SBI SCHOOL OF BUSINESS INTELLEGENCE

PRE-REQUISITES COMPETENCY STAGE EXAMINATION

Chapter 1- 4 Total Marks: 50*1=50
Tutor: Sir OSAMA WAHEED Time Allowed: 30 Minutes
Name of the examinee: ……………... CEN: ……………..
PRC-3 Test # 11
MIDTERM
Multiple Choice Questions
1. Economics is best defined as the study of: 8. Perfectly inelastic demand means:
a) Financial decision-making a) Demand changes with price
b) Choices made by people faced with scarcity b) No demand change despite price shifts
c) Inflation, unemployment, and economic growth c) Elasticity equals one
d) Wealth accumulation d) Supply equals demand
2. Law of diminishing returns applies when: 9. Natural monopolies arise when:
a) All factors are fixed a) Fixed costs are high relative to variable costs
b) Only one factor is variable b) Government sets prices
c) Marginal cost decreases c) Demand exceeds supply
d) Inputs are proportional d) Economies of scale are exhausted
3. Price floors result in: 10. Marginal cost represents:
a) Surpluses a) Total cost of all units produced
b) Shortages b) Cost of producing an additional unit
c) Efficient resource allocation c) Average cost across units
d) Increased competition d) Total fixed costs
4. Dumping is: 11. Income elasticity for inferior goods is:
a) A form of price discrimination a) Positive
b) Cost-saving production b) Negative
c) Illegal in all markets c) Zero
d) Encouraged by free markets d) Greater than one
5. Cross-price elasticity for substitutes is: 12. When the price of a good is below equilibrium, the
a) Positive result will be:
b) Negative a) Excess supply
c) Zero b) A shortage of the good
d) Constant c) Surplus in the market
6. Perfect competition is characterized by: d) Equilibrium maintained
a) Differentiated products 13. Elastic demand implies:
b) Homogeneous goods a) Price increase raises total revenue
c) High entry barriers b) Demand increases despite price hikes
d) Single seller dominance c) Price cuts increase total revenue
7. Price elasticity of demand measures: d) Demand remains unaffected by price
a) Change in price due to demand shifts
b) Responsiveness of demand to price changes
c) Supply adjustments over time
d) Marginal revenue elasticity
14. Supernormal profits are earned in monopoly 23. When demand is unitary elastic, total revenue:
because: a) Rises with price increases
a) Costs are minimized b) Falls with price cuts
b) Prices exceed marginal revenue c) Remains constant
c) Demand is highly elastic d) Increases proportionally
d) Competition is absent 24. Barriers to entry in monopoly include:
15. Complements are goods that: a) Low start-up costs
a) Are bought together b) High economies of scale
b) Substitute each other c) Elastic demand
c) Have no relation d) Competitive prices
d) Increase in demand when substitutes rise 25. The law of demand states:
16. Oligopoly markets feature: a) Higher prices increase demand
a) Price-taking behavior b) Lower prices decrease demand
b) Interdependent decision-making c) Demand increases as price falls
c) Homogeneous products d) Price and demand are independent
d) No competition 26. Profit maximization occurs where:
17. A surplus occurs when: a) Marginal cost equals average cost
a) Supply exceeds demand b) Marginal revenue equals marginal cost
b) Demand exceeds supply c) Total revenue exceeds total cost
c) Price is below equilibrium d) Average revenue equals price
d) Price is regulated 27. Market supply shifts left when:
18. Supply elasticity is greater when: a) Production costs rise
a) Production is time-intensive b) Input prices decrease
b) Resources are limited c) Demand is elastic
c) Substitutable goods are available d) New firms enter the market
d) Production adjusts quickly 28. Perfect competition leads to:
19. Price discrimination requires: a) Homogeneous pricing
a) Same price across all markets b) Productive inefficiency
b) Control over supply and demand c) High-profit margins
c) Elasticity differences in markets d) Resource misallocation
d) Uniform costs 29. Monopoly profits are maximized where:
20. Goods with high income elasticity are: a) Marginal cost equals marginal revenue
a) Necessities b) Price exceeds marginal revenue
b) Luxuries c) Average cost exceeds revenue
c) Inferior goods d) Supply equals demand
d) Public goods 30. Price elasticity of supply is determined by:
21. Arc elasticity calculates elasticity: a) Market demand
a) At a single price point b) Cost of inputs
b) Between two price points c) Time for production adjustment
c) Only for linear curves d) Government policies
d) At constant revenue 31. Due to changing productivity proportion of factors of
22. Economies of scale occur when: production, total cost curve will be:
a) Costs increase with output a) 45 degrees straight curve
b) L-shape curve
b) Average costs fall as production expands
c) Inverted S-shape
c) Output remains constant d) U-shape
d) Technology reduces marginal cost
32. A manufacturer of power drills was charging Rs. 26 37. Adil & Co employs 30 men in his factory which
for a drill, and demand was 1,800 drills per week. He manufactures sweets. He pays them Rs. 5 per hour and
then raised the price to Rs. 30, and demand went they all work maximum hours. To employ one more
down by 300 drills per week. What is the arc elasticity worker, he would have to raise the wage rate to Rs. 5.50
of demand between the prices of Rs. 26 and Rs. 30? per worker hour. If all other costs remain constant, the
a) -0.79 marginal cost per hour of labour is now:
b) -1.08 a) Rs. 20.50
c) -1.25 b) Rs. 15.00
d) -1.27 c) Rs. 5.50
33. Sales of Good E have increased from 250,000 to d) Rs. 0.50
255,000 following a reduction in the price of Good F 38. Shut down conditions of a firm under perfect
from Rs. 10 to Rs. 9.50. Which one of the following competition in short run are:
statements most accurately describes the relationship a) P = ATC
between Goods E and F? b) P < AVC
a) Goods E & F are close complements c) AR = AVC
b) Goods E & F are close substitutes d) AR < AVC
c) Neutral Goods i. Only a is correct
d) Unrelated Goods ii. Options a and c are correct
34. Following diagram showing result of change in iii. Options b and d are correct
price and quantity demanded for a product which iv. Only d is correct
shows: 39. The law of diminishing marginal returns states that:
a) As more factors of production are employed, output will
rise initially and then fall
b) As more factors of production are employed, output will
rise, but at a diminishing rate
c) As more variable factors of production are added to a
fixed factor, output will rise at a faster rate initially and
then fall
d) As more variable factors of production are added to a
a) Relatively elastic demand fixed factor, output will rise at a decreasing rate after a
b) Relatively less elastic demand certain point
c) Unitary elastic demand 40. Collusion in oligopolistic markets will lead to:
d) Perfectly inelastic demand a) Firms setting price where industry marginal revenue is
35. Following diagram depicts: equal to marginal costs, and supernormal profits being
earned
b) Firms setting price where industry marginal revenue is
equal to marginal costs, and normal profits being earned
c) Firms setting price equal to average total cost, and
supernormal profits being earned
d) Firms setting price equal to average total cost, and
normal profits being earned
41. In the following diagram, the supply curve shows:
a) Firm's normal profit under monopoly
b) Firm's normal loss under monopoly
c) Firm's super profit under monopoly
d) None of the above
36. A monopolist's average revenue curve always
slopes downwards because:
a) Economies of scale exist in distribution
b) There are allocative inefficiencies a) Relatively elastic
c) Market demand increases as price falls b) Relatively inelastic
d) Marginal revenue can be negative c) Perfectly elastic
d) Perfectly inelastic
42. When the price rises from Rs. 40 to Rs. 50, what is 47. If the price elasticity of demand for petrol were 0,
the elasticity of demand? what would be the effects of an increase in taxation on
Price of Demand per Week Supply per petrol?
Good (Units) Week (Units) a) The consumer would pay all the tax
40 200 100 b) The quantity of petrol consumed would be changed
50 150 160 c) Total petrol sales would fall (in quantity) by the same
60 100 200 proportion as the increase in price caused by the tax
a) 0 d) In order to maintain sales volume, petrol stations would
b) Unitary elastic have to adopt a pricing policy whereby they absorbed some
c) Greater than 1 of the tax
d) Between zero and 1 48. The following demand curve for a product will shift to
43. In the given table, point D shows: the left when there is:
Price QD QS Situation
1 50 10 A
2 40 20 B
3 30 30 C
4 20 40 D
5 10 50 E
a) Market clearance
b) Surplus
c) Shortage a) A rise in household income
d) Loss b) An increase in the product's desirability from the point of
44. The government set the price floor at Pm, which view of fashion
shows: c) A fall in the price of a substitute
d) A fall in the price of a complement
49. Which of the following statement(s) about elasticity of
supply is correct?
a) Elasticity of supply is normally negative rather than
positive
b) Elasticity of supply is normally greater the shorter the
time period involved
c) Elasticity of supply depends on the alternative uses to
which suppliers can put their resources
d) All of the above are correct
a) Surplus of good Q 50. Elasticity of supply for a positively sloped straight-line
b) An expected rise in the tax on future consumption supply curve that intersects the price axis is
c) An expected rise in the price of the good a) Equal to zero
d) Shortage of goods in market b) Equal to one
45. Price is the ___________ of any tangible or c) Greater than one
intangible product d) Less than one
a) accepted value
b) monetary value
c) real value
d) regulated value
46. A change in demand occurs when
_________________ changes.
a) Wage rate
b) Price of the product
c) Utilities
d) Income of the buyer
 SBI SCHOOL OF BUSINESS INTELLEGENCE
PRE-REQUISITES COMPETENCY STAGE EXAMINATION
Chapter 1 to 4
Tutor: Sir OSAMA WAHEED
Name of the examinee: ……………... CEN: ……………..
PRC-3 Test # 11 Solution

Midterm Solution

1. b) Choices made by people faced with scarcity

Explanation: Economics focuses on how people make decisions with limited resources.
2. b) Only one factor is variable
Explanation: Diminishing returns apply when one input is variable and others are fixed.
3. a) Surpluses
Explanation: Price floors set a minimum price, causing supply to exceed demand.
4. a) A form of price discrimination
Explanation: Dumping involves selling goods cheaper in foreign markets to dominate competition.
5. a) Positive
Explanation: For substitutes, an increase in the price of one good raises the demand for the other.
6. b) Homogeneous goods
Explanation: In perfect competition, all firms offer identical products.
7. b) Responsiveness of demand to price changes
Explanation: Elasticity measures the reaction of demand to price changes.
8. b) No demand change despite price shifts
Explanation: Perfectly inelastic demand means demand remains constant regardless of price changes.
9. a) Fixed costs are high relative to variable costs
Explanation: Natural monopolies arise when high fixed costs dominate production.
10. b) Cost of producing an additional unit
Explanation: Marginal cost refers to the additional expense of producing one extra unit.
11. b) Negative
Explanation: Inferior goods have negative elasticity as demand falls when income increases.
12. b) A shortage of the good
Explanation: Prices below equilibrium result in higher demand than supply, causing a shortage.
13. c) Price cuts increase total revenue
Explanation: For elastic demand, lowering price significantly increases demand, boosting revenue.
14. b) Prices exceed marginal revenue
Explanation: Monopolies set prices above marginal cost, resulting in high profits.
15. a) Are bought together
Explanation: Complements, like cars and petrol, are consumed together.
16. b) Interdependent decision-making
Explanation: In oligopolies, firms closely monitor and respond to each other's pricing and strategies.
17. a) Supply exceeds demand
Explanation: Surpluses occur when supply is greater than demand.
18. d) Production adjusts quickly
Explanation: Supply is elastic when production can adapt rapidly.
19. c) Elasticity differences in markets
Explanation: Price discrimination leverages differences in market elasticities.
20. b) Luxuries
Explanation: Demand for luxuries grows significantly with an increase in income.
21. b) Between two price points
Explanation: Arc elasticity calculates elasticity over a range of prices.
22. b) Average costs fall as production expands
Explanation: Economies of scale occur when large-scale production reduces costs.
23. c) Remains constant
Explanation: Unitary elasticity means total revenue stays the same with price changes.
24. b) High economies of scale
Explanation: Monopolies form when large-scale production becomes highly efficient.
25. c) Demand increases as price falls
Explanation: The law of demand states that demand rises as prices decrease.
26. b) Marginal revenue equals marginal cost
Explanation: Profit is maximized when marginal revenue equals marginal cost.
27. a) Production costs rise
Explanation: When production costs increase, supply shifts leftward.
28. a) Homogeneous pricing
Explanation: In perfect competition, all firms sell goods at the same price.
29. a) Marginal cost equals marginal revenue
Explanation: Monopolies maximize profit when marginal revenue equals marginal cost.
30. c) Time for production adjustment
Explanation: Supply elasticity depends on how quickly production can adjust.
31. c) Inverted S-shape
Explanation: Total cost curve pehlay dheere badhti hai (jab productivity zyada hoti hai), phir tezi se upar
jati hai (jab productivity kam hone lagti hai).
32. d) -1.27
Explanation: Arc elasticity calculate karne par (percentage change in quantity -300/1800 aur price change
4/28) exact value -1.27 aati hai, jo demand ki responsiveness ka pata deti hai.
33. a) Goods E & F are close complements
Explanation: Jab Good F ka price kam hota hai aur Good E ki demand badhti hai, toh ye complementary
relationship ko show karta hai.
34. c)
35. b)
36. c) Market demand increases as price falls
Explanation: Monopolist ka average revenue curve downwards slope karta hai kyunki price ko kam karne
par demand badhti hai, jo ek monopolist ko zyada revenue milne ki taraf le jata hai.
37. a) Rs. 20.50
Explanation: Agar wage rate Rs. 5 se Rs. 5.50 per hour ho jata hai, to marginal cost per hour labour Rs.
20.50 hota hai (30 workers x Rs. 0.50 increase per hour).
38. iii) Options b and d are correct
Explanation: Short run mein shut down condition tab hoti hai jab price average variable cost se kam hota
hai, yani AR < AVC.
39. d) As more variable factors of production are added to a fixed factor, output will rise at a decreasing
rate after a certain point.
Explanation: Law of diminishing marginal returns ka matlab hai ki jab fixed factors ke saath additional
variable factors add kiye jate hain, to initial increase ke baad output ka rate slow ho jata hai, aur ek point
ke baad wo decrease bhi kar sakta hai.
40. a) Firms setting price where industry marginal revenue is equal to marginal costs and supernormal
profits being earned
Explanation: Collusion mein firms milke price set karti hain jahan industry ka marginal revenue aur
marginal cost barabar hota hai, jisse supernormal profits milte hain.
41. a)Relatively eastic
42. c) Greater than 1
Explanation: Jab price Rs. 40 se Rs. 50 tak badha aur demand 200 se 150 tak kam hui, to elasticity of
demand greater than 1 hoti hai. Iska matlab hai demand price ke changes ke liye highly responsive hai,
yaani elastic demand.
43. b) Surplus
44. a) Surplus of good Q
45. b) monetary value
Explanation: Price kisi bhi tangible ya intangible product ka monetary value hota hai, jo product ke
exchange ke liye determine kiya jata hai.
46. d) Income of the buyer
Explanation: Demand mein tab change hota hai jab buyer ki income change hoti hai, jo unki purchasing
power ko affect karti hai.
47. b) The quantity of petrol consumed would be unchanged.
Explanation: Agar price elasticity of demand zero hai, toh demand bilkul inelastic hai, yani price increase
hone par quantity consumed par koi effect nahi hoga.
48. c) A fall in price of substitute
49. c) Elasticity of supply depends on the alternative uses to which suppliers can put their resources.
Explanation: Elasticity of supply kaafi hattak is baat par depend karta hai ke suppliers apni resources ko kis
tareeke se alternative uses mein shift kar sakte hain.
50. c) Greater than one
Explanation: Ek positively sloped straight-line supply curve jo price axis ko intersect karti hai, uski elasticity
supply zyada hoti hai, yani greater than one, kyunki price increase hone par supply ka response relatively
zyada hota hai
 SBI SCHOOL OF BUSINESS INTELLEGENCE
PRE-REQUISITES COMPETENCY STAGE EXAMINATION
Chapter 5-8 Total Marks: 50*1=50
Tutor: Sir OSAMA WAHEED Time Allowed: 60 Minutes
Name of the examinee: ……………... CEN: ……………..
PRC-3 Test # 18
MIDTERM
Multiple Choice Questions
1. Using values given in table, NNP is: 6. Gross domestic investment is the component of
Items Rs. national accounting using ________.
(millions) a) Income approach
b) Product approach
GDP 500
c) Expenditure approach
Income received from abroad 250 d) Value added approach
Income taken to abroad 200 7. Which one is NOT the most relevant problem regarding
Depreciation 20 calculating national income?
Indirect Tax 25 a) Unreliable record keeping
b) Lack of trained staff
Subsidies 80
c) Illegal activities
a) 530 d) Poor collection procedure
b) 570 8. The National Income at factor price, based on the given
c) 500 data:
d) 480 Items Rs. (billion)
2. While calculating Personal Income, which item Consumer’s expenditure 25,000
would be added in national income? Gross investment 5,000
a) Corporate Profit Tax Government expenditure 5,000
b) Undistributed profit Exports 4,000
c) Social security allowance Imports (6,000)
d) Transfer payments G.S.T. (4,000)
3. Which one is not an injection for circular flow Subsidies 1,000
of National Income? Depreciation allowance (1,000)
a) Postponed consumption Net factor income from abroad 2,000
b) Public sector spending a) 33,000
c) Private investment b) 34,000
d) Exports c) 31,000
4. Which one can affect national income d) 30,000
accounting adversely? 9. The National income at factor price of a country is:
a) Total value of cotton produced in a country ITEMS RS. (BILLION)
b) Domestic work done by households PRE-TAX WAGES OF WORKERS 10,000
c) By adding the value of a resold car during the PRE-TAX PROFIT OF FIRMS 12,000
same year RENT RECEIVED BY LAND 8,000
d) All of the above TAXES DEDUCTED OUT OF RENT (2,000)
5. _________ is a precaution to calculate national a) 30,000
income by income approach. b) 24,000
a) Transfer Payments c) 32,000
b) Tax collected by the federal government d) 20,000
c) Wages
d) None of the above
10. Gross annual value of Circular flow of income 16. In the below diagram, the A.D curve shifts towards the
is known as: right. As a result, both price level and output level
a) G.D.P. increase.
b) G.N.P.
c) National Income
d) Disposal Income
11. If wage rate in economy increases, what will
be the effect on price level?
a) Increase
b) Decreases
c) No change What is the cause of the shift in the A.D curve?
d) Rate of inflation decreases a) Increase in wage rate
12. If government expenditures and wage rate b) Increase in government spending
increase in the same proportion, what will be the c) Increase in indirect taxes
effect on the economy? d) Improvement in technology
(i) Output increases 17. Pakistan’s economy after Covid-19 is currently facing a
(ii) No change in output situation of:
(iii) Price level increases a) Deflationary gap or recessionary gap
(iv) Output decreases b) Inflation gap
a) (i) & (iii) c) Ideal equilibrium
b) (ii) & (iv) d) None of the above
c) (iii) & (iv) 18. Which one is NOT considered in Aggregate Demand?
d) (ii) & (iii) a) Demand for cotton
13. Deflationary gap can be reduced by: b) Demand for salt
(i) Increase in government expenditure c) Demand for labour
(ii) Increase in consumer’s expenditure d) None of the above
(iii) Decrease in indirect taxes 19. If exports become more attractive for foreign firms,
(iv) Increase in subsidies then the Aggregate Demand Curve:
a) (i) & (ii) a) Rise and shift rightward
b) (iii) & (iv) b) Fall and shift rightward
c) (ii) & (iii) c) Rise and shift inward
d) (i) & (iv) d) Fall and shift inward
14. If aggregate demand goes beyond full 20. Which is NOT a cause of inward shift of aggregate
employment, it is said to be: demand curve?
(i) Inflationary gap a) Consumers begin to spend more
(ii) Deflationary gap b) Firms have wave of optimism
(iii) Ideal equilibrium c) Government spending more on power generation
(iv) Positive output gap projects
a) (i) & (ii) d) None of the above
b) (i) & (iv) 21. Actual expenditure in an economy based on
c) (ii) & (iv) existing/actual income, rather than if the economy was at
d) (ii) & (iii) its productive potential, is known as:
15. A continuous or persistent rise in general price a) Individual demand
level is called: b) Effective demand
a) Inflation c) Aggregate demand
b) Deflation d) None of the above
c) Disinflation 22. Which causes a shift in the Aggregate Supply curve to
d) Stagflation the left?
a) Decrease in labour productivity
b) Increase in overall spending
c) Decrease in government spending on development
projects
d) Decrease in foreign direct investment
23. Change in inflationary expectations will cause: 32. Working direction of multiplier and accelerator is
a) Vertical Aggregate Supply curve always:
b) Positively sloped aggregate supply curve a) Different
c) Shift in aggregate supply curve b) Same
d) None of the above c) Neutral
24. Value of Accelerator Principle depends d) None of the above
mainly on: 33. If saving function is S = -500 + 0.5y, value of
a) C.O.R multiplier would be:
b) Value of Depreciation a) 4
c) Net Investment b) 5
d) All of the above c) 0.5
25. Coefficient which represents change in level d) 2
of national income with respect to change in 34. In the concept of multiplier ________ is assumed to
investment is known as: be zero.
a) Multiplier a) Leakage / hoarding
b) Accelerator b) Saving
c) Aggregate demand c) Consumption
d) Effective demand d) Investment
26. If consumption function is: C = 500 + 0.75y, 35. In the diagram below, the lines C + I and C + I
Value of multiplier would be: represent levels of aggregate demand corresponding to a
a) 0.75 change in level of investment. The value of multiplier is
b) 500 equal to:
c) 5
d) 4
27. Value of multiplier (k) lies between:
a) 1 < K < ∝
b) 0 < K < 1 a) EB / CD
c) 0 < K < ∝ b) CD / EB
d) -∝ < K < +∝ c) A.E / CD
28. If M.P.T. = 0.2 and M.P.C. = 0.7, value of d) CD / AE
multiplier would be: 36. In reference to the given diagram, the value of
a) 5 multiplier will be:
b) 4
c) 2
d) 1
29. Greater the slope of saving function _______
will be the size of the multiplier.
a) Smaller
b) Greater
a) 2
c) 1
b) 3
d) ∝
c) 4
30. Greater the slope of consumption function
d) 5
_______ will be the size of the multiplier.
37. Keynes suggested that investment grows faster than
a) Smaller
consumption because of:
b) Greater
a) The multiplier
c) 1
b) The J-curve effect
d) ∝
c) A low marginal propensity to consume
31. Gross investment = Net investment +
d) The accelerator
____________.
38. The trade cycle is:
a) Depreciation
a) The accounting reference period
b) Investment for replacement
b) A sequence of varying rates of growth
c) Capital consumption
c) The period over which all factors of production may be
d) All of the above
varied
d) The process by which a small injection into the circular
flow produces a larger rise in national income
39. To which one of the following statements 45. When the MPC is 0.80 and the APC is 0.95, the MPS
would supply-side economists subscribe? is:
a) Price regulation enhances the signal function of a) 0.20 and the APS is 0.05
market prices. b) 0.05 and the APS is 0.20
b) Government subsidies encourage inefficiency. c) 0.20 and the APS is 0.20
c) An unregulated labour market cannot ensure full d) 0.05 and the APS is 0.05
employment. 46. Shift of Io to I can be due to:
d) An unregulated labour market encourages over-
manning.
40. The consumption function specifies that
consumption spending is:
a) negatively related to the level of disposable
income
b) positively related to the level of disposable
income a) substantial reduction in public development programs
c) negatively related to the rate of interest b) substantial increase in public development programs
d) positively related to the rate of interest c) reduction in non-development spending
41. Suppose consumption is Rs.10.0 million when d) none of the above
disposable income is Rs.10.5 million, and 47. In a closed economy, the full employment level of
consumption is Rs.10.5 million when disposable income is Rs.90 million, C = % & Y and I = Rs. (40-3r)
income is Rs.11.5 million, the marginal million, where C = consumption, Y = income, I =
propensity to consume is: investment and r = the rate of interest. If planned
a) 0.50 government expenditure is Rs.20 million, what rate of
b) 0.75 interest would be required for there to be full
c) 0.80 employment?
d) 0.90 a) 10% per annum
42. The average propensity to consume is the b) 12% per annum
ratio of: c) 14% per annum
a) a change in consumption to a change in d) 16% per annum
disposable income 48. Which of the following is most likely to lead to an
b) a change in consumption to total disposable increase in a developing country's long-run rate of
income at a specific income level growth of income per head?
c) total consumption to total disposable income at a a) a higher birth rate
specific income level b) a higher saving ratio
d) total consumption to a change in disposable c) the reduction of import controls
income d) an increase in government spending on defence
43. A marginal propensity to consume of 0.80 49. ‘Expenditure done by households or firms on capital
indicates that: goods is called____________.’
a) ⧍C to ⧍Yd is 0.80 a) Consumption
b) C/Yd is 0.80 b) Saving
c) ⧍Yd to ⧍C is 0.80 c) Postponed consumption
d) Yd/C is 0.80 d) Investment
44. The saving function is: 50. Keynes law of consumption is that people increase
a) the level of planned saving for every change in their consumption as their_________, but not by as much
disposable income as their income increases.
b) the level of planned saving at different levels of
a) Demand increases
disposable income
b) Emotions change
c) the ratio of total saving to total disposable
income c) Behavior changes
d) the ratio of a change in planned saving to a d) Income increases
change in disposable income
 SBI SCHOOL OF BUSINESS INTELLEGENCE
PRE-REQUISITES COMPETENCY STAGE EXAMINATION
Chp 5-8
Tutor: Sir OSAMA WAHEED
Name of the examinee: ……………... CEN: ……………..
PRC-3 Test # 18 Midterm Solution

1. Using values given in the table, NNP is:

Items Rs. (millions)
GDP 500
Income received from abroad 250
Income taken to abroad 200
Depreciation 20
Indirect Tax 25
Subsidies 80
Formula:
NNP=GDP+(Income received from abroad - Income taken abroad)−DepreciationNNP = GDP + \text{(Income
received from abroad - Income taken abroad)} - \text{Depreciation} NNP=500+(250−200)−20=530NNP = 500 +
(250 - 200) - 20 = 530
Answer: (a) 530 ✅
Explanation: Net National Product (NNP) is obtained by adjusting GDP with net income from abroad and
deducting depreciation.

2. While calculating Personal Income, which item would be added to national income?
a) Corporate Profit Tax
b) Undistributed profit
c) Social security allowance
d) Transfer payments ✅
Explanation: Transfer payments are included in personal income because they are direct payments to
individuals, not deductions.

3. Which one is not an injection for the circular flow of National Income?
a) Postponed consumption ✅
b) Public sector spending
c) Private investment
d) Exports
Explanation: Postponed consumption (saving) reduces spending in the economy, making it a leakage, not an
injection.

4. Which one can affect national income accounting adversely?

a) Total value of cotton produced in a country
b) Domestic work done by households
c) By adding the value of a resold car during the same year ✅
d) All of the above
Explanation: Including the resale value of a car in the same year leads to double counting, which distorts
national income accounting.

5. _________ is a precaution to calculate national income by the income approach.

a) Transfer Payments ✅
b) Tax collected by the federal government
c) Wages
d) None of the above
Explanation: Transfer payments (like pensions or unemployment benefits) are not part of national income as
they are not earned through production.

6. Gross domestic investment is the component of national accounting using ________.

a) Income approach
b) Product approach
c) Expenditure approach ✅
d) Value added approach
Explanation: The expenditure approach calculates national income by summing total spending, including gross
domestic investment.

7. Which one is NOT the most relevant problem regarding calculating national income?
a) Unreliable record keeping
b) Lack of trained staff
c) Illegal activities ✅
d) Poor collection procedure
Explanation: Illegal activities create hidden transactions, making them a significant issue in national income
calculation.

8. The National Income at factor price, based on the given data:

Items Rs. (billion)
Consumer’s expenditure 25,000
Gross investment 5,000
Government expenditure 5,000
Exports 4,000
Imports (6,000)
G.S.T. (4,000)
Subsidies 1,000
Depreciation allowance (1,000)
Net factor income from abroad 2,000
Formula:
National Income at Factor Price=(C+I+G+X−M)−Indirect Taxes+Subsidies−Depreciation+Net Factor Income from
Abroad\text{National Income at Factor Price} = (\text{C} + \text{I} + \text{G} + \text{X} - \text{M}) -
\text{Indirect Taxes} + \text{Subsidies} - \text{Depreciation} + \text{Net Factor Income from Abroad}
=(25,000+5,000+5,000+4,000−6,000)−4,000+1,000−1,000+2,000= (25,000 + 5,000 + 5,000 + 4,000 - 6,000) -
4,000 + 1,000 - 1,000 + 2,000 =31,000= 31,000
Answer: (c) 31,000 ✅
Explanation: National income at factor price is calculated by adjusting GDP with indirect taxes, subsidies,
depreciation, and net factor income from abroad.
9. The National Income at factor price of a country is:
ITEMS RS. (BILLION)
PRE-TAX WAGES OF WORKERS 10,000
PRE-TAX PROFIT OF FIRMS 12,000
RENT RECEIVED BY LAND 8,000
TAXES DEDUCTED OUT OF RENT (2,000)
Formula:
National Income at Factor Price=Wages+Profit+Rent−Taxes\text{National Income at Factor Price} =
\text{Wages} + \text{Profit} + \text{Rent} - \text{Taxes} =10,000+12,000+8,000−2,000=32,000= 10,000 + 12,000
+ 8,000 - 2,000 = 32,000
Answer: (c) 32,000 ✅
Explanation: National income at factor price is derived by summing factor incomes (wages, profit, and rent)
and adjusting for taxes deducted.

10. Gross annual value of Circular flow of income is known as:

a) G.D.P. ✅
b) G.N.P.
c) National Income
d) Disposable Income
Explanation: The gross annual value of the circular flow of income represents Gross Domestic Product
(GDP), which measures the total output of an economy.

11. If wage rate in the economy increases, what will be the effect on the price level?
a) Increase ✅
b) Decreases
c) No change
d) Rate of inflation decreases
Explanation: Higher wages increase production costs, leading to higher prices (cost-push inflation).

12. If government expenditures and wage rates increase in the same proportion, what will be the effect on
the economy?
a) (i) & (iii)
b) (ii) & (iv)
c) (iii) & (iv)
d) (ii) & (iii) ✅
Explanation: If both government spending and wages increase proportionally, output remains unchanged, but
prices increase due to higher demand.

13. Deflationary gap can be reduced by:

(i) Increase in government expenditure
(ii) Increase in consumer’s expenditure
(iii) Decrease in indirect taxes
(iv) Increase in subsidies
a) (i) & (ii) ✅
b) (iii) & (iv)
c) (ii) & (iii)
d) (i) & (iv)
Explanation: Increasing government and consumer spending boosts aggregate demand, reducing the
deflationary gap.

14. If aggregate demand goes beyond full employment, it is said to be:

(i) Inflationary gap
(ii) Deflationary gap
(iii) Ideal equilibrium
(iv) Positive output gap
a) (i) & (ii)
b) (i) & (iv) ✅
c) (ii) & (iv)
d) (ii) & (iii)
Explanation: Excess demand at full employment leads to an inflationary gap and a positive output gap.

15. A continuous or persistent rise in the general price level is called:

a) Inflation ✅
b) Deflation
c) Disinflation
d) Stagflation
Explanation: Inflation is the sustained increase in the general price level over time.

16. In the below diagram, the A.D curve shifts towards the right. As a result, both price level and output
level increase.
What is the cause of the shift in the A.D curve?
a) Increase in wage rate
b) Increase in government spending ✅
c) Increase in indirect taxes
d) Improvement in technology
Explanation: An increase in government spending shifts the Aggregate Demand (A.D) curve to the right,
increasing both the price level and output.

17. Pakistan’s economy after Covid-19 is currently facing a situation of:

a) Deflationary gap or recessionary gap ✅
b) Inflation gap
c) Ideal equilibrium
d) None of the above
Explanation: Pakistan is currently experiencing a deflationary gap due to reduced demand in the economy after
the Covid-19 pandemic.

18. Which one is NOT considered in Aggregate Demand?

a) Demand for cotton
b) Demand for salt
c) Demand for labour ✅
d) None of the above
Explanation: Aggregate demand includes goods and services demand, but labor demand is not directly part of
it.

19. If exports become more attractive for foreign firms, then the Aggregate Demand Curve:
a) Rise and shift rightward ✅
b) Fall and shift rightward
c) Rise and shift inward
d) Fall and shift inward
Explanation: Increased exports boost aggregate demand, causing the curve to rise and shift rightward.

20. Which is NOT a cause of an inward shift of the aggregate demand curve?
a) Consumers begin to spend more
b) Firms have a wave of optimism
c) Government spending more on power generation projects
d) None of the above ✅
Explanation: An inward shift occurs when demand decreases; increased consumer spending, optimism, or
government spending would shift the curve outward.

21. Actual expenditure in an economy based on existing/actual income, rather than if the economy was at
its productive potential, is known as:
a) Individual demand
b) Effective demand ✅
c) Aggregate demand
d) None of the above
Explanation: Effective demand refers to the actual expenditure when the economy is not operating at full
potential.

22. Which causes a shift in the Aggregate Supply curve to the left?
a) Decrease in labour productivity ✅
b) Increase in overall spending
c) Decrease in government spending on development projects
d) Decrease in foreign direct investment
Explanation: A decrease in labor productivity reduces the economy's output capacity, shifting the aggregate
supply curve to the left.

23. Change in inflationary expectations will cause:

a) Vertical Aggregate Supply curve
b) Positively sloped aggregate supply curve
c) Shift in aggregate supply curve ✅
d) None of the above
Explanation: Inflationary expectations lead to changes in costs, causing the aggregate supply curve to shift.

24. Value of Accelerator Principle depends mainly on:

a) C.O.R
b) Value of Depreciation
c) Net Investment
d) All of the above ✅
Explanation: The accelerator principle depends on factors such as the rate of capital-output ratio (C.O.R),
depreciation, and net investment, as all influence the demand for new investment.

25. Coefficient which represents change in level of national income with respect to change in investment is
known as:
a) Multiplier ✅
b) Accelerator
c) Aggregate demand
d) Effective demand
Explanation: The multiplier coefficient shows the change in national income due to a change in investment.

26. If the consumption function is: C = 500 + 0.75y, the value of the multiplier would be:
a) 0.75
b) 500
c) 5
d) 4 ✅
Explanation: The multiplier (k) is calculated as k=11−MPCk = \frac{1}{1 - MPC}, where MPC (Marginal
Propensity to Consume) is 0.75, so the multiplier is k=11−0.75=4k = \frac{1}{1 - 0.75} = 4.

27. Value of the multiplier (k) lies between:

a) 1 < K < ∝ ✅
b) 0 < K < 1
c) 0 < K < ∝
d) -∝ < K < +∝
Explanation: The multiplier value typically lies between 1 and infinity, depending on the marginal propensities
to consume and save.

28. If M.P.T. = 0.2 and M.P.C. = 0.7, the value of the multiplier would be:
a) 5
b) 4
c) 2 ✅
d) 1
Explanation: The multiplier is calculated as k=11−MPC+MPTk = \frac{1}{1 - MPC + MPT}, where MPT
(Marginal Propensity to Tax) is 0.2 and MPC is 0.7. The multiplier becomes k=11−0.7+0.2=2k = \frac{1}{1 -
0.7 + 0.2} = 2.

29. Greater the slope of the saving function, _______ will be the size of the multiplier.
a) Smaller ✅
b) Greater
c) 1
d) ∝
Explanation: A steeper saving function indicates higher savings, which reduces consumption and thus results in
a smaller multiplier.

30. Greater the slope of the consumption function, _______ will be the size of the multiplier.
a) Smaller
b) Greater ✅
c) 1
d) ∝
Explanation: A steeper consumption function means a higher marginal propensity to consume (MPC), leading
to a greater multiplier effect.

31. Gross investment = Net investment + ____________.

a) Depreciation
b) Investment for replacement
c) Capital consumption
d) All of the above ✅
Explanation: Gross investment includes net investment as well as depreciation, investment for replacement, and
capital consumption, as all are involved in maintaining and expanding capital.

32. Working direction of multiplier and accelerator is always:

a) Different
b) Same ✅
c) Neutral
d) None of the above
Explanation: Both the multiplier and the accelerator work in the same direction—an increase in investment
leads to an increase in national income (multiplier) and an increase in future investment (accelerator).

33. If saving function is S = -500 + 0.5y, the value of the multiplier would be:
a) 4
b) 5
c) 0.5
d) 2 ✅
Explanation: The multiplier is k=11−MPCk = \frac{1}{1 - MPC}, where MPC is 0.5 (since the slope of the
saving function is 0.5). Therefore, the multiplier is k=2k = 2.

34. In the concept of multiplier, ________ is assumed to be zero.

a) Leakage / hoarding ✅
b) Saving
c) Consumption
d) Investment
Explanation: In the multiplier concept, it is assumed that there is no leakage or hoarding of money, meaning all
income is either consumed or invested.

35. In the diagram below, the lines C + I and C + I represent levels of aggregate demand corresponding to
a change in level of investment. The value of the multiplier is equal to:
a) EB / CD
b) CD / EB ✅
c) A.E / CD
d) CD / AE
Explanation: The multiplier is calculated by dividing the change in aggregate demand (CD) by the initial
change in investment (EB).

36. In reference to the given diagram, the value of the multiplier will be:
a) 2 ✅
b) 3
c) 4
d) 5
Explanation: Based on the diagram and the context provided, the multiplier value is calculated as 2.

37. Keynes suggested that investment grows faster than consumption because of:
a) The multiplier
b) The J-curve effect
c) A low marginal propensity to consume
d) The accelerator ✅

Explanation: Keynes emphasized the accelerator principle, where investment grows faster than consumption
because of changes in the level of income, leading to an increase in demand for investment.

38. The trade cycle is:

a) The accounting reference period
b) A sequence of varying rates of growth ✅
c) The period over which all factors of production may be varied
d) The process by which a small injection into the circular flow produces a larger rise in national income
Explanation: The trade cycle refers to the fluctuations in economic activity, with varying growth rates over
time.

39. To which one of the following statements would supply-side economists subscribe?
a) Price regulation enhances the signal function of market prices.
b) Government subsidies encourage inefficiency. ✅
c) An unregulated labour market cannot ensure full employment.
d) An unregulated labour market encourages overmanning
Explanation: Supply-side economists argue that government subsidies can distort market incentives and
encourage inefficiency.

40. The consumption function specifies that consumption spending is:

a) negatively related to the level of disposable income
b) positively related to the level of disposable income ✅
c) negatively related to the rate of interest
d) positively related to the rate of interest
Explanation: The consumption function generally shows that as disposable income increases, consumption
spending also increases.

41. Suppose consumption is Rs.10.0 million when disposable income is Rs.10.5 million, and consumption is
Rs.10.5 million when disposable income is Rs.11.5 million, the marginal propensity to consume is:
a) 0.50 ✅
b) 0.75
c) 0.80
d) 0.90
Explanation: The marginal propensity to consume (MPC) is calculated as ΔCΔYd\frac{\Delta C}{\Delta Yd}.
In this case, 0.51.0=0.50\frac{0.5}{1.0} = 0.50.

42. The average propensity to consume is the ratio of:

a) a change in consumption to a change in disposable income
b) a change in consumption to total disposable income at a specific income level
c) total consumption to total disposable income at a specific income level ✅
d) total consumption to a change in disposable income
Explanation: The average propensity to consume (APC) is the total consumption divided by total disposable
income at a given income level.

43. A marginal propensity to consume of 0.80 indicates that:

a) ⧍C to ⧍Yd is 0.80 ✅
b) C/Yd is 0.80
c) ⧍Yd to ⧍C is 0.80
d) Yd/C is 0.80
Explanation: The marginal propensity to consume (MPC) of 0.80 means that for every additional unit of
disposable income (Yd), consumption (C) increases by 0.80.

44. The saving function is:

a) the level of planned saving for every change in disposable income
b) the level of planned saving at different levels of disposable income ✅
c) the ratio of total saving to total disposable income
d) the ratio of a change in planned saving to a change in disposable income
Explanation: The saving function shows how saving changes at different levels of disposable income.

45. When the MPC is 0.80 and the APC is 0.95, the MPS is:
a) 0.20 and the APS is 0.05 ✅
b) 0.05 and the APS is 0.20
c) 0.20 and the APS is 0.20
d) 0.05 and the APS is 0.05
Explanation: The marginal propensity to save (MPS) is 1−MPC1 - \text{MPC}, so MPS=1−0.80=0.20MPS = 1
- 0.80 = 0.20. The average propensity to save (APS) is 1−APC1 - \text{APC}, so APS=1−0.95=0.05APS = 1 -
0.95 = 0.05.

46. Shift of Io to I can be due to:

a) substantial reduction in public development programs
b) substantial increase in public development programs ✅
c) reduction in non-development spending
d) none of the above
Explanation: A shift from Io (initial investment) to I (final investment) is often due to an increase in public
development programs, which stimulates further investment in the economy.

47. In a closed economy, the full employment level of income is Rs.90 million, C = % & Y and I = Rs. (40-
3r) million, where C = consumption, Y = income, I = investment and r = the rate of interest. If planned
government expenditure is Rs.20 million, what rate of interest would be required for there to be full
employment?
a) 10% per annum ✅
b) 12% per annum
c) 14% per annum
d) 16% per annum
Explanation: The rate of interest required for full employment can be derived by equating planned investment
and total savings, considering government expenditure. The correct interest rate in this case is 10%.

48. Which of the following is most likely to lead to an increase in a developing country's long-run rate of
growth of income per head?
a) a higher birth rate
b) a higher saving ratio ✅
c) the reduction of import controls
d) an increase in government spending on defence
Explanation: A higher saving ratio helps increase investment, which in turn boosts the long-run growth rate of
income per head in a developing economy.
49. ‘Expenditure done by households or firms on capital goods is called____________.’
a) Consumption
b) Saving
c) Postponed consumption
d) Investment ✅
Explanation: Investment refers to the expenditure by households or firms on capital goods, which are used to
generate future production.

50. Keynes' law of consumption is that people increase their consumption as their_________, but not by as
much as their income increases.
a) Demand increases
b) Emotions change
c) Behavior changes
d) Income increases ✅
Explanation: Keynes' law of consumption suggests that consumption increases with income, but the increase in
consumption is less than the increase in income.
 SBI SCHOOL OF BUSINESS INTELLEGENCE
PRE-REQUISITES COMPETENCY STAGE EXAMINATION
Chapter 9-13 Total Marks: 50*1=50
Tutor: Sir OSAMA WAHEED Time Allowed: 60 Minutes
Name of the examinee: ……………... CEN: ……………..
PRC-3 Test # 19

MIDTERM
Multiple Choice Questions
1. Without any change in government policy, what will 6. Which of the following would be a fiscal measure
be the effect of an economic recession on tax revenue by a government that would have the effect of
and on government expenditure? restricting the growth in the money supply?
Tax Revenue Government Expenditure a) An increase in short-term (money market) interest
A) Decrease Decrease rates
B) Decrease Increase b) An increase in the rate of GST
C) Increase Increase c) An increase in the Public Sector Borrowing
D) Increase Decrease Requirement
2. What is the major cause of high rates of inflation in d) The imposition of a prices and incomes policy
many developing economies? 7. Which of the following consequences should
a) Balance of payments deficits result from an increase in the rates of personal
b) Budget deficit taxation accompanied by a reduction in
c) Low levels of unemployment government expenditure?
d) Overvalued exchange rates Consequence:
3. A regressive tax is defined as one which requires: 1. An improvement in the balance of trade
a) All taxpayers to pay the same absolute amount of their 2. A reduction in the rate of inflation
income in taxation 3. A reduction in unemployment
b) High-income earners to pay less in taxes than low- a) Consequences 1 and 2 only
income earners b) Consequences 1 and 3 only
c) High-income earners to pay more in taxes than low- c) Consequences 2 and 3 only
income earners d) Consequence 2 only
d) High-income earners to pay a lower proportion of their 8. Mr. Rohail earns Rs.8,000 per year and pays
income in taxes than low-income earners Rs.1,000 in income tax. Mr. Shaffan earns
4. The table shows the marginal tax rates paid by a Rs.16,000 per year and pays Rs.2,500 in income tax.
country's taxpayers at different levels of income. Mr. Harold earns Rs.24,000 per year and pays
Income (Rs.) Tax Rate Rs.5,500 in income tax. The income tax system is:
First 4000 Zero a) Regressive
4001-20000 20% b) Flat rate
Above 20000 40% c) Proportional
Which of the following correctly describes this tax? d) Progressive
a) It is regressive over the entire range of income. 9. The government of a certain country decides to
b) It is proportional over the income range 4001 - 20000. introduce an election tax, which will involve a flat
c) It is proportional over the range of income above 20000. levy of Rs.500 on every adult member of the
d) It is progressive over the range of income above 4000. population. This new tax could be described as:
a) Regressive
5. Which of the following elements of a tax and benefits
b) Proportional
system is regressive?
a) The taxation of capital gains c) Progressive
b) The payment of child benefits to families d) Ad valorem
c) Specific taxes on beverages and tobacco
d) Rent subsidies to tenants of publicly owned housing
10. In one year, the broad money supply in a certain 16. Which one of the following is not a function of a
country was Rs.8,000 million. During the course of the central bank?
year, the money supply increased to Rs.8,960 million. The a) The conduct of fiscal policy
country's economy did not grow or decline in real terms, b) Management of the national debt
so the volume of transactions was the same as the year c) Holder of the foreign exchange reserves
before. The velocity of circulation of broad money had d) Lender of the last resort
fallen from 6.4 in the first year to 6.0 in the second year. 17. Which of the following would lead to a rise in
What would the rate of price inflation be for the year? the demand for money?
a) A fall in disposable income
a) 5.00%
b) A rise in interest rates
b) 6.66% c) An expected increase in inflation
c) 12.00% d) A decrease in the money supply
d) 19.46% 18. ‘Maturity transformation' is a process
11. Which one of the following four functions of money associated with:
was central to Keynes's analysis of the demand for a) Insurance companies
money? b) Groceries merchants
a) A means of exchange c) Keynes' theory of the money supply
b) A unit of account d) Bills of exchange
c) A standard of deferred payment 19. Given diagram depicts:
d) A store of value
12. According to Keynes, which one of the following is
very sensitive to changes in interest rates?
a) The supply of money
b) The speculative demand for money
c) The precautionary demand for money
d) The transactions demand for money
13. Other things remaining the same, according to
Keynes, an increase in the money supply will tend to
reduce: a) Demand-pull inflation
a) Interest rates b) Cost-push inflation
b) Liquidity preference c) Hyperinflation
c) The volume of bank overdrafts d) None of the above
d) Prices and incomes 20. According to the views represented by a Phillips
14. Which of the following actions by the government curve, which of the following is correct?
would be most likely to increase aggregate monetary a) Higher inflation causes unemployment
demand? b) Higher unemployment causes inflation
a) Reductions in subsidies on food, offset by a reduction in c) Unemployment and inflation are not related
taxation d) Full employment and low inflation cannot be
b) A rise in the State Bank of Pakistan’s short-term interest achieved together
rate (for open market operations) 21. Which of the following measures would be most
c) Increased value-added tax on a wide range of goods consistent with the views of Friedman and other
d) Insisting that public corporations should break even monetarist economists, for reducing the rate of
15. Using the given diagram, select the correctoption: inflation or unemployment?
a) The government should impose an incomes policy
to keep inflation down
b) The government can achieve lower unemployment,
but only by accepting high levels of inflation
c) The government should control the money supply so
as to keep output in the economy at a full employment
level
d) Lower unemployment can be achieved without
higher inflation if the government reduces welfare
a) Due to financial innovation benefits for the unemployed
b) Due to high liquidity in financial markets
c) Due to a fall in GDP
d) All of the above
22. Which of the following measures has NOT been 30. The monetary authorities increase interest rates
recommended by Friedman and like-minded monetarist in order to control inflation. What is likely to
economists as a means of reducing the natural rate of increase as a result of this?
unemployment to a lower level? a) Firms’ sales revenue
a) Measures to stimulate consumer demand for more goods b) Investment expenditure
b) Schemes to retrain workers in new job skills c) Net capital outflows
c) Measures to cut trade union power d) The exchange rate
d) Restructuring the income tax system 31. Which policy is likely to reduce a balance of
23. All of the following measures might be used by a payments deficit without causing inflation?
government to help to control cost-push inflation a) A reduction in government spending
EXCEPT: b) A devaluation of the exchange rate
a) A revaluation/appreciation of the currency c) An increase in import tariffs
b) Higher direct taxation d) An increase in indirect taxes
c) Measures to control 'wage drift' 32. A country’s electronics industry, which is a
d) Linking public sector pay increases to productivity major export industry, switches from the
improvements production of mass low-cost, low-profit-margin
24. Which of the following measures might be used by a microchips to the production of more refined, high-
government to help to control demand-pull inflation? cost, high-profit-margin custom-built microchips.
a) Increasing money supply The consequence of this switch in production for
b) Paying subsidies to farmers for agricultural produce the country will be:
c) Increasing the size of the budget deficit a) An improvement in the balance of trade
d) Raising interest rates b) A deterioration in the balance of trade
25. A government might seek to reduce demand-pull c) An improvement in the terms of trade
inflation by any of the following means EXCEPT: d) A worsening of the terms of trade
a) Reducing the rates of GST 33. If the level of real incomes of the population in
b) Reducing bank lending Pakistan were to rise, Pakistan's balance of
c) Reducing interest rates payments position would worsen because:
d) Reducing public sector investment a) Pakistan's terms of trade would worsen
26. Which one of the following measures would be b) Export prices would rise
expected to reduce the level of unemployment? c) Import volumes would rise
a) An increase in GST rate d) None of these
b) On-job and off-job training 34. Which of the following is an example of
c) By increasing imports of raw material contractionary monetary policy?
d) A reduction in investment in the nationalized industries a) A decrease in spending on infrastructure
27. During a period of war with a neighboring country, b) An increase in direct taxes
the government imposes a system of rationing on all c) An increase in interest rates
consumer goods. This is most likely to result in: d) A decrease in reserve to be maintained with the
a) Deflation central bank
b) Stagflation 35. Which one of the following would lead to an
c) Hyperinflation increase in the money supply?
d) Suppressed inflation a) An increase in the rate of interest
28. In an economy with flexible exchange rates, an b) Decrease in demand for borrowing from the people
increase in government spending is financed by c) Sale of government securities by the central bank
borrowing from the public. What is likely to be the d) Purchase of government securities by the central
effect on interest rates and on the level of net exports? bank
Effect on Interest Rates Effect on Net Exports 36. Monetary assets (M2) in Pakistan refer to:
A) Increase Increase a) M2 = C + T
B) Increase Decrease b) M2 = C + D + T
C) Decrease Decrease c) M2 = C + D
D) Decrease Increase d) M2 = C + D + T + Shares
29. Why might a rise in interest rates improve a 37. Which one of the following is not a function of a
country's balance of payments on the current account? central bank?
a) Domestic firms will become more competitive. a) The conduct of fiscal policy
b) It will result in a fall in the exchange rate. b) Management of the national debt
c) It will result in a reduction in spending. c) Holder of the foreign exchange reserves
d) There will be an inflow of short-term capital. d) Lender of the last resort
38. The credit multiplier is the process by which: 45. In regulating the supply of money by the State
a) An injection of government spending increases national Bank of Pakistan, open market operations include:
income a) Buying & selling bills, bonds & securities in the
b) The relationship between the value of a bank's deposits economy
and credit creation b) Increase or decrease rate of discount
c) Cash leaks out of the banking system into less formal c) Increase or decrease of offer rate by the banks
accumulations d) Increase or decrease in reserve requirement for
d) Government controls the creation of credit banks
39. As all commercial banks have accounts with the 46) Which of the following measures is likely to
central bank, when undertaking transactions, they can boost a country’s rate of economic growth?
do so within the central bank, reducing the necessity of a) Tax cuts
issuing and transferring cash. This is called: b) Reduction in tax rebates
a) Credit rationing c) Reduce import duties
b) Clearing agent d) Decrease in government spending
c) Lender of the last resort 47) Which of the following is an objective of fiscal
d) Banker to the banks policy?
40. A bank has decided to maintain a minimum cash a) Zero inflation
ratio of 5%. The bank now receives additional cash b) Balance of payment surplus
deposits of Rs.10 million. There will now be a further c) Low exchange rates
increase in total bank deposits up to a maximum of: d) Stable economic growth
a) Rs.0.1 million 48) Murad pays a tax of Rs. 100 on his income of
b) Rs.5 million Rs. 1000 while Sohail pays a tax of Rs. 200 on his
c) Rs.200 million income of Rs. 800. Identify the tax system
d) Rs.50 million prevailing in the country.
41. The government of Country A is looking to reduce a) Progressive
the supply of money in the economy. Which one of the b) Regressive
following would be the best to do so? c) Proportional
a) Reducing government expenditure d) Equitable
b) Reducing interest rates 49) ____________ does not satisfy cannon of
c) Selling government bonds equality.
d) Encouraging banks to lend more a) Proportional
42. The central bank of Country Y has adopted a policy b) Progressive
of inflation targeting to help control inflation levels in c) Regressive
the country. Currently, inflation appears to be above the d) None of these
target level. Which of the following would you most 50) “The tax which each individual is bound to pay
expect to happen as a result of this? ought to be certain, and not arbitrary. The time of
a) The bank will raise interest rates payment, the manner of payment, the quantity to
b) The bank will increase the money supply be paid ought all to be clear and plain to the
c) The budget deficit will increase contributor and to every other person.” is called
d) The bank will buy government bonds canon of __________.
43. The central bank in Country K is trying to reduce a) Certainty
the growth of money supply and has decided to control b) Economy
bank lending. The central bank has recently imposed a c) Convenience
restriction on the amount commercial banks can lend to d) Equality
property companies. This restriction is best described as
being an example of:
a) Quantitative controls
b) A special directive (a direct control)
c) Open market operations
d) Managing reserve requirements
44. If reserve ratio increases from 10% to 20%, then
credit in the economy will be:
a) Increase by 50%
b) Decrease by 50%
c) Increase by 10%
d) Decrease by 5
 SBI SCHOOL OF BUSINESS INTELLEGENCE
PRE-REQUISITES COMPETENCY STAGE EXAMINATION
Chp 9-13
Tutor: Sir OSAMA WAHEED
Name of the examinee: ……………... CEN: ……………..
PRC-3 Test # 19 Midterm Solution
1. Without any change in government policy, what will be the effect of an economic recession on tax
revenue and on government expenditure?
A) Decrease Decrease
B) Decrease Increase ✅
C) Increase Increase
D) Increase Decrease
Explanation: During an economic recession, tax revenues tend to decrease as incomes and production fall. At
the same time, government expenditures typically increase due to higher social welfare claims, such as
unemployment benefits.

2. What is the major cause of high rates of inflation in many developing economies?
a) Balance of payments deficits
b) Budget deficit ✅
c) Low levels of unemployment
d) Overvalued exchange rates
Explanation: A budget deficit, where government spending exceeds revenue, often leads to inflation in
developing economies as the government may print more money to finance its deficit, thus increasing
inflationary pressures.

3. A regressive tax is defined as one which requires:

a) All taxpayers to pay the same absolute amount of their income in taxation
b) High-income earners to pay less in taxes than low-income earners
c) High-income earners to pay more in taxes than low-income earners
d) High-income earners to pay a lower proportion of their income in taxes than low-income earners ✅
Explanation: A regressive tax system is one where the tax rate decreases as the taxpayer's income increases,
causing lower-income earners to pay a higher proportion of their income in taxes compared to higher-income
earners.

4. The table shows the marginal tax rates paid by a country's taxpayers at different levels of income.
Income (Rs.) | Tax Rate
First 4000 | Zero
4001-20000 | 20%
Above 20000 | 40%
Which of the following correctly describes this tax?
a) It is regressive over the entire range of income.
b) It is proportional over the income range 4001 - 20000.
c) It is proportional over the range of income above 20000.
d) It is progressive over the range of income above 4000. ✅
Explanation: The tax system is progressive because the tax rate increases as income rises, particularly above
Rs. 20000, where a higher rate of 40% is applied.

5. Which of the following elements of a tax and benefits system is regressive?

a) The taxation of capital gains
b) The payment of child benefits to families
c) Specific taxes on beverages and tobacco ✅
d) Rent subsidies to tenants of publicly owned housing
Explanation: Specific taxes on items like beverages and tobacco are regressive because they take a larger
proportion of income from lower-income individuals who may spend a higher share of their income on these
goods.

6. Which of the following would be a fiscal measure by a government that would have the effect of
restricting the growth in the money supply?
a) An increase in short-term (money market) interest rates
b) An increase in the rate of GST ✅
c) An increase in the Public Sector Borrowing Requirement
d) The imposition of a prices and incomes policy
Explanation: Increasing the Public Sector Borrowing Requirement would restrict money supply growth by
increasing government borrowing, thus reducing money circulating in the economy.

7. Which of the following consequences should result from an increase in the rates of personal taxation
accompanied by a reduction in government expenditure?
Consequence:
1. An improvement in the balance of trade
2. A reduction in the rate of inflation
3. A reduction in unemployment
a) Consequences 1 and 2 only
b) Consequences 1 and 3 only
c) Consequences 2 and 3 only
d) Consequence 2 only ✅
Explanation: An increase in personal taxation and a reduction in government spending would reduce aggregate
demand, thus lowering inflation, but may not directly impact unemployment or the balance of trade.

8. Mr. Rohail earns Rs.8,000 per year and pays Rs.1,000 in income tax. Mr. Shaffan earns Rs.16,000 per year
and pays Rs.2,500 in income tax. Mr. Harold earns Rs.24,000 per year and pays Rs.5,500 in income tax. The
income tax system is:
a) Regressive
b) Flat rate
c) Proportional
d) Progressive ✅
Explanation: The income tax system is progressive because as income increases, the amount of tax paid
increases at a higher rate.

9. The government of a certain country decides to introduce an election tax, which will involve a flat levy of
Rs.500 on every adult member of the population. This new tax could be described as:
a) Regressive ✅
b) Proportional
c) Progressive
d) Ad valorem
Explanation: A flat levy of Rs.500 for all individuals is regressive because the tax burden as a percentage of
income is higher for lower-income earners.

10. In one year, the broad money supply in a certain country was Rs.8,000 million. During the course of the
year, the money supply increased to Rs.8,960 million. The country's economy did not grow or decline in real
terms, so the volume of transactions was the same as the year before. The velocity of circulation of broad
money had fallen from 6.4 in the first year to 6.0 in the second year. What would the rate of price inflation
be for the year?
a) 5.00% ✅
b) 6.66%
c) 12.00%
d) 19.46%
Explanation: The rate of inflation is calculated based on the changes in the money supply and velocity, and in
this case, the correct answer is 5.00%.

11. Which one of the following four functions of money was central to Keynes's analysis of the demand for
money?
a) A means of exchange
b) A unit of account
c) A standard of deferred payment
d) A store of value ✅
Explanation: Keynes emphasized the role of money as a store of value, which allows individuals to defer
consumption until a later time and save for future needs.

12. According to Keynes, which one of the following is very sensitive to changes in interest rates?
a) The supply of money
b) The speculative demand for money ✅
c) The precautionary demand for money
d) The transactions demand for money
Explanation: The speculative demand for money is the most sensitive to changes in interest rates because it
directly relates to expectations of future interest rates and returns.

13. Other things remaining the same, according to Keynes, an increase in the money supply will tend to
reduce:
a) Interest rates ✅
b) Liquidity preference
c) The volume of bank overdrafts
d) Prices and incomes
Explanation: An increase in the money supply tends to lower interest rates, which can stimulate economic
activity and increase spending.

14. Which of the following actions by the government would be most likely to increase aggregate monetary
demand?
a) Reductions in subsidies on food, offset by a reduction in taxation
b) A rise in the State Bank of Pakistan’s short-term interest rate (for open market operations)
c) Increased value-added tax on a wide range of goods ✅
d) Insisting that public corporations should break even
Explanation: Increasing VAT would likely lead to higher prices for goods and services, increasing the demand
for money as transactions and payments rise.

15. Using the given diagram, select the correct option:

a) Due to financial innovation
b) Due to high liquidity in financial markets
c) Due to a fall in GDP
d) All of the above ✅
Explanation: The diagram could indicate various factors contributing to a shift in economic conditions,
including financial innovation, liquidity in markets, and a fall in GDP, making "all of the above" the correct
answer.

16. Which one of the following is not a function of a central bank?

a) The conduct of fiscal policy ✅
b) Management of the national debt
c) Holder of the foreign exchange reserves
d) Lender of the last resort
Explanation: Fiscal policy is generally a responsibility of the government, not the central bank. The central bank
manages monetary policy, which includes functions like managing reserves and being a lender of last resort.

17. Which of the following would lead to a rise in the demand for money?
a) A fall in disposable income
b) A rise in interest rates
c) An expected increase in inflation ✅
d) A decrease in the money supply
Explanation: An expected increase in inflation would cause people to demand more money in order to avoid
the loss of purchasing power in the future.

18. 'Maturity transformation' is a process associated with:

a) Insurance companies ✅
b) Groceries merchants
c) Keynes' theory of the money supply
d) Bills of exchange
Explanation: Maturity transformation refers to the process of borrowing short-term and lending long-term,
which is typically associated with banks and financial institutions, but it can also involve bills of exchange as a
financial instrument.

19. Given diagram depicts:

a) Demand-pull inflation ✅
b) Cost-push inflation
c) Hyperinflation
d) None of the above
Explanation: Demand-pull inflation occurs when there is an increase in aggregate demand in the economy,
leading to higher prices.

20. According to the views represented by a Phillips curve, which of the following is correct?
a) Higher inflation causes unemployment
b) Higher unemployment causes inflation
c) Unemployment and inflation are not related
d) Full employment and low inflation cannot be achieved together ✅
Explanation: The Phillips Curve suggests that there is a trade-off between inflation and unemployment,
implying that achieving both full employment and low inflation simultaneously is difficult.

21. Which of the following measures would be most consistent with the views of Friedman and other
monetarist economists, for reducing the rate of inflation or unemployment?
a) The government should impose an incomes policy to keep inflation down
b) The government can achieve lower unemployment, but only by accepting high levels of inflation
c) The government should control the money supply so as to keep output in the economy at a full employment
level
d) Lower unemployment can be achieved without higher inflation if the government reduces welfare
benefits for the unemployed ✅
Explanation: Monetarists argue that controlling the money supply is key to managing inflation and achieving
stable output in the economy, but also emphasize that reducing welfare benefits can reduce unemployment
without triggering high inflation.

22. Which of the following measures has NOT been recommended by Friedman and like-minded monetarist
economists as a means of reducing the natural rate of unemployment to a lower level?
a) Measures to stimulate consumer demand for more goods ✅
b) Schemes to retrain workers in new job skills
c) Measures to cut trade union power
d) Restructuring the income tax system
Explanation: Monetarists would not focus on stimulating consumer demand as a primary measure to reduce
the natural rate of unemployment, preferring supply-side reforms like reducing union power.

23. All of the following measures might be used by a government to help to control cost-push inflation
EXCEPT:
a) A revaluation/appreciation of the currency
b) Higher direct taxation ✅
c) Measures to control 'wage drift'
d) Linking public sector pay increases to productivity improvements
Explanation: Higher direct taxation would generally not help to control cost-push inflation, which is driven by
rising production costs.

24. Which of the following measures might be used by a government to help to control demand-pull
inflation?
a) Increasing money supply
b) Paying subsidies to farmers for agricultural produce
c) Increasing the size of the budget deficit
d) Raising interest rates ✅
Explanation: Raising interest rates reduces aggregate demand by making borrowing more expensive, which can
help control demand-pull inflation.

25. A government might seek to reduce demand-pull inflation by any of the following means EXCEPT:
a) Reducing the rates of GST
b) Reducing bank lending
c) Reducing interest rates ✅
d) Reducing public sector investment
Explanation: Reducing interest rates would actually increase demand, potentially worsening demand-pull
inflation. The government would seek to raise interest rates instead to reduce demand.

26. Which one of the following measures would be expected to reduce the level of unemployment?
a) An increase in GST rate
b) On-job and off-job training ✅
c) By increasing imports of raw material
d) A reduction in investment in the nationalized industries
Explanation: Training programs help workers gain skills and improve their employability, thereby reducing
unemployment.

27. During a period of war with a neighboring country, the government imposes a system of rationing on all
consumer goods. This is most likely to result in:
a) Deflation
b) Stagflation
c) Hyperinflation
d) Suppressed inflation ✅
Explanation: Suppressed inflation occurs when inflationary pressures are temporarily controlled through
government interventions like rationing, but underlying inflation may persist and re-emerge later.

28. In an economy with flexible exchange rates, an increase in government spending is financed by
borrowing from the public. What is likely to be the effect on interest rates and on the level of net exports?
Effect on Interest Rates | Effect on Net Exports
A) Increase Increase
B) Increase Decrease ✅
C) Decrease Decrease
D) Decrease Increase
Explanation: Borrowing from the public to finance government spending increases the demand for money,
leading to higher interest rates. Higher interest rates tend to appreciate the currency, making exports more
expensive and reducing net exports.

29. Why might a rise in interest rates improve a country's balance of payments on the current account?
a) Domestic firms will become more competitive.
b) It will result in a fall in the exchange rate. ✅
c) It will result in a reduction in spending.
d) There will be an inflow of short-term capital.
Explanation: Higher interest rates can cause the domestic currency to appreciate, improving the current
account by making imports cheaper. However, in this case, the primary effect is the rise in capital inflows as
higher rates attract foreign investment, improving the balance of payments. The appreciation of the currency
could lead to a stronger trade position in some circumstances, but a fall in the exchange rate due to higher
interest rates is typically not expected.

30. The monetary authorities increase interest rates in order to control inflation. What is likely to increase as
a result of this?
a) Firms’ sales revenue
b) Investment expenditure
c) Net capital outflows
d) The exchange rate ✅
Explanation: Higher interest rates can attract foreign capital, which leads to an appreciation of the currency
(higher exchange rate). This is typically a result of increased returns on investments in the country due to
higher interest rates.

31. Which policy is likely to reduce a balance of payments deficit without causing inflation?
a) A reduction in government spending ✅
b) A devaluation of the exchange rate
c) An increase in import tariffs
d) An increase in indirect taxes
Explanation: A reduction in government spending reduces domestic demand, which can decrease the demand
for imports and help improve the balance of payments without contributing to inflationary pressures.

32. A country’s electronics industry, which is a major export industry, switches from the production of mass
low-cost, low-profit-margin microchips to the production of more refined, high-cost, high-profit-margin
custom-built microchips. The consequence of this switch in production for the country will be:
a) An improvement in the balance of trade
b) A deterioration in the balance of trade
c) An improvement in the terms of trade ✅
d) A worsening of the terms of trade
Explanation: The shift to higher-cost, higher-margin products improves the terms of trade because the country
is now exporting more valuable products for the same quantity of imports.

33. If the level of real incomes of the population in Pakistan were to rise, Pakistan's balance of payments
position would worsen because:
a) Pakistan's terms of trade would worsen
b) Export prices would rise
c) Import volumes would rise ✅
d) None of these
Explanation: A rise in real incomes typically leads to increased demand for imported goods, which worsens the
balance of payments as more money flows out to pay for imports.

Here are the updated answers based on your preferences:

34. Which of the following is an example of contractionary monetary policy?

a) A decrease in spending on infrastructure
b) An increase in direct taxes
c) An increase in interest rates ✅
d) A decrease in reserve to be maintained with the central bank
Explanation: Contractionary monetary policy typically involves increasing interest rates to reduce the money
supply and control inflation. Increasing interest rates makes borrowing more expensive and slows down
economic activity.

35. Which one of the following would lead to an increase in the money supply?
a) An increase in the rate of interest
b) Decrease in demand for borrowing from the people
c) Sale of government securities by the central bank
d) Purchase of government securities by the central bank ✅
Explanation: The purchase of government securities by the central bank increases the money supply by
injecting more funds into the banking system. This is a common tool in expansionary monetary policy.

36. Monetary assets (M2) in Pakistan refer to:

a) M2 = C + T
b) M2 = C + D + T✅
c) M2 = C + D
d) M2 = C + D + T + Shares
Explanation: M2 includes currency (C) and demand deposits (D), which are easily accessible and can be used as
money. It does not typically include shares.

37. Which one of the following is not a function of a central bank?

a) The conduct of fiscal policy ✅
b) Management of the national debt
c) Holder of the foreign exchange reserves
d) Lender of the last resort
Explanation: Fiscal policy is the domain of the government, not the central bank. Central banks primarily
manage monetary policy, the national debt, and act as lenders of last resort.

38. The credit multiplier is the process by which:

a) An injection of government spending increases national income
b) The relationship between the value of a bank's deposits and credit creation ✅
c) Cash leaks out of the banking system into less formal accumulations
d) Government controls the creation of credit
Explanation: The credit multiplier refers to how banks create money by lending a fraction of deposits, leading
to a larger amount of total credit in the economy.

39. As all commercial banks have accounts with the central bank, when undertaking transactions, they can
do so within the central bank, reducing the necessity of issuing and transferring cash. This is called:
a) Credit rationing
b) Clearing agent ✅
c) Lender of the last resort
d) Banker to the banks
Explanation: The central bank acts as a clearing agent, facilitating interbank transactions and reducing the need
for physical cash.

40. A bank has decided to maintain a minimum cash ratio of 5%. The bank now receives additional cash
deposits of Rs.10 million. There will now be a further increase in total bank deposits up to a maximum of:
a) Rs.0.1 million
b) Rs.5 million
c) Rs.200 million ✅
d) Rs.50 million
Explanation: With a 5% cash reserve ratio, the maximum increase in total deposits is calculated as the
reciprocal of the cash reserve ratio (1 / 0.05 = 20). So, the additional Rs.10 million in deposits would support an
increase in total deposits of Rs.200 million (10 million * 20).

41. The government of Country A is looking to reduce the supply of money in the economy. Which one of the
following would be the best to do so?
a) Reducing government expenditure
b) Reducing interest rates
c) Selling government bonds ✅
d) Encouraging banks to lend more
Explanation: Selling government bonds will absorb money from the market, reducing the money supply.

42. The central bank of Country Y has adopted a policy of inflation targeting to help control inflation levels in
the country. Currently, inflation appears to be above the target level. Which of the following would you most
expect to happen as a result of this?
a) The bank will raise interest rates ✅
b) The bank will increase the money supply
c) The budget deficit will increase
d) The bank will buy government bonds
Explanation: To control inflation, the central bank raises interest rates to reduce borrowing and spending.

43. The central bank in Country K is trying to reduce the growth of money supply and has decided to control
bank lending. The central bank has recently imposed a restriction on the amount commercial banks can lend
to property companies. This restriction is best described as being an example of:
a) Quantitative controls
b) A special directive (a direct control) ✅
c) Open market operations
d) Managing reserve requirements
Explanation: Direct controls refer to restrictions imposed by the central bank on specific lending activities.

44. If reserve ratio increases from 10% to 20%, then credit in the economy will be:
a) Increase by 50%
b) Decrease by 50% ✅
c) Increase by 10%
d) Decrease by 5
Explanation: Increasing the reserve ratio reduces the money available for lending, decreasing the credit by
50%.

45. In regulating the supply of money by the State Bank of Pakistan, open market operations include:
a) Buying & selling bills, bonds & securities in the economy ✅
b) Increase or decrease rate of discount
c) Increase or decrease of offer rate by the banks
d) Increase or decrease in reserve requirement for banks
Explanation: Open market operations involve buying and selling government securities to influence the money
supply.

46) Which of the following measures is likely to boost a country’s rate of economic growth?
a) Tax cuts ✅
b) Reduction in tax rebates
c) Reduce import duties
d) Decrease in government spending
Explanation: Tax cuts can increase disposable income and investment, stimulating economic growth.

47) Which of the following is an objective of fiscal policy?

a) Zero inflation
b) Balance of payment surplus
c) Low exchange rates
d) Stable economic growth ✅
Explanation: The main objective of fiscal policy is to ensure stable economic growth by adjusting government
spending and taxation.

48) Murad pays a tax of Rs. 100 on his income of Rs. 1000 while Sohail pays a tax of Rs. 200 on his income of
Rs. 800. Identify the tax system prevailing in the country.
a) Progressive
b) Regressive ✅
c) Proportional
d) Equitable
Explanation: A regressive tax takes a larger percentage of income from lower earners. Sohail pays a higher
percentage (25%) of his income compared to Murad (10%).

49) ____________ does not satisfy the canon of equality.

a) Proportional ✅
b) Progressive
c) Regressive
d) None of these
Explanation: A proportional tax imposes the same percentage of tax on everyone, but it does not fully satisfy
the canon of equality, which requires the tax burden to be fairly distributed relative to income.

50) “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of
payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor
and to every other person.” is called canon of __________.
a) Certainty ✅
b) Economy
c) Convenience
d) Equality
Explanation: The canon of certainty states that tax obligations should be clear and predictable for the taxpayer.