Download Economic Environment May 2012

INSTITUTE OF BANKERS IN MALAWI
DIPLOMA IN BANKING EXAMINATION
SUBJECT: ECONOMIC ENVIRONMENT
(IOBM-D211)
Date: Saturday, 5th May, 2012
Time Allocated: 3 hours (8:00 am - 11:00 am)
INSTRUCTIONS TO CANDIDATES
1
This paper consists of TWO Sections, A and B.
2
Section A is multiple choice and consists of 30 questions, each question carries 2
marks. Answer ALL questions.
3
Section B consists of 4 questions, each question carries 20 marks. Answer ANY
TWO questions.
4
You will be allowed 10 minutes to go through the paper before the start of the
examination when you may write on this paper but not in the answer book.
5
Begin each answer on a new page.
6
Please write your examination number on each answer book used. Answer
books without examination numbers will not be marked.
7
DO NOT open this question paper until instructed to do so.
ECTION A
60 MARKS
Answer ALL questions in this section
1. Which of the following would be done by the Reserve Bank of Malawi (RBM) to
decrease money supply in the economy?
(a) Increase tax rates
(b) Sell government securities in an open market
(c) Transfer government funds from RBM to commercial banks
(d) Decrease the bank rates.
2. Assuming a Malawian business Tujariwe Enterprise imports cell phones worth
$1,000 and sells them for $ 2000; the effect on GDP would be:
(a) An increase in the value of GDP by USD $ 2000
(b) A decrease in value by $ 3000
(c) An increase in value by $ 1000
(d) An increase in value by $ 3000.
Use the graph below showing production possibility frontiers of Malawi and Japan to
answer the questions 3, 4 and 5 that follow.
Maize Tons
10000 M
Malawi PPF
5000
J
Japan PPF
M
5000
J
10,000 Sewing Machines
3. The PPFs are straight lines showing that
(a) Both countries have got equal opportunities in production
(b) The opportunity costs of producing sewing machines in terms of maize is
constant
(c) Malawi is the only country that can produce maize
(d) Japan is the only country that can produce sewing machines.
4. What is the opportunity cost of producing one additional sewing machine in terms of
maize in Japan?
(a) 0.5 tonnes
(b) 2 tonnes
(c) 3 tonnes
(d) 1.5 tonnes
5. If each country specialised in products that it has comparative advantage in, what
would be the total production?
(a) 10,000 tonnes of maize and 10,000 sewing machines
(b) 10,000 tonnes of maize and 7,500 sewing machines
(c) 7,500 tonnes of maize and 7, 500 sewing machines
(d) 15,000 tonnes of maize and 15,000 sewing machines
6. Absolute advantage is determined by
(a) The actual difference in labour productivity between countries
(b) The relative differences in labour productivity between countries
(c) The needs of the countries that are trading
(d) Both (a) and (b).
7. The quantity theory of money :
(a) Is the speed at which money changes hands in an economy
(b) States that the quantity of money is dependent on deposits in bank accounts
(c) States that a change in the supply of money is associated with changes in price
level and volume of transactions given the velocity of circulation
(d) States that the velocity of money and level of transaction are equal.
8. Which of the following expresses a relationship according to Keynesian consumption
theory?
(a) An increase in interest rates will result in an increase in savings
(b) If disposable income increases then savings will increase
(c) If government expenditure increases then national income will increase
(d) If personal consumption increases then disposable income will decline.
9. Old people need to be provided with an income that will ensure that they live a
comfortable life after retirement. This statement is:
(a) Neither normative nor positive
(b) Both positive and normative
(c) Normative
(d) Strictly a macro economic issue.
10. One of the following types of taxes is an indirect tax
(a) Income Tax
(b) Value added tax
(c) Inheritance transfer tax
(d) Capital gains tax.
11. National Income is:
a) All income from nationals living abroad
b) Gross national product less capital consumption
c) Gross domestic product less taxes
d) All of the above.
12. Which one is not a method of privatization ?
(a) Asset sale privatization
(b) Voucher privatization
(c) Coupons privatization
(d) Share issue privatization.
13. Which statement is true?
(a) Decreasing returns to scale and diminishing returns to production are two ways
of stating the same thing
(b) Increasing returns to scale is a short-run concept and diminishing returns to
production is a long run concept
(c) Constant returns to scale is a short run concept and decreasing returns to scale
is a long run concept
(d) None of the above.
14. A large increase in fuel prices if unchecked, will eventually lead to:
(a) Inflation and economic expansion
(b) Inflation and recession
(c) Recession and cost push disinflation
(d) Economic expansion and deflation.
Mr Phiri has the following information on his spending:
Year
2010
2011
Salary (MK)
100,000
200, 000
Consumption (MK)
90, 000
160,000
15. What is his marginal propensity to consume?
(a) 0.7
(b) 0.9
(c) 0.8
(d) MK 70,000.
16. Given data in table above, what would be the hypothetical marginal propensity to save?
(a) 1
(b) 0.4
(c) 0.3
(d) MK 40,000
17. Assume that a certain local company (ZET) is using two inputs, capital and labour.
If the price of labour (wages) fell, what would happen?
(a) ZET’s average cost curve will shift downwards
(b) ZET’s marginal cost curve will shift downwards
(c) To produce the same amount of output, ZET will have to use more labour units
(d) All of the above.
18. Which of the following would cause ZET company’s investment spending to rise?
(a) A fall in sales in relation to capacity from 80% to 50%
(b) An increase in real interest rates from 5% to 9%
(c) A decrease in the corporate profits tax rate from 52% to 35%
(d) A decrease on investment tax credit from 10% to 3 %.
19. Which of the following is totally true about the Malawi’s National debt?
(a) Most of it is owed by the government to foreigners
(b) It means that the huge burden will be passed on to future generations
(c) It is in total higher now than it has ever been before
(d) Because of the debt, the government is almost bankrupt.
20. In labour market, if the government imposes a minimum wage that is below
equilibrium, then
(a) Nothing will happen to the wage rate or employment levels
(b) Some workers may lose their jobs as a result
(c) Firms will hire fewer workers than without the minimum wage law
(d) Workers who wish to work at minimum wage will have a difficult time finding a
job.
21. All of these except one are social indicators that are normally used to measure the
quality of life in an economy
a) Number of patients per doctor
b) Child mortality rates
c) Pay as you earn tax levels
d) Literacy rates.
22. An increase in money supply will cause
(a) Interest rates to fall, investment spending to fall and aggregate demand to fall
(b) Interest rates to rise, investment spending to fall, and aggregate demand to fall
(c) Interest rates to rise, investment spending to fall and aggregate demand to rise
(d) Interest rates to fall, investment spending to rise and aggregate demand to rise.
23. According to the monetarists, in the long run, the Phillip’s curve is
(a) Downward slopping
(b) Upward slopping
(c) Vertical
(d) Horizontal
24. The national rate of unemployment is:
a) The ratio of frictional unemployment rate over cyclical unemployment rate
b) The sum of frictional unemployment and cyclical unemployment
c) The sum of structural unemployment and cyclical unemployment
d) The sum of frictional unemployment and structural unemployment.
Answer the questions 25-27 that follow ,using the PPcurves provided below for the
Malawi economy
Clothing
A
N
Y
X Uranium
25. Which statement would explain the shift in the production possibility curve from AX
to AY in figure above?
(a) Some major uranium reserves are discovered in South Africa
(b) An increase in size of the labour force that can produce either uranium products
or clothing
(c) Major uranium mines are declared off limits in order to protect the environment
(d) An improvement in clothing production that has no impact on uranium production.
26. Which statement would explain the shift in production possibility curve from AY to
AX?
(a) Technical improvements in both uranium and clothing production
(b) An improvement in clothing production that has no effect on uranium production
(c) Major uranium reserves discovered in Nsanje
(d) A decrease labour force that can produce either uranium or clothing.
27. Assuming the economy was producing at point N, which statement is true?
(a) The economy is not fully employing all its resources
(b) The economy can increase the production of clothing if it decreases the
production of uranium
(c) The economy can move onto the curve/frontier even without changing the current
technologies of production
(d) Both (a) and (c) are true.
28. The following are characteristics of an economic recession, except one.
(a) Increased inflationary pressure and increased demand for imports
(b) Declining aggregate demand
(c) Destocking and heavy price discounting
(d) A decrease in capital investment.
29. Expansionary fiscal policy is a combination of the following
(a) Increase in government expenditure and a decrease in taxes
(b) A decrease in government expenditure and a decrease in taxes
(c) An increase in government expenditure and an increase in taxes
(d) None of the above.
30. If the nominal interest rate on a checking account is 2% and the inflation rate is 3%
per annum. What is the real interest rate?
(a) 5%
(b) -1%
(c) 2%
(d) 2/3%.
SECTION B
40 MARKS
Choose ANY TWO questions
Question 1
Using the following function, answer the questions that follow below:
NX = Y – (G + I + C)
Where NX= trade surplus, Y = National Income, C = Consumption, I = Investment and
G = Government expenditure.
(a) State three ways in which a current account is financed .
( 6 marks)
(b) If a country is facing a current account deficit, how can it adjust the current account
using the factors in the schedule above
(2 marks)
(c) Using the LM- IS curve, show how a decline in exports can affect income and trade
balances assuming the economy is in full employment.
(10 marks)
(d) Explain the term devaluation.
(2 marks)
(Total 20 marks)
QUESTION 2
In 2010, Malawi was said to be one of the fastest growing economies next to Qatar.
(a) What do you understand by economic growth?
(2 marks)
(b) Explain four disadvantages of economic growth.
(12 marks)
(c) Distinguish between economic growth and an increase in output.
(6 Marks)
(Total 20 marks)
QUESTION 3
a) Describe three economic factors of production and state their return.
(6 marks)
b) Distinguish between free market and command economic systems.
(4 marks)
c) A Chinese corporation is building a private hotel in the Capital City. They have also
hired specialists who are Chinese nationals to assist in the project.
(i) What do you understand by the term “Specialisation”?
(ii) State two benefits and two costs of specialisation.
(2 marks)
(8 marks)
Total 20 marks
QUESTION 4
(a) Explain briefly three major macro-economic objectives.
(6 marks)
(b) With the aid of a “Phillips Curve”, explain the relationship between inflation and
unemployment.
(10 marks)
(c) Assuming you were appointed as the economic advisor for government, what would
your advice be if the economy was facing persistent price increases?
(4 marks)
(Total 20 marks)
END OF EXAMINATION PAPER