KHYBER PUKHTUNKHWA PUBLIC SERVICE COMMISSION
COMPETITIVE EXAMINATION FOR THE POST OF
PROVINCIAL MANAGEMENT SERVICE (BPS-17) 2022
ECONOMICS PAPER-1
Time Allowed: 03 Hours Maximum Marks: 100
Note: Attempt any FIVE questions. All questions carry equal marks.
Q1: What is the relationship between the State Bank’s monetary policy and long-term interest rates?
Q2: Suppose that two goods are perfect complements. If the price of good 1 changes what part of the change in demand is due to the substitution effect and what is due to income effect?
Q3: Suppose that the government decides to issue tradeable permits for a certain form of pollution.
a) Does it matter for efficiency whether the government distributes or auctions the permits? Does it matter in other ways?
b) If the government chooses to distribute the permits, does the allocation of permits among firms matter for efficiency? Does it matter in other ways?
Q4: ‘Whenever a good or service is good – that is, it is valued by consumers – a government rule that mandates an increases the quantity traded of the good increases total surplus.’ Discuss this statement.
Q5: Assess the reasons why the use of fiscal policy to stabilize the economy is more complicated than suggested by the basic Keynesian model.
Q6: Please select the correct answer.
1. The State Bank’s strategy of lowering interest rates in order to increase real GDP is called:
a) Reactionary monetary policy.
b) Contractionary monetary policy.
c) Expansionary monetary policy.
d) Contractionary fiscal policy.
e) none of the above
2. Which statement is true?
a) The unemployment rate fails to account for underemployment.
b) Structural unemployment falls and rises with economic activity.
c) Cyclical unemployment is caused by a mismatch of worker skills and the labor requirements of employers.
d)Frictional unemployment us unemployment that changes with the seasons.
e)none of the above.
3. Which statement is true?
a)Given the consumer basket adjusts regularly, the CPI accounts for changes in product quality.
b)The substitution bias in the CPI tends to underestimate inflation.
c)Given frequent updating of the representative consumer basket, the inclusion of new products tends to moderate inflation.
d)Changes in prices, when they reflect an improvement in product quality, tend to cause an overestimation in changes in the cost of living.
e)None of the above
Q7: For each of the following scenarios, state whether the unemployment is frictional, structural, or cyclical. Justify your answer.
a)Nadeem lost his job when the steel mill closed down. He lacks the skills to work in another industry and so has been unemployed over a year.
b)Aliya was laid off from her job at the auto plant because the recession reduced the demand for cars. She expects to get her job back when the economy picks up.
c)Waqar is an unskilled worker who works for local moving companies during their busy seasons. The rest of the year he is unemployed.
d)Tauqeer looked for a job for six weeks after finishing college. He turned down a couple of offers because they didn’t let him use the skills he had acquired in university, but now he has a job in the area that he trained for.
e)Bandeel, a software engineer, lost her job when the start-up company she was working for went bankrupt. She interviewed at five companies before accepting a new job in another firm in the same industry.
Q8: What are the key assumptions of the Keynesian model? Explain why this assumption is needed if one is to accept the view that aggregate spending is a driving force behind short-term fluctuations.
Q9: The government is considering two alternative policies, one involving increased government purchases of 50 units, the other involving tax cuts of 50 units. Which policy will stimulate planned aggregate expenditure more? Why?
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