Caf-2 Ief

Certificate in Accounting and Finance Stage Examinations
4 March 2015
3 hours 100 marks
Additional reading time 15 minutes
The Institute of
Chartered Accountants
of Pakistan
Introduction to Economics and Finance

Instructions to candidates:
All the Questions from Section A are compulsory.
(i)
(ii) Attempt any FIVE out of SEVEN Questions from Section B.
Section A
Q.1
Q.2
(a)
What do you understand by the term Production Possibility Curve (PPC)? Why is
PPC downward sloping and concave to the origin?
(04)
(b)
Under what conditions would PPC shift outwards?
(03)
(a)
Illustrate with the help of a diagram, how new equilibrium market price of a good is
achieved when price of substitute good increases.
(06)
List any four factors which are responsible for each of the following:

Change in demand

Change in supply
(02)
(02)
What do you understand by economies of scale? Briefly discuss any four factors that
contribute towards achievement of economies of scale.
(07)
Explain economies and diseconomies of scale with the help of long run average cost
curve.
(04)
(a)
Explain the term equilibrium of the firm.
(02)
(b)
Briefly describe the reasons on account of which a firm under perfect competition acts
as a price taker rather than a price maker.
(05)
(b)
Q.3
(a)
(b)
Q.4
Q.5
Select the most appropriate answer from the options available for each of the following
Multiple Choice Questions (MCQs). Each MCQ carries ONE mark.
(i)
Which of the following is a basic economic problem?

(a) Lower incomes and higher taxes
(b) Unemployment and inflation
(c) Unlimited wants and scarce resources
(d) Balance of payment deficits and recession
(ii)
Which of the following is more likely to be found in a free market economy than in a
planned economy?
(a) An even distribution of wealth
(b) An incentive to innovate
(c) Production of goods for benefit of society as a whole
(d) Full employment of labour
Page 2 of 4
(iii)
A firm with existing sales of 1,000,000 units per annum is planning to increase the
price of a product from Rs. 100 to Rs. 120 per unit. If price elasticity of demand for
that product is 1.25, assuming no other changes, the sale of the firm after price
increase would be:
(a) 1,250,000 units
(b) 750,000 units
(c) 1,200,000 units
(d) 800,000 units
(iv)
If the government sets the maximum price of a product below the market equilibrium
price, it would lead to:
(a) excess demand
(b) excess supply
(c) market equilibrium
(d) economies of scale
(v)
Which of the following is not a characteristic of Indifference Curve (IC)?

(a) IC is negatively sloped
(b) Higher IC curve signifies higher level of utility
(c) IC is concave to the origin
(d) ICs cannot intersect each other
(vi)
If marginal revenue is Rs. 50 and marginal cost is Rs. 40, the firm seeking profit
maximization would:
(a) increase price
(b) reduce output
(c) reduce price
(d) increase output
(vii)
Which of the following is a tool of expansionary policy?

(a) Increase taxes
(b) Reduce subsidies
(c) Allow tax rebates
(d) Freeze wages
(viii) While pursuing contractionary monetary policy, the government would:

(a) raise interest rates and sell securities
(b) lower interest rates and sell securities
(c) raise interest rates and buy securities
(d) lower interest rates and buy securities
(ix)
In a given economy, out of every additional Rs. 1,000 of national income, Rs. 200 is
taken in taxes, Rs. 100 is spent on imports and Rs. 500 is spent on domestically
produced goods. The multiplier is:
(a) 1.25
(b) 2
(c) 2.5
(d) 1.67
(x)
Sales tax on food items is an example of:

(a) direct tax
(b) fixed tax
(c) progressive tax
(d) regressive tax
(xi)
Net
by:
(a)
(b)
(c)
(d)
Page 3 of 4
National Product (NNP) can be arrived at from Gross National Product (GNP)
deducting depreciation
adding indirect taxes
deducting indirect taxes and adding depreciation
adding depreciation
(xii) Long Run Aggregate Supply (LRAS) curve is a vertical line because it is:
(a) dependent on price level and signifies the upper limit of the capacity
economy
(b) dependent on price level and signifies the lower limit of the capacity
economy
(c) independent of price level and signifies the upper limit of the capacity
economy
(d) independent of price level and signifies the lower limit of the capacity
economy
in the
in the
in the
in the
(xiii) Which of the following is a monetary measure for correcting the current account
deficit?
(a) Quotas
(b) Export promotion
(c) Import substitution
(d) Exchange rate depreciation
(xiv) The gilt edged market is regarded as the market for:
(a) stocks and shares
(b) derivatives
(c) high rated debt securities
(d) all of the above
(xv)
The main difference between an investment bank and a commercial bank is that
investment bank:
(a) does not accept deposits
(b) does not underwrite shares
(c) does not assist companies in acquiring funds
(d) none of the above
Section B
Q.6
Q.7
Q.8
(a)
Briefly describe three different approaches to measure National Income.
(06)
(b)
Differentiate between Autonomous and Induced investments. Give any two

examples of each.
(04)
(a)
Discuss the Keynes Psychological Law of Consumption and the related propositions.
(04)
(b)
Briefly describe the determinants of consumption in an economy.
(06)
(a)
Briefly explain the Quantity Theory of Money.
(03)
(b)
Identify three reasons why people prefer to hold money in liquid form.
(03)
(c)
Discuss how introduction of money has resulted in overcoming the shortcomings of

barter system.
(04)
Q.9
(a)
(b)
Q.10 (a)
(b)
Q.11 (a)
(b)
Q.12 (a)
(b)
Page 4 of 4
Distinguish between Money Market and Capital Market. Identify any three
institutions which operate in each market.
(06)
Identify any two capital market instruments that are available to the government for
financing its expenditure. What factors the government should consider before raising
finances through these instruments?
(04)
State the meaning of Financial Intermediary.
(02)
Describe the measures that are available to a central bank for restricting credit creation
ability of commercial banks. How such measures affect the process of credit creation?
(08)
What do you understand by the term Derivative? List different ways in which
derivatives are traded.
(03)
Explain the following financial instruments:

(i)
Call and Put Options
(ii)
Swaps
(04)
(03)
Illustrate with the help of a diagram, the concept of deflationary gap in the economy.
(04)
Various sources of short-term and long-term credit are available to the firms. Briefly
discuss any two sources in each case.
(06)
(THE END)

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Certificate in Accounting and Finance Stage Examinations

Introduction to Economics and Finance

Under what conditions would PPC shift outwards?

Explain the term equilibrium of the firm.

Which of the following is a basic economic problem?

Introduction to Economics and Finance

Which of the following is not a characteristic of Indifference Curve (IC)?

Which of the following is a tool of expansionary policy?

(viii) While pursuing contractionary monetary policy, the government would:

Sales tax on food items is an example of:

Introduction to Economics and Finance

Briefly describe three different approaches to measure National Income.

Differentiate between Autonomous and Induced investments. Give any two

Briefly describe the determinants of consumption in an economy.

Briefly explain the Quantity Theory of Money.

Discuss how introduction of money has resulted in overcoming the shortcomings of

Introduction to Economics and Finance

State the meaning of Financial Intermediary.

Explain the following financial instruments:

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