of income earned
by a factor of production? The demand for a Factor of Production is called:
a) Indirect taxes a) quantity demand
b) Depreciation b) derived demand.
c) Rent. c) factor price
d) Corporate taxes d) cost of production
Which statement is true of a curve with a constant The curvature of Production Possibility Curve is due to:
slope?
a) Change in opportunity cost.
a) It is a straight line.
b) Increase in resources
b) It is non linear
c) Decrease in demand
c) It runs parallel to Y-axis
d) Decrease in supply
d) It runs parallel to X-axis
Which one of the following is a basic economic
Which of the following is not a factor of production? problem?
a) Land a) Unlimited wants and scarce resources.
b) Labour b) Lower incomes and higher indirect taxes
c) Money. c) Unemployment and inflation
d) Entrepreneurship d) Recession
Which of the following is not an economic resource? Which one of the following is part of the primary
sector of an economy?
a) Air.
a) Banking
b) Water
b) Transport
c) Sulphuric acid
c) Farming.
d) Books
d) Textile industries
Following concept is NOT illustrated by the Production
Possibility Curve: If the production possibility curve moves outward to
the right, it means that:
a) efficiency
a) the economy is capable of producing more goods
b) opportunity cost
and services than it could produce previously
PREPARED BY : M. JUNAID QURESHI 1 0300-0554011

LECTURER: SKANS MULTAN
b) the economy is not able to produce goods and c) Production of goods for benefit of society as a
services that it could produce previously. whole
c) it is not possible to produce the optimum d) Full employment of labour

combination of goods and services.
Islamic mode of financing includes an arrangement in
d) there is significant decline in population or which a person participates with his money and
exhaustion of natural resources. another with his efforts/expertise. This mode of
financing is known as:
Microeconomics may be defined as the study of:
a) Ijara
a) the ‘focused picture’ of the national economy
b) Mudaraba.
b) acquisition of new technological skills by the factors
of production c) Musharaka
c) a study of the level of aggregate production and d) Murabaha

reasons for its fluctuations
The production possibility curve would move inwards
d) none of the above. when:
Which of the following is NOT a measure of income a) there is a change in consumer taste
earned by a factor of production?
b) there is an increase in employment of skilled labour
a) Rent
c) there is a depletion of natural resources.
b) Interest
d) all of the above
c) Profits
The production possibility frontier is concave to the
d) Taxes. origin because:
Which of the following is a basic economic problem? a) in order to produce one good, resources must be
diverted from the other
a) Lower incomes and higher taxes
b) some resources are better at producing one good
b) Unemployment and inflation and some resources are good at producing other good.
c) Unlimited wants and scarce resources. c) there is always some level of unemployment
d) Balance of payment deficits and recession d) all resources contribute towards production equally
Which of the following is more likely to be found in a In which of the following options consumer
free market economy than in a planned economy? sovereignty is in the order of highest to lowest?
a) An even distribution of wealth a) Market economy, mixed economy, planned
b) An incentive to innovate. economy.

b) Mixed economy, market economy, planned c) Musharaka
economy
d) Murabaha
c) Market economy, planned economy, mixed
economy Which of the following statements relate to normative
aspect of economics?
d) None of the above
a) Government should provide basic health care to all
Which of the following concepts is NOT illustrated by citizens.
the production possibility curve?
b) Government-provided health care increases public
a) Efficiency expenditures
b) Opportunity cost c) Economists are paid more than the accountants
c) Equity. d) Technology has great impact on productivity
d) Trade-off In deciding what products to produce, the central

planners in a planned economywould give least priority
Which of the following is NOT a basic question of to:
economics?
a) size of economy’s labour force
a) What will be produced?
b) production capabilities of the economy’s factories
b) Where it will be produced.?
c) consumer preferences.
c) For whom will it be produced?
d) type of raw materials produced by the economy
d) Who will produce it?
The slope of a production possibility frontier is called:
Smart phones have become the latest craze. Everyone
wants to have the smart phone and its sales are a) marginal rate of substitution
increasing. Therefore, the factory has increased
production. This is an example of: b) marginal utility of product
a) circular flow c) marginal rate of transformation.
b) due process d) marginal product
Which one of the following statements is NOT true for

c) opportunity cost
a planned economic system?
d) consumer sovereignty.
a) Productive resources are state owned
The mode of Islamic financing where a financial expert
offers services for managing investment; and the b) Auto-adjusted price mechanism.
investor and the expert share profits, is called: c) Full employment is possible
a) Ijara d) Less duplication of resources
b) Mudaraba.

Which of the following will NOT cause a shift in the b) Profit motive
Production Possibility Curve?
c) No conflict between labour and capital.
a) A fall in unemployment.
d) Freedom of enterprise
b) Increase in age of retirement
The demand for a Factor of Production is called:
c) Technological improvement
a) quantity demand
d) Capital investment
b) derived demand.
Which of the following statements is NOT true?
c) individual demand
a) Ceteris paribus means other things remaining same
d) market demand
b) One of the economic goals is to maintain price
stability Which of the following would NOT be an agent of a
closed economy?
c) Normative aspect of economics deals with factual
questions. a) Household
d) Agent is a decision maker within an economic model b) Firm
Which of the following features is more related to free c) Government

market economy as compared to planned economy? d) Foreign trader.
a) An incentive to innovate. An entrepreneur opens a retail outlet for handcrafted
jewellery that he wishes to sell at higher prices as
b) An even distribution of wealth
compared to machine made jewellery. Which of the
c) Full employment of labour following factors of production would be involved in
the above process?
d) Production of goods for the benefit of the society as
a whole a) Land, capital and enterprise
Micro economics does NOT cover: b) Land, labour and enterprise.
a) consumer behaviour c) Capital, labour and enterprise
b) factor pricing d) Land, labour and capital
c) general price level. CHAPTER # 2

d) product pricing
All of the following are determinants of supply except:
Which of the following features is NOT related to
a) Price
capitalist economy?
b) income level
a) Consumer sovereignty
c) level of technology

d) objectives of the firms. b) A movement up the existing supply curve
Demand curve slopes downward because of: c) A shift to the right of the supply curve
a) Consumer indifference d) A shift to the left of the supply curve.
b) Elasticity of demand Demand curve slopes downward because of:
c) Inelastic demand a) consumer indifference
d) Law of diminishing marginal utility. b) elasticity of demand
A movement along a supply curve is caused by a: c) inelastic demand
a) change in the unit price of the particular product. d) law of diminishing marginal utility.
b) change in the number of producers Which one of the following will NOT shift the demand
curve for a normal good to the left?
c) change in the level of technology
a) A fall in consumers incomes
d) change in supply of the particular product
b) A rise in the price of a complementary good
If peas and beans are substitutes of each other, an
increase in the price of peas will: c) A fall in the price of the substitute good
a) increase the quantity of beans demanded d) A rise in the price of the normal good.
b) increase the price of beans and the quantity sold Which of the following would unambiguously occur
when there is a simultaneous decrease in demand and
c) decrease the quantity of peas sold supply?
d) all of the above. a) An increase in equilibrium price
If the government sets the maximum price of a
b) A decrease in equilibrium price
product below the market equilibrium price, it would
lead to: c) An increase in equilibrium quantity
a) excess demand. d) A decrease in equilibrium quantity.
b) excess supply Which of the following is held constant along the

demand curve?
c) market equilibrium
a) Price
d) economies of scale
b) Quantity
During the year, a flood destroyed significant portion
of agricultural land used to produce rice. What would c) Income.
be the short-run effect on supply diagram for rice?
d) Both (a) and (b)
a) A movement down the existing supply curve

If the demand equation for a good is Qd = 20 – P and b) There is no substitute for the good
the supply equation is Qs = 6 + 1.5 P and the price is set
equal to 2.4 above the equilibrium level, there will be c) The prices of related goods are unstable.
an excess: d) The size of population is stable
a) demand of 6 units The horizontal demand curve parallel to x-axis implies
b) supply of 6 units. that elasticity of demand is:
c) demand of 12 units a) zero
d) supply of 18 units b) Infinite.
c) equal to one
The supply curve would shift to the left when:
a) price of good goes down d) between zero and one
b) taxes of government go down The demand curve slopes downward due to:
c) prices of substitute goods go down a) income effect
d) prices of complements go down. b) income and substitution effect.
A price floor set above the market equilibrium price is c) price effect
likely to cause: d) price and substitution effect
a) excess supply.
CHAPTER # 3
b) excess demand
The price elasticity of demand is defined as the
c) a decrease in price and a decrease in the quantity responsiveness of:
traded
a) price to a change in quantity demanded
d) an increase in price and an increase in the quantity
traded b) quantity demanded to a change in price
A movie theatre may be regarded as an example of: c) price to a change in income
a) public goods d) quantity demanded to a change in income
b) private goods Why is the price elasticity of demand a relative

measure? That is, why is elasticity measured in
c) demerit goods
percentage terms rather than in absolute terms?
d) club goods.
a) So the coefficient of elasticity will not be
Which one of the following assumptions does NOT dependent on the physical units of the good
confer to the law of demand?
a) There is no change in the income of consumers

b) Because relative measures are generally a) 0.8
considered to be more accurate than absolute
b) 1.0
measures
c) 1.25
c) So that the coefficient of elasticity will not be
negative d) 1.50
d) Because the price or quantity demanded of a A discount store has a special offer on CD players
product is irrelevant to the elasticity measure and lowers their price from $150 to $100. Suppose
the store manager observes that the quantity
The coefficient of the price elasticity of demand is
demanded increases from 700 CD players to 1,300
calculated as:
CD players. What is the price elasticity of demand for
a) the change in price divided by the change in CD players?
quantity demanded
a) 0.8
b) the change in quantity demanded divided by the
b) 1.0
change in price
c) 1.25
c) the percentage change in price divided by the
percentage change in quantity demanded d) 1.50
d) the percentage change in quantity demanded If the local pizzeria raises the price of a medium
divided by the percentage change in price pizza from $6 to $10 and quantity demanded falls
from 700 pizzas a night to 100 pizzas a night, the
Suppose the price of movies seen at a theater rises
price elasticity of demand for pizzas is:
from $12 per couple to $20 per couple. The theater
manager observes that the rise in price causes a) 0.67
attendance at a given movie to fall from 300 persons
to 200 persons. What is the price elasticity of b) 1.5
demand for movies?
c) 2.0
a) 0.5
d) 3.0
b) 0.8
The elasticity of demand is equal t
c) 1.0
a) Marginal / Total
d) 1.2
b) Total / Marginal
Suppose a department store has a sale on its
c) Marginal / Average
silverware. If the price of a place-setting is reduced
from $30 to $20 and the quantity demanded d) None of the above
increases from 3,000 place-settings to 5,000 place-
settings, what is the price elasticity of demand for Which of the following best describes a perfectly
silverware? inelastic demand function?

a) The quantity demanded is completely insensitive a) large fall in quantity demanded
to changes in price
b) large fall in demand
b) Price is completely insensitive to changes in
c) small fall in quantity demanded
quantity demanded
d) small fall in demand
c) When price changes by a certain percentage,
quantity demanded changes by the same Average income increases from £20,000 per annum
percentage to £22,000 p.a. Quantity demanded per year
increases 5000 to 6000 units. Which of the following
d) The demand function is horizontal at the given
is correct?
price
a) Demand is price inelastic
Which of the following is not true of a perfectly
elastic demand function? b) The good is inferior
a) Consumers will purchase all of the good offered c) Income elasticity is -2
on the market at one price
d) The product is normal
b) Consumers will not purchase any of the good at a
higher price The price decreases from £2,000 to £1,800. Quantity
demanded per year increases 5000 to 6000 units.
c) The slope of the function is equal to infinity Which of the following is correct?
d) It represents the demand function faced by an a) The price elasticity of demand is -2
individual farmer
b) The good is inferior
If electricity demand is inelastic, and electric rates
increase, which of the following is likely to occur? c) Income elasticity is + 0.5
a) Quantity demanded will fall by a relatively large d) Income elasticity is + 2

amount
If the price elasticity of demand is unit then a fall in
b) Quantity demanded will fall by a relatively small price:
amount
a) Reduces revenue
c) Quantity demanded will rise in the short run, but
b) Leaves revenue unchanged
fall in the long run
c) Increases revenue
d) Quantity demanded will fall in the short run, but
rise in the long run d) Reduces costs
Suppose the demand for meals at a medium-priced If the cross elasticity of demand is -2:
restaurant is elastic. If the management of the
restaurant is considering raising prices, it can expect a) The products are substitutes and demand is cross
a relatively: price elastic

b) The products are substitutes and demand is cross b) An increase in price decreases revenue
price inelastic
c) An increase in price increases revenue
c) The products are complements and demand is
d) A decrease in price reduces sales
cross price elastic
For an inferior good:
d) The products are complements and demand is
cross price inelastic a) The price elasticity of demand is negative; the
income elasticity of demand is negative
The income elasticity is +2 and income increases by
20%. Sales were 5000 units, what will they be now? b) The price elasticity of demand is positive; the
a) 3000
c) The price elasticity of demand is negative; the
b) 7000
income elasticity of demand is positive
c) 5500
d) The price elasticity of demand is positive; the
d) 4500 income elasticity of demand is positive
The price elasticity of demand is a negative number For a normal good:

this means:
a) The price elasticity of demand is negative; the
a) Demand is price elastic income elasticity of demand is negative
b) Demand is price inelastic b) The price elasticity of demand is positive; the

c) The demand curve is downward sloping
c) The price elasticity of demand is negative; the
d) An increase in income will reduce the quantity
demanded
d) The price elasticity of demand is positive; the
Price increases from 10 to 12 pence and the price
elasticity of demand is -0.5. The quantity demanded
was 500 units. What will it be now? Which of the following products is likely to have the
lowest price elasticity of demand?
a) 550 units
a) salt.
b) 500 units
b) cars
c) 450 units
c) houses
d) 490 units
d) apples
If demand is price inelastic:
If the market price of a product increases from Rs. 35
a) An increase in price must raise profits to Rs. 40 and in response, the quantity demanded

decreases from 1400 units to 1200 units, the value of its b) 750,000 units.
price elasticity of demand is:
c) 1,200,000 units
a) 0.9
d) 800,000 units
b) 1
Assume that the demand for cars decrease highly
c) 1.1 when their prices increase. However, demand may also
d) 1.2 decrease when income of consumers decrease. Price
and income elasticities of cars are said to be:
Which of the following has the most inelastic demand?
a) elastic; negative
a) Fuel
b) elastic; positive.
b) Wheat.
c) inelastic; negative
c) Meat
d) inelastic; positive
d) Sugar
Price elasticity of demand depends upon: If cross elasticity of demand between Goods X and Y is
negative then:
a) proportion of income spent on the particular good
a) the demand for both X and Y are price inelastic
b) income elasticity of demand
b) X and Y are complements.
c) substitution elasticity of demand
c) X and Y are substitutes
d) all of the above.
d) the demand for both X and Y are price elastic
Over a long period of time:
The price of a product is Rs. 3 and the quantity supplied
a) demand becomes more elastic and supply becomes is 10 units. When price is increased to Rs. 7 the quantity
less elastic supplied increases to 12 units. The supply is:
b) demand becomes less elastic and supply becomes a) perfectly elastic

more elastic
b) elastic
c) both demand and supply becomes more elastic.
c) inelastic.
d) both demand and supply becomes less elastic
d) perfectly inelastic
A firm with existing sales of 1,000,000 units per annum
is planning to increase the price of a product from Rs.
CHAPTER # 4
100 to Rs. 120 per unit. If price elasticity of demand for Under perfect market conditions, the supply curve of a
that product is 1.25, assuming no other changes, the firm is the same as:
sale of the firm after price increase would be:
a) MC curve.
a) 1,250,000 units
b) MR curve

c) AR curve b) operating technology of the plant
d) AC curve c) operating capacity

In a perfectly competitive market ___________ is/are d) all of the above.
the price maker(s):
As its output increases, a firm’s short-run marginal cost
a) the individual firm will eventually increase because of:
b) the industry. a) diseconomies of scale
c) a large number of consumers b) a lower product price
d) the trade association c) the firm’s need to break even
Which of the following is NOT included in the explicit d) diminishing returns.
costs of a firm?
Which of the following is NOT a characteristic of
a) wages paid to labour oligopolies?
b) interest paid for borrowed capital a) Mutual dependence
c) payments for purchases of materials b) Growth through merger
d) normal profit. c) Large number of firms.
In the long-run, price is determined by: d) Non-price competition
a) cost of production. Identify the key element of a market structure:
b) number of consumers a) Barriers to entry
c) influence of tastes and fashion b) Barriers to exit
d) competitive forces c) Product differentiation
Monopoly power may be based on: d) None of the above.
a) economies of large scale production A firm that breaks even after all the economic costs are
paid, is earning:
b) patents
a) Economic profit
c) control of key natural resources
b) No profit
c) Normal profit.
Which of these is NOT a component of cost function of
a product? d) Supper normal profit
a) market price of the product The supply curve of a factor for a firm that is in perfect
competition in the input market is:

a) Elastic b) Economies of scale
b) Inelastic c) Advances in knowledge

c) Perfectly elastic. d) Diminishing returns.
d) Perfectly inelastic
International trade encourages the formation of:
The short-run average cost curve is:
a) Perfect competition.
a) Upward sloping
b) Imperfect competition
b) Downward sloping
c) Monopolistic competition
c) U shaped.
d) Oligopoly
d) A straight line
Firms can benefit through specialization and
Which of the following has a relatively flat supply international trade due to:
curve?
a) Absolute advantage
a) Raw material
b) Comparative advantage.
b) Land.
c) Unilateral advantage
c) Labour
d) All of the above
d) Capital
Which of the following is NOT a characteristic of
Increasing long-run average costs are associated with: monopolistic competition?
a) Law of diminishing return a) Existence of many firms.
b) Constant returns to scale b) Barrier to entry or exit from the market
c) Increasing returns to scale c) Product differentiation.
d) Decreasing returns to scale. d) Goods produced are close substitutes of one

another.
A profit maximising firm will produce output where:
Marginal Revenue is greater than zero if:
a) Total sales are maximized
a) the elasticity of demand is greater than one.
b) Average total costs are minimised
b) the elasticity of demand is less than one
c) Marginal cost equals marginal revenue.
c) the elasticity of demand is one
d) Average revenue is maximized
d) none of the above
The productivity of an input is NOT affected by:
In conditions of oligopoly:
a) Technological change

a) the steps taken by the market leader are observed d) Rs. 200
very closely by the other firms.
Under perfect market conditions, the supply curve of a
b) the market leader is always in a position to assess firm is the same as:
accurately the market reactions of the other firms
a) MC curve.
c) the market leader’s higher costs and higher prices
discourage the rival competitors from undercutting the b) MR curve
market leaders price c) AR curve
d) the other firms would not dare to make secret price d) AC curve
cuts and antagonize the market leader
If marginal revenue is Rs. 50 and marginal cost is Rs.
Which of these costs will increase or decrease with 40, the firm seeking profit maximization would:
increase or decrease in production levels?
a) increase price
a) Marginal cost.
b) reduce output
b) Fixed cost
c) reduce price
c) Financial cost
d) increase output.
d) All of the above
Which of the following statement is correct with
An Isoquant: respect to relationship between the average cost curve
a) shows the increase/decrease in output that can be and marginal cost?
achieved by increasing/decreasing the total quantities a) Average cost curve will slope downwards when
of input marginal cost is less than average cost.
b) shows the different levels of output that can be b) Average cost curve will slope upwards when
achieved by alternative combinations of input marginal cost is less than average cost
c) shows the same levels of output that can be c) Average cost curve will slope downwards when
achieved by alternative combinations of inputs. marginal cost is more than average cost
d) none of the above d) There is no direct relationship between average cost
ABC Limited employs 100 skilled workers at a wage curve and marginal cost
rate of Rs. 2,800 per week. To attract 10 more workers The demand curve for the product of a firm operating
it raises the wage rate to Rs. 3,000 per week. The under conditions of perfect competition would be:
marginal cost of employing the extra workers is:
a) identical to the marginal revenue.
a) Rs. 20,000
b) intersecting the marginal revenue curve at the point
b) Rs. 30,000 where marginal cost is equal to marginal revenue
c) Rs. 50,000.

c) intersecting the average variable cost curve at its Which of the following is the example of price
lowest point discrimination?
d) perfectly inelastic a) Peak and off-peak call charges
Shahid has employed 25 workers to whom he pays b) A doctor charging higher consultancy fees in posh
wages at the rate of Rs. 150 per day. He is now area
intending to increase the wage rate of all workers by
Rs. 20 per day in order to attract one additional c) Business and economy class flights
worker. Given that all other costs remain constant, the d) Both (a) and (b).
marginal cost of labour per day would be:
An industry is a group of firms:
a) Rs. 20
a) located in the same geographical area
b) Rs. 170
b) producing similar products.
c) Rs. 670.
c) which supply the various inputs needed to produce a
d) Rs. 4,420 final product
Which of the following will always increase when a d) owned by a corporation
manufacturing business increases its output?
With 50 units of labour, a firm can produce 1,800 units
a) Fixed costs of output. With 60 units of labour the firm can produce
2,100 units of output. The marginal product of labour
b) Marginal cost
is:
c) Total costs.
a) 0.33
d) Average variable cost
b) 3
In the short run, a firm would stop production if:
c) 30.
a) marginal cost was equal to marginal revenue
d) 300
b) total revenues were less than total variable costs.
Which one of the following is NOT a barrier to entry
c) total costs were equal to total revenues into a monopoly market?
d) total revenues were less than total fixed costs a) Significant economies of scale
Diseconomies of scale occur when: b) Heavy potential advertising costs
a) long run average costs begin to rise. c) Large capital requirements
b) short run average costs begin to rise d) Constant returns to scale.
c) long run average costs begin to fall Which of the following is NOT a feature of
monopolistic competition?
d) short run average costs begin to fall

a) Freedom of entry and exit to the industry To maximise profit the firm should:
b) Downward sloping demand curve a) reduce price and increase output
c) Identical products. b) reduce price and reduce output
d) Many firms supplying the market c) increase price and increase output
Which of the following may NOT be regarded as d) increase price and reduce output.
strength of a collusive oligopoly?
Which one of the following assumptions is related to
a) production techniques and costs of all the firms are the law of variable proportion?
similar
a) Continuous improvement in techniques of
b) there are no barriers on entry of new firms. production
c) similar products are produced by the firms b) All factors of production are proportionately varied
d) the market is stable c) There is no scarcity of the factors of production
Which of the following would most likely result in d) The factors are able to be combined to make a
failure of price cartel under oligopoly? product.
a) Non-availability of close substitutes Which one of the following is NOT a feature of perfect
competition?
b) Existence of control over supply
a) Firms are price makers.
c) Price elasticity of demand is elastic.
b) Perfect factor mobility
d) Presence of agreement on allotted quota of supply
c) Free entry and exit of firms in the market
A firm is operating in an industry where many firms are
producing similar products. Each firm is able to set d) Products are homogenous
prices of its products without affecting the market
Which of the following statements is correct?
place as a whole. The firm is most likely operating in:
a) When the average cost is constant, the marginal
a) monopoly
cost must be falling
b) oligopoly
b) When the average cost is rising, marginal cost is
c) perfect competition lower than average cost
d) monopolistic competition. c) When the average cost is rising, marginal cost is

higher than average cost.
Following data has been provided to the Chief
Executive Officer of a monopoly firm: d) When the average cost is falling, marginal cost must
be rising
Marginal revenue Rs. 10 Marginal cost Rs. 11
Which of the following is NOT a feature of
Average revenue Rs. 16 Average cost Rs. 12 monopolistic competition?

a) Low barriers to entry and exit d) Payment for raw material
b) Many firms supplying to the market Which of the following conditions is true, when the
firm is producing at the minimum point of the average
c) Firms can change their actions without influencing cost curve and there is production efficiency?
the behaviour of other firms
a) AC = AR
d) Each firm faces a horizontal demand curve.
b) MC = AC.
Under perfect competition, the supply curve of a firm
is equal to: c) MC = MR
a) MR curve d) AR = MR
b) AR curve Marginal revenue will be negative if elasticity of

demand is:
c) MC curve.
a) less than zero
d) AC curve
b) more than unity
If price and marginal revenue are the same then the
demand curve must be: c) equal to unity
a) perfectly inelastic and vertical d) equal to zero.
b) highly elastic and downward sloping Assume that when all inputs to a production process
are doubled, there is less than a doubling of total
c) perfectly elastic and horizontal. output.
d) highly inelastic and downward sloping This production function would be said to exhibit:
With the increase in output, a firm’s short-run marginal a) Decreasing returns to scale.
cost will eventually increase because of:
b) Constant returns to scale
a) diseconomies of scale
c) Increasing returns to scale
b) lower product price
d) Cannot be determined with the information given
c) the firm’s need to break even
d) diminishing returns. CHAPTER # 5
Which of the following is regarded as an implicit cost of Which of the following topics are studied in Macro
production? Economics?
a) Wages of the labour a) Theory of Demand
b) Electricity charges b) Aggregate Demand and Aggregate Supply.
c) Interest on owned money capital. c) Equilibrium of Industry

d) None of the above a) Study of collective decisions by households or
producers
The difference between GDP and GNP consists of:
b) The role of the State Bank in regulating the money
a) Consumption of fixed capital supply
b) Indirect business taxes c) The economic behaviour of buyers and sellers in
c) Public and private transfer payments particular markets.
d) Net foreign factor income. d) Study of issues such as unemployment, inflation,

economic growth, etc
Which of the following are regarded as withdrawals
from the circular flow of income? GDP is equal to:
a) saving and taxation. a) the market value of all final goods and services
produced during the course of the year
b) export and import
b) the sum of the incomes earned by suppliers of
c) investment and saving resources in the economy
d) Government spending and borrowing c) the sum of value-added at all stages of production
The GDP deflator is the: d) all of the above.
a) Ratio of nominal GDP to real GDP multiplied by 100. Which of the following statement is correct?
b) Ratio of real GDP to nominal GDP multiplied by 100 a) Disposable Income is equal to consumption plus
saving
c) Difference between real GDP and nominal GDP
multiplied by 100 b) Disposable Income is equal to personal income less
personal taxes
d) Difference between nominal GDP and real GDP
multiplied by 100 c) Disposable Income is either spent on consumer
goods and services or saved
To transform GDP from market prices to basic prices it
is necessary to: d) All of the above.
a) Exclude imports Which of the following is not an issue in

macroeconomics?
b) Subtract taxes and subsidies
a) issues relating to balance of payment
c) Subtract taxes and add subsidies.
b) determination of prices in the agricultural sector.
d) Add income from abroad
c) relationship between inflation and unemployment
Which of the following is NOT associated with
macroeconomics? d) possible effect of a budget deficit on the level of
investment

Net National Product (NNP) can be arrived at from c) The value of exports
Gross National Product (GNP) by:
d) All of the above.
a) deducting depreciation.
The following data relates to the economy of a country
b) adding indirect taxes during a one year period:
Rs. in billion
c) deducting indirect taxes and adding depreciation Exports 288
d) adding depreciation Investment 166
Savings 117
Consider the following with reference to circular flow Government expenditure 150
of national income: Imports 335
Taxes 199
a) subsidy on agricultural produce
The national income of this economy ________ during
b) import of capital goods the year.
a) falls.
c) export of consumer goods
b) rises
d) levy of withholding tax
c) remains static
Which of the above represent injections into the
d) is in equilibrium
circular flow of national income:
Assume that in 2017 the nominal gross domestic
a) (A) and (B) only product of a country is Rs. 500 billion and the price
index is 200. If the price index was 150 in 2010 what
b) (B) and (D) only
would be the real gross domestic product of the
c) (A) and (C) only. country in 2017 computed in terms of 2010 prices?
d) (C) and (D) only a) Rs. 125 billion
Which of the following represents a withdrawal from b) Rs. 166.67 billion

the circular flow of national income?
c) Rs. 375 billion.
a) A rise in consumption
d) Rs. 666.7 billion
b) A deficit on the balance of trade.
Given below is the Consumer Price Index (CPI) of a
c) A surplus on the balance of trade country for four years:
Year 2014 2015 2016 2017
d) A rise in public investment CPI 500 550 600 650
Which of the following constitute(s) injection into the Based on the above schedule, which of the following
circular flow of income? statements is correct?
a) The rate of inflation has been consistently rising
a) Investments by businesses from 2015 to 2017
b) Government expenditures on goods and services b) The rate of inflation in 2016 is 10%

c) The rate of inflation is the highest in 2017 c) government spending decreases
d) The rate of inflation has been consistently falling d) the nominal money supply decreases
from 2015 to 2017.
Which of the following would decrease aggregate
(viii) Which of the following is NOT part of a country’s demand?
Gross Domestic Product?
a) increased investment
a) Company profit
b) increase in export revenue
b) Net income from abroad.
c) increased taxation.
c) Salaries of school teacher
d) increased consumption
d) Investment expenditure
The aggregate supply curve:
Which of the following is NOT to be considered while
a) is the sum of the individual supply curves in the
estimating national income under income approach?
economy
a) Rent of land
b) is a market supply curve
b) Unemployment benefits.
c) embodies the same logic that lies behind an
c) Interest on capital individual firm’s supply curve
d) Income of self-employed people d) None of the above.
GDP deflator is calculated by: According to Keynes, aggregate demand is inherently

unstable because:
a) dividing real GDP by nominal GDP and multiplying by
100 a) a government has limited capability to fine-tune the
economy
b) dividing actual GDP by nominal GDP and multiplying
by 100 b) investment decisions of businessmen are often
destabilizing.
c) dividing nominal GDP by real GDP and multiplying by
100. c) increase in taxes adversely affect investment in new
business ventures
d) dividing potential GDP by actual GDP and multiplying
by 100 d) measures to control money supply take
considerable time to achieve the desired results
CHAPTER # 6
Inflation will increase when:
The aggregate demand curve would shift to the right
a) aggregate demand increases faster than aggregate
if:
supply.
a) government taxes increase
b) aggregate supply increases faster than aggregate
b) net exports increase. demand

c) aggregate demand falls Consider the following data for a country: Rs. in billion
Consumer expenditure 250 Government expenditure
d) both b and c 500 Imports 100 Taxes 20 Depreciation 5
A deflationary gap exists in an economy when: Based on the above data, the aggregate demand for
a) aggregate demand is less than the full employment the economy would be:
level of income. a) Rs. 625 billion
b) injections exceed withdrawals at the full
b) Rs. 850 billion
employment level of income
c) Rs. 650 billion.
c) the government has a budget surplus
d) Rs. 825 billion
d) none of the above
When the national income is in equilibrium, an increase
Long Run Aggregate Supply (LRAS) curve is a vertical in investment causes the equilibrium to change. Which
line because it is: change of equivalent value would bring national
a) dependent on price level and signifies the upper income to its original equilibrium level?
limit of the capacity in the economy a) Decrease in government spending. (b) Increase in
b) dependent on price level and signifies the lower government spending
limit of the capacity in the economy c) Decrease in government taxes (d) Increase in
c) independent of price level and signifies the upper exports
limit of the capacity in the economy. Which one of the following is most likely to lead to a
d) independent of price level and signifies the lower rise in aggregate demand?
limit of the capacity in the economy a) Decrease in government expenditure
The inflationary gap may only be bridged by:
b) Decrease in income tax rate.
a) raising the government spending c) Increase in autonomous savings
b) raising the price level. d) Increase in rate of interest
c) raising the output level Which of the following will occur, if the government
d) raising the employment level increases its expenditures on goods and services and
increases taxation by the same amount?
Aggregate supply increases due to increase in:
a) Aggregate demand will be unchanged
a) labour productivity.
b) Aggregate demand will increase
b) consumer spending
c) Interest rates will decrease
c) wage rate
d) Money supply will increase
d) interest rates

CHAPTER # 7 b) National income is said to be in an equilibrium when
planned withdrawals from circular flow of national
When will savings increase in a country? income are equal to planned injections into circular
flow of national income
a) When interest rate rises.
c) People with high incomes have higher average
b) When inflation increases propensity to spend
c) When more credit cards are issued by the banks d) Both (a) and (b).
d) When production of consumer goods decreases The inverse relationship between rate of interest and
The ratio of change in consumption to change in level of investment is shown by:
income is called: a) supply curve
a) Marginal propensity to consume. b) the marginal efficiency of capital curve.
b) Average propensity to consume c) demand curve
c) Aggregate consumption d) indifference curve
d) Consumption function Induced investment is the investment which is:
If planned injections are less than planned a) income-inelastic
withdrawals:
b) income-elastic.
a) Unemployment will tend to reduce
c) independent of profit
b) Inflation will tend to rise
d) motivated by the well being of society
c) Balance of trade will tend to improve.
Which of the following is NOT a major determinant of
d) National income will tend to rise the consumption function?
Other things being equal, an increase in the rate of a) Political instability.
interest leads to:
b) Real income
a) an increase in consumer spending.
c) Distribution of wealth
b) an increase in saving
d) Changes in fiscal policy
c) an increase in business activity.
The expectation of fall in prices would result in:
d) an increase in government spending.
a) shift of current consumption curve to the left
Which of the following is correct?
b) shift of current consumption curve to the right.
a) People with low incomes have higher average
propensity to spend c) no change on current consumption curve

d) shift of current savings curve to the left a) marginal propensity to save
Which of the following factors might cause an upward b) marginal propensity to import
shift in the country’s consumption function?
c) marginal propensity to tax
a) A fall in share prices
d) marginal propensity to export.
b) A fall in interest rates.
To counteract a recession, the Central Bank should:
c) Households deciding to be economical
a) raise the reserve requirement and the discount rate
d) Expectation of recession
b) sell securities on the open market and lower the
Savings in a country increases when: discount rate
a) indirect taxes decreases c) buy securities on the open market and raise the
discount rate
b) inflation increases
d) buy securities on the open market and lower the
c) net wealth of households’ increases discount rate.
d) interest rate increases. The four main phases of a business cycle does NOT
Which of the following is true for induced investment? include:
a) It is independent of profit a) Depression
b) It will increase even if costs outweigh economic b) Inflation.

gains c) Boom
c) It is mostly done by the private sector. d) Recession
d) It is done by the government The concept of Multiplier discusses:
CHAPTER # 8 a) Savings and investments
Production and employment in which of the following b) Income and investments.

industries would be least affected by recession?
c) Income and expenditure
a) Sugar.
d) Income and savings
b) Steel
A prolonged and deep recession is called:
c) Garments
a) Hyperinflation
d) Vehicles
b) Depression.
Which of the following factor is not used in the
c) Stagflation
multiplier formula for the open economy?
d) Great depression

The multiplier measures the relationship between an b) investment is inversely related to the rate of interest
increase in income caused by an increase in :
c) investment is determined by the volume of
a) expenditures commercial bank lending
b) investment. d) investment in an economy is a function of output.
c) taxes If there is an increase in investment in an economy by

Rs. 250 million and marginal propensity to consume is
d) savings 3/4, then overall effect on the total output of the
Period of a business cycle in which real GDP is economy would be:
increasing is called: a) Rs. 1,000 million.
a) Recovery. b) Rs. 333.33 million
b) Downturn c) Rs. 187.50 million
c) Recession d) Rs. 750 million
d) Trough Which of the following situations would cause the
The four main phases of business cycle are: value of the multiplier to fall
a) boom, inflation, recession and recovery a) A fall in the level of government expenditure
b) inflation, recession, recovery and boom b) A rise in the marginal propensity to consume
c) recession, downturn, recovery and growth c) A rise in the marginal propensity to save.
d) boom, downturn, recession and recovery. d) A fall in business investment
In a given economy, out of every additional Rs. 1,000 of Which of the following does not normally happen in
national income, Rs. 200 is taken in taxes, Rs. 100 is the recession phase of the business cycle?
spent on imports and Rs. 500 is spent on domestically
a) A fall in the level of national output
produced goods. The multiplier is:
b) A rise in the rate of inflation.
a) 1.25
c) A rise in the level of unemployment
b) 2.
d) All of the above
c) 2.5
Assume that marginal propensity to consume out of
d) 1.67 disposable income is 0.8 and the rate of tax is 30% of
The basic concept which underlies the accelerator total income. Under the simple Keynesian model, what
theory of investment is: would be the total change in national income if
government increases public spending by Rs. 150
a) investment depends on the level of savings million?

a) Rs. 187.5 million d) Marginal propensity to export.
b) Rs. 341 million. Under which of the following circumstances, the value
of the multiplier would be higher?
c) Rs. 525 million
a) When both marginal propensity to consume and
d) Rs. 750 million marginal propensity to import are low
Which of the following marks the beginning of a b) When marginal propensity to consume is low and
contraction in the business cycle? marginal propensity to import is high
a) Peak. c) When marginal propensity to consume is high and
b) Trough marginal propensity to import is low.
c) Expansion d) When both marginal propensity to consume and

marginal propensity to import are high
d) Recession
In a business cycle, the stage which eventually leads
A central bank is likely to increase interest rates when the economy to the state of inflation is:
economy is in a phase of:
a) Boom.
a) prosperity.
b) Down turn
b) downturn
c) Recession
c) recession
d) Trough
d) trough
Which of the following would increase the value of
The basic concept which underlies the accelerator multiplier?
theory of investment is:
a) The propensity to spend extra income on domestic
a) investment depends on the level of savings goods and services is high
b) investment is inversely related to the rate of interest b) The marginal rate of tax on extra income is low
c) investment is determined by the volume of c) The propensity to spend extra income rather than
commercial bank lending save is high and consumer confidence is high
d) investment in an economy is a function of output. d) All of the above.
Which of the following factors is NOT used in the Which of the following may NOT be regarded as a
multiplier formula? characteristic of economic boom phase in the business
cycle?
a) Marginal propensity to save
a) Falling asset prices.
b) Marginal propensity to import
b) Lower unemployment
c) Marginal propensity to tax

c) Higher inflation c) interest rate to fall
d) High GDP d) interest rates to rise.
Which of the following statements is true in an Which of the following is an example of indirect tax?
economy with fixed taxes, no international trade and
the marginal propensity to consume is 0.8? a) Income tax
a) If consumption increases by Rs.50, investment b) Sales tax.

increases by a maximum of Rs.10 c) Capital gains tax
b) If consumption increases by Rs.50, savings increase d) Property tax
by a maximum of Rs.10
A contraction in an economy’s aggregate output
c) If investment increases by Rs.10, consumption combined with inflation is called:
increases by a maximum of Rs.50
a) Disinflation
d) If investment increases by Rs.10, income increases
by a maximum of Rs.50. b) Deflation
c) Stagflation.
CHAPTER # 9
d) Recession
Fiscal deficit can be controlled by reducing:
Which one of the following is NOT a feature of a good
a) Taxes
tax system?
b) Imports
a) It should be equitable
c) Unemployment
b) It should be economical
d) Public expenditure.
c) The rate should be same for everybody.
Which of the following is a direct tax?
d) It should be certain
a) Sales tax
Economic growth in an industrial society results from:
b) Capital gains tax.
a) Technological change
c) Federal excise duty
b) Innovation
d) Value added tax
c) Capital production
A stimulative fiscal policy combined with a restrictive
d) All of the above.
monetary policy will necessarily cause:
Which of the following is a direct tax?
a) gross domestic product to increase
a) Federal excise duty
b) gross domestic product to decrease
b) Value added tax

c) Sales tax Mohsin pays income tax of Rs. 2,500 on his earnings of
Rs. 20,000. Danish pays Rs. 4,000 income tax on his
d) Capital gains tax. earnings of Rs. 32,000. Kinza pays Rs. 5,000 income tax
Which of the following is NOT a determinant factor in on her earnings of Rs. 40,000. The income tax system
the rate of growth of a country’s standard of living? is:
a) Lowering of retirement age a) regressive
b) Capital investment. b) proportional.
c) Technological improvements. c) progressive
d) Upgrading of educational standards at the university d) equitable

level. Which of the following would reduce inflation?
Fiscal deficit can be controlled by: a) Increase in government spending
a) increasing taxes b) Increase in direct taxes.
b) reducing subsidies c) Increase in indirect taxes
c) reducing public expenditure d) All of the above
d) all of the above. Which of the following is an objective of fiscal policy?
Which of the following is a tool of expansionary policy? a) Zero inflation
a) Increase taxes b) Reduced money supply
b) Reduce subsidies c) Low exchange rates
c) Allow tax rebates. d) Stable economic growth.
d) Freeze wages Murad pays a tax of Rs. 100 on his income of Rs. 1000
In a given economy, out of every additional Rs. 1,000 of while Sohail pays a tax of Rs. 200 on his income of Rs.
national income, Rs. 200 is taken in taxes, Rs. 100 is 800. Identify the tax system prevailing in the country.
spent on imports and Sales tax on food items is an
a) Progressive
example of:
b) Regressive.
a) direct tax
c) Proportional
b) fixed tax
d) Equitable
c) progressive tax
Along with the benefits, certain costs are also
d) regressive tax. associated with economic growth. These include:
(a) high unemployment

(b) decrease in tax revenue (a) Tax cuts.
(c) inflation. (b) Reduction in tax rebates
(d) stagflation (c) Reduction in subsidies
Which of the following measures is NOT likely to boost (d) Decrease in government spending
a country’s rate of economic growth?
Which one of the following defines the economic
(a) Tax cuts growth rate?
(b) Tax rebates (a) Increase in real investment
(c) Reduction in subsidies. (b) Increase in GDP
(d) Increase in government spending (c) Increase in real GDP.
Which of the following policies help in increasing (d) Increase in GDP deflator
economic growth?
A expansionary fiscal policy combined with a restrictive
(a) Increase in taxes monetary policy would result in:
(b) Increase in government spending. (a) budget deficit to decrease
(c) Reduction in subsidies (b) taxes to increase.
(d) Wage freezes (c) government expenditure to decrease
The imposition of indirect taxes would likely result in: (d) interest rates to increase.
(a) demand-pull inflation Which of the following is NOT part of public

expenditure?
(b) cost-push inflation.
(a) Investment by nationalised industries
(c) wage spiral inflation
(b)Spending by local governments
(d) deflation
(c) Capital spending of public companies.
Crowding out is a result of:
(d) Interest on the national debt
(a) high government expenditure.
By budgeting for a deficit, a government aims to
(b) low government expenditure reduce:
(c) high taxes
(a) consumer spending
(d) none of these (b) inflation
Which of the following measures is likely to boost a
(c) rate of economic growth
country’s rate of economic growth?
(d) Unemployment.

Which of the following is NOT a part of Adam Smith’s (b) aggregate supply to the right
canon of taxation?
(c) aggregate demand to the left
(a) Equality
(d) aggregate demand to the right
(b) Economy
(c) Objectivity.
(d) Convenience CHAPTER # 10
The crowding out effect is caused by a: Money does NOT function as a:
(a) rise in interest rates reducing private sector a) medium of exchange

investment.
b) hedge against inflation.
(b) rise in interest rates reducing public sector
c) store of value
investment
d) measure of value
(c) fall in interest rates increasing savings
Which of the following is not a function of money?
(d) fall in interest rates reducing consumption
a) Store of value
If income tax of Rs. 500 is charged on an income of Rs.
5,000, then, compared to this, which of the following b) Unit of account
would indicate a regressive tax scale?
c) Standard of deferred payment
(a) Tax of Rs. 1,000 on an income of Rs. 10,000
d) Payment of interest.
(b) Tax of Rs. 1,500 on an income of Rs. 20,000.
The term “Precautionary motive” has been discussed
(c) Tax of Rs. 3,500 on an income of Rs. 30,000 in:
(d) Tax of Rs. 4,500 on an income of Rs. 40,000 a) Quantity theory of money
Which of the following is NOT regarded as a tool of b) Theory of consumer behavior

fiscal policy?
c) Liquidity preference theory.
(a) Private investment.
d) Multiplier accelerator theory
(b) Transfer payments
Which of the following is NOT considered to be a credit
(c) Taxation instrument?
(d) Government spending a) IOU
An expansionary monetary and fiscal policy shifts: b) Draft
(a) aggregate supply to the left c) Bond

d) Stock. a) Store of value
In the Keynesian theory of demand for money, the b) Medium of exchange.

transactions demand for money is determined by:
c) Standard of value
a) The rate of interest
d) Statement of financial resourcefulness
b) The level of consumers’ income.
According to Keynes, individuals retain cash for:
c) Expected changes in consumer prices
a) motives of transactions
d) The amount of money in circulation
b) motives of precaution
Which of the following is NOT a method of holding
wealth? c) motives of speculation
a) Bonds and equities d) all of the above.
According to the Quantity Theory of Money, if the

b) Human wealth.
money supply is Rs. 125 million, the average price level
c) Consumer durables is Rs. 5 and national output is Rs. 300 million, the
velocity of circulation of money is:
d) Commodities
a) 4
Which of the following is NOT a motive for holding
money? b) 8
a) Inflationary motive. c) 12.
b) Precautionary motive d) 16
c) Transactions motive Which of the following is regarded as ‘Fiat money’?
d) Asset motive a) Gold
Under the Quantity Theory of Money, changes in price b) Gold standard

level are:
c) Credit card
a) inversely related to change in money supply.
d) US dollar.
b) determined primarily by the Government.
Suppose in an economy, the average price level is 1.3,
c) directly proportional to changes in money supply real value of national output is Rs. 230 billion and the
quantity of money in circulation is Rs. 103 billion. The
d) independent of changes in money supply. velocity of circulation would be:
Which of the following functions money performs best (a) 2.90.
when used to purchase or sell different goods and
services? (b) 1.60

(c) 0.72 In an economy, there are Rs. 200 million in currency
held outside banks, Rs. 100 million in travellers’
(d) 0.58 cheques, Rs. 250 million in currency held inside the
banks, Rs. 300 million in checking deposits and Rs. 700
Which of the following best describes Keynesian million in savings deposits.
Liquidity trap?
The value of M1 (type of money) is:
a) High interest rates, low savings rates
a) Rs. 750 million
b) Low interest rates, high savings rates.
b) Rs. 1,200 million
c) High interest rates, high savings rates
c) Rs. 1,150 million
d) Low interest rates, low savings rates
d) Rs. 600 million.
(xiii) Which of the following is NOT a motive for
holding money? Which of the following statements is NOT true in
context of Keynesian liquidity trap, where prevailing
a) Inflationary motive. interest rates are very low?
b) Precautionary motive a) People may decide to hoard cash
c) Transaction motive b) Savings are moved to short-term investment

bearing accounts
d) Speculative motive
c) Monetary policy triggers aggregate demand.
What would be the velocity of circulation of money in
an economy in which the d) Forecast of return on investment is downgraded
average price level is 1.8, real GDP is Rs. 260 billion and In the Keynesian theory of demand for money, the
the nominal money supply is transactions demand for money is determined by:
Rs. 117 billion? a) the rate of interest
a) 4.0. b) the level of consumers’ income.
b) 3.2 c) expected changes in consumer prices
c) 4.8 d) the amount of money in circulation
d) 0.8
CHAPTER # 11
Cheques are NOT money because they:
On a short-run Phillips Curve, high rates of inflation
a) are issued by the banks instead of the government coincide with:
b) are merely instructions to transfer money. a) low interest rates
c) have value in exchange but little intrinsic value b) high unemployment rates
d) are not backed by either gold or silver c) low unemployment rates.

d) low discount rates b) aggregate supply increases faster than aggregate
demand.
Which of the following would reduce inflation?
c) aggregate demand falls.
a) an increase in direct taxes.
d) both b and c.
b) an increase in indirect taxes
Which of the following statement is correct?
c) increase in government spending
a) A government can help to counter demand-pull
d) increase in income inflation by reducing interest rate.
Rapid increases in price level during recession or high b) A government can help to counter cost-push
unemployment is referred to as: inflation by linking wage increase to productivity
a) Stagnation improvement
b) Inflation c) A government can help to counter cost-push

inflation by increasing income tax rate.
c) Stagflation.
d) None of the above.
d) Slump
A period of stagflation is characterized by:
The sum of frictional and structural unemployment is
considered as the: a) increasing prices and increasing employment
a) Demand deficient unemployment b) increasing prices and declining employment.
b) Natural rate of unemployment. c) declining prices and increasing employment
c) Seasonal rate of unemployment d) declining prices and declining employment
d) Cyclical rate of unemployment Which of the following would NOT lead to inflation?
Unemployment arising from a long term decline in a a) Increase in money supply

particular industry causes an increase in: b) Increase in interest rate.
a) structural unemployment c) Increase in tax exemptions
b) seasonal unemployment. d) Exchange rate depreciation
c) frictional unemployment. Farhan lost his job when Orient Bank closed its
d) cyclical unemployment. operations in Karachi. He received various offers but
remained unemployed because he wanted a job in a
Inflation will increase when: bank only. Farhan’s unemployment would be termed
as:
a) aggregate demand increases faster than aggregate
supply a) frictional unemployment.
b) structural unemployment

c) demand-deficient unemployment b) cost-push inflation.
d) seasonal unemployment c) wage spiral inflation
The level of structural unemployment would most d) deflation

likely be reduced by:
Which one of the following is NOT a cause of cost push
a) increase in the level of consumer expenditure inflation?
b) increase in research and development grants for a) Increase in the price of raw material
technology
b) Fall in interest rates.
c) increase in labour mobility.
c) Increase in firm’s profit margins
d) both (a) and (b)
d) Exchange rate depreciation
Which of the following would reduce inflation?
Which of the following may be regarded as a positive
a) Increase in government spending consequence of inflation?
b) Increase in direct taxes. a) Improvement in the value of money
c) Increase in indirect taxes b) Benefit to the debtors.
d) All of the above c) Benefit to the creditors
Slow economic growth and high unemployment refers d) Reduction in prices

to:
Structural unemployment is a type of unemployment
a) Stagflation. which:
b) Hyper inflation a) increases in a recession and falls in a boom
c) Wage spiral inflation b) arises due to lack of skills required for a newly
created job.
d) Deflation
c) arises when persons give up hope of finding a job
The Phillips curve indicates that there is a trade-off
between the objectives of: d) occurs as a result of transition from one job to
another
a) inflation and economic growth
A reduction in the demand for coal miners is likely to
b) inflation and unemployment. lead the economy to the following type of
c) inflation and balance of payments unemployment:
d) inflation and exchange rate a) frictional
The imposition of indirect taxes would likely result in: b) Structural.
a) demand-pull inflation c) voluntary

d) cyclical b) International Monetary Fund
On a short-run Phillips curve, high rates of inflation c) State Bank of Pakistan

correspond to:
d) Stock exchange
a) low unemployment rates.
Which of the following is a central bank unable to do?
b) high unemployment rates
a) Influence banks to tighten or loosen their credit
c) low interest rates policies
d) high interest rates b) Create a climate of monetary ease or restraint
CHAPTER # 12 c) Directly set market interest rates.
d) Influence the interest rate on new treasury bonds

Which of the following is most likely to be affected by
change in interest rates? If the nominal interest rate is 5% and the inflation rate is
2%, then the real interest rate is:
a) Consumer spending
a) 2%
b) Investment spending.
b) 3%
c) Government spending
c) 5%
d) Exports
d) 7%
Which of the following is NOT the function of a central
bank? A stimulative fiscal policy combined with a restrictive
monetary policy will necessarily cause:
a) Lender of the last resort
a) gross domestic product to increase
b) Monetary policy
b) gross domestic product to decrease
c) Fiscal policy.
c) interest rate to fall
d) Credit creation
d) interest rates to rise.
Which of the following is NOT a method of note issue?
Increase in Cash Reserve Ratio would:
a) Fixed fiduciary issue
a) Decrease prices
b) Proportional reserve system
b) Reduce inflation
c) Floating exchange system.
c) Control lending
d) Exchange management
d) All the above.
Which of the following is a financial intermediary?
Which of the following is NOT considered to be a
a) Pension fund.
protectionist measure?

a) Tariff Which of the following is an example of contractionary
monetary policy?
b) Exchange control regulations
a) A decrease in spending on infrastructure
c) Export subsidies
b) An increase in direct taxes
d) Free imports.
c) An increase in interest rates.
Other things being equal, an increase in the rate of
interest leads to: d) A decrease in reserve to be maintained with central
bank
a) an increase in consumer spending
Central banks can act as lenders of last resort because:
b) an increase in saving.
a) they have the ability to create money.
c) an increase in business activity
b) they are the only financial institution that is legally
d) an increase in government spending allowed to make loans during financial crises
While pursuing contractionary monetary policy, the
c) it provides consulting services to commercial banks
government would: whenever they find themselves in financial difficulty
a) raise interest rates and sell securities. d) all of the above
b) lower interest rates and sell securities If a government were to pursue an expansionary
c) raise interest rates and buy securities monetary policy it would:
d) lower interest rates and buy securities a) raise interest rates and sell securities
The main difference between an investment bank and b) lower interest rates and sell securities
a commercial bank is that investment bank: c) raise interest rates and buy securities
a) does not accept deposits. d) lower interest rates and buy securities.
b) does not underwrite shares Monetary policy can be effective if:
c) does not assist companies in acquiring funds (a) the money supply reacts to changes in the interest
d) none of the above rate
Which of the following would NOT lead to inflation? (b) money demand reacts to changes in the interest
rate
a) Increase in money supply
(c) planned investment reacts to changes in the
b) Increase in interest rate. interest rate.
c) Increase in tax exemptions (d) government spending reacts to changes in the

interest rate
d) Exchange rate depreciation

Whenever a commercial bank’s desired reserve ratio d) increase reserve requirement, increase discount rate
exceeds its actual reserve ratio the bank will: and buy government securities
(a) call in loans and reduce reserves A contractionary monetary policy in an open economy
with a flexible exchange rate
(b) call in loans and increase reserves.
would possibly steer the economy towards a:
(c) make additional loans and reduce reserves
a) higher domestic interest rate and exchange rate
(d) make additional loans and increase reserves appreciation.
(ii) If the reserve requirement is 20% and banks b) higher domestic interest rate and exchange rate
hold no excess reserves, an open market sale of depreciation
government securities of Rs. 60 million by the central
bank will: c) lower domestic interest rate and exchange rate
appreciation
(a) increase the money supply by up to Rs. 300 million
d) lower domestic interest rate and exchange rate
(b) decrease the money supply by up to Rs. 300 million. depreciation
(c) increase the money supply by up to Rs. 12 million
Which one of the following statements is NOT true?
(d) decrease the money supply by up to Rs. 12 million a) High interest rates makes it less expensive to
Government may increase the money supply through borrow.
open market operations but such measures are likely
b) Low interest rates discourage saving
to result in short-term interest rates to:
c) High interest rates would result in lower disposable
a) rise and increase the demand for money income
b) rise and reduce the demand for money d) Low interest rates encourage consumption
c) fall and increase the demand for money. Which one of the following is NOT an outcome of the
d) fall and reduce the demand for money central bank’s expansionary monetary policy?
For reducing inflationary pressure, the most a) Increase of money supply in the economy
appropriate combination of policies for a central bank
b) Decrease in market rate of interest
would be:
c) Increase in exchange rate.
a) increase reserve requirement, reduce discount rate
and sell government securities d) Increase in aggregate demand
b) increase reserve requirement, increase discount rate Which of the following is a financial intermediary?
and sell government securities.
a)Commercial bank.
c) increase reserve requirement, reduce discount rate
and buy government securities b) Federal Government
c) State Bank of Pakistan

d) Stock exchange c) cooperative bank.
Savings in a country increases when: d) investment bank
a) indirect taxes decreases CHAPTER # 13

b) inflation increases
If the American dollar is overvalued relative to the
c) net wealth of households’ increases Pakistan rupee:
d) interest rate increases. a) Pakistani goods are cheaper than US goods
Which of the following is NOT a part of monetary b) the Pakistan rupee is undervalued relative to the
policy? dollar.
a) Affecting interest rates by changing monetary base c) the rupee price of the dollar must rise
b) Changing the discount rate d) the cost of Pakistani goods in the United states must
be increasing
c) Selling bonds to increase government spending.
The Purchase power parity theory explains the
d) Changing reserve requirements determination of:
Which of the following is the main function of a central a) Exchange rates.

bank?
b) Power tariff
a) Controlling the money supply.
c) Prices
b) Issuing /processing credit cards
d) Supply of goods
c) Investing in commerce and industry
Which of the following is regarded as an argument in
d) Collection of statistical data favour of trade protection?
An expansionary monetary and fiscal policy shifts: a) to protect domestic labour against cheap foreign
labour
a) aggregate supply to the left
b) to reduce domestic unemployment
b) aggregate supply to the right
c) to protect infant industries
c) aggregate demand to the left
d) aggregate demand to the right.
Index price of exports ÷ Index price of imports is equal
A financial institution which provides banking and
to:
other financial services to its members is called:
a) Balance of trade
a) retail bank
b) Balance of payment
b) specialized bank

c) Terms of trade. b) the value of the dominant reserve/transaction
currency appreciates significantly.
d) Inflation
c) the supply of currency of that country in foreign
Which of the following measures would immediately exchange markets increases.
increase the cost of imports?
d) citizens of that country increase import of foreign
a) Tariff. goods and services.
b) Quota Which of the following measures would immediately
c) Embargo increase the cost of imports?
d) Subsidies a) Tariff.
Currency is usually devalued to: b) Dumping duty
a) Increase exports. c) Embargo
b) Increase imports d) Subsidies
c) Decrease inflation The quantities of domestic goods given up to obtain a

unit of imported goods is called:
d) Increase prices
a) Terms of trade.
The quantities of domestic goods given up to obtain a
unit of imported goods is called: b) Balance of trade
a) Balance of trade c) Substitution effect
b) Terms of trade. d) Opportunity cost
c) Substitution effect If the UK Pound is overvalued relative to the Pak rupee:
d) Balance of payment a) Pakistani exporters will be in an advantageous

position.
International trade encourages the formation of:
b) Pakistani importers will be in an advantageous
a) Perfect competition. position
b) Imperfect competition c) UK exporters will be in an advantageous position
c) Monopolistic competition d) Both (b) and (c)
d) Oligopoly Which of the following is a monetary measure for

correcting the current account deficit?
The rate of exchange of the currency of a country will
tend to increase, if: a) Quotas
a) the demand for the country’s goods and services b) Export promotion
increases in the foreign markets

c) Import substitution appreciation in the value of domestic currency would
result in:
d) Exchange rate depreciation.
a) increase in imports spending and decrease in
A Pakistani resident makes an investment in a company exports revenue
resident in United States. This transaction will be
recorded in Pakistan as: b) increase in exports revenue and decrease in imports
spending
a) credit in current account
c) increase in imports spending as well as exports
b) debit in current account revenue
c) credit in capital account d) decrease in imports spending as well as exports
d) debit in capital account. revenue.
Demand for imports may be price inelastic due to: A devaluation of the currency will normally result in:
a) high dependence on imports a) a reduction in the current account deficit
b) firmly entrenched preferences for imported goods b) an increased level of economic activity
c) lack of flexibility of domestic firms to replace c) a reduction in the domestic cost of living
imports d) both (a) and (b).
d) all of the above. Which of the following is the advantage of floating
Balance of payments surplus is balanced by: exchange rates?
a) buying gold or other foreign reserves a) Avoids damaging speculation against the currency
b) paying off debts b) Avoids the need for government intervention in the
foreign exchange markets.
c) selling gold or other foreign reserves
c) There is no need to hold reserves
d) both (a) and (b).
d) Both (a) and (b)
Which of the following cannot be used as a tool to
correct balance of payments disequilibrium? The Current Account of the Balance of Payments
consists of:
a) Floating exchange rate
(a) Trade in goods and services
b) Fixed exchange rate.
(b) Investment income
c) Domestic interest rate
(c) Transfers
d) Buying / selling of domestic currency by central bank
(d) All of the above.
In an economy where demand for imports is price
inelastic and demand for exports is price elastic, an The protective measure of a government where only a
fixed amount may be imported into a country refers to:

(a) Import tariff (a) Decrease interest rates and increase income tax
rates
(b) Export tariff
(b) Increase interest rates and decrease income tax
(c) Quota. rates
(d) Import substitution (c) Decrease interest rates and decrease income tax
Which of the following is most likely to result from rates
revaluation of a country’s exchange rate? (d) Increase interest rates and increase income tax
(a) Exports will become less competitive. rates.
(b) Imports will become more expensive The most effective macroeconomic policy to increase
output under fixed exchange rates and perfect capital
(c) Inflation will rise mobility would be:
(d) Export volumes will rise (a) an expansionary monetary policy (b) a revaluation
of the domestic currency
Which of the following is a non-monetary measure for
correcting current account deficit? (c) an expansionary fiscal policy. (d) an increase in
taxes
(a) Exchange rate depreciation
Which of the following is not an advantage of floating
(b) Tariffs.
exchange rate?
(c) Interest rate appreciation
(a) It minimizes government intervention in foreign
(d) Exchange control exchange markets
The restrictive monetary policy in an open economy (b) It automatically corrects disequilibrium in balance
with flexible exchange rate is most likely to result in: of payments
(a) higher interest rates and an exchange rate (c) It stimulates demand for exports.
appreciation.
(d) It frees policy instruments of government
(b) higher interest rates and an exchange rate
A US resident sets up a factory in Pakistan. This
depreciation
transaction will be recorded in Pakistan as:
(c) lower interest rates and an exchange rate
a) credit in current account
appreciation
b) debit in current account
(d) lower interest rates and an exchange rate
depreciation c) credit in capital account.
Which of the following policy combination is likely to d) debit in capital account

solve a deficit on the current account of the balance of
payment in an economy with a floating exchange rate? Which one of the following is NOT part of the country’s
current account?

a) Export of goods a) In short-run, the current account deficit gets worse
before improving
b) Foreign direct investment flows.
b) In short-run, import costs increase sharply
c) Unilateral transfers to other countries
c) In long-run, export revenues remain unchanged.
d) Imports of services
d) In long-run, high import prices have a contributory
The use of exchange control to overcome balance of effect to inflation
payment deficit results in:
The currency rate of exchange of a country will tend to
a) decrease in imports. increase, if:
b) decrease in exports a) the demand for country’s goods and services
c) decrease in price level increases in the foreign markets.
d) decrease in national income b) the value of the dominant reserve/transaction

currency appreciates significantly
Which one of the following will NOT be the result of
devaluation of domestic currency on the foreign c) the supply of currency of that country in foreign
exchange market? exchange markets increases
a) Export becomes less expensive in terms of foreign d) citizens of that country increase import of foreign
currency goods and services
b) Imports become more expensive in terms of A country’s balance of payment position exhibits:
domestic currency a) whether the country saves enough to pay for its
c) Export volumes will increase imports
d) Import volumes will increase. b)whether the country produces enough economic
output to pay for its growth
If a country has exports of goods of Rs. 5,300 million,
exports of services of Rs. 1,120 million, imports of c) whether the country's currency value is appreciating
goods of Rs. 5,700 million and imports of services of or depreciating
Rs. 1,420 million, than the value of its balance of trade
is:
The appreciation in the value of a domestic currency is
a) Rs. 700 million deficit likely to result in:
b) Rs. 400 million deficit. a) decrease in current account deficit
c) Rs. 300 million deficit b) a decline in the terms of trade
d) Rs. 300 million surplus c) exports becoming more expensive.
Which of the following does NOT depict the concept of d) imports becoming more expensive
J curve?

Which of the following measures would restrict the
quantity of goods imported in a country to a specified
amount/level?
a) Custom duty
b) Tariff
c) Exchange control
d) Quota.
The income from tourism is recorded in:
a) the current account under trade in services.
b) the current account under investment income
d) the capital account under foreign direct investment
d) the capital account under portfolio investment
If a country wants to reduce its current account deficit,

it will:
a) increase government expenditure
b) reduce taxes
c) increase private investment spending
d) decrease domestic consumption.


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Principles of Economics ICAP PAST PAPER MCQS PRC-3

PREPARED BY : M. JUNAID QURESHI 1 0300-0554011

c) it is not possible to produce the optimum d) Full employment of labour

c) a study of the level of aggregate production and d) Murabaha

PREPARED BY : M. JUNAID QURESHI 2 0300-0554011

b) Opportunity cost c) Economists are paid more than the accountants

c) Equity. d) Technology has great impact on productivity

d) Trade-off In deciding what products to produce, the central

a) circular flow c) marginal rate of transformation.

b) due process d) marginal product

Which one of the following statements is NOT true for

PREPARED BY : M. JUNAID QURESHI 3 0300-0554011

d) Agent is a decision maker within an economic model b) Firm

Which of the following features is more related to free c) Government

Micro economics does NOT cover: b) Land, labour and enterprise.

a) consumer behaviour c) Capital, labour and enterprise

b) factor pricing d) Land, labour and capital

c) general price level. CHAPTER # 2

PREPARED BY : M. JUNAID QURESHI 4 0300-0554011

a) Consumer indifference d) A shift to the left of the supply curve.

b) Elasticity of demand Demand curve slopes downward because of:

c) Inelastic demand a) consumer indifference

d) Law of diminishing marginal utility. b) elasticity of demand

A movement along a supply curve is caused by a: c) inelastic demand

a) excess demand. d) A decrease in equilibrium quantity.

b) excess supply Which of the following is held constant along the

PREPARED BY : M. JUNAID QURESHI 5 0300-0554011

c) demand of 12 units a) zero

d) supply of 18 units b) Infinite.

a) price of good goes down d) between zero and one

c) prices of substitute goods go down a) income effect

d) prices of complements go down. b) income and substitution effect.

A movie theatre may be regarded as an example of: c) price to a change in income

a) public goods d) quantity demanded to a change in income

b) private goods Why is the price elasticity of demand a relative

a) There is no change in the income of consumers

PREPARED BY : M. JUNAID QURESHI 6 0300-0554011

PREPARED BY : M. JUNAID QURESHI 7 0300-0554011

a) Quantity demanded will fall by a relatively large d) Income elasticity is + 2

PREPARED BY : M. JUNAID QURESHI 8 0300-0554011

The price elasticity of demand is a negative number For a normal good:

b) Demand is price inelastic b) The price elasticity of demand is positive; the

PREPARED BY : M. JUNAID QURESHI 9 0300-0554011

b) demand becomes less elastic and supply becomes a) perfectly elastic

PREPARED BY : M. JUNAID QURESHI 10 0300-0554011

d) AC curve c) operating capacity

PREPARED BY : M. JUNAID QURESHI 11 0300-0554011

b) Inelastic c) Advances in knowledge

a) Law of diminishing return a) Existence of many firms.

b) Constant returns to scale b) Barrier to entry or exit from the market

c) Increasing returns to scale c) Product differentiation.

d) Decreasing returns to scale. d) Goods produced are close substitutes of one

PREPARED BY : M. JUNAID QURESHI 12 0300-0554011

PREPARED BY : M. JUNAID QURESHI 13 0300-0554011

d) perfectly inelastic a) Peak and off-peak call charges

Diseconomies of scale occur when: b) Heavy potential advertising costs

a) long run average costs begin to rise. c) Large capital requirements

b) short run average costs begin to rise d) Constant returns to scale.

PREPARED BY : M. JUNAID QURESHI 14 0300-0554011

b) Downward sloping demand curve a) reduce price and increase output

c) Identical products. b) reduce price and reduce output

d) the market is stable c) There is no scarcity of the factors of production

d) monopolistic competition. c) When the average cost is rising, marginal cost is

PREPARED BY : M. JUNAID QURESHI 15 0300-0554011