INSTITUTE OF BANKERS OF SRI LANKA
Intermediate in Applied Banking and Finance (IABF)
Principles of Economics - Guidance Multiple Choice Questions
a) The questions below are provided to guide students and teachers in
their studies on the subject as per the syllabus.
b) The first question in the Examination Paper will carry a number of
multiple questions up to 10 carrying two marks each.
1. Economics is the study of:
A. How to produce most goods for the most people.
B. How to do business in the economy.
C. How people deal with scarcity.
D. The equitable distribution of society’s income and wealth.
2. In a market economy, the fiscal policy is managed by
E. A planning ministry.
F. The parliament.
G. The price mechanism.
H. The ministry of finance.
3. The Production Possibility curve for an economy is
A. Concave to the origin
B. Convex to the origin
C. Linear
D. Positive
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4. The graph below shows the result introduction of guaranteed price scheme by the government
for paddy under which a price P is guaranteed price for the paddy producers.
Price
S
D
A
B
P
K
L
S
D
Quantity
Accordingly, in order to maintain the guaranteed price, the paddy stock of the government
should increase by
A. BL
B. AK
C. AB
D. PA
5. In consumer- choice theory, a diminishing marginal rate of substitution implies
A. Convex indifference curves
B. Diminishing marginal utility
C. Intersecting indifference curves
D. Negatively sloped indifference curves.
6. When the total utility increases, marginal utility is
A. Negative and increasing
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B. Negative and increasing
C. Positive and declining
D. constant
7. The demand curve for Pencils is given by D = 85 -5P and Supply is given by S = 25+ 5P
where P is the price of pencils. When Pencil market is in equilibrium, the quantity of pencils
bought and the equilibrium price of pencils are respectively,
A. 6 and 14.80
B. 30 and 14.50
C. 80 and 15.50
D. 11 and 17.00
8. If the quantity of a good demanded remains unchanged as its price changes, the price
elasticity of demand is
A. Greater than one
B. Smaller than one
C. zero
D. infinity
9. The income elasticity of demand for cars is approximately 1.8. This figure implies that if
income increases by
A. 10%, the demand for cars will increase by 1.8%
B. 10%, the demand for cars will increase by 18%
C. 18%, the demand for cars will increase by 10%
D. Rs.100, the demand for cars will increase by Rs.180
10. The price elasticity of demand for mobile telephones is reported to be –0.7 and income
elasticity of demand is 3.0. Therefore, 1 percent increase in income and a 1 percent increase
in price would
A. increase demand by 3.7 %
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B. increase demand by 2.3 %
C. increase demand by 1 %
D. decrease demand by 2.3 %
11. The demand curve for a normal good will shift to the right if
A. The consumer’s income rises.
B. The price of the good rises.
C. The price of complementary good falls.
D. There is a decrease in preference for the commodity.
12. The banking industry can be best explained by the following market model
A. The perfect competition
B. The monopoly
C. The oligopoly
D. The monopolistic competition
13. Which of the following is NOT a characteristic of a perfectly competitive industry?
A. The firms in the industry behave strategically
B. Entry into the industry is free
C. The product is homogeneous
D. The firms are price takers
14. In the short run, a firm with the objective of maximizing profits should NOT produce if
A. Price is less than minimum average variable cost
B. Price is less than minimum average cost
C. Price is less than average fixed cost
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D. Minimum average cost is less than marginal cost
Question 15 - 18 are based on the following IS-LM diagram
LM
Interest
Rate
E
IS
Income
15. Which of the following is NOT true for the movements of IS-LM curves?
When other things remain the same
A. Increased government expenditure moves the IS curve upward to the right.
B. Increased money supply moves the LM curve downward to the right.
C. Fall in tax rates move the IS curve upward to the right.
D. Increased money supply moves the LM curve upward to the left.
16. If other things remain the same, an increase in tax rates causes the equilibrium level of
income to
A. Fall and the interest rate to fall.
C. Fall and the interest rate to rise
D. Fall and leaves the equilibrium interest rate unchanged
E. Rise and the interest rate to rise
17. The purchase of USD 1 bn. worth of bonds by the Central Bank will
A. Shift the IS curve to the right
B. Shift the LM curve to the right
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C. Shift the IS curve to the left
D. Shift the LM curve to the left
18. If the GDP in an economy is Rs. 3,452 billion, Consumer expenditure is Rs.2,343, Investment
is Rs.379 billion and Government expenditure is Rs.865, the external trade balance is
A. + Rs 93 billon
B. + Rs 123 billon
C. - Rs 45 billon
D. - Rs 135 billon
Questions 19 -21 are based on the following macro model of a closed economy. All data are in
billions of rupees.
Y= C+I+G
C = 0.8 (Y – T)
I = 40 + 0.1Y
Where
Y = income,
C = consumption,
I = investment,
G = government expenditure,
T = taxes
19. If there are no taxes or government expenditure what is the equilibrium level of national
income?
A. Rs.60 billion
B. Rs.100 billion
C. Rs.400 billion
D. Rs.800 billion
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20. If the government levies an income tax of 10 percent and incurs expenditure of Rs.50 billion,
what would be the equilibrium level of national income?
A. Rs.100 billion
B. Rs.200 billion
C. Rs.400 billion
D. Rs.500 billion
21. If all the income earners of a country earned an equal amount of income, the Gini co-efficient
of its income distribution would be
A. 0.0
B. 0.5
C. 1.0
D. More than 1.0
22. A depreciation in the value of Sri Lankan rupee will
A. Discourage tourist from coming to Sri Lanka
B. Discourage foreign consumers from buying Sri Lankan products
C. Encourage Sri Lankan s to consume more and more foreign goods
D. Encourage foreigners to buy more Sri Lankan products
23. In 2013, the per capita income and the annual average inflation rate in Sri Lanka were
respectively;
A. USD 3,280 and 6.9 %
B. USD 2,500 and 6.9 %
C. USD 2,500 and 8.5 %
D. USD 3,280 and 8.5 %
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24. In 2013, the Labor force participation rate and the unemployment rate in Sri Lanka were
respectively;
A. 53.8 % and 4.4 %
B. 45.8 % and 6.9 %
C. 60.2 % and 4.4 %
D. 53.8 % and 8.5 %
25. In 2013, the investment and national savings ratios were respectively;
A. 30.6 % and 30.5 %
B. 29.6 % and 25.7 %
C. 19.6 % and 15.7 %
D. 40.5 % and 25.7 %
26. When nominal (current prices) GDP is Rs.9,000 billion and real (constant prices) GDP Rs.
3,000 billion, the GDP deflator is
A. 9.9
B. 3.0
C. 2.0
D. 4..5
27. When investment spending is negatively related to the rate of interest, equilibrium income in
the goods market
A. is uncorrelated to the rate of interest
B. is negatively related to the rate of interest
C. is positively related to the rate of interest
D. Falls as the rate of interest deceases.
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28. When the cross price elasticity between two goods is zero, the two goods are said to be
A. substitutes
B. complements
C. non-related
D. luxury goods
29. The profit maximization of a firm in the short-run can occur when the
A. Marginal product rises
B. Average cost falls
C. Price of the product falls
D. Marginal cost rises
30. If the price elasticity of a consumer good is less than 1 and the Government wishes to
increase the revenue from VAT, the Government should
A. Reduce the VAT on the good
B. Increase the VAT on the good
C. Keep the VAT on the good unchanged
D. Increase the VAT on substitutes of the good
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