Sunday, June 3, 2018

MCQ Review for Winter 2016 (9708/32) (CIE) (CAIE)


F to G represents substitution effect and G to H represents income effect. Answer is C
Vertical integration refers to the merger between two firms from the same industry but at different stage of production process. Backward vertical is a cooperation/ merger between a manufacturer and a firm which is close to the source of inputs. Forward vertical is a cooperation/ merger between a manufacturer and a firm which is close to the customers. A is incorrect as it is equally applicable to horizontal integration. B may or may not be true unless stated as forward vertical. D may or may not happen. Larger firms/ firms with bigger market share may or may not be productively and allocatively efficient. Answer is B. Through backward vertical integration, a manufacturer is able to secure a steady supply of raw materials. Through forward vertical integration, a firm will be able to expand its market share easily without the need to incur high spending on advertisements and R&Ds 

A contestable market is one where the barriers to entry and exit are low. Perfectly contestable implies that there are no barriers to entry and exit. Answer is therefore D. One common mistake is to always assume that a contestable/ perfectly contestable market is necessarily perfect market. That is not true. In fact, even a monopoly or an oligopoly can be contestable. Otherwise, we won't have so many options of banks, airlines, cars, smartphones and others to choose from. A big firm can even become contestable if the government were to intervene into their operations. Answer is D B is the answer. Income inequality is NOT A MARKET FAILURE. It cannot be considered as one, as wage/ pay differentials may be due to factors like academic qualification, experience and skills which correctly justify as to why one person earns more than the other.  A, C and D are market failures. Asymmetric information causes transactions not to settle at the socially efficient/ optimal e.g. consumers buying when they shouldn't and consumers aren't buying when they should. Monopoly will cause market output to settle below socially desirable level. Non-excludability is related to public goods. They are goods that are high in demand and therefore should be made available. Unfortunately, in free market, none of them that will be provided Poverty trap is a situation in which a person has no incentive to take up a better paying job. The reason is, that particular individual may realise that he/ she is not really well-off after being promoted. He/ she will start to pay higher rates of income tax, benefits will be significantly reduced or withdrawn altogether and there are also more job commitments. A is therefore the answer Net leakages imply that there are greater outflows of money than inflows from the circular flow of income. Trade surplus is where X > M and this is a net injection. Budget deficit is when G > T and this is another net injection. Private sector surplus means S > I. Answer is D. The first two are net injections. Only the last one is a net leakage  Most candidates thought that there is only one type of time lag. In fact there are four e.g. recognition lag, decision lag, implementation lag and finally effect lag, all in their own sequence. The question asks for the first stage and therefore the answer is C  Contractionary monetary policy involves measures like reduction in money supply, higher interest rates, higher cash reserve ratio/ reserve requirement and stricter bank lending. A will allow commercial banks to pass on the cheaper cost of funding in the form of lower interest rates. B will allow commercial banks to be able to generate more lending. Purchase of foreign currency using local currency will cause foreign currency to appreciate while local currency to depreciate. This will cause X to increase while M to fall. The economy will expand. Answer is D. Sale of government bonds in an open market a.k.a. open market operations (OMO) will cause commercial banks to have lesser money to lend out. So it is a contractionary policy 

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