G.C.E.

Advanced Level
Economics II
Mock Test for General Certificate of Education Advanced Level Examination

Economics II Time Duration( Three hours

Instructions Admission No : ………………….……..

 Answer five questions only, selecting minimum of two questions from sub section A and two
questions from sub section B.

Sub Section A

1. (i) How you classify natural resources in Economics? Explain with examples. (4 m)
(ii) “Choice arises with scarcity & when making a choice it incurs an opportunity cost”.
Confirm this statement with the use of a production possibility curve? (4 m)
(iii Define human capital and state the ways to improve human capital. (4 m)
(iv) What is meant by an economic system? What criteria is used to classify economic
systems? (4 m)
(v) A particular economy operates on the point of a production possibility curve. Do you
think it achieves economic efficiency? Explain your answer. (4 m)

2. (i) Define the law of demand. What factors kept constant in defining law of demand? (4 m)
(ii) Define inelastic supply and explain it with the use of an appropriate diagram. (4 m)
(iii) Coefficient values of price elasticity of demand for rice and computer are as follows.
Rice = -0.25 Computer = -2.25
With an expectation of increasing producer revenue, producers of above goods decided to
increase the price of them. Would producers succeed or not? Explain the reasons for your
answer. (4 m)

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 (iv) Demand and supply information with regard to a particular good is shown by the
schedule below.
Price in Rs. Quantity demanded Quantity supplied
2 44 -6
10 12 42

Using above information estimate the following.

a. Equilibrium price & quantity.
b. Price elasticity of demand & price elasticity of supply at equilibrium.

(v) Ceylon petroleum corporation of Sri Lanka decided to reduce the fuel prices, following
the fuel price reduction at the world market. However, government decided to continue
import control over vehicles. Explain with the use of an appropriate diagram how these
economic incidents affect over fuel market in Sri Lanka. (4 m)

3. (i) Sri Lankan government recently decreed a maximum price policy for eggs. What are the
economic consequences of this policy? (3 m)
(ii) Explain with the use of an appropriate diagram how tax burden is distributed between
consumer and producer when a tax is imposed over a product with elastic supply &
inelastic demand. (4 m)
(iii) Demand & supply equations with regard to paddy are given below.
QD = 250 - 2P
QS = -60 +3P
a. Estimate the values of market equilibrium price & quantity. (2 m)
b. If government decided a guaranteed price of Rs.80 for paddy to encourage paddy
production estimate the cost to the government at the situations where government
purchase excess supply & follow deficiency payment system. (4 m)
c. Estimate the values of social welfare loss (SWL) & dead weight loss (DWL) at the
situation where government purchase excess supply. (4 m)
(iv) Explain accumulation & release of buffer stocks by the government to maintain price
stability of agricultural goods with the use of an appropriate diagram. (3 m)

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4. (i) Define production function & show short run & long run production functions with
notations. (4 m)
(ii) Explain the relationship between short run product curves & short run cost curves with the
use of an appropriate diagram. (4 m)
(iii)Provide reasons for increasing returns to scale & economies of scale separately. (4 m)
(iv) What similarities are there between perfect competition & monopolistic competition. (4 m)
(v) Explain with the use of an appropriate diagram the way that production firm act to
maximize its profits by expanding output from an output level where marginal cost (MC) is
less than marginal revenue (MR) towards an optimum output level. (4 m)

5. (i) Define gross domestic capital formation & state its components. (4 m)
(ii) Some data related to national accounts of a country is given below. (All values in billion
rupees)
Exports 300
Imports 200
Net secondary income from ROW 250
Household final consumption expenditure 500
Net primary income from ROW 150
Collective government consumption 400
Domestic savings 800
Individual government consumption 350
Using above information estimate the following.
a. Gross Domestic Expenditure
b. Gross Domestic Product
c. Disposable Gross National Income
d. National savings
(iii) Explain the determination of macroeconomic equilibrium of a closed economy using
withdrawals injections approach by a diagram. (4 m)
(iv) Distinguish between following concepts.
a. Autonomous consumption & induced consumption (2 m)
b. Marginal propensity to save & average propensity to save (2 m)
(v) Marginal propensity to consume of a particular economy is 0.8. If government purchases &
taxes of this economy increased by Rs.100 million, explain how it affects over
macroeconomic equilibrium of the economy. (4 m)

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 Sub Section B

6. (i) What are the components of consolidated broad money supply? (4 m)

(ii) Sri Lanka recently faced hyper inflationary situation. What are the economic consequences
of this type of inflation? (4 m)
(iii) What factors determine money demand of an economy? (4 m)
(iv) Demand deposits held by a commercial bank which operates within a banking system is
Rs.2000 million. Statutory reserve ratio of the economy is 10%. The bank has lent Rs.1500
million.
a. What would be the values of required reserves & excess reserves of this economy? (2 m)
b. If the bank uses all its excess reserves for lending what would be the total amount of
bank loans that can be lent by the banking system? (2 m)
(v) Define financial market & classify. (4 m)

7. (i) “World Health Organization has emphasized the importance of vaccination against covid
19 pandemic. Following this majority of population in the world got vaccinated.” What
kind of externality is depicted by this statement? Explain with the use of an appropriate
diagram how resource allocation become inefficient in this situation. (4 m)
(ii) Define public goods and common resources. (4 m)
(iii) State 4 principles of taxation. (4 m)
(iv) Government of Sri Lanka uses the concept of public private partnership to improve
efficiency of public sector. Define the concept of public private partnership & state benefits
of this concept with examples. (4 m)
(v) What are the economic consequences of increased amount of government recurrent
expenditures? (4 m)

8. (i) Cost information related to the production of two goods by Sri Lanka & India is given by
the schedule below. Assume each country has 200 labour units.
Good Sri Lanka China
Tea (Kg) 2 4
Rice (Kg) 4 2

a. Draw production possibility curve for each country. (2 m)

4

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 b. If Sri Lanka enters into international trade what would be the mutual beneficial
exchange rate relevant for Sri Lanka.
(2 m)
(ii) What are the reasons for long term current account deficit in Sri Lanka? (4 m)
(iii) Explain with the use of an appropriate diagram how floating exchange rate act as an
automatic correction mechanism of balance of payments deficit. (4 m)
(iv) Show how following transactions are recorded in balance of payments of Sri Lanka
following double entry principle.
a. Importing of Rs.100 billion worth of non monetary gold by a Sri Lankan businessman.
b. Payment of Rs.150 billion for a Japanese company for the construction work of central
expressway.
c. Sending of Indian Rs.5000 by a Sri Lankan doctor who went for a 6 months medical
training in India.
d. Providing of a loan worth of Rs.400 billion to Sri Lanka by the International Monetary
Fund.
(v) Exports are a very important tool towards a country’s economic growth. In this regard what
steps can be taken to improve exports in Sri Lanka. (4 m)

9. (i) What approaches can be followed by the Sri Lankan government to achieve high rate of
economic growth? (5 m)
(ii) State 5 major areas of Sustainable Development Goals (SDGs). (5 m)
(iii) The value of poverty headcount index in Sri Lanka during 2019 was 14.3. However, the
value recorded as 6.0 in the urban sector compared to the value of 15.0 recorded in the rural
sector. Explain reasons for this difference of poverty headcount index. (5 m)
(iv) Define under employment & explain the forms of underemployment. (5 m)

10. (i) What you suggest to increase foreign investment in Sri Lanka? (5 m)
(ii) What obstacles are there for the tourism industry in Sri Lanka? (5 m)
(iii)The trend of work from home emerged after covid 19 pandemic. What are the economic
consequences of this? (5 m)
(iv) As a low income earned country what approaches can be implemented by Sri Lanka in
order to enhance food security within the country? (5 m)

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