EC1301 PRINCIPLES OF ECONOMICS
(SEMESTER II : AY2006-2007)
Time Allowed : 2 Hours
INSTRUCTIONS TO CANDIDATES1.
This examination paper contains 60 multiple-choice questions and comprises 16 printed pages.
Answer all the questions on the computer bubble form provided.This paper accounts for 60% of your course score.This is a CLOSED BOOK examination.
2.3.4.
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1.
EC1301Suppose that the price elasticities of demand for pharmaceutical
products differ across several customer groups. If senior citizens have the most elastic demand for pharmaceutical products, they will receive:A) the lowest price for pharmaceutical products.
B) the greatest quantity of pharmaceutical products. C) the smallest quantity of pharmaceutical products. D) the highest price for pharmaceutical products.Question 2 and 3 refers to Figure 2.
Figure 2
2.
The figure shows prices, demands, and cost data for the only restaurant in a small town. If the restaurant charges the single price of $8 per meal, what is its profit from senior customers?A) $1,200 B) $1,500 C) $2,280 D) $2,560
3.
If they were to charge different prices in both groups, they will earn a total profit of:A) $3,120B) $3,780C) $3,760D) $4,060
3EC13014.
Consider four types of markets: monopoly, perfect competition, duopoly, and insecure monopoly. If they were ranked from lowest output to highest output the ranking would be:
A) monopoly, duopoly, insecure monopoly, perfect competition B) perfect competition, duopoly, monopoly, insecure monopolyC) monopoly, insecure monopoly, duopoly, perfect competition D) duopoly, monopoly, insecure monopoly, perfect competition
Figure 5
5.
Refer to Figure 5 above. The decision tree shows the payoffs for two firms based on the strategies they choose in this non-repeated simultaneous game. In this game the outcome is for Firm A to ___________ and Firm B to _____________:
A) stand by the agreement, stand by the agreementB) cheat only if B cheats, stand by the agreement. C) stand by the agreement, cheat only if A cheats D) cheat, cheat
Consider a college that has only ever had one on-campus bookstore. Over the last two years you have observed that book prices are 20% lower. One possible explanation is:
A) the fear that other bookstores may open in this contestable market. B) competition from online stores has encouraged the bookstore to behave as an insecure monopolist.
C) the college ordered the bookstore to lower prices. D) all of the above
6.
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7.
EC1301A single firm selling its output in a contestable market cannot enjoy monopoly profit because of:A) dominant strategies. B) collusion.
C) free entry and exit. D) dominant firms.
Questions 8 and 9 use Figure 8.
Figure 8
InnovateFirm B’s ChoiceInnovateDon’t Innovate
Firm A’s ChoiceFirm B’s ChoiceFirm A: 200 millionFirm B: 200 millionFirm A: 500 millionFirm B: 400 millionInnovate
Firm A: 400 millionFirm B: 500 millionDon’t Innovate
Don’t Innovate
Firm A: 300 millionFirm B: 300 millionTwo firms, A and B, are competitors in the computer industry. If Firm A were to undertake research and development (innovate), it would
undertake research costs but be able to capture a larger market share if Firm B does not (don’t innovate). Figure 8 (above) gives the payoffs depending on whether Firm A or Firm B chooses to innovate. 8.
In the above duopoly sequential game,
A) Firm B has a dominant strategy, but Firm A does notB) Both have dominant strategies which is not to innovateC) Both have dominant strategies which is to innovateD) Both do not have dominant strategies
9.
Firm B will get ________ if each firm follows its best strategy.A) 200 millionB) 300 millionC) 400 millionD) 500 million
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Figure 10
EC1301310 380 430 510
10.
Figure 10 (above) shows the market demand curve for air-travel. The airline Fly Smart is initially a secure monopoly between two cities X and Y at point M, serving 300 passengers per day at the profit
maximizing price of $300 per ticket. Suppose that Fly Smart discovers that a second airline is contemplating entering the market, and that the minimum market entry quantity is 130 passengers per day. If Fly Smart commits to the entry-deterring quantity, what is the difference in profits compared to if Fly Smart passively allows the competitor to enter?
A) $11200B) $27600C) $28400D) $44800
Table 11ProductionPrice Per Unit200520062005200646$0.40$0.3053$0.20$0.5068$0.60$0.80
Year
Good AGood BGood C
11.
Refer to Table 11. If we use 2006 as the base year, then real GDP in 2005 is:A) $7.80 B) $6.20 C) $7.50 D) $9.70
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12.
EC1301If no foreign companies produce in Singapore, but many of Singapore’s companies produce abroad, then it is probably true that:A) Singapore’s GNP and GDP are equal. B) Singapore’s GNP exceeds its GDP. C) Singapore’s GDP exceeds its GNP.
D) Singapore’s GDP equals its domestic income.
Questions 13 and 14 refer to Table 13, which shows all the information needed to compute the Meat Price Index.
Table 132005 Quantity681BeefMuttonPork2004 Quantity4532004 Price$3.00$2.00$2.002005 Price$3.50$3.00$1.002006 Quantity4822006 Price$4.00$3.00$1.5013.
If 2004 is the base year, then the Meat Price Index for 2006 is approximately:A) 154B) 107C) 127D) 114
14.If 2005 is the base year, then the inflation rate of meat from 2004 to
2005 is approximately:A) 128% B) 22% C) 28% D) 14%
15.
Ignoring the value of services that people perform for themselves in their own homes when calculating GDP has probably led us to:A) overestimate GDP growth in recent years.
B) overestimate the demand for services in the economy. C) underestimate GDP growth in recent years.
D) overestimate the real level of economic activity during any given year.
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Table 16
Employment Status of the working age population of XanaduEmployed Full TimeEmployed Part Time
Not employed, looking for workNot employed, not looking for work
1500500250150
EC130116.
Refer to Table 16. Suppose half of the part-time workers of Xanadu are looking for full-time jobs. If these workers were counted as not employed and looking for work, the unemployment rate would be:A) 94% B) 11% C) 22% D) 17%
17.In the income-expenditure model, suppose the economy is in
equilibrium. Now, suppose there is an increase in investment. As the economy adjusts to this increase in investment:A) consumption will fall.
B) the multiplier will increase. C) saving will fall.
D) none of the above.
18.
Suppose that in the United States people begin to spend a smaller fraction of their income on imports. This would cause the multiplier to:A) decrease. B) increase.
C) remain unchanged.
D) either increase or decrease depending on the value of the Marginal propensity to consume.
19.If C = 100 + 0.6Y and I = 50, then the equilibrium level of income is:
A) 450B) 375C) 525D) 390
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Questions 20 and 21 refer to Figure 20, which shows an increase in investment in the income-expenditure model.
Figure 20
Demand
45oD’YZWXDEC13010Output
20.
The size of the multiplier is given by the length of the line ___ divided by the length of the line ___.A) XZ, WZ B) WY, YZ C) XY, WZ D) WX, XY
21.
If the increase in investment is 60 and the marginal propensity to consume is 0.5, then the output level represented by line YZ is:A) 30B) 60 C) 120 D) 200
22.
When the general price level rises:
A) consumption rises as a result of the accelerator effect.B) investment rises as a result of the wealth effect.
C) investment falls as a result of the interest rate effect.D) consumption falls as a result of the multiplier effect.
23.Fiscal policy affects aggregate demand because:
A) taxes affect corporate spending and so investment.B) taxes affect disposable income and so consumption
C) government spending is a category of aggregate demand.D) all of the above
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24.
EC1301If the government chooses to increase government expenditure or to decrease taxes, according to the Aggregate Demand - Aggregate Supply model:
A) the price level will fall and GDP will decrease.B) the price level will rise and GDP will decreaseC) the price level will rise and GDP will increaseD) the price level will fall and GDP will increase
25.Which of the following is an example of investment?
A) a firm builds a new factory
B) the government builds a dam to have a source of hydroelectric power C) a student attends collegeD) all of the above
26.
The multiplier-accelerator model:
A) emphasizes that current investment spending depends negatively on the expected future growth of GDP.
B) suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP.C) links investment spending to stock prices.
D) emphasizes the role of real interest rates and taxes.
27.
If a project costs $300 today and pays a real return of $321 two years from now, what is (approximately) the highest real interest rate at which the project should be undertaken?A) 7% B) 5% C) 3.5% D) 7.5%
28.
Starhub is deciding whether to join the Wireless@SG nationwide wireless internet access project. The cost to Starhub is $200 million today. The inflation rate is 5%. In order for Starhub to earn a nominal return of $216 million a year from today, the real interest rate must be:A) 5% B) 3% C) 8% D) 13%
29.
Financial intermediaries reduce risk by:
A) investing in a large number of projects with independent returns.B) pooling funds.
C) gaining expertise in evaluating and monitoring investments. D) none of the above.
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30.As a medium of exchange, money:
A) eliminates the need for double coincidence of wants.B) makes simpler the recording of prices.C) is a useful asset to hold.D) requires intrinsic value.
EC130131.
If households move cash they have previously kept at home into bank accounts, this will:
A) increase money supply.B) reduce money supply.
C) have no effect on money supply.
D) have an effect on money supply, but the direction is uncertain.Questions 32 and 33 refer to Figure 32
Figure 32
Interest Rate (%)ABDMd’
CMd032.
MoneyAll of the following events can cause a movement from Point A to Point B except:A) a decrease in the interest rateB) an increase in the price level C) an increase in income D) none of the above
33.
All the following events can cause a movement from Point B to Point D except:A) the discount rate is lowered.
B) banks decide to reduce their excess reserves.
C) the Central Bank sells government bonds on the open market.D) an expansionary monetary policy.
11EC130134.Suppose banks follow a required reserve ratio of 10%. They also hold
another 10% of deposits as excess reserves. What happens to total deposits when $100 is withdrawn from a bank account?A) falls by $125B) falls by $500C) falls by $1,000D) falls by $8035.In the choice of commodity to be used as money, moving from paper to
electronic means has the advantage of allowing money to be:A) more easily divisible
B) more easy to store and transportC) both A and B
D) none of the above
36.
Which of the following does not shift the long run aggregate supply curve?
A) workers accept lower wages in the face of unemploymentB) a new invention doubles the fuel efficiency of cars
C) the government grants more work permits to foreign workersD) a tornado destroys many of the country’s power stations
37.
In the transition from short run to long run, the short run aggregate supply shifts as the result of:
A) government’s fiscal and monetary policiesB) adjustments made to wages and prices
C) investors reacting to changes in economic outlookD) shifts in the full employment level of output
38.
Which of the following events does not lead to an increase in aggregate demand?
A) The central bank reduces the required reserve ratio
B) Workers express willingness to accept lower wages in negotiationsC) The government lowers the income taxD) Business confidence improves
39.
Favourable supply shocks result in:A) prices falling and real GDP rising. B) prices rising and real GDP rising.C) prices falling and real GDP falling.D) stagflation.
12EC1301Questions 40 and 41 use Figure 40, which shows various possible aggregate demand, short run aggregate supply, and long run aggregate supply curves. Points A to E are intersections of curves.
Figure 40
General Price Level
ABDCE0Real GDP
40.
Which of the following is consistent with the economy moving from point D to point E?
A) Wages and prices get revised downwardsB) Wages and prices get revised upwards
C) Government cuts spending and raises taxesD) Government cuts taxes and raises spending
41.Which of the following is consistent with the economy moving from point
C to point B?
A) Wages and prices get revised downwardsB) Wages and prices get revised upwards
C) Government cuts spending and raises taxesD) Government cuts taxes and raises spending
42.
Contractionary fiscal policy shifts the:
A) the short run aggregate supply curve to the left. B) the short run aggregate supply curve to the right. C) the aggregate demand curve to the right. D) the aggregate demand curve to the left.
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43.
EC1301Inside lags associated with fiscal policy are due to all of the following, except:A) the need for policymakers to collect data about the economy.B) the political process of getting government fiscal plans approved.C) the forecasting deficiencies of econometric models.
D) the bureaucratic process of designing spending and tax policies.
44.
Automatic stabilizers (e.g. the income tax) may act faster, compared to other kinds of fiscal policy used for stabilization. This is because:A) there are no transmission lags or effectiveness lags.B) there are no inside or outside lags.
C) there are no recognition lags or decision lags.D) none of the above.
45.If long-run neutrality of money is correct, then:
A) the supply of money has no long-run effect on output.
B) the supply of money has no long-run effect on real interest rates.C) in the long run, inflation is essentially a monetary phenomenon.D) all of the above.
46.
The idea of “crowding out” suggests that:
A) expansionary monetary policy can increase the level of investment.B) expansionary fiscal policy can reduce the level of investment.
C) governments can use tax cuts to entice investors to start investment projects.
D) central banks can curb lending by increasing reserve requirements.
47.Country A’s per capita real GDP is currently one quarter of Country B’s.
But Country A’s per capita real GDP is growing at rate 10% per year, while Country B’s is growing at rate 3% per year. Approximately how many years will it take for Country A to overtake with Country B? [Hint: use the rule of 70]A) 21B) 25C) 70D) 748.What should governments do in order to ‘get incentives right’?
A) use tariffs and subsidies to help domestic firms face international competition
B) fight corruption
C) provide free education to all citizens
D) seek foreign aid from international organizations
14EC130149.Which of the following has an ambiguous effect on technological
progress?
A) granting long-lasting patents to companies for their inventions
B) increasing the scale of the market by opening the economy to tradeC) increasing the education level of the populationD) putting resources into funding basic research50.Comparing the economic performance of divided countries allows one to
illustrate the impact of:A) adoption of technology.B) geography.
C) capital deepening.D) choice of institutions.
51.
Other things being equal, countries with high savings rates tend to _______________, compared to other countries.A) grow faster
B) grow faster initially, but eventually slows to the same rateC) grow faster initially, but eventually grow slowerD) grow slower
52.Which of the following describes the state of growth of countries?
A) Poor countries are converging towards rich countries
B) Skilled labour tends to move from poor countries to rich countriesC) Technology tend to get transmitted from poor countries to rich countries
D) Capital deepening forms the basis of growth in the very long term
53.
Which of the following is not an argument in favour of protection?A) Protection raises total employment and output at home and abroad. B) Protection safeguards infant industries.
C) Protection protects domestic workers from foreign competition. D) none of the above
15EC1301Questions 54 and 55 use Table 54, which shows the production
possibilities available to the two economies of Singapore and Vietnam.
Table 54
SingaporeComputers
100806040200
Cars020406080100
VietnamComputersCars
250201015201030540050
54.Vietnam has:
A) an absolute advantage in car production
B) a comparative advantage in computer productionC) an absolute advantage in computer productionD) none of the above
55.For both countries to benefit from trade, the terms of trade must be
between ____ and _____.
A) 1 computer for 1 car; 1 computer for 2 carsB) 1 computer for 4 cars; 2 computers for 1 carC) 1 computer for 1 car; 2 computers for 1 carD) 2 computers for 1 car; 4 computers for 1 car56.Given the natural displacement of workers across industries that is
associated with free international trade, we should expect:A) workers in exporting industries to oppose free trade.
B) workers flexible enough to switch industries easily to oppose free trade.
C) workers facing stiffer international competition to endorse free trade. D) workers in exporting industries to endorse free trade. 57.Fixed exchange rates have the drawback of:
A) requiring the coordination of economic policies between countries. B) requiring permission of the IMF in order for rates to be changed. C) making international transactions more expensive. D) making international transactions less efficient.
58.
An increase in U.S. imports from Japan ________ the supply of dollars and ________ the demand for yen.A) decreases; increases B) decreases; decreases C) increases; decreases D) increases; increases
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59.
EC1301According to purchasing power parity, if it takes five times as many
Russian roubles to buy a kilogram of fish in Russia as it takes Singapore dollars to buy a kilogram of fish in Singapore, then:A) the law of one price no longer holds.
B) there is a lower rate of inflation in Russia than in Singapore. C) the equilibrium exchange rate should be five roubles per dollar.
D) the equilibrium exchange rate should be one rouble per five dollars.
60.The Asian financial crisis of 1997 was due to the fact:
A) that the U.S. continuously raised its interest rates. B) that Asian inflation rates were out of control.
C) that Asian countries experienced increasingly larger trade deficits. D) that loss of confidence in several economies resulted in the massive selling of their currencies.
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