THE ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA FOUNDATION EXAMINATION - JULY 2011 (52) ECONOMICS

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1 All Rights Reserved THE ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA FOUNDATION EXAMINATION - JULY 2011 Time: 02 hours (52) ECONOMICS Afternoon Instructions to candidates (1) This paper consists of two (02) Sections A & B. (2) Five (05) questions should be answered, as follows: Question No.01 of Section A, Any four (04) questions from Section B. (3) Answers should be in one language, in the medium applied for, in the booklets provided. (4) Graph Paper will be provided. (5) 100 Marks. SECTION - A Multiple Choice Questions All questions of this Section should be answered. 40 marks 01. Select from (1), (2), (3), (4) the most correct answer to each of the following questions. Write the number of the selected answer in your answer booklet with the English letter assigned to the question. No. of Pages: 06 No. of Questions: 07 (A) Select from the following, the statement which contains a characteristic of an economic good: (1) It has an infinitely elastic supply. (2) It yields zero satisfaction to consumers. (3) It is provided to consumers by the government free of charge. (4) It has an opportunity cost. (B) Which one of the following explains a correct feature of the Production Possibility Curve (PPC) that shows diminishing opportunity cost? (1) PPC is concave to the origin. (2) PPC is a straight line. (3) PPC is convex to the origin. (4) PPC takes different shapes at different levels of output. (C) Select from the following, the statement which is not true in relation to functions of price theory in a market economy: (1) Signals to consumers. (2) A distribution of income according to needs. (3) Incentives to producers. (4) A means of allocating scarce resources.

2 (D) Which one of the following is not an example for derived demand? (1) Labour. (2) Land or Capital. (3) Entrepreneurship. (4) Jewellery. (E) If cross elasticity of demand for good x in relation to the price change of good y is zero, x and y items can be described as: (1) Complementary goods. (2) Independent goods. (3) Substitute goods. (4) Public goods. (F) Satisfaction obtained by a person after consuming one additional unit of a product is called: (1) Opportunity cost. (2) Marginal cost. (3) Marginal utility. (4) Total utility. (G) Good x O Good y ID 2 ID 1 Which one of the following could shift the indifference curve from ID 2 to ID 1 with a given income, as shown in the above diagram? (1) A reduction in the prices of both goods x and y. (2) A reduction in the price of good x only. (3) An increase in the price of good x only. (4) An increase in the level of real income of the consumer. (H) Select from the following, the statement which is not true in relation to shift of the demand curve from left to right: (1) A change of fashion. (2) Fall in price of the good. (3) An expected rise in the price of the good. (4) A fall in the price of complements. 2

3 (I) The following diagram shows the demand and supply curves for commodity x with OP equilibrium price and OQ equilibrium quantity. Price A S P E O Q D Quantity As per the above diagram, the shaded area (PAE) shows: (1) The supernormal profits of the firm. (2) Economic rent. (3) Transfer earnings. (4) Consumer surplus. (J) Which one of the following is a function of the household sector? (1) Producing and supplying goods and services. (2) Supplying goods and welfare facilities. (3) Earning of income by supplying factors of production. (4) Involvement in foreign trade. (K) The table below shows the details of national income of a country for a year. Rs. (million) Gross domestic product 1. 50,000 at factor cost prices 2. Capital expenditure 5, Indirect taxes 9, Exports 5, Subsidies 1, Imports 6,000 Select from the following, the value of Gross Domestic Product at market prices: (1) Rs.60,000/- million. (2) Rs.61,000/- million. (3) Rs.58,000/- million. (4) Rs.57,000/- million. (L) Select from the following, a transfer payment of the Government budget: (1) Salaries of Government employees. (2) Interest payment for public debt. (3) Supply of school books free of charge. (4) Payment for the construction of a new road. 3

4 (M) According to the Annual Report of the Central Bank of Sri Lanka for the year 2010, the economic growth of the country in 2010 was: (1) 6% (2) 8% (3) 4.8% (4) 7.5% (N) Select from the following, the most correct definition of money: (1) It is a medium of exchange. (2) It is a store of value. (3) Anything that is accepted as a medium used for the exchange of different types of goods and services in an economy. (4) It is a unit of account. (O) From the following, what can be considered as bank money? (1) Coins and notes. (2) Money which has an intrinsic value equal to face value. (3) Deposits in the banks. (4) The demand deposits of the public in the commercial banks. (P) What is meant by inflation? (1) Tendency of general price level falling continuously. (2) Tendency of general price level rising continuously. (3) Tendency of the value of money rising continuously. (4) Tendency of unemployment rising continuously. (Q) If the government allocates Rs.50 million from its budget for the construction of a new road, the expenditure can be considered as: (1) A subsidy for road users. (2) A recurrent expenditure of the government. (3) A capital expenditure of the government. (4) A transfer payment of the government. (R) Which one of the following is used to measure the economic growth of a country? (1) Consumer protection. (2) Measures taken to reduce poverty. (3) An increase in the total output of a nation over a period of time. (4) Reduction of economic inequalities while maintaining economic growth. 4

5 (S) Tax compliance can be defined as: (1) Raising the tax rate for higher income groups. (2) Certain industries and businesses being fully exempted from tax. (3) That is the voluntary adherence to tax laws relating to making payment and reporting. (4) It is usually expressed as a percentage of the value that is taxed. (T) Select from the following, the expansionary source of financing a budget deficit: (1) Using private savings. (2) Selling Treasury Bills to general public. (3) Borrowing from the Employees Provident Fund. (4) Borrowing from Commercial Banks. (02 marks each, Total 40 marks) SECTION - B Answer any four (04) questions only from this Section 60 marks 02. (a) (i) What is meant by scarcity? (02 marks) (ii) Explain the differences between scarcity and choice. (03 marks) (b) Explain briefly basic economic problems. (06 marks) (c) How does the market economy solve basic economic problems? (04 marks) 03. (a) List five(05) main characteristics of perfect competition. (b) Explain briefly the long run equilibrium in a firm under perfect competition. (c) (i) What is meant by oligopoly? (01 mark) (ii) List the main features of oligopoly. (04 marks) 04. (a) Explain what is meant by Diminishing Marginal Utility. Give an example. (b) What are the disadvantages of marginal utility theory? (c) State the determinants of demand. 5

6 05. (a) The diagram below shows a circular flow of National Income in a closed economy. A B (i) (ii) Firms Households D F E (iii) Factors of Production (iv) Goods and Services (v) Expenditure on purchases C (vi) Factor incomes Select the most correct term for English letters in the diagram from list of terms provided in the box. (03 marks) (b) (c) Describe briefly the three(03) approaches (methods) used to estimate the National income. (06 marks) The following data are taken from National Income accounts of a country in a given year: Rs. (million) 1. Consumers expenditure 29, Government consumption 8, Gross domestic capital formation 8, Subsidies 1, Net income from abroad 1, Indirect taxes 8, Imports 5, Exports 4, Capital consumption 4,000 Calculate the Gross National Product (GNP) at factor cost prices. (06 marks) 06. (a) Explain what is meant by Broad Money Supply. (04 marks) (b) (i) What is meant by Value of Money? (02 marks) (ii) Explain briefly the relationship between the General Price Level and the Value of Money. (04 marks) (c) What are the effects of inflation? 07. (a) Explain the difference between Economic Growth and Economic Development. (b) State five(05) measures that can be implemented to achieve Economic Growth of a country. (c) State five(05) reasons for fluctuation of vegetable prices in Sri Lanka. - o0o - 6