CA FOUNDATION - ECONOMICS

TIME : 2 HRS TOTAL MARKS : 100

1. Economists regard decision making as important because:
a. The resources required to satisfy our unlimited wants and needs are finite, or scarce
b. It is crucial to understand how we can best allocate our scarce resources to satisfy society’s
unlimited wants and needs
c. Resources have alternative uses.
d. All the above
2. Macroeconomics is also called——— economics.
a. applied
b. aggregate
c. experimental
d. none of the above
3. An example of ‘positive’ economic analysis would be:
a. an analysis of the relationship between the price of food and the quantity purchased.
b. determining how much income each person should be guaranteed.
c. determining the ‘fair’ price for food.
d. deciding how to distribute the output of the economy.
4. Which of the following is not a subject matter of Micro-economies?
a. The price of mangoes.
b. The cost of producing a fire truck for the fire department of Delhi, India.
c. The quantity of mangoes produced for the mangoes market.
d. The national economy’s annual rate of growth.
5. The difference between positive and normative Economics is:
a. Positive Economics explains the performance of the economy while normative Economics
finds out the reasons for poor performance.
b. Positive Economics describes the facts of the economy while normative Economics involves
evaluating whether some of these are good or bad for the welfare of the people.
c. Normative Economics describes the facts of the economy while positive Economics involves
evaluating whether some of these are good or bad for the welfare of the people.
d. Positive Economics prescribes while normative Economics describes.
6. Which of the following is not within the scope of Business Economics?
a. Capital Budgeting
b. Risk Analysis
c. Business Cycles
d. Accounting Standards
7. Who defined Business economics in terms of the use of economic analysis in the formulation
of business policies?
a. Adam Smith
b. Robbins
c. Joel Dean
d. Alfred
8. Successful business firms spend considerable time, energy, and efforts in analysing the
_________ for their products.
a. Supply
b. Price
c. Demand
d. None of these

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9. The demand for labour in response to the wage rate is __________ whereas the demand for
same labour in response to the price of electronic goods where labour enters as an input
is_____
a. Derived Demand, Direct Demand
b. Direct Demand, Derived Demand
c. Individual Demand, Market Demand
d. Company Demand, Industry Demand
10. All but one of the following are assumed not to remain the same while drawing an individual’s
demand curve for a commodity. Which one is it?
a. The preference of the individual.
b. His monetary income.
c. Price of the commodity
d. Price of related goods.
11. The economist’s concept of demand is _____________ as desire or need or choice or
preference or order.
a. the same thing
b. not the same thing
c. (a) or (b)
d. None of these
12. Which of the following groups of goods have inelastic demand?
a. Salt, Smart Phone and Branded Lipstick
b. School Uniform, Branded Goggles and Smart Phone
c. Salt, School Uniform and Medicine
d. Medicine, Branded Sports Shoes, and Diamond ring
13. If the price of Pepsi decreases relative to the price of Coke and 7-UP, the demand for:
a. Coke will decrease.
b. 7-Up will decrease.
c. Coke and 7-UP will increase,
d. Coke and 7-Up will decrease.
14. If a good is a luxury, its income elasticity of demand is:
a. Positive and less than 1.
b. Negative but greater than -1.
c. Positive and greater than 1.
d. Zero.
15. Suppose potatoes have (-).0.4 as income elasticity. We can say from the data given that:
a. Potatoes are superior goods.
b. Potatoes are necessities.
c. Potatoes are inferior goods.
d. There is a need to increase the income of consumers so that they can purchase potatoes.
16. The price of tomatoes increases and people buy tomato puree. You infer that tomato puree
and tomatoes are
a. Normal goods
b. Complements
c. Substitutes
d. Inferior goods
17. A firm learns that the own price elasticity of a product it manufactures is 3.5. What would be
the correct action for this firm to take if it wishes to raise its total revenue?
a. Lower the price because demand for the good is elastic.
 b. Raise the price because demand for the product is inelastic.
c. Raise the price because demand is elastic.
d. We need information in order to answer this question.
18. The concept of utility is ethically neutral- this statement is
a. True
b. False
c. Partially true
d. Cannot be commented at all
19. Law of diminishing marginal utility is based on the assumption that the habits and tastes of
the consumer
a. Must remain constant
b. Must change
c. Both (a) and (b)
d. Neither (a) nor (b)
20. The ratio that relates the change in the money supply to a given change in the monetary base
is called the
a. Required reserve ratio.
b. Money multiplier.
c. Deposit ratio.
d. Discount rate.
21. The money multiplier will be large
a. for higher currency ratio (c), lower required reserve ratio (r) and lower excess reserve ratio
(e)
b. for constant currency ratio (c), higher required reserve ratio (r) and lower excess reserve
ratio (e)
c. for lower currency ratio (c), lower required reserve ratio (r) and lower excess reserve ratio (e)
d. None of the above
22. The strategy of agricultural development in India before green revolution was –
a. High yielding varieties of seeds and chemical fertilizers to boost productivity
b. Institutional reforms such as land reforms
c. Technological up gradation of agriculture
d. All the above
23. Which one of the following is a feature of green revolution –
a. use of soil friendly green manure to preserve fertility of soil
b. grow more crops by redistributing land to landless people
c. High yielding varieties of seeds and scientific cultivation
d. Diversification to horticulture
24. ‘Who gave ‘The Theory of Public Finance (1959)?
a Adam Smith
b Richard Musgrave
c A.C. Pigou
d Alfred Marshall
25. The law of diminishing returns begins at the level of output where:
a Marginal cost is at a minimum.
b Average variable cost is at a minimum.
c Average fixed cost is at a maximum.
d None of the above is correct
26. What is the other name given to the Average Revenue Curve?
 a. Profit Curve
b. Demand Curve
c. Average Cost Curve
d. Indifference Curve
27. Production refers to —
a. Capital Goods only
b. Consumer Goods only
c. Both (a) and (b)
d. Neither (a) nor (b)
28. If a firm has a downward-sloping long-run average cost curve, then:
a it is experiencing decreasing returns to scale.
b it is experiencing decreasing returns.
c it is a natural monopoly.
d marginal cost is greater than average cost.
29. Which of the following would be an example of foreign direct investment from Country X?
a. A firm in Country X buys bonds issued by a Chinese computer manufacturer.
b. A computer firm in Country X enters into a contract with a Malaysian firm for the latter to
make and sell to it processors
c. Mr Z a citizen of Country X buys a controlling share in an Italian electronics firm
d. None of the above
30. Which of the following statement is false in respect of FPI?
a. portfolio capital in general, moves to investment in financial stocks, bonds and other financial
instruments
b. is effected largely by individuals and institutions through the mechanism of capital market
c. is difficult to recover as it involves purely long-term investments and the investors have
controlling interest
d. Investors also do not have any intention of exercising voting power or controlling or
managing the affairs of the company.
31. In Economics, Production Activity should involve —
a. Creation of new matter
b. Addition of value to existing matter
c. Both (a) and (b)
d. Neither (a) nor (b)
32. All else equal, which of the following is true if consumers of India develop taste for imported
commodities and decide to buy more from the US?
a. The demand curve for dollars shifts to the right and Indian Rupee appreciates
b. The supply of US dollars shrinks and, therefore, import prices decrease
c. The demand curve for dollars shifts to the right and Indian Rupee depreciates
d. The demand curve for dollars shifts to the left and leads to an increase in exchange rate
33. ‘The nominal exchange rate is expressed in units of one currency per unit of the other
currency. A real exchange rate adjusts this for changes in price levels’. The statements are
a. wholly correct
b. partially correct
c. wholly incorrect
d. None of the above
34. An increase in the supply of foreign exchange
a. shifts the supply curve to the right and as a consequence, the exchange rate declines
b. shifts the supply curve to the right and as a consequence, the exchange rate increases
 c. more units of domestic currency are required to buy a unit of foreign exchange
d. the domestic currency depreciates and the foreign currency appreciates
35. At any point of time, all markets tend to have the same exchange rate for a given currency due
to
a. Hedging
b. Speculation
c. Arbitrage
d. Currency futures
36. If Electricity Demand is inelastic, and electric rates increase, which of the following is likely to
occur?
a. Quantity demanded will fall by a relatively large amount
b. Quantity demanded will fall by a relatively small amount
c. Quantity demanded will rise in the short run, but fall in the long run
d. Quantity demanded will fall in the short run, but rise in the long run
37. For goods with less elastic demand —
a. Aq > Ap
b. Aq = Ap
c. Aq < Ap
d. Aq =1
38. If the demand for the good is less elastic, and E is the measure of Elasticity, which of the
following is true?
a. E = 0
b. 0 < E < 1
c. E = 1
d. E > 1
39. Which of the following culminated in the establishment of the World Trade Organization
a. The Doha Round
b. The Tokyo Round
c. The Uruguay Round
d. The Kennedy Round
40. Choose the correct statement
a. The GATT was meant to prevent exploitation of poor countries by richer countries
b. The GATT dealt with trade in goods only, while, the WTO covers services as well as
intellectual property.
c. All members of the World Trade Organization are required to avoid tariffs of all types
d. All the above
41. The ‘National treatment’ principle stands for
a. the procedures within the WTO for resolving disagreements about trade policy among
countries
b. the principle that imported products are to be treated no worse in the domestic market than
the local ones
c. exported products are to be treated no worse in the domestic market than the local ones
d. imported products should have the same tariff, no matter where they are imported from
42. Shows the output produced with a given amount of inputs.
a. Cost Function
b. Production Function
c. Demand Function
d. Isoquants
43. After reaching the saturation point, consumption of additional units of the commodity cause:
a Total utility to fall and marginal utility to increase.
b Total and marginal utility both to increase.
c Total utility to fall and marginal utility to become negative.
d Marginal utility to fall and total utility to become negative. Cost Function
44. A tax applied as a percentage of the value of an imported good is known as
a. preferential tariff
b. ad valorem tariff
c. specific tariff
d. mixed or compound tariff
45. Escalated tariff refers to
a. nominal tariff rates on raw materials which are greater than tariffs on manufactured products
b. nominal tariff rates on manufactured products which are greater than tariffs on raw materials
c. a tariff which is escalated to prohibit imports of a particular good to protect domestic
industries
d. none of the above
46. The essence of ‘MFN principle’ is
a equality of treatment of all member countries of WTO in respect of matters related to trade
b favour one, country, you need to favour all in the same manner
c every WTO member will treat all its trading partners equally without any prejudice and
discrimination
d all the above
47. Voluntary export restraints involve:
a. an importing country voluntarily restraining the quantity of goods that can be exported into
the country during a specified period of time
b. domestic firms agreeing to limit the quantity foreign products sold in their domestic markets
c. an exporting country voluntarily restraining the quantity of goods that can be exported out of
a country during a specified period of time
d. Quantitative restrictions imposed by the importing country's government.
48. Which of the following is an outcome of tariff?
a. create obstacles to trade and increase the volume of imports and exports
b. domestic consumers enjoy consumer surplus because consumers must now pay only a lower
price for the good
c. discourage domestic consumers from consuming imported foreign goods and encourage
consumption of domestically produced import substitutes
d. increase government revenues of the importing country by more than value of the total tariff
it charges
49. If Price of Coffee decreases from! 5 to! 4.50, and as a result the Consumer's Demand for Coffee
increase from 60 grams to 75 grams, the absolute Price Elasticity of Demand of Coffee is –
a. 1.5
b. 3.0
c. 2.0
d. 2.5
50. Which of the following does not represent a difference between internal trade and
international trade?
a. transactions in multiple currencies
b. homogeneity of customers and currencies
c. differences in legal systems
 d. none of the above
51. Which of the following theories advocates that countries should produce those goods for
which it has the greatest relative advantage?
a. Modern theory of international trade
b. The factor endowment theory
c. The Heckscher-Ohlin Theory
d. None of the above
52. Which of the following holds that a country can increase its wealth by encouraging exports
and discouraging imports
a. Capitalism
b. Socialism
c. Mercantilism
d. Laissez faire
53. Given the number of labour hours to produce wheat and rice in two countries and that these
countries specialise and engage in trade at a relative price of 1:1 what will be the gain of
country X? Labour cost (hours) for production of one unit
Country Wheat Rice
X 10 20
Y 20 10
a. 20 labour hours
b. 10 labour hours
c. 30 labour hours
d. Does not gain anything
54. Production Function specifies the quantities of various inputs that are required to yield a given
quantity of output.
a. Minimum
b. Maximum
c. Average
d. Zero
55. Under Cobb- Douglas production function contribution of capital and labour respectively
a. 3/4th , 1/4th
b. 1/4th , 3/4th
c. 1/2th , 1/2th
d. none of the above
56. Production Function specifies —
a. Maximum amount of output that can be produced with given quantities of inputs
b. Minimum quantities of various inputs that are required to yield a given quantity of output.
c. Both (a) and (b)
d. Neither (a) nor (b)
57. Which of the following does not enter into the calculation of national income?
a. Exchange of previously produced goods
b. Exchange of second hand goods
c. Exchange of stocks and bonds
d. All the above
58. Which of the following enters into the calculation of national income?
a. The value of the services that accompany the sale
b. Additions to inventory stocks of final goods and materials
c. Stocks and bonds sold during eth current year
 d. (a) and (b) above
59. Gross National Product at market prices GNP MP is
a. GDP MP + Net Factor Income from Abroad
b. GDP MP - Net Factor Income from Abroad
c. GDP MP - Depreciation
d. GDP MP + Net Indirect Taxes
60. A significant decline in general economic activity extending over a period of time is
a. business cycle
b. contraction phase
c. recession
d. recovery
61. The lowest point in the business cycle is referred to as the
a. Expansion.
b. Boom.
c. Peak.
d. Trough
62. A variable that tends to move later than aggregate economic activity is called
a. a leading variable.
b. a coincident variable.
c. a lagging variable.
d. a cyclical variable
63. Industries that are extremely sensitive to the business cycle are the
a. Durable goods and service sectors.
b. Non-durable goods and service sectors.
c. Capital goods and non-durable goods sectors.
d. Capital goods and durable goods sectors.
64. Which of the following markets comes close to satisfying the assumptions of a perfectly
competitive market structure?
a) The stock market
b The market for agricultural commodities such as wheat or corn
c The market for petroleum and natural gas
d All of the above come close to satisfying the assumptions of perfect competition.
65. Which of the following best describes a typical business cycle?
a. Economic expansions are followed by economic contractions.
b. Inflation is followed by rising income and unemployment.
c. Economic expansions are followed by economic growth and development.
d. Stagflation is followed by inflationary economic growth.
66. If purchase of raw from domestic firm is given at Rs 158 crore and imports are Rs 8 crore, what
will be the amount of intermediate consumption under value added method
a. Rs 8 crore
b. Rs 150 crore
c. Rs 158 crore
d. Rs 166
67. ________ is the total volume of the commodity which can be brought into the market for sale
at a short notice.
a. Demand
b. Supply
c. Stock
 d. Sales
68. In the Keynesian Consumption Function C = a +by, what may be the value of b?
a. b = 0
b. b = 1
c. b > 1
d. 0 < b < 1
69. An increase in investment by Rs 1000 crores leads to increase in national income by Rs 2500
crores. What will be Marginal Propensity to Consume (MPC)?
a. 2.5
b. 0.6
c. 0.4
d. None of these
70. Which of the following is part of private cost incurred by the firm?
a. Wages
b. Raw material
c. Heating and lighting
d. All of these
71. Law of Returns to Scale indicates the responsiveness of total product when all inputs
a. Remain same
b. Are changed drastically
c. Are changed marginally
d. Are changed proportionately
72. Government borrowings from foreign governments and institutions:
a. Capital receipts
b. Revenue receipts
c. Accounts for fiscal deficit
d. Any of the above
73. Fiscal deficit is calculated as a percentage of -
a. NNP
b. GDP
c. NDP
d. None of the above
74. In the very beginning of production, generally the Increasing Returns to scale is found
because—
a. Input is increased
b. Plant and Machinery will be new
c. Production Problems are less
d. Economies of Scale
75. In a small scale rubber plant, factors of production like labour, material and capital are
increased by 10% and output increases. It implies that the Firm is experiencing
a. Constant Returns to Scale
b. Decreasing Returns to Scale
c. Increasing Returns to Scale
d. Increasing as well as decreasing
76. The Cambridge money demand function is stated as follows: Md = KPY. In this equation, PY
stands for -
a. National Income
b. Real National Income
 c. Nominal Income
d. Real Income
77. Which of these refer to "Market Forces"?
a. Price and Output
b. Demand and Supply
c. Cost and Revenue
d. All of the above
78. In the situation of liquidity trap, the monetary authority is …………. to stimulate the economy
with monetary policy.
a. Unable
b. Able
c. Perfectly able
d. Very effective
79. M1 and M2 are generally known as ………. Supply concepts, whereas M3 and M4 are known as
……. Supply concepts
a. Narrow Money, Broad Money
b. Broad Money, Narrow money
c. Least Liquid Money, Narrow Money
d. Broad Money, Most Liquid Money
80. If net factor income from abroad is positive, then
a. national income will be greater than domestic factor incomes
b. national income will be less than domestic factor incomes
c. net exports will be negative
d. domestic factor incomes will be greater than national income
81. ……… is defined as an instrument for lending funds by purchasing securities with an agreement
to resell the securities on mutually agreed future date at an agreed price which includes
interest for the funds lent.
a. Reverse Repo Rate
b. Repo Rate
c. Bank Rate
d. MSF
82. Leading economic indicators
a. are used to forecast probable shifts in economic policies
b. are generally used to forecast economic fluctuations
c. are indicators of stock prices existing in an economy
d. are indicators of probable recession and depression
83. When aggregate economic activity is declining, the economy is said to be in
a. Contraction.
b. an expansion.
c. a trough.
d. a turning point.
84. TRIM stands for —
a. Trade policy International mechanism
b. Trade Related Investment Measures
c. Transparent Reforms Inherent Mechanism
d. None of these
85. A Cost Function deals with —
a. Total Cost
 b. Cost per unit
c. Either (a) or (b)
d. Neither (a) nor (b)
86. Expansion of Scale of operation forms a part of........Cost Function.
a. Long run
b. Short run
c. Fixed
d. Both (b) and (c)
87. Which of the following statements regarding Short and Long Run Cost Functions is not true?
a. A Variable Input varies according to the quantity of output to be produced
b. In the Short Run, one or more of the inputs of the production process is fixed
c. In the Long Run, all the inputs are fixed
d. In the Long Run there are no restrictions on the resource allocation in the production
process.
88. The Cost that a Firm incurs in hiring or purchasing any Factor of Production is referred to as —
a. Explicit Cost
b. Implicit Cost
c. Variable Cost
d. Fixed Cost
89. What was the focus of monetary and fiscal sector reforms (1991)?
a. Reducing the burden of non-performing assets on government banks
b. Introducing and sustaining competition
c. Deregulating Interest rates
d. All of the above
90. Implicit Costs are used for purposes.
a. Accounting and Reporting
b. Cost Control
c. Decision Making
d. All of the above
91. Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring
explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year,
we would conclude that :
a. The firm is incurring an economic loss.
b. Implicit costs are Rs. 25,000.
c. The total economic costs are Rs. 1,00,000.
d. The individual is earning an economic profit of Rs. 25,000
92. Assume that consumers’ incomes and the number of sellers in the market for good A both
decrease. Based upon this information, we can conclude, with certainty, that the equilibrium:
a. price will increase.
b. price will decrease.
c. quantity will increase.
d. quantity will decrease.
93. Oligopolistic industries are characterized by:
a. a few dominant firms and substantial barriers to entry.
b. a few large firms and no entry barriers.
c. a large number of small firms and no entry barriers.
d. one dominant firm and low entry barriers.
94. In the context of oligopoly, the kinked demand hypothesis is designed to explain
 a. Price and output determination
b. Price rigidity
c. Price leadership
d. Collusion among rivals.
95. If required reserve ratio is 20% then what will be credit multiplier?
a. 0.2
b. 0.8
c. 1.2
d. 5
96. The firm in a perfectly competitive market is a price-taker. This designation as a price- taker is
based on the assumption that –
a. the firm has some, but not complete, control over its product price.
b. there are so many buyers and sellers in the market that any individual firm cannot affect the
market.
c. each firm produces a homogeneous product.
d. there is easy entry into or exit from the market place.
97. Outlay Costs—
a. Involve cash payment
b. Do not involve any cash payment
c. Both (a) and (b)
d. Neither (a) nor (b)
98. Which of the following is not a characteristic of a competitive market?
a. There are many buyers and sellers in the market.
b. The goods offered for sales are largely the same.
c. Firms generate small but positive supernormal profits in the long run.
d. Firms can freely enter or exit the market.
99. A market structure in which many firms sell products that are similar but not identical is
known as
a. monopolistic competition
b. monopoly
c. perfect competition
d. oligopoly
100. ‘Who gave ‘The Theory of Public Finance (1959)?
(a) Adam Smith
(b) Richard Musgrave
(c) A.C. Pigou
(d) Alfred Marshall