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HKICPA QP Module 3 Business Economics study materials
HKICPA QP Module 3 Business Economics study resources

HKICPA QP Module 3 Business Economics practice questions

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Question 1Scarcity, markets and consumer decisions

According to the law of demand, a decrease in the price of a good leads to an increase in quantity demanded because of:

  1. A shift of the demand curve to the right
  2. The income effect and substitution effect Correct answer.
  3. An increase in the supply of the good
  4. An increase in consumers' tastes and preferences

Explanation

A decrease in price leads to a movement along the demand curve (change in quantity demanded) driven by the substitution effect (the good is now relatively cheaper) and the income effect (the consumer's purchasing power has increased).

Question 2Scarcity, markets and consumer decisions

A bakery in Central increases the price of its croissants from HKD 20 to HKD 24. As a result, the quantity demanded per day decreases from 500 to 350. Using the midpoint method (arc elasticity), what is the price elasticity of demand for croissants?

  1. -0.53
  2. -1.50
  3. -1.94 Correct answer.
  4. -0.80

Explanation

Percentage change in quantity is (350 − 500) / [(500 + 350) / 2] = −150 / 425 = −35.29%. Percentage change in price is (24 − 20) / [(20 + 24) / 2] = 4 / 22 = 18.18%. Elasticity = −35.29% / 18.18% = −1.94.

Question 3Scarcity, markets and consumer decisions

When the price of bubble tea increases by 10%, the quantity demanded for egg waffles increases by 15%. What is the cross-price elasticity of demand, and how are these two goods related?

  1. 1.50, and they are substitutes Correct answer.
  2. -1.50, and they are complements
  3. 0.67, and they are substitutes
  4. 1.50, and they are normal goods

Explanation

Cross-price elasticity = % change in Q of egg waffles / % change in P of bubble tea = +15% / +10% = 1.50. A positive cross-price elasticity indicates that the goods are substitutes, as consumers buy more egg waffles when bubble tea becomes more expensive.

Question 4Scarcity, markets and consumer decisions

Due to a rise in real incomes in Hong Kong by 8%, the quantity demanded for generic brand instant noodles drops by 12%. What is the income elasticity of demand, and what type of good are the instant noodles?

  1. -1.5, and they are a normal good
  2. -1.5, and they are an inferior good Correct answer.
  3. 1.5, and they are a luxury good
  4. -0.67, and they are an inferior good

Explanation

Income elasticity of demand = % change in quantity demanded / % change in income = −12% / 8% = −1.50. Since the income elasticity is negative, the product is classified as an inferior good.

Question 5Scarcity, markets and consumer decisions

The demand for a product is given by Q = 100 − 2P. The market price is currently HKD 20. If the price increases to HKD 30, what is the loss in consumer surplus?

  1. HKD 500 Correct answer.
  2. HKD 200
  3. HKD 400
  4. HKD 100

Explanation

At P = 20, Q = 60. At P = 30, Q = 40. Consumer surplus at P = 20 is 0.5 × (50 − 20) × 60 = 900. Consumer surplus at P = 30 is 0.5 × (50 − 30) × 40 = 400. The loss in consumer surplus is 900 − 400 = 500. Alternatively, the area of the trapezoid is (60 + 40) / 2 × (30 − 20) = 500.

Question 6Scarcity, markets and consumer decisions

Which of the following will happen to consumer surplus, producer surplus, and deadweight loss when a government imposes a binding price ceiling?

  1. Consumer surplus always increases, producer surplus decreases, deadweight loss is zero
  2. Consumer surplus change is ambiguous, producer surplus decreases, deadweight loss increases Correct answer.
  3. Consumer surplus decreases, producer surplus increases, deadweight loss increases
  4. Consumer surplus increases, producer surplus change is ambiguous, deadweight loss decreases

Explanation

A binding price ceiling is set below the equilibrium price. It reduces the quantity supplied, so producer surplus must fall. Deadweight loss increases due to underproduction. The effect on consumer surplus is ambiguous: remaining consumers benefit from lower prices, but others cannot purchase the good due to shortages.

Question 7Scarcity, markets and consumer decisions

A price floor is a government-mandated minimum price. A price floor is binding (effective) only if it is set:

  1. Below the equilibrium price, resulting in a shortage
  2. Above the equilibrium price, resulting in a surplus Correct answer.
  3. Below the equilibrium price, resulting in a surplus
  4. Above the equilibrium price, resulting in a shortage

Explanation

A price floor prevents price from falling to equilibrium. If it is set above the equilibrium price, the quantity supplied will exceed the quantity demanded, resulting in a binding surplus. If set below equilibrium, the market will naturally settle at equilibrium, making the floor non-binding.

Question 8Scarcity, markets and consumer decisions

According to the law of diminishing marginal utility, as a consumer consumes more units of a specific good, their total utility:

  1. Increases at a decreasing rate Correct answer.
  2. Decreases at an increasing rate
  3. Increases at an increasing rate
  4. Remains constant once marginal utility is zero

Explanation

Diminishing marginal utility means that each additional unit consumed adds less utility than the previous one. Therefore, total utility continues to rise, but it does so at a decreasing rate until marginal utility hits zero.

Question 9Scarcity, markets and consumer decisions

For a normal good, when its price decreases, the substitution effect and the income effect work in the same direction. How do these effects behave for an inferior good?

  1. Both effects encourage the consumer to buy less of the good.
  2. The substitution effect encourages more consumption, while the income effect encourages less. Correct answer.
  3. The substitution effect encourages less consumption, while the income effect encourages more.
  4. Both effects encourage the consumer to buy more of the good.

Explanation

When the price of an inferior good falls, the substitution effect always encourages consumers to buy more because the good is relatively cheaper. However, the drop in price increases real income, and since it is an inferior good, this income effect discourages consumption.

Question 10Scarcity, markets and consumer decisions

In economic theory, the primary difference between the short run and the long run is that:

  1. In the short run, all inputs are fixed, whereas in the long run, all inputs are variable
  2. In the short run, at least one input is fixed, whereas in the long run, all inputs are variable Correct answer.
  3. The short run is defined as less than one calendar year
  4. The long run is defined as a period exceeding five years

Explanation

The short run is a conceptual time period in which at least one factor of production (often capital/factory size) is fixed. In the long run, firms can adjust all inputs, making all factors variable.

Question 11Scarcity, markets and consumer decisions

A firm's total cost function is TC = 100 + 5Q + 2Q². What are the equations for Average Variable Cost (AVC) and Marginal Cost (MC), respectively?

  1. AVC = 5 + 2Q; MC = 5 + 4Q Correct answer.
  2. AVC = 100/Q + 5 + 2Q; MC = 5 + 2Q
  3. AVC = 5Q + 2Q²; MC = 100 + 4Q
  4. AVC = 5 + 2Q; MC = 100 + 4Q

Explanation

Variable Cost (VC) is 5Q + 2Q². Therefore, AVC = VC / Q = 5 + 2Q. Marginal Cost is the first derivative of the Total Cost function with respect to quantity: MC = d(TC)/dQ = 5 + 4Q.

Question 12Scarcity, markets and consumer decisions

To maximize profit, any firm operating in any market structure should produce the output level where:

  1. Average revenue equals average total cost
  2. Marginal revenue equals marginal cost Correct answer.
  3. Total revenue is maximized
  4. Price equals average variable cost

Explanation

The golden rule of profit maximization is to produce where marginal revenue equals marginal cost (MR = MC). At this point, the last unit produced adds exactly as much to total revenue as it does to total cost, and no additional profit can be made by changing output.

Question 13Scarcity, markets and consumer decisions

Which of the following is a key characteristic of a perfectly competitive market?

  1. A few large sellers who dominate the industry
  2. Differentiated products with many close substitutes
  3. Firms are price takers with free entry and exit Correct answer.
  4. Significant barriers to entry and exit

Explanation

A perfectly competitive market has many buyers and sellers, homogeneous products, perfect information, and free entry and exit. Individual firms have no market power and must accept the market price (price takers).

Question 14Scarcity, markets and consumer decisions

A monopolist faces a market demand curve given by P = 100 − Q. The firm's total cost function is TC = 20Q. What are the profit-maximizing output, price, and profit for this monopolist?

  1. Output = 40; Price = HKD 60; Profit = HKD 1,600 Correct answer.
  2. Output = 80; Price = HKD 20; Profit = HKD 0
  3. Output = 40; Price = HKD 20; Profit = HKD 800
  4. Output = 50; Price = HKD 50; Profit = HKD 1,500

Explanation

Total Revenue TR = P × Q = 100Q − Q². Marginal Revenue MR = d(TR)/dQ = 100 − 2Q. Marginal Cost MC = d(TC)/dQ = 20. Set MR = MC: 100 − 2Q = 20 => 2Q = 80 => Q = 40. Price P = 100 − 40 = 60. Profit = TR − TC = (60 × 40) − (20 × 40) = 2,400 − 800 = 1,600.

Question 15Scarcity, markets and consumer decisions

In the long-run equilibrium of a monopolistically competitive industry, firms earn:

  1. Positive economic profits because of product differentiation
  2. Zero economic profits, and they produce at the minimum of average total cost
  3. Zero economic profits, and they operate with excess capacity Correct answer.
  4. Negative economic profits because of high advertising costs

Explanation

Due to free entry and exit, firms in monopolistic competition earn zero economic profits in the long run. However, because they face downward-sloping demand curves, their price equals ATC at a point where ATC is still declining, resulting in excess capacity (producing less than the cost-minimizing output).

Question 16Scarcity, markets and consumer decisions

Two competing firms in Hong Kong are deciding whether to advertise. If both advertise, they each earn HKD 5 million. If neither advertises, they each earn HKD 8 million. If one advertises and the other does not, the advertiser earns HKD 10 million and the non-advertiser earns HKD 2 million. What is the Nash equilibrium for this game?

  1. Both advertise Correct answer.
  2. Neither advertises
  3. One advertises and the other does not
  4. There is no Nash equilibrium in this game

Explanation

For each firm, advertising is a dominant strategy. If Firm B advertises, Firm A earns 5m by advertising vs 2m by not. If Firm B does not advertise, Firm A earns 10m by advertising vs 8m by not. Both firms will choose to advertise, which is a classic Prisoner's Dilemma.

Question 17Scarcity, markets and consumer decisions

Why are cartel agreements inherently unstable and difficult to maintain in the long run?

  1. Governments always nationalize cartels to protect consumers
  2. Each member has a financial incentive to cheat by producing more than their allocated quota Correct answer.
  3. Cartels face high corporate profit tax rates compared to monopolies
  4. Cartels cannot legally register as limited companies in Hong Kong

Explanation

Cartels restrict output to raise prices and maximize joint profits. However, once the price is high, individual members face a marginal revenue (the cartel price) that exceeds their marginal cost, creating a strong incentive to cheat by expanding output.

Question 18Scarcity, markets and consumer decisions

An airline charges different prices for business class and economy class tickets. It also charges higher prices for bookings made closer to the departure date. What level of price discrimination is this airline primarily practicing?

  1. First-degree price discrimination
  2. Second-degree price discrimination
  3. Third-degree price discrimination Correct answer.
  4. Perfect price discrimination

Explanation

Third-degree price discrimination involves segmenting the market into distinct groups with different price elasticities of demand (business vs. leisure travelers, or early planners vs. last-minute travelers) and charging each group a different price.

Question 19Scarcity, markets and consumer decisions

A chemical plant emits pollutants that damage nearby residential properties, creating a negative externality. The competitive market output is too high. How can a Pigouvian tax achieve the socially optimal output?

  1. By shifting the private demand curve upward to match social demand
  2. By setting the tax equal to the marginal external cost, shifting the private marginal cost curve upward Correct answer.
  3. By forcing the firm to pay dividends to the local residents
  4. By subsidizing the firm to install cleaner technology

Explanation

A Pigouvian tax internalizes the negative externality by adding the external cost to the firm's private costs. The tax shifts the private marginal cost (supply) curve up to align with the social marginal cost curve, reducing output to the socially optimal level.

Question 20Scarcity, markets and consumer decisions

Public goods are characterized by which two properties?

  1. Excludability and rivalry
  2. Non-excludability and non-rivalry Correct answer.
  3. Non-excludability and rivalry
  4. Excludability and non-rivalry

Explanation

Public goods are non-excludable (it is impossible to prevent people from using them once provided) and non-rival (one person's use does not diminish another person's ability to use them). Examples include national defense and street lighting.

Question 21Scarcity, markets and consumer decisions

In the insurance market, when high-risk individuals are more likely to purchase insurance policies than low-risk individuals, this phenomenon is known as:

  1. Moral hazard
  2. Adverse selection Correct answer.
  3. Principal-agent problem
  4. Asymmetric cost structure

Explanation

Adverse selection is a problem of asymmetric information that occurs before a transaction. High-risk buyers are more eager to sign up for insurance because they know their own risk profile, while the insurer cannot distinguish high-risk from low-risk applicants.

Question 22Scarcity, markets and consumer decisions

Consider a market where demand is Q = 100 − P. The competitive supply curve (which represents marginal cost) is constant at MC = 20. If a monopolist takes over the market, they produce Q = 40 and charge P = 60. What is the deadweight loss created by this monopoly?

  1. HKD 400
  2. HKD 800 Correct answer.
  3. HKD 1,600
  4. HKD 200

Explanation

Under perfect competition, P = MC = 20, and Q = 80. Under monopoly, Q = 40 and P = 60. The deadweight loss is the area of the welfare loss triangle: 0.5 × (P_monopoly − MC) × (Q_competition − Q_monopoly) = 0.5 × (60 − 20) × (80 − 40) = 0.5 × 40 × 40 = 800.

Question 23Scarcity, markets and consumer decisions

The marginal rate of substitution (MRS) of Good X for Good Y represents:

  1. The ratio of the market prices of the two goods
  2. The rate at which a consumer is willing to trade Good Y for Good X while maintaining the same level of utility Correct answer.
  3. The rate at which the market allows the consumer to substitute Good X for Good Y
  4. The percentage change in demand for Good X when income increases

Explanation

The marginal rate of substitution (MRS) measures the consumer's subjective valuation. It is the amount of Good Y that a consumer is willing to give up to obtain one additional unit of Good X, while remaining on the same indifference curve.

Question 24Scarcity, markets and consumer decisions

If a firm doubles all of its inputs (labor and capital) and its output increases by exactly 100%, the firm is experiencing:

  1. Increasing returns to scale
  2. Constant returns to scale Correct answer.
  3. Decreasing returns to scale
  4. Diminishing marginal returns

Explanation

Returns to scale measure the responsiveness of output to a proportional change in all inputs. If output increases by the exact same proportion as inputs (doubling inputs leads to doubled output), the firm has constant returns to scale.

Question 25Scarcity, markets and consumer decisions

In the short run, a firm operating in a perfectly competitive market should continue to produce even if it is making an economic loss, as long as the market price is:

  1. Greater than average variable cost (AVC) Correct answer.
  2. Greater than average total cost (ATC)
  3. Less than average fixed cost (AFC)
  4. Equal to marginal revenue

Explanation

If the price is greater than the average variable cost (P > AVC), the firm's revenue covers all of its variable costs and has some remaining amount to pay for its fixed costs. Shutting down would mean losing all fixed costs, whereas operating reduces the loss.

Question 26Scarcity, markets and consumer decisions

A firm's short-run total cost is TC = 200 + 10Q + 2Q². What are the breakeven price and the shut-down price for this firm in a perfectly competitive market?

  1. Breakeven price = HKD 50; Shut-down price = HKD 10 Correct answer.
  2. Breakeven price = HKD 10; Shut-down price = HKD 0
  3. Breakeven price = HKD 40; Shut-down price = HKD 20
  4. Breakeven price = HKD 30; Shut-down price = HKD 15

Explanation

ATC = 200/Q + 10 + 2Q. Min ATC occurs where d(ATC)/dQ = −200/Q² + 2 = 0 => Q = 10. Breakeven price = min ATC = 200/10 + 10 + 2(10) = 50. AVC = 10 + 2Q. Min AVC occurs at Q = 0, so shut-down price = 10. Thus, Breakeven price = 50 and Shut-down price = 10.

Question 27Scarcity, markets and consumer decisions

According to the Coase theorem, private parties can solve the problem of externalities on their own without government intervention if:

  1. Property rights are clearly defined and transaction costs are negligible Correct answer.
  2. The government imposes strict environmental regulations
  3. Transaction costs are high enough to prevent lawsuits
  4. Both parties belong to the public sector

Explanation

The Coase theorem states that if property rights are well-defined and transaction costs are close to zero, private bargaining will lead to an efficient allocation of resources, regardless of which party holds the initial property rights.

Question 28Scarcity, markets and consumer decisions

If the demand for a product is price elastic (elasticity coefficient > 1 in absolute value), a decrease in the price of the product will cause the firm's total revenue to:

  1. Decrease
  2. Increase Correct answer.
  3. Remain unchanged
  4. Drop to zero

Explanation

When demand is price elastic, the percentage increase in quantity demanded is larger than the percentage decrease in price. Consequently, the revenue gained from selling more units outweighs the revenue lost from the lower price, causing total revenue to rise.

Question 29Scarcity, markets and consumer decisions

Common resources (such as fish in the ocean or public parks) are often overused or depleted because they are:

  1. Non-excludable and non-rival
  2. Excludable and rival
  3. Non-excludable and rival Correct answer.
  4. Excludable and non-rival

Explanation

Common resources are non-excludable, meaning anyone can access them without paying. They are also rival, meaning one person's consumption reduces the amount available for others. This combination leads to the 'tragedy of the commons' where individuals overconsume the resource.

Question 30Scarcity, markets and consumer decisions

A Giffen good is a highly inferior good for which the quantity demanded increases when the price increases. This happens because:

  1. The substitution effect dominates the income effect
  2. The income effect is positive and dominates the substitution effect
  3. The negative income effect dominates the substitution effect Correct answer.
  4. The good is luxury and has high prestige value

Explanation

For a Giffen good, a price increase reduces real income. Because it is an inferior good, the drop in real income increases demand. For a Giffen good, this negative income effect is extremely strong and outweighs the substitution effect (which always favors cheaper alternatives), leading to a positive price-demand relationship.

Question 31Scarcity, markets and consumer decisions

In a constant-cost industry, the long-run industry supply curve is:

  1. Upward sloping
  2. Downward sloping
  3. Horizontal Correct answer.
  4. Vertical

Explanation

In a constant-cost industry, the entry and exit of firms do not affect the prices of inputs. As demand increases and the industry expands, firms enter until profits return to zero at the original minimum average total cost, resulting in a horizontal long-run supply curve.

Question 32Scarcity, markets and consumer decisions

The kinked demand curve model of oligopoly explains why:

  1. Prices in oligopolistic markets are highly flexible
  2. Firms collude to maximize joint profits
  3. Prices in oligopolistic markets tend to be rigid (sticky) Correct answer.
  4. Firms always engage in intense price wars

Explanation

The kinked demand curve model assumes that competitors will match price cuts but ignore price increases. This creates a kink in the demand curve at the current price, leading to a gap in the marginal revenue curve. As a result, marginal cost can fluctuate within this gap without changing the profit-maximizing price.

Question 33Scarcity, markets and consumer decisions

A natural monopoly has high fixed costs and low, constant marginal costs. If the government regulates the natural monopoly to set price equal to marginal cost (marginal-cost pricing):

  1. The firm will earn zero economic profit
  2. The firm will suffer an economic loss and require government subsidies to stay in business Correct answer.
  3. The firm will maximize its profits
  4. The allocation of resources will be inefficient

Explanation

Because a natural monopoly's average total cost (ATC) declines over the entire relevant range of output, its marginal cost (MC) is always below its ATC. If the regulator sets P = MC, the price will be below ATC, causing the firm to incur losses and eventually shut down unless subsidized.

Question 34Scarcity, markets and consumer decisions

The law of diminishing returns states that as more units of a variable input (like labor) are added to a fixed input (like capital):

  1. Total output eventually decreases
  2. Marginal product of the variable input eventually declines Correct answer.
  3. Average cost of production eventually declines
  4. Total cost of production remains constant

Explanation

The law of diminishing returns is a short-run concept. It states that adding more variable inputs to a fixed factor will eventually yield smaller increases in output, meaning the marginal product of the variable input decreases.

Question 35Scarcity, markets and consumer decisions

If the income elasticity of demand for a good is positive but less than 1, the good is classified as a:

  1. Luxury normal good
  2. Necessity normal good Correct answer.
  3. Inferior good
  4. Giffen good

Explanation

A positive income elasticity means that demand increases as income rises, which defines a normal good. If the elasticity is less than 1, the demand grows slower than income, classifying it as a necessity (e.g., food).

Question 36Macroeconomics, finance and policy

In the circular flow of income model, which of the following is classified as an injection?

  1. Savings
  2. Taxes
  3. Imports
  4. Government spending Correct answer.

Explanation

Injections are income flows that enter the circular flow from outside the core household-firm loop. They include Investment (I), Government spending (G), and Exports (X). Savings, taxes, and imports are leakages.

Question 37Macroeconomics, finance and policy

In national income accounting, if a country has Consumption (C) of HKD 500 billion, Investment (I) of HKD 120 billion, Government Purchases (G) of HKD 150 billion, Exports (X) of HKD 200 billion, and Imports (M) of HKD 220 billion, what is the Gross Domestic Product (GDP)?

  1. HKD 990 billion
  2. HKD 750 billion Correct answer.
  3. HKD 770 billion
  4. HKD 790 billion

Explanation

Using the expenditure approach: GDP = C + I + G + (X − M). Substituting the values: GDP = 500 + 120 + 150 + (200 − 220) = 770 − 20 = HKD 750 billion.

Question 38Macroeconomics, finance and policy

Which of the following is included in the calculation of GDP using the income approach?

  1. Household spending on consumer durables
  2. Wages, corporate profits, rental income, and net interest Correct answer.
  3. Government transfer payments like social welfare
  4. The purchase of existing shares of stock on the HKEX

Explanation

The income approach sums all incomes earned by factors of production in the domestic economy, which includes wages (compensation of employees), corporate profits, rental income, net interest, and proprietor's income.

Question 39Macroeconomics, finance and policy

In Year 1, nominal GDP is HKD 200 billion and the GDP deflator is 100. In Year 2, nominal GDP is HKD 240 billion and the GDP deflator is 120. What is the real GDP in Year 2, and what is the real GDP growth rate from Year 1 to Year 2?

  1. Real GDP Year 2 = HKD 200 billion; Growth rate = 0% Correct answer.
  2. Real GDP Year 2 = HKD 200 billion; Growth rate = 20%
  3. Real GDP Year 2 = HKD 240 billion; Growth rate = 10%
  4. Real GDP Year 2 = HKD 220 billion; Growth rate = 10%

Explanation

Real GDP = Nominal GDP / (GDP Deflator / 100). Year 1 Real GDP = 200 / (100 / 100) = HKD 200 billion. Year 2 Real GDP = 240 / (120 / 100) = HKD 200 billion. The real GDP growth rate is (200 − 200) / 200 = 0%.

Question 40Macroeconomics, finance and policy

In a closed economy with a government sector, the marginal propensity to consume (MPC) is 0.8, and the marginal tax rate on income is 0.25. If the government increases spending by HKD 10 billion, what is the resulting change in equilibrium GDP?

  1. An increase of HKD 50 billion
  2. An increase of HKD 25 billion Correct answer.
  3. An increase of HKD 12.5 billion
  4. An increase of HKD 20 billion

Explanation

The spending multiplier with income taxes is 1 / [1 − MPC(1 − t)] = 1 / [1 − 0.8(1 − 0.25)] = 1 / [1 − 0.8(0.75)] = 1 / [1 − 0.6] = 1 / 0.4 = 2.5. The change in GDP is 2.5 × HKD 10 billion = HKD 25 billion.

Question 41Macroeconomics, finance and policy

A fresh graduate from a university in Hong Kong is currently looking for their first job. This person is experiencing what type of unemployment?

  1. Cyclical unemployment
  2. Frictional unemployment Correct answer.
  3. Structural unemployment
  4. Seasonal unemployment

Explanation

Frictional unemployment occurs when workers are in the process of moving between jobs or entering the labor force. Fresh graduates looking for work represent classic frictional unemployment.

Question 42Macroeconomics, finance and policy

A territory has a total adult population of 6 million. The labor force is 4 million, and 3.8 million people are currently employed. What is the unemployment rate?

  1. 3.33%
  2. 5.00% Correct answer.
  3. 33.33%
  4. 10.00%

Explanation

The number of unemployed people is Labor Force − Employed = 4.0 million − 3.8 million = 0.2 million. The unemployment rate is Unemployed / Labor Force = 0.2 / 4.0 = 5.0%.

Question 43Macroeconomics, finance and policy

A hypothetical economy's consumer basket consists of 2 goods: Food (weight 60%) and Housing (weight 40%). In the base year, Food price is HKD 10 and Housing price is HKD 20. In the current year, Food price rises to HKD 15 and Housing price rises to HKD 22. What is the Consumer Price Index (CPI) for the current year, using 100 as the base year index?

  1. 130
  2. 134 Correct answer.
  3. 150
  4. 144

Explanation

The price index for Food is (15 / 10) × 100 = 150. The price index for Housing is (22 / 20) × 100 = 110. Weighted CPI = (150 × 60%) + (110 × 40%) = 90 + 44 = 134.

Question 44Macroeconomics, finance and policy

The term 'menu costs' of inflation refers to:

  1. The resources spent when people decrease their money holdings to avoid inflation tax
  2. The costs to firms of constantly changing their advertised prices Correct answer.
  3. The distortion of relative prices due to tax bracket creep
  4. The redistribution of wealth from creditors to debtors

Explanation

Menu costs are the physical and administrative costs that businesses incur when they update their prices. Examples include printing new menus, updating pricing software, or re-tagging retail inventory.

Question 45Macroeconomics, finance and policy

During the contraction (recession) phase of a business cycle, which of the following typically occurs?

  1. Real GDP decreases and the unemployment rate increases Correct answer.
  2. Real GDP increases and the inflation rate increases
  3. Real GDP decreases and the unemployment rate decreases
  4. Capacity utilization rates increase

Explanation

A contraction is characterized by falling economic output (decreasing real GDP) and rising slack in the labor market, which pushes the unemployment rate upward.

Question 46Macroeconomics, finance and policy

In an economy, the velocity of money (V) is constant at 4, the money supply (M) is HKD 50 billion, and real output (Y) is 100 billion units. According to the Quantity Theory of Money (MV = PY), what is the price level (P)?

  1. 2.00 Correct answer.
  2. 0.50
  3. 8.00
  4. 4.00

Explanation

The quantity equation is MV = PY. Rearranging to solve for P: P = MV / Y = (50 × 4) / 100 = 200 / 100 = 2.00.

Question 47Macroeconomics, finance and policy

When a consumer compares the prices of two different brands of laptops in Hong Kong dollars, they are using money as a:

  1. Medium of exchange
  2. Store of value
  3. Unit of account Correct answer.
  4. Standard of deferred payment

Explanation

A unit of account is a standard unit of monetary measurement used to measure and compare the relative value of goods, services, assets, and liabilities.

Question 48Macroeconomics, finance and policy

Under the definitions used by the Hong Kong Monetary Authority (HKMA), Money Supply M1 includes:

  1. Legal tender notes and coins held by the public plus customers' demand deposits with licensed banks Correct answer.
  2. Legal tender notes and coins held by the public plus savings deposits with all authorized institutions
  3. Demand deposits plus savings deposits and time deposits with licensed banks
  4. All deposits with licensed banks, restricted licence banks, and deposit-taking companies

Explanation

Under HKMA guidelines, M1 represents the most liquid component of the money supply. It comprises legal tender notes and coins held by the public plus customers' demand deposits with licensed banks.

Question 49Macroeconomics, finance and policy

In a banking system, the required reserve ratio is 10%, and commercial banks hold no excess reserves. However, the public holds cash equal to 15% of their deposits (cash leakage ratio c = 0.15). What is the value of the money multiplier under these conditions?

  1. 10.00
  2. 4.60 Correct answer.
  3. 4.00
  4. 8.00

Explanation

The money multiplier with a cash leakage is given by m = (1 + c) / (r + c), where r is the reserve ratio (0.10) and c is the cash ratio (0.15). Therefore, m = (1 + 0.15) / (0.10 + 0.15) = 1.15 / 0.25 = 4.60.

Question 50Macroeconomics, finance and policy

If a central bank wants to implement contractionary monetary policy to curb inflation, it should:

  1. Buy government bonds in open market operations and lower the reserve requirement
  2. Sell government bonds in open market operations and raise the discount (policy) rate Correct answer.
  3. Lower the discount rate and decrease the reserve requirement ratio
  4. Increase government spending and reduce income tax rates

Explanation

Contractionary monetary policy reduces the money supply and increases interest rates. This is achieved by selling government bonds in open market operations (absorbing cash) and raising the policy discount rate (increasing the cost of borrowing).