Practice Exit Exam: Economics

Addis Ababa University

College of Business And Economics
Department of Economics
Model Exit Exam: Economics

Instructions!
1. This model exam is prepared by the department of economics to assist you in preparing for
the exit exam.
2. The Model Exam contains 100 multiple choice questions from courses that you have taken
during your undergraduate stay.
3. Write your full name on the space given below and on the answer sheet.
4. The exam booklet has 20 pages including the cover page and answer sheet.
5. Switch off your mobile phone. Using a mobile phone for any purpose is strictly forbidden.
6. Sharing calculators is not allowed.
7. Do not mark any answer on the question paper. Put your answers on the answer sheet only.
8. There is no excuse for any attempt to cheat. It entails serious penalty.

GOOD LUCK!

Personal Details:

Name: _____________________________________
ID. No. ___________
Section: _________

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 Practice Exit Exam: Economics

Choose the best answer from the suggested options and write the letter of your choice ONLY
on the answer sheet.

Microeconomics

1) Abebe spends all his income on goods x and y. His preferences can be represented by the utility
function, u( x, y ) = x 0.3 y 0.6 . Suppose a unit of x costs 40 while a unit of y costs 50. If Abebe’s
monthly income is 3000, what is his optimal monthly bundle (x, y)?
A) (25,40)
B) (50,20)
C) (75,60)
D) (60.755)
2) In the case of inferior goods, the substitution and income effects of a price increase will
A) both decrease the quantity of the good demanded
B) both increase the quantity of the good demanded
C) The substitution effect will increase the quantity of the good demanded while the
income
effect will decrease the quantity of the good demanded
D) the substitution effect will decrease the quantity of the good consumed while the
income effect will increase the quantity of the good consumed
3) Consider two risk-averse individuals A and B. Suppose consumer A is more risk averse than
B. Which of the following is true about A and B?
A) A has a utility function concave to the origin while B has a linear utility function
B) A has a diminishing marginal utility of wealth while B has an increasing marginal
utility of wealth
C) A and B have the same utility function
D) A gets lower expected utility than B gets for the same gamble and wealth levels
4) If a firm finds itself operating in stage I of production,
A) It can increase its profits by decreasing input use
B) It can increase its profit by increasing input use to the point where marginal product of
labour is zero.
C) It can increase its profits by moving to stage II
D) It should stay in stage I because marginal product is increasing
5) Suppose the long-run marginal cost of a firm is constant at 5. If total cost is 50 when output is
10, then its AC when output equals 15 units must be
A) 5
B) 75
C) 15
D) Not possible to determine with the information provided

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 Practice Exit Exam: Economics

6) When a perfectly competitive industry is in long-run equilibrium, all firms in the industry
A) earn zero economic profits
B) produce a level of output where short-run marginal cost is equal to short-run average
total cost
C) produce a level of output where long-run marginal cost is equal to long-run average
cost
D) All of the above are correct
7) Monopoly is a market structure characterized by all the following features except
A) The firm is a dominant seller of a good or service having no close substitutes
B) The existence of high barriers to entry
C) The firm enjoys economic profit even in the long run
D) The firm is a price taker
8) Which one of the following is TRUE about a monopolistically competitive market?
A) Firms in a monopolistically competitive market are price takers
B) Product differentiation leaves firms under monopolistic competition some monopoly
power
C) Demand curve facing a monopolistic competitive firm is inelastic compare to perfect
competition
D) The cost structure of a monopolistic competitive firm is different from perfect
competition and monopoly
9) One of the following is TRUE about duopoly models;
A) In Bertrand duopoly model firms are making decision simultaneously about output that
maximizes their profit.
B) The isoprofit curve found near to the price axis in case of Bertrand model represent
higher level of profit like the of Cournot model.
C) In the Cournot model, industry profit is maximized if firms decided to operate on
contract curve rather deciding to produce at the intersection between the reaction
curves.
D) In the kinked demand model the high cost firm act passively.
10) Two firms operate in joint profit maximizing cartel and the demand they face estimated as P =
60 - 2Q, where Q = Q1 + Q2. Firm 1’s total cost function is C1 = 𝑄12 and Firm 2’s total cost
function is C2 = 4Q2. How much output will each frim produce to maximize industry profit.
A) Q1 = 2 and Q2 =12
B) Q1= 60 and Q2 = 56
C) Q1 = 4 and Q2 = 4
D) Q1 = 6 and Q2 = 4
11) In game theory, a strategy that is best regardless of what rival players do is called
A) first-mover advantage
B) a Nash equilibrium strategy
C) tit-for-tat

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 Practice Exit Exam: Economics

D) a dominant strategy
12) The demand for factors of production is called a derived demand because it is:
A) derived from the marginal cost of employing those factors
B) derived from the available supply of factors
C) not easy to determine and must be derived by a technical (and often complicated)
process.
D) derived from the demand for the outputs that are produced by the factors of production
13) As a general rule, a profit-maximizing firm employs each factor of production up to the point
at which the value of the marginal product of the ________ unit of the factor employed is
________ that factor's price.
A) first; greater than
B) last; equal to
C) first; equal to
D) last; less than
E) next; greater than
14) In general equilibrium theory, the economy has reached Pareto Optimality when
A. society’s initial endowment is distributed equally among all individuals
B. no one can be made better off without making someone else worse off
C. society’s initial endowment is distributed fairly among all individuals
D. every firm is enjoying a profit
15) Asymmetric information problems are particularly severe in the market for insurance. This is
true because:
A) insurance companies will always know more about the likelihood of an event happening
than will buyers of insurance
B) buyers of insurance will always know more about the likelihood of an event happening
than will insurance companies
C) insurance companies and buyers of insurance cannot distinguish between good and bad
information
D) insurance companies are non-depository financial institutions.

Macroeconomics

16) Which one of the following is not true?

A) According to the Classical school of thought, prices are unnecessarily flexible and
possibly harm certain segments of the society
B) Keynesians argue that markets are not always self-regulating, output fluctuations are
partly caused by private sector behaviour (animal sprit).

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 Practice Exit Exam: Economics

C) Classical school argues that disequilibrium in the various markets that are likely to cause
unemployment is a short run phenomenon that can be addressed through the interaction of
market forces.
D) In a Classical school of thought, the economy is operating at full employment; any change
in fiscal or monetary policy instruments will have nominal value changes only.
17) Which of the following is not true?
A) Comparison of countries in GDP per capita income terms is a good measure because it
takes into account income distribution
B) If nominal GDP grows with 10 percent and inflation increases by 5 percent, then Real
GDP grows at a rate of 5 percent
C) If nominal GDP grows at a rate of 10 percent, inflation grows at 3 percent and population
grows at 3 percent, real per capita income grows at a rate of 4 percent
D) Among the various shortcomings of GDP as a measure of welfare is its inability to take
into account political freedom, the degree of access to education for all
18) Which one of the following is not true?
A) Investment should be related to interest rate even if the investor uses his/her own money.
B) If Ministry of Finance increases taxes, equilibrium income will be negatively affected but
National Bank can protect it from the decline by using expansionary monetary policy.
C) The amount of money kept for speculative demand is related to interest rate, and not to
the level of income of households
D) In a linear consumption function with autonomous consumption, average propensity to
consume tends to decline and marginal propensity to consume remains constant if income
increases.
19) Which one of the following is not true about the monetary and fiscal policy measures?
A) In the vertical segment of the LM curve, the economy is in its full employment level; thus
expansionary fiscal policy will lead to private investment crowd-out.
B) In the state of liquidity trap, an increase in money supply will boost the economy
C) In the upward sloping segment of the LM curve, expansionary fiscal policy causes a
decline in private investment but still output increases.
D) The effect of expansionary monetary policy on the economy depends on the
responsiveness of speculative demand to interest rate.

20) Consider an open economy given by the following expressions:

C = 10 + 0.8 (Y – T), I = 10, G = 10, T = 10, IM = 0.3Y and X = 0.3Y*
Assume the real exchange rate is fixed and equal to 1. What is the government purchase
multiplier in this economy, given Y*?
A) 1
B) 2
C) 3
D) 4

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21) Using the information in question number 4, what is the equilibrium outputs in both the
domestic and foreign economy assuming the economies are identical?
A) 44
B) 44.6
C) 110
D) 100
22) Which of the following statements is true regarding the long-run aggregate supply curve?
A) It is vertical because an equal change in all prices and wages leaves output unaffected
B) It is positively sloped because price expectations and wages tend to be fixed in the long
run
C) It is horizontal because price expectations and wages tend to be fixed in the long run.
D) It shifts left when the natural rate of unemployment falls.
23) In Irving Fisher two-period model of consumer behavior, suppose
Y1 = Consumer’s present time period’s labor income.
Y2 = Consumer’s future time period’s labor income which is known to the consumer.
C1= Consumption in the present time period.
C2 = Consumption in the future time period.
r = Interest rate
then, the Intertemporal Budget Constraint can be stated as:
A) C2= Y2+Y1(1+r)
B) C1= Y1+ Y2/(1-r)
C) C1+ C2/(1+r) = Y1+ Y2/(1+r)
D) C1+ C2/(1-r) = Y1+ Y2/(1-r)
24) In neoclassical investment model, which on is not correct
A) An increase in MPK increases investment
B) A decrease in MPK shifts the investment curve to the left
C) An increase in real interest rate decreases investment
D) An increase in depreciation increases investment
25) In Tobin q:
A) If q >1, replacement cost of capital is greater than market value
B) If q >1, firms invest more on new capital
C) If q < 1, firms replace capital as it wears out
D) If q < 1, the value of the firm in the stock market is greater than its replacement
capital
26) In Ethiopia, the money supply is determined:
A) only by the National Bank of Ethiopia.
B) only by the behavior of individuals who hold money and of banks in which money is
held.
C) jointly by the National Bank of Ethiopia and by the behavior of individuals who hold
money and of banks in which money is held.

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 Practice Exit Exam: Economics

D) according to a constant-growth-rate rule.

27) "Full employment" occurs when:
A) the unemployment rate is zero percent
B) the structural unemployment rate is zero percent
C) the frictional unemployment rate is zero percent
D) the cyclical unemployment rate is zero percent
28) Macroeconomic policy making takes time to recognize the problem, implement remedial
polices and see the effect on the economy. This argument is made in favor of:
A) Active policy making
B) Passive policy making
C) Policy conducted by rule
D) Policy conducted by discretion
29) In the Solow growth model, if investment exceeds depreciation, the capital stock will ______
and output will ______ until the steady state is attained.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
30) Which one of the following is not the macroeconomic features of least developed countries:
A) Openness to trade in commodities and assets
B) Adoption of managed exchange rates
C) Financial repression
D) None

Development Economics

31) Which one of the following best describes the relationship between supply of educational
quality, educational quantity, and employment in developing countries
A) Demand for education and employment is economically motivated while supplies of
education is politically responsive
B) Market supply of education is led by market demand for education
C) economically motivated supply of education faces politically responsive demand for
education
D) Market demand for education is led by market supply of education
32) An effective government role in health systems is crucial mainly for the following reason
A) Although markets internalize externalities, households invest little in infrastructure
B) Households neglect externalities and the markets invest little in health infrastructure
C) Government has more than sufficient funds to invest in health as compared to the markets

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D) Government supply of health services is of lesser cost than market supply of health
services
33) In several developing countries, observations of massive additions to the urban labor force are
accompanied by failure of this labor force to show up in the formal unemployment statistics in
the modern-sector. This is most likely indicative of
A) the expansion of the urban formal sector absorbing the rural migrants
B) the existence of an urban informal sector
C) the conversion of rural migrants to international migration
D) Government failure to register employed and unemployed rural migrants.
34) The Harris-Todaro model explains migration with ________________
A) unemployment equilibrium between urban expected wages and average rural income
B) full employment equilibrium between equalized rural urban wage in free market
situation
C) full employment equilibrium between urban expected wages and average rural income
D) Unemployment disequilibrium between urban rural wages reversing the direction of
migration
35) Trade protectionism of developed countries heavily disadvantages developing countries
because the protection is largely on _____________
A) high level services
B) new technology
C) agricultural products
D) manufacturing products
36) As compared to that of developed nations (typically western Europe), the demographic
transition of developing countries is characterized by:
A) faster decline in mortality rates in stage II
B) relatively lower magnitude of birth rates and death rates in stage I
C) lower replacement level of fertility
D) identical demographic characteristics across all developing countries in stage III
37) The major advantage of the Foster Greer Thorbecke index over the head count ratio and the
poverty gap index is that:
A) It shows the severity of poverty among the poor
B) It shows the average number of deprivations each poor faces at the same time.
C) It is insensitive to the variation in well-being among the poor.
D) All of the above
38) Modern development economics arose _________
A) first in the 19th century to study the development problems of Eastern Europe
B) in the late 18th century as a new branch of economics
C) in the late 1940s to study the development problems of the Third World
D) None of the above
39) Which one of the following signifies a common feature of less developed countries

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A) Size
B) Low level of living
C) Natural resource endowment
D) Structure of the economy
40) Which one of the following is a dual economy model?
A) The Solow growth model
B) The Lewis model
C) The Rostow model
D) The New Growth Theory
41) Which of the following names are associated with the so called new growth theory?
A) K. Arrow and R. Solow
B) North and E. Ostrom
C) R. Lucas and P. Romer
D) M. Todaro and J. Harris
42) According to the traditional approach to economic development, which one of the following
is an important factor of long-term growth?
A) Population growth and labour force
B) Capital Accumulation
C) Technological Progress
D) All of the above
43) The most widely quoted example of vicious circle of poverty with respect to capital
accumulation is: ___________________.
A) “underdeveloped countries will never develop”
B) “the source of underdevelopment is lack of human capital”
C) “Poor countries are poor because they are poor”
D) “Natural resource capital is necessary but not a sufficient condition”
44) No one/country is said to be developed if it is used as a tool by others for their own needs. This
is the notion of:
A) Self-sustenance
B) Freedom from ignorance
C) Self-esteem
D) Capability to function
45) Which one of the following best describes the relationship between supply of educational
quality, educational quantity, and employment in developing countries
A) Demand for education and employment is economically motivated while supplies of
education is politically responsive
B) Market supply of education is led by market demand for education
C) economically motivated supply of education faces politically responsive demand for
education
D) Market demand for education is led by market supply of education

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International Economics

46) Among the following statement, which one is not true about international economic analysis?
A) Descriptive international economics deals with institutional environment in which
international transactions take place between countries.
B) Explanation of international economic transactions as they take place in the institutional
environment belongs theoretical international economics analysis.
C) Monetary theory of international economics deals with the study of effects of trade on
prices of goods and services and rate of economic growth
D) The pure theory of international economics deals with trade patterns, impact of trade on
production, rate of consumption, and income distribution.
47) Which one of the following is not true about physiocracy economic thought?
A) Physiocracy was just a furthering and refinement of the mercantilist doctrine or a
modification of it.
B) Physiocracy was basically a reaction against mercantilism and was offering an alternative
political and social system.
C) Physiocracy was claiming to be a natural system, based upon a belief that there existed
natural laws
D) The physiocrats are credited for their famous decline of ‘laissez-faire, laissez-passer’
48) The importance of international economics in the world economy can be demonstrated in
several ways. Which one is not true about this?
A) International trade enables all of us to consume goods and services from a variety of
countries
B) Trade enables resource-poor countries to access raw materials that are necessary for the
development of their industries.
C) Trading nations always share world trade gain equally
D) Total global output of the goods and services can increase, and leading to increased
welfare, and employment opportunities
49) Which one of the following is not true about scope and meaning of international economics?
A) International economics studies about the economic interdependence between countries
and its effects on economy.
B) International economics describes production, trade, and investment between countries.
C) International economics deals with the impact of various government restrictions on
production, trade, consumption, and distribution of income
D) International economics does not assess the implications of domestic trade and investment.
50) One among the following statement is wrong about the law of comparative advantage and gain
from trade
A) According to the law of comparative advantage, even if one nation is less efficient than
the other nation in the production of both commodities, there is still a basis for mutually
beneficial trade.

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 Practice Exit Exam: Economics

B) The first nation should specialize in the production and export of the commodity in which
its absolute advantage is greater, and the other nation should import the commodity in
which its absolute advantage is smaller.
C) Consumption gains to the two trading countries depend upon the terms of trade (TOT)
D) If terms of trade (TOT) of country A is equal to internal opportunity cost ratio of country
A, all the gains in consumption can be taken by country B.
51) Which one of the following is not true about Adam Smith’s Theory of Absolute Advantage?
A) Adam Smith started with the simple truth that for two nations to trade
with each other voluntarily, both nations must gain.
B) According to Adam Smith, trade between two nations is based on absolute
advantage.
C) According to Adam Smith, both trading nations can gain by each specializing in the
production of the commodity of its absolute advantage and exchanging part of its output
with the other nation for the commodity of its absolute disadvantage.
D) Adam Smith’s theory of Absolute Advantage assumes increase returns to scale in the
production of both goods in the two countries.
52) One of the following statements is not true about mercantilist.
A) According to the mercantilists, the central question was how a nation could
regulate its domestic and international affairs to promote its own interests.
B) To promote a favorable trade balance, the mercantilists advocated the principle of laissez-
faire, laissez-passer’.
C) Tariffs, quotas, and other commercial policies were proposed by the
mercantilists to minimize imports in order to protect a nation’s trade position
D) Although the foundations of mercantilism have been disproved, mercantilism is alive
today.
53) The Heckscher-Ohlin trade theory argues that
A) International differences in labor, labor skills, physical capital or land (factors of
production) create productive differences that explain why trade occurs.
B) The Ricardian model show how trade affect the income distribution
C) Trade arise by the interaction between differences in factor endowments across countries
and differences in factor intensities across industries
D) While trade is partly explained by differences in labor productivity, it also can be
explained by differences in resources across countries.
54) Which one of the following statements is TRUE about a foreign exchange market?
A) A foreign exchange market is a part of the financial market for the buying and selling of
long – term debt
B) A foreign exchange market is a part of the financial market for the buying and selling of
short – term debt
C) A foreign exchange market is the market for the buying and selling of foreign currencies

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D) A foreign exchange market is the market for the buying and selling of foreign goods and
services
55) In the context of a foreign exchange market, what does “Over – the – Counter” transaction
mean?
A) A decentralized market in which securities are traded between two counterparties without
the supervision of an exchange regulator
B) A decentralized market in which securities are traded between two counterparties with the
supervision of an exchange regulator
C) The buying of securities at a spot rate and the selling at forward rate
D) The buying of securities at forward rate and the selling at a sport rate
56) In international economics, which one of the following is TRUE about an optimal currency
area?
A) It is a geographical area in which members of the region would maximize economic
benefits by keeping the exchange rate fixed within the area
B) It is a geographical area in which members of the region reduce trade barriers among
themselves, but each maintains its commercial policies with the non- members
C) It is a geographical area in which members of the region abolish trade barriers among
themselves, but each maintains its commercial policies with the non - members
D) It is geographical area in which members of the region abolish trade barriers among
themselves and also impose a common external tariff on the non - members
57) In the context of a foreign exchange market, which one of the following is TRUE about the
role of an arbitrager?
A) An arbitrager buys a foreign currency where it is cheaper and sells it where it is expensive
in order to make a profit
B) An arbitrager buys a foreign commodity where it is cheaper and sells it where it is
expensive in order to make a profit
C) An arbitrager accepts a foreign exchange risk in the hope of making a profit
D) An arbitrager avoids a foreign exchange risk through the diversification of assets
58) Let the spot rate between the United States Dollar ($) and the United Kingdom Pound Sterling
(£) be $2 = £ 1, and let the forward rate be $ 2.05 = £ 1. What will be the rate of premium on
the Pound Sterling?
A) 0.05 percent
B) 1.50 percent
C) 2.00 percent
D) 2. 50 percent
59) Other things being constant, what does real effective exchange rate measure?
A) The real effective exchange rate measures the weighted average of a country’s currency
in relation to a basket of other major currencies
B) The real effective exchange rate measures the weighted average of a country’s export
and import prices in relation to a basket of other countries’ export and import prices

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C) The real effective exchange rate measures the responsiveness of export prices to
changes in exchange rates
D) The real effective exchange rate measures the responsiveness of import prices to
changes in exchange rates
60) Assume that the United States of America (USA) and the United Kingdom (UK) are trading
partners. Let the USA be the domestic partner, while the UK is the foreign partner. Other
things being equal, what does an increase in the real exchange rate imply?
A) The USA has become more competitive than the UK
B) The USA has become less competitive than the UK
C) USA goods and services have become more attractive to UK consumers and businesses
D) UK goods and services have become less attractive to USA consumers and businesses

Monetary Economics

61) Which of the following is TRUE?

A) Barter is the most efficient system of exchange
B) Barter system is still practiced in some parts of the world
C) Barter system never contributed to the evolution of money
D) Barter transaction is difficult to arrange even in the modern world
62) Financial institutions are
A) dealers in securities, they buy secondary securities and sell primary securities
B) dealers in securities, they buy primary securities and sell secondary securities
C) dealers in financial assets, they by financial assets and sell physical assets
D) dealers in physical assets, they by financial assets and sell physical assets
63) Liquidity trap along the liquidity preference curve refers to the region where
A) monetary policy becomes effective
B) monetary policy fails
C) money demand becomes interest sensitive
D) money demand becomes price sensitive
E) money demand becomes reserve sensitive
64) Speculative demand for money arises due to___________________.
A) uncertainties about the future rate of interest
B) opinion similarities between individuals about the future rate of interest
C) opinion differences between individuals about the future rate of interest
D) the existence of bond market
E) A and D
65) Which of the following is TRUE?
A) Higher currency ratio, c, and reserve ratio, r, lead to higher money supply for a given
level of monetary base.

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B) Lower currency ratio, c, and reserve ratio, r, lead to lower money supply for a given
level of monetary base
C) higher currency ratio, c, and reserve ratio, r, lead to lower money supply for a given
level of monetary base
D) higher currency ratio, c, and reserve ratio, r, does not lead to change in supply for a
given level of monetary base
66) General instability in the economy may induce people to make a shift from_______________.
A) Currency to deposits
B) Deposits to currency
C) Money to bond
D) Land to deposits
E) A and D
67) Printing money by the government to finance budget deficit is equivalent to
A) Expenditure on the part of the government
B) Tax on the part of the government
C) Tax on the part of the individuals
D) A revenue on the part of the individuals
68) Which of the following the principal objective of the monetary policy of the National Bank of
Ethiopia?
A) Maintain price & exchange rate stability and support sustainable economic growth of
Ethiopia.
B) Expand education in Ethiopia
C) Improve productivity of firms
D) Expand supply of electricity in Ethiopia

Econometrics

69) The data collected from different parties or entities at a given point in time is
A) Panel data
B) Cross-sectional data
C) Time series data
D) Longitudinal data
70) We need normality of disturbances in linear regression model for
A) Estimating the parameters of the model
B) Checking the unbiasedness property
C) Conducting hypothesis testing and making inferences
D) Calculating coefficient of determination
71) Linearity in classical linear regression model requires all but(61)
A) Linearity in variables.
B) Linearity in parameters.

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C) Linearity in parameter and non-linearity in variables.

D) Non-linearity in parameters.
72) The ordinary least squares estimator will be biased when there is violation of (40)
A) Independence of error terms across cross sectional units
B) Constant variance of error terms
C) No perfect and linear correlation between explanatory variables
D) Independence of error terms and one of the explanatory variables.

The following results have been obtained from a sample of 20 households on the household saving
(Y), household income (X1) and bank saving interest rate (X2) where variables are measured in
deviations from their means.
∑𝐲 𝟐 = 𝟕𝟎 ∑𝐱 𝟏 𝐲 = 𝟔𝟎
𝟐 ∑𝐱 𝟐 𝐲 = 𝟓𝟎
∑𝐱𝟏 = 𝟏𝟎𝟎
∑𝐱𝟐𝟐 = 𝟖𝟎 ∑𝐱𝟏 𝐱 𝟐 = 𝟔𝟎
Then answer questions 5 through 6 based above information
73) The slope coefficients (estimates of β1 and β2) for the above regression function, respectively
are
A) 0.409 and 4.136
B) 0.409 and 0.318
C) 0.318 and 4.136
D) 0.318 and 4.136
74) The Coefficient of the determination for the above model is
A) 47.48
B) 87.78
C) 57.78
D) 65.79
75) Variance inflation factor is the most commonly used test for testing the problem of (57)
A) Autocorrelation
B) Heteroscedasticity
C) Multicollinearity
D) Endogeneity
76) The following is potential remedial measure of heteroscedasticity in classical linear regression
models except (59)
A) Transformation of variables into natural logarithm
B) Running Cochrane-Orcutt regression
C) Transforming the Ordinary Least Square into Generalized Least Square model
D) Running robust regression
77) Dummy variables are used to include _______ into a regression model. (70)
A) Count data variables
B) Categorical variables

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C) Continuous variables
D) Time series variables
78) If a Durbin Watson statistic takes a value close to zero, what will be the value of the first
order autocorrelation coefficient? (71)
A) Close to minus one
B) Close to zero
C) Less than zero
D) Close to plus one
79) One of the following statements is NOT true about the Probit model?
A) Significance of single coefficient can be tested using t-test
B) It is possible to estimate the Probit model using maximum likelihood technique
C) It is possible to estimate the Probit model using OLS
D) Coefficient of determination has no usual interpretation
80) In a system of simultaneous equations model if OLS is applied to a particular equation in the
system, the resulting estimators will be:
A) Unbiased but inefficient
B) Biased and inconsistent
C) Biased but consistent
D) Unbiased and consistent
81) For a stationary autoregressive process, the effects of shocks will (77)
A) Persist indefinitely
B) Eventually die out
C) Neither persist nor die out
D) Exponentially grow
82) A spurious regression refers to a situation where: (86)
A) The relationship between dependent and independent variable is exact
B) Even if two variables with unit root are independent, regressing one variable over the other
results in statistically significant relationship.
C) Both the dependent and independent variables are stationary at level
D) Only dependent or independent variable has unit root
83) If two variables, xt and yt are cointegrated, which of the following statements is true? (83)
A) Either xt or yt must be stationary at level
B) Only one linear combination of xt and yt will be stationary at first difference
C) The residuals from a regression of yt on xt must be stationary at level
D) Only xt will be stationary at level
84) Which test a researcher should conduct to choose between a fixed effects and a random effects
model? (96)
A) Chi-square
B) Hausman’s test
C) LM-test

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 Practice Exit Exam: Economics

D) F-test

Development Planning and Project Analysis II

85) ______refers to costs incurred in covering expenditures before it gets its first revenue.
A) Working capital costs
B) Operating costs
C) Fixed capital costs
D) All except A
E) None
86) In which phase of the project life cycle brief market survey and some rough projections and
forecasting are undertaken
A) Feasibility
B) Ex-post evaluation
C) Pre-investment
D) Pre-feasibility
E) None
87) All of the following are limitations of NPV appraisal criteria of a project except,
A) For some projects the required data for computing NPV may not be available
B) A project must have at least one negative cash flow period to use NPV criteria
C) It does not show the exact profitability of the project
D) It is not suitable method for a large and complex investment budget
88) Financial analysis is different from economic analysis in that
A) Economic analysis considers intangible benefits and costs explicitly
B) Economic analysis focuses on financial profitability of the project
C) Financial analysis measures a project’s contribution to the community’s welfare.
D) Economic analysis uses market prices to value cost and benefit of the project
89) Which one of the following statements is/are correct about the UNIDO and Little and Mirrlees
(LM) approaches measure of project costs and benefits?
A) Both approaches employ the same numeraires in terms of which net benefits are expressed
B) In UNIDO approach goods are valued at their boarder price equivalent
C) In LM approach goods are valued at their domestic price equivalent
D) In UNIDO approach domestic price equivalent of traded goods is valued at Shadow
Exchange Rate
90) All of the following is/ are advantages of Internal Rate of Returns (IRR) project appraisal
criteria except,
A) It is the only measure of project worth that takes account of the opportunity cost of capital
B) The IRR is appropriate to use for mutually exclusive projects
C) The measure is easily understood by non-economists

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 Practice Exit Exam: Economics

D) It does not depend on predetermined discount rate

91) Project benefit includes all of the following except
A) Receipt from sales of goods and services
B) Market value of equivalent home consumed output
C) Sales of by product
D) Sales of assets that finish their economic life
E) None
92) The greater is the distribution of the input and output prices and quantities around their
expected values,
A) the more reliable estimate of the cost and benefit data
B) the less risky the project is
C) the higher the variation of NPV around its mean value
D) the more the confident of the decision maker to appraise the project
E) All of the above
F) None of the above

Mathematical Economics

93) If 𝑦 = 𝑥 𝑥 , then its derivative 𝑦 ′ =?

A) 𝑥 𝑥 𝑙𝑛𝑥
B) 𝑥 𝑥 (1 + 𝑙𝑛𝑥)
𝑥𝑥
C)
𝑙𝑛𝑥
𝑥𝑥
D)
1+𝑙𝑛𝑥
94) Suppose the equation of an isoquant is 𝑄(𝐾, 𝐿) = 𝐾 0.5 𝐿0.5 = 𝐶. The marginal rate of technical
substitution of labour for capital ( 𝑀𝑅𝑇𝑆𝐿,𝐾 ) when 𝐿 = 3 and 𝐾 = 4 is
A) 0.75
B) 1.3
C) 12
D) 1
95) Suppose a consumer who consumes two goods x and y has the utility function 𝑈(𝑥, 𝑦) = 𝑥𝑦.
The consumer has a budget of $400. The price of good x is 𝑃𝑥 = $10 and the price of good y
is 𝑃𝑦 = $20. His optimal consumption bundle when the price of x falls to $5, other factors
remaining constant is:
A) (40,10)
B) (400, 10)
C) (20,10)
D) (10, 20)

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 Practice Exit Exam: Economics

96) Suppose that a firm’s production function 𝑄 = 𝑓(𝐾, 𝐿) = 50𝐾 0.5 𝐿0.5 . Suppose, also that the
price of labour w = 5 and the price of capital r=20. The cost minimizing input bundle if the
firm wants to produce 1000 units per year is:
A) (10,40)
B) (20,40)
C) (40,10)
D) (5,4)
97) Given the following national income model,
Y = C + 𝐼0 + 𝐺0 where C = 100 + 0.75(Y − T) ; T = 240 + 0.2Y ; 𝐼0 = 90; 𝐺0 = 330
What happens to equilibrium national income when government expenditure increases by 50
units?
A) It increases by 2.5
B) It increases by 125
C) It decreases by 125
D) It does not change
98) For the differential equation given in question 10 if 𝑦 = 100 at time 𝑡 = 0, the solution to the
complete differential equation, i.e., the solution to the homogenous form plus the particular
solution is
A) 𝑦(𝑡) = 𝐶𝑒 5𝑡 + 2 where 𝐶 is arbitrary constant of integration
B) 𝑦(𝑡) = 𝐶𝑒 −5𝑡 + 2 where 𝐶 is arbitrary constant of integration
C) 𝑦(𝑡) = 98𝑒 5𝑡 + 2
D) 𝑦(𝑡) = 98𝑒 −5𝑡 + 2
99) The solution of the difference equation 𝑦𝑡+1 − 2𝑦𝑡 = 0 is:
A) 𝑦𝑡 = 2𝑡 𝑦0
B) 𝑦𝑡 = 2𝑡 + 𝑦0
C) 𝑦𝑡 = 2𝑡
D) 𝑦𝑡 = 2𝑡
A dynamic optimization problem is given by:
1
𝑀𝑎𝑥 ∫0 (𝑥 − 𝑦 2 ) 𝑑𝑡
Subject to 𝑥̇ = 𝑦
𝑥(0) = 2
100) The solution path for the control variable 𝑦 is
1−𝑡
A) 𝑦(𝑡) =
2
2
B) 𝑦(𝑡) =
1−𝑡
C) 𝑦(𝑡) = 1 − 𝑡
𝑡 𝑡2
D) 𝑦(𝑡) = − +2
2 4

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 Practice Exit Exam: Economics

Answer Sheet

Name: _____________________________________ ID. No. ___________ Section:_________

No. Answer No. Answer No. Answer No.

1) 26) 51) 76)
2) 27) 52) 77)
3) 28) 53) 78)
4) 29) 54) 79)
5) 30) 55) 80)
6) 31) 56) 81)
7) 32) 57) 82)
8) 33) 58) 83)
9) 34) 59) 84)
10) 35) 60) 85)
11) 36) 61) 86)
12) 37) 62) 87)
13) 38) 63) 88)
14) 39) 64) 89)
15) 40) 65) 90)
16) 41) 66) 91)
17) 42) 67) 92)
18) 43) 68) 93)
19) 44) 69) 94)
20) 45) 70) 95)
21) 46) 71) 96)
22) 47) 72) 97)
23) 48) 73) 98)
24) 49) 74) 99)
25) 50) 75) 100)

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