INSTITUTE OF BANKERS IN MALAWI

CERTIFICATE IN BANKING EXAMINATION

SUBJECT: INTRODUCTION TO ECONOMICS (IOBM – C103)

Date: Wednesday, 2nd May 2012

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 30 multiple choice questions each carries 2 marks.

Answer ALL questions.

3 Section B consists of 4 questions, each question carries 20 marks. Answer ANY TWO questions.

4You will be allowed 10 minutes to go through the paper before the start of the examination, you may write on this paper but not in the answer book.

5Begin each answer on a new page.

6Please write your examination number on each answer book used. Answer sheets without examination numbers will not be marked.

7DO NOT open this question paper until instructed to do so.

SECTION A (60 MARKS)

Answer ALL Questions

Based on the graph below showing demand and supply curves of air tickets in the country, answer questions 1 and 2 below.

Figure 1

  1. An increase in the price of fuel and a simultaneous increase in consumer’s income will most likely have the following effects on equilibrium price and quantity of Air tickets.

a.Price will increase and quantity will increase

b.Price will decrease and quantity will decrease

c.Price will be uncertain and Quantity will decrease

d.Price will increase and quantity will be uncertain.

  1. If a government places a ceiling price on air tickets that is below the equilibrium price, what will happen in the market of air travel.

a.There will be shortage of seats on planes

b.There will be a surplus

c.The demand curve for air tickets will shift leftwards

d.The supply curve for air tickets will shift rightwards.

  1. As long as the principle of diminishing marginal utility is operating, any increase consumption of a good X,

a.Lowers marginal utility, but may rise total utility

b.Lowers total utility

c.Produces negative total utility

d.Lowers marginal utility and therefore total utility.

  1. At any given point of an indifference curve, the absolute value of the slope equals,

a.The marginal rate of substitution

b.The consumer’s marginal utility

c.Unity. Otherwise there would be no indifference

d.None of the above.

  1. If a good is normal then the demand curve for that good X is:

a.Downward slopping

b.Upward slopping

c.Perfect elastic

d.Perfect inelastic.

  1. Economics is:

a.The study of markets for bonds and stocks

b.The same as sociology

c.The study of business firms exclusively

d.The study of choice under conditions of scarcity.

  1. The three groups of decision makers in the economy are:

a. Households, business firms and banks

b.Business firms, governments and banks

c.Households, business firms and governments

d.Households, governments and banks.

  1. If the price of vehicles/cars were to be increased greatly, the demand curve for fuel would likely:

a.Shift leftward

b.Shift rightward

c.Become steeper

d.Become flatter.

  1. Assume that the required reserve ratio is 20%. Natives Bank of Nyasa (NBN) is currently fully loaned up, but it receives a cash deposit of MK 4 Million from a new customer. NBN is legally required to:

a.Keep 20 % of the MK4 Million as reserves

b.Keep 80% of the MK 4 million as reserves

c.Send 80% of the MK4 Million to Reserve Bank of Malawi

d.Lend 20% of the MK4 million and keep the rest as reserves.

  1. In deciding exactly how to use the funds deposited by savers, banks take into account a number of factors especially.

a.Affiliation to groups like Lions Club

b.Profitability of the business and number of assets that the firm has

c.Liquidity, need to comply with government policy and profitability

d.Liquidity, affiliation to groups like Lions club and profitability.

Figure 2 shows a graph of a Pizza market in Lilongwe City. Use the graph to answer questions11 and 12 that follow.

Figure 2

  1. At the price of MK800.00, what is the amount of excess demand

a.0, there is no excess supply

b.2 pizzas

c.5 pizzas

d.7 pizzas

  1. From figure 2 above, No pizza will be supplied unless the price is above.

a.MK 0

b.MK 1000

c.MK500

d.MK 2000.

  1. What is money?

a.Money is anything that can be used as a medium of exchange of goods only

b.Money exclusively includes coins, notes

c.Money is anything that can be used as a medium of exchange for food

d.Money is anything that can be used to exchange goods and services.

  1. The following statement is all true about the characteristics of money

a.Durable, portable, imitable and divisible

b.Durable, acceptable, divisible, forgeable

c. Portable, durable, indivisible, acceptable

d.Portable, durable, acceptable, divisible.

  1. The main sources of funds on which the government can draw in order to satisfy PSBR does not include the following.

a.Borrowing from donors and the oversees sector

b.Borrowing from individuals and firms in Malawi by selling bonds, national savings certificate etc

c.It can borrow from the banking sector

d.Borrowing from sales of Maize to neighbouring countries.

  1. The earlieststatement of the principle of “comparative advantage” in Economics is associated with:

a.Adam smith

b.David Ricardo

c.Bertil ohlin

d.Eli Heckscher.

Use the informationin the table below to answer questions 17 and 18below

Country / Tons of Coal / Music DVDs
Zambia / 800 / 400
Malawi / 200 / 200
  1. The opportunity cost of producing one Music DVD in Malawi is:

a.1 ton of coal

b.3 tons of coal

c.2 tons of coal

d.4 tons of coal

  1. According to the principle of absolute advantage, Malawi should:

a.Export coal

b.Export DVDs

c.Export Coal and Music DVDs

d.There is no basis for gainful specialisation and trade.

  1. Most tariffs have:

a.Only revenue effects in an economy

b.Only protective effects in an economy

c.Both protective and revenue effects

d.Neither protective or revenue effects on an economy.

  1. Quotas are government imposed limits on the ______of goods and trade between countries.

a.Prices

b.Quantity

c.Revenue

d.Costs

  1. Under managed floating exchange rate, if the rate of inflation in a country is less than the rate of inflation of its trading partners, the currency of that country will:

a.Appreciate against foreign currencies

b.Depreciate against foreign currencies

c.Be devalued officially by the government

d.Be officially re-valued by the government.

  1. Expansionarymonetary policy

a.Tends to lead to depreciation of the currencies of other nations

b.Tends to lead to an appreciation of a nation’s currency

c.Usually has no effect on a currency’s exchange value

d.Tends to lead to a depreciation of a nation’s currency.

  1. If John Phiri cannot find a job because his skills have become obsolete/outdate, then this is an example of :

a.Frictional unemployment

b.Structural unemployment

c.Seasonal Unemployment

d.Cyclical unemployment.

  1. Which of the following events will lead to an increase in the equilibrium interest rate without fail:

a.A decrease in the level of real GDP

b.An increase in real GDP and an increase in money supply

c.The purchase of government securities by the Reserve bank of Malawi

d.The sale of government securities by the Reserve bank of Malawi.

  1. The Reserve Bank of Malawi’s primary policy tools include all of the following except:

a.Operating in an open market

b.Changing the discount rate

c.Setting reserve requirements

d.Borrowing from foreign governments.

  1. When all of the debit or credit items in the balance of payments are combined
  1. Merchandise imports equals merchandise exports
  2. Service exports equals service imports
  3. Capital imports equals capital exports
  4. The total surplus or deficit equals zero.
  1. The most traded currency in the foreign exchange market is the:

a. Malawi Kwacha

b.Chinese Yen

c.British pound

d.United States Dollar.

  1. The most important reason why countries should conduct trade is:

a.Interest rates are not the same in these countries

b.Some nations prefer to stick the production of one product while others produce another product

c.Trade increases opportunities to accumulate profits

d.Resources are not equally distributed to all nations that would want to trade.

  1. One of the following is not a form of direct tax that the Malawi Revenue Authority collects.

a.Income tax

b.Value added tax

c.Capital gained tax

d.Corporate tax.

  1. Banks can create money

a.Only by illegal printing of additional Kwachas

b.By paying interest to their depositors

c.By making loans that eventually will result in additional deposits

d.By offering financial services like ATMs and charging for them.

SECTION B(40 MARKS)

Answer ANY TWO questions from this section.

QUESTION 1

a.Define ‘price discrimination”. (4 marks)

b.With the aid of a diagram, please describe how supernormal profits can exist in the short run of a perfectly competitive market. (10 marks)

c.Compare and contrast Oligopoly with Monopoly(6 marks)

(Total 20 marks)

QUESTION 2

a.Explainthreeapproaches that are used to measure National Income. (9 marks)

b.Briefly explain threedeterminants of Consumer expenditure.(6 marks)

c.State twodifficulties that are associated with calculating national income.

(3 marks)

d.What is National Income?(2 marks)

(Total 20 marks)

QUESTION 3

The Government of Malawi is implementing a budget in its financial year. One way of raising funding for the budget is through taxation

(a)State and briefly explain two types of indirect tax.(4 marks)

(b)What are the threetypes of fiscal policy?(6 marks)

(c)Why must a government impose higher taxes on some products than others? (4 marks)

(d)Show graphically the effect of a subsidy on price and output of a product.

(6 Marks)

(Total 20 marks)

QUESTION 4

The rising price of goods and services in the country was evident when the currency was devalued. This in turn resulted in closing down of small businesses in the country. The National Statistical Office therefore conducted a study to find out how the economy is fairing. Table 1 below shows the findings.

NSO Findings
1. / Total population / 12, 000,000
2. / Total Employed / 2, 300,000
3. / Total unemployed / 700,000

(a)What is unemployment?(2 marks)

(b)From the table above, what is the unemployment rate? (4 marks)

(c)How does the A. W. Phillips curve attempt to explain the relationship between inflation and employment in the short run period? (8 marks)

(d)Graphically define either Demand Pull inflation or Cost Push inflation.

(6 marks)

(Total 20 marks)

END OF EXAMINATION PAPER

A qualification examined by the Institute of Bankers in Malawi1