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ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA

AA1 EXAMINATION - JANUARY 2019
(AA13) ECONOMICS FOR BUSINESS AND ACCOUNTING
02-02-2019
• Instructions to candidates (Please Read Carefully): Afternoon
[1.45 – 5.00]
(1) Time allowed: Reading - 15 minutes
Writing - 03 hours. No. of Pages : 06
No. of Questions : 06
(2) All questions should be answered.
(3) Answers should be in one language, in the medium applied for, in the booklets provided.
(4) Submit all workings and calculations. State clearly assumptions made by you, if any.
(5) Use of Non-programmable calculators is only permitted.
(6) Graph Paper will be provided.
(7) Action Verb Check List with definitions is attached. Each question begins with an action verb
excluding OTQ’s. Candidates should answer the questions based on the definition of the verb given in
the Action Verb Check List.
(8) 100 Marks.

SECTION A
Objective Test Questions (OTQs)
Twenty (20) compulsory questions
(Total 40 marks)

Question 01

Select the most correct answer for question No. 1.1 to 1.10. Write the number of the selected answer
in your answer booklet with the number assigned to the question.

1.1 Select from the following, the statement which correctly describes “Scarcity” in Economics:

(1) Scarcity is the value of the next best alternative choice foregone in the choice of a
particular decision.
(2) Scarcity is the alternative use of resources to produce goods and services.
(3) Scarcity is the addition to the total utility made by an extra unit of a commodity consumed.
(4) Scarcity is the limited availability of resources in relation to human needs and unlimited
human wants.

1.2 If the cross elasticity of demand between goods x and y is positive, the goods are:

(1) complementary goods. (2) substitute goods.

(3) normal goods. (4) inferior goods.
1.3 You are given the following statements with respect to the characteristics of perfect competition:
(a) There are very large number of firms.
(b) It sells homogeneous products.
(c) It earns only normal profits in the long run.

Of the above, the correct statements of characteristics of perfect competition are:

(1) (a) and (c) only. (2) (a) and (b) only.
(3) (b) and (c) only. (4) All of the above.

1.4 A firm maximizes its profit when:

(1) Price is below the average variable cost.

(2) Total cost is equal to the marginal cost.
(3) Total cost is equal to the total revenue.
(4) Marginal cost is equal to the marginal revenue.

1.5 Imposing a unit tax on a commodity that has a relatively inelastic demand will lead:

(1) Consumer to bear the total tax burden.

(2) Consumer to bear a large portion of the tax burden.
(3) Consumer to bear a small portion of the tax burden.
(4) Consumer to bear exactly half of the tax burden.

1.6 Which one of the following is a Macro Economic Objective of the govenment?

(1) Aggregate consumption. (2) Exchange rate.

(3) Equilibrium in balance of payment. (4) Unemployment.

1.7 Select from the following, a correct characteristic of the market (capitalist) economy:

(1) There is no consumer sovereignty (freedom).

(2) The economic activities are handled by the centralized planning committee.
(3) Production and distribution are performed by the government.
(4) Producers have the sovereignty (freedom).

1.8 At the minimum point of the average total cost curve:

(1) Average total cost is equal to Marginal Cost.

(2) Average fixed cost is equal to Marginal Cost.
(3) Total cost is equal to Average Fixed Cost.
(4) Total cost is equal to Marginal Revenue.

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1.9 According to the Annual Report of the Central Bank of Sri Lanka for the year 2017, the per
capita income in Sri Lanka for the year 2017 was:

(1) US $ 4,200 (2) US $ 3,924 (3) US $ 3,700 (4) US $ 4,065

1.10 Positive balance in the trade account of the balance of payment indicates:

(1) The value of exports of goods is greater than the value of imports of goods.
(2) The value of exports of goods is lower than the value of imports of goods.
(3) The value of exports of goods is same as the value of imports of goods.
(4) The export price index is lower than the import price index.

State whether each of the following statements in question No.1.11 to 1.15 is TRUE or FALSE. Write
the answer (True/False) in your answer booklet with the number assigned to the question.

1.11 An indifference curve describes the relationship between total cost and marginal cost of a firm.

1.12 The income effect is a reason for the downward slope of the demand curve.

1.13 If the change in the quantity demanded of a commodity is equal to the change in the price of
that commodity, the price elasticity of demand is greater than one.

1.14 Producers’ surplus is the difference between the equilibrium price of the commodity and the
price at which the producer is willing to sell.

1.15 Full employment of resources is an underlying assumption of the Production Possibility Curve
(PPC).

Select the correct word/words from those given within brackets to fill in the blanks of question
No. 1.16 to 1.20. Write the selected word/words in your answer booklet with the number assigned to
the question.

1.16 In a …………………… (mixed economy / planned economy), the government influences prices
through taxes and subsidies and affects the operation of the price mechanism directly and
indirectly.

1.17 Differentiated products are produced by …………………… (perfect competition / monopolistic

competition).

1.18 Non excludability and non-rivalry in consumption show the importance of the provision of
…………………… (public goods / merit goods).

1.19 The exchange rate determined based on the demand and supply for foreign exchange is
known as …………………… (fixed / floating) exchange rate.

1.20 The process of collecting funds from depositors and lending them to borrowers is known as
…………………… (Financial inclusion / Financial intermediation). (02 marks each, Total 40 marks)
End of Section A
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 SECTION B
Four (04) compulsory questions

(Total 40 marks)

Question 02

(a) You are given the following demand (Qd) and supply (Qs) equations for a commodity:

Qd = 200 – 2P
Qs = -40 + 6P

(i) Calculate the equilibrium price of the commodity. (02 marks)

(ii) Calculate the equilibrium quantity of the commodity. (02 marks)

(iii) Explain the impact of the above computed equilibrium price and quantity, if the
consumers’ taste for the above commodity has been moved from it when other things
being constant. (03 marks)

(b) Identify three(03) factors that determine the price elasticity of demand. (03 marks)
(Total 10 marks)

Question 03

(a) Explain the difference between shutdown point and break-even point of a firm using a graph.
(06 marks)

(b) (i) List three(03) functions of a commercial bank. (03 marks)

(ii) State two(02) examples for licensed commercial banks in Sri Lanka. (01 mark)
(Total 10 marks)

Question 04

(a) Explain the effect of an increase in the demand for money on the equilibrium interest rate using
a graph. (06 marks)

(b) Explain the difference between Demand Pull Inflation and Cost Push Inflation. (04 marks)
(Total 10 marks)

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 Question 05

(a) Explain how open market operations act as a quantitative control in managing the money
supply. (04 marks)

(b) State two(02) disadvantages of protectionism. (02 marks)

(c) Explain two(02) main reasons for recent devaluation of the Sri Lankan Rupee against US dollar.
(04 marks)
(Total 10 marks)
End of Section B

SECTION C
A compulsory question
(Total 20 marks)

Question 06

(A) (a) State two(02) disadvantages of public enterprises. (02 marks)

(b) State four(04) main objectives of the government budget. (04 marks)

(B) You are given the following hypothetical data relating to national accounts of an economy for a
period of one year:
Rs. Million
Compensation for employees 2,000
Net operating surplus 1,000
Mixed income 1,100
Net taxes on production and imports 750
Net foreign current transfers 550
Net foreign primary income 1,200
Net indirect taxes 150
Using the above information,

You are required to,

Calculate the following:

(a) Gross Value Added (GVA) at basic price. (04 marks)

(b) Gross Domestic Product (GDP) at market price. (02 marks)

(c) Gross National Income (GNI). (02 marks)
(d) Gross National Disposable Income (GNDI). (02 marks)

(C) Explain the following two terms:

(a) Economic Growth. (02 marks)
(b) Economic Development. (02 marks)
(Total 20 marks)
End of Section C
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 ACTION VERB CHECK LIST
Knowledge Process Verb List Verb Definitions
Define Describe exactly the nature, scope, or meaning.
Draw Produce (a picture or diagram).
Identify Recognize, establish or select after consideration.
List Write the connected items one below the other.
Relate To establish logical or causal connections.
State Express something definitely or clearly.

Level 01 Calculate/Compute Make a mathematical computation

Comprehension Examine in detail by argument showing different
Discuss
aspects, for the purpose of arriving at a conclusion.
Recall & explain Make a clear description in detail revealing relevant
important information Explain
facts.
Interpret Present in an understandable terms.
To show validity or otherwise, using knowledge or
Recognize
contextual experience.
Record Enter relevant entries in detail.
Give a brief statement of the main points (in facts or
Summarize
figures).

Knowledge Process Verb List Verb Definitions

Apply Put to practical use.
Assess Determine the value, nature, ability, or quality.
Level 02
Application Demonstrate Prove, especially with examples.
Graph Represent by means of a graph.
Use knowledge in a setting
other than the one in Prepare Make ready for a particular purpose.
which it was learned / Prioritize Arrange or do in order of importance.
Solve closed-ended
Reconcile Make consistent with another.
problems
To find a solution through calculations and/or
Solve
explanation.

Knowledge Process Verb List Verb Definitions

Examine in detail in order to determine the solution
Level 03 Analyze
or outcome.
Analysis
Compare Examine for the purpose of discovering similarities.
Draw relations among Contrast Examine in order to show unlikeness or differences.
ideas and compare and
contrast / Solve open- Differentiate Constitute a difference that distinguishes something.
ended problems. Outline Make a summary of significant features.

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