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INSTITUTE OF BANKERS IN MALAWI CERTIFICATE IN BANKING EXAMINATION SUBJECT: INTRODUCTION TO ECONOMICS (IOBM - C106) Date: Wednesday, 3rd November 2010 Time Allocated: 3 hours (08:00 – 11:00 am) INSTRUCTIONS TO CANDIDATES 1 This paper consists of TWO Sections, A and B. 2 Section A consists of 4 questions, each question carries 15 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. SECTION A (60 MARKS) Answer ALL questions from this section. QUESTION 1 Mr. Yohane Maluzi is a young entrepreneur. Below is a table showing a record of accounts for the first year of his Malambe Juice Production Company (MJPC). Activities Value in Kwacha Initial investment on capital 150,000.00 goods: furniture and equipment Costs: rent, telephone bills, 500,000.00 water and electricity Sales value 700,000.00 (a) Assuming there is no depreciation, what is the profit in the first year? (b) How would an economist define the “profit” above as compared to an accountant? (c) (3 marks) (4 marks) A high profile Chinese investor has read about Mr Maluzi’s business in the Daily City newspaper and wants to have a joint venture with him. What four advantages would accrue to MJPC if he accepts the offer? (8 marks) (Total 15 marks) QUESTION 2 (a) Mention three differentiate between “Perfect Competition” and “Oligopoly” market structures. (b) (6 marks) An application at the Ministry of Energy and Mining for a license to operate a new electricity company has induced debate in the A qualification examined by the Institute of Bankers in Malawi 2 country. Most citizens are supporting the venture whilst the government is reluctant to grant the license to the applicant. (i) What could be two reasons behind government’s reluctant to grant the license? (ii) (c) (4 marks) State two methods that the government can use to prevent entry into the electricity industry. (2 marks) Explain the term “Price Discrimination”. (3 marks) (Total 15 marks) QUESTION 3 (a) What does the term “Liquidity Preference” mean? (b) Explain the difference between nominal interest rates and real (3 marks) interest rates. (c) (4 marks) With the aid of a graph, explain how the government of a small economy would manage to dampen expenditure using interest rate as a tool. (7 marks) (Total 15 marks) QUESTION 4 (a) State any three forms of money. (b) In relation to currencies, distinguish the following terms: (c) (3 marks) (i) devaluation and depreciation (2 marks) (ii) revaluation and appreciation (2 marks) What is the difference between monetary policy and fiscal policy? (8 marks) (Total 15 marks) A qualification examined by the Institute of Bankers in Malawi 3 SECTION B (40 MARKS) Answer ANY TWO questions from this section. QUESTION 5 (a) Outline two advantages and two disadvantages of a “Command Economy”. (b) (4 marks) Malawi is a mixed economy. What factors would you present in agreement with this statement? (c) (4 marks) Maize is considered a merit good in Malawi, therefore the government decided to introduce a universal fertilizer subsidy to improve the production quantities of this staple food. Draw a graph and explain how the subsidy will increase production. (12 marks) (Total 20 marks) QUESTION 6 (a) Explain the concept of “ diseconomies of scale” (b) Briefly explain the six major sources of internal economies of scale. (4 marks) (12 marks) (c) Give two advantages that a firm might expects to gain from “Vertical Growth” (4 marks) (Total 20 marks) QUESTION 7 Development economists have in recent years questioned the effectiveness of foreign aid to developing countries particularly Africa as people have remained poor and the countries are still under-developed. A qualification examined by the Institute of Bankers in Malawi 4 (a) Briefly explain two uses of aid in Malawi. (4 marks) (b) What other two sources do developing countries get there funding from apart from aid? (c) (4 marks) State any four conditionalities imposed by the International Monetary Fund and World Bank on developing countries. (4 marks) (d) What four benefits may arise when government reduces borrowing? (8 marks) (Total 20 marks) QUESTION 8 (a) Define the term “natural rate of unemployment”. (4 marks) (b) Explain four forms of unemployment. (8 marks) (c) Briefly state two internal (within the economy) and two external effects of inflation. (8 marks) (Total 20 marks) END OF EXAMINATION PAPER A qualification examined by the Institute of Bankers in Malawi 5