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CIMA BA1 Fundamentals of Business Economics Exam Practice Test

Demo: 70 questions
Total 468 questions

Fundamentals of Business Economics Questions and Answers

Question 1

Which ONE of the following conditions would lead to instability over time in the incomes of producers of primary products?

Options:

A.

Both demand and supply tend to be price inelastic

B.

Large shifts in demand combined with supply that is price inelastic

C.

Large supply shifts under the impact of unstable weather conditions

D.

Both demand and supply tend to be price elastic

Question 2

The average price of recorded music CDs has been declining for several years. Which of the following changes in market conditions would NOT be a cause of this?

Options:

A.

Availability of new cheaper substitutes such as downloads

B.

Increased competition due to entry to the market by supermarket and internet sellers of CDs

C.

Decline in the number of CD shops due to bankruptcy and closure

D.

Growth in popularity of alternative goods such as mobile phones and video games

Question 3

All of the following would tend to make the demand for a good highly price elastic except one. Which ONE is the exception?

Options:

A.

There are many close substitutes for the good

B.

The time period under consideration is long

C.

The good is a luxury

D.

The proportion of consumer income spent on the good is small

Question 4

Which of the following statements about public goods is correct?

Options:

A.

Public goods are defined as those goods provided by the state

B.

Public goods are examples of free goods

C.

Public goods are characterized by the free-rider problem

D.

The problem of scarcity does not affect the provision of public goods

Question 5

Which of the following is NOT a characteristic of a pure public good?

Options:

A.

It is not possible to exclude non-payers from enjoying the good

B.

It is always provided by the state or public sector

C.

It does not get used up by more people enjoying it

D.

It has no price

Question 6

The 'satisfying' model of business behavior states that business will aim to:

Options:

A.

seek profits as the primary business objective

B.

concentrate on the long run growth of sales

C.

attempt to meet the differing demands of various stakeholders

D.

satisfy shareholders demands to maximize shareholder wealth

Question 7

One of the features of an oligopoly market is that the pricing strategy of producers

Options:

A.

is conditioned by the expected reaction of rival producers

B.

tends to ignore expectations about consumer reactions

C.

is constrained by the absence of barriers to entry into the industry

D.

is largely determined by government competition rules

Question 8

If a manufacturing firm contributes to global warming as a byproduct of its production process, this is an example of

Options:

A.

A merit good

B.

An external social cost

C.

A diseconomy of scale

D.

A public good

Question 9

In a supply and demand diagram, other things remaining the same, an increase in production costs will normally shift:

Options:

A.

The demand curve to the right

B.

The supply curve to the right

C.

The demand curve to the left

D.

The supply curve to the left

Question 10

Firms in competitive markets can earn only normal profit in the long run because:

Options:

A.

they produce homogeneous products

B.

there are no barriers to entry into these markets

C.

production costs are the same for all producers

D.

of the absence of economies of scale

Question 11

If the demand curve for good A is negatively sloped, a fall in the price of a substitute good B results in

Options:

A.

An increase in the quantity demanded of good A

B.

A rightward shift in the demand curve for good A

C.

A leftward shift in the demand curve for good B

D.

A leftward shift in the demand curve for good A

Question 12

In a market economy the market mechanism can achieve all the following except one. Which is the exception?

Options:

A.

Signaling changes in consumer tastes

B.

Causing supply to respond to changes in demand

C.

Eliminating excess supply and demand

D.

Ensuring a socially fair distribution of goods and services

Question 13

Why do monopoly market structures charge higher prices than would be charged by more competitive market structures?

Options:

A.

They are more likely to suffer from diseconomies of scale

B.

They must recover their higher research and development expenditures

C.

They can increase profits by reducing output to force prices higher

D.

They have barriers to entry that stop customers going to new markets

Question 14

A market is in equilibrium. If the government imposes a minimum price above the equilibrium price, there will be:

Options:

A.

an extension in demand, a contraction in supply and a market shortage

B.

a decrease in demand, an extension in supply and a market surplus

C.

a contraction in demand, an increase in supply and a market surplus

D.

a contraction in demand, an extension in supply and market surplus

Question 15

If a central bank adopted an expansionary monetary policy the effects would include A.

Options:

A.

rise in interest rates

B.

rise in exchange rate

C.

fall in the rate of inflation

D.

rise in bond prices

Question 16

Which theory of the firm is described by the following statement?

'The decisions of management are the result of a political maneuvering of the various stakeholders connected to the organization.'

Options:

A.

Profit maximizing

B.

Satisfying

C.

Behavioral

D.

Managerial

Question 17

Why was the Global Banking Crisis of 2007 followed by a credit crunch of low lending?

Options:

A.

Governments sought to reduce aggregate demand to avoid a boom

B.

Households and firms were unwilling to borrow

C.

Banks had lost reserves and could not support high lending

D.

Households had stop saving due to loss of confidence in commercial banks

Question 18

Which of the following have been recommended in order to prevent a repeat of the 2008 financial crisis?

Options:

A.

Higher capital adequacy ratios for commercial banks

B.

A reduction in the required liquidity ratio for commercial banks

C.

The merging of retail and investment banking

D.

The purchase of bank shares by the government

Question 19

Whenever a government provides health care services free of charge

Options:

A.

Economic welfare is maximized

B.

Government expenditure on the provision of public goods increases

C.

The incentive to provide private health care through the market disappears

D.

Provision of merit goods by the state is taking place

Question 20

All of the following are sources of finance for business except which one?

Options:

A.

Retained profits

B.

Certificates of deposit

C.

New share issues

D.

Mortgages

Question 21

Which of the following best describes the term 'National Debt'?

Options:

A.

Money the government owes to governments of other countries

B.

Money the government must borrow to make up the shortfall between tax revenue and government expenditures

C.

Special assets issued by government to finance wars

D.

The accumulated borrowings by the government in previous years that have not yet been repaid

Question 22

When central banks adopt a policy of 'quantitative easing' this means that they:

Options:

A.

Lift quantitative restrictions on bank lending

B.

Lower the capital adequacy requirements for banks

C.

Buy government bonds from the banks

D.

Ease the liquidity ratios banks need to hold

Question 23

Which of the following describes a 'spot rate' in foreign currency dealing?

Options:

A.

It is a short term rate that may change in the immediate future

B.

It is the price for a currency that is to be delivered immediately

C.

It is the exchange rate minus any commissions or transactions charges

D.

It is the exchange rate minus the inflation rate

Question 24

Lenders normally wish to offer their funds for the short term, but most borrowers prefer to borrow over the long term. Resolving this mismatch is known as:

Options:

A.

Risk reduction

B.

Aggregation

C.

Maturity transformation

D.

Pooling

Question 25

What is described by the following definition 'the total accumulated amount the state owes to lenders in its own country and internationally'?

Options:

A.

The national debt

B.

The fiscal deficit

C.

The balance of payments deficit

D.

The structural deficit

Question 26

If a country were to join a currency union (for example, the European single currency, the Euro), its businesses would experience all of the following except which one?

Options:

A.

Reduced transaction costs on overseas transactions.

B.

Exchange rate certainty.

C.

A common monetary policy.

D.

Reduced price transparency.

Question 27

All of the following were contributory causes of the banking crisis of 2008 (the 'credit crunch') except one. Which ONE is the exception?

Options:

A.

Large scale default in the in the US sub-prime mortgage market

B.

Over- capitalization of commercial and investment banks

C.

The bundling of mortgages into collateralized debt obligations which were sold onto banks

D.

Erroneous credit rating of collateralized debt obligations by credit rating agencies

Question 28

A government can finance a budget deficit by:

i. increasing taxation rates.

ii. Reducing government expenditure.

iii. Selling long term government bonds.

iv. Issuing Treasury Bills.

v. Raising interest rates.

vi. Reducing transfer payments.

Options:

A.

(i), (ii) and (iii) only

B.

(ii), (v) and (vi) only

C.

(ii) and (vi) only

D.

(iii) and (iv) only

Question 29

Which global institution is concerned with enforcing the GATT?

Options:

A.

The IMF

B.

The World Bank

C.

The World Trade Organization

D.

The G20

Question 30

Which of the following best defines a fiscal policy?

Options:

A.

A policy that increases government spending to increase national income

B.

A policy which seeks to influence the economy through manipulation of government spending and taxation

C.

A policy aimed at influencing the level of aggregate demand in the economy

D.

A policy which controls inflation by controlling the amount of money in the economy

Question 31

All of the following are characteristics of a recession except which one?

Options:

A.

Rising levels of unemployment.

B.

Increased inflationary pressure.

C.

Improving trade balances.

D.

Increased government budget deficits.

Question 32

All of the following are early indicators of a recovery from a recession except which one?

Options:

A.

A rise in business confidence.

B.

An acceleration in the growth of the money supply.

C.

A fall in the level of net personal debt.

D.

An increase in the number of unfilled vacancies.

Question 33

If a government adopted a fiscal policy of cutting its budget deficit, the aggregate demand and supply model shows that the result would be:

Options:

A.

a shift in the aggregate demand curve to the right, a fall in output and employment and a rise in the price level

B.

a shift in the aggregate demand curve to the left, a fall in output and employment and a fall in the price level

C.

a shift in the aggregate demand curve to the left, a fall in output and employment and a rise in the price level

D.

a shift in the aggregate demand curve to the right, a rise in output and employment and a rise in the price level

Question 34

Which of the following would lead to an increase in a firm's share price?

Options:

A.

Management announces that profits are still rising in line with the forecasts in its published 5 year plan

B.

Management announces that profits will be higher than had previously been forecast

C.

A rise in the rate of interest available from investing in government securities

D.

Management announces that new laws on working conditions have forced them to close a profitable factory earlier than had been expected

Question 35

Which ONE of the following is regarded as a general characteristic of an organization?

Options:

A.

Controlled performance of its activities

B.

Social goals towards society

C.

Collective goals towards society

D.

Social arrangement of people

Question 36

The existence of a natural rate of unemployment means that

Options:

A.

the short run Phillips curve is steeper that the long run Phillips curve.

B.

nominal wages rise faster the prices in the long run.

C.

governments cannot reduce unemployment below this level.

D.

there is no trade-off between inflation and unemployment in the long run.

Question 37

Which ONE of the following is an External stakeholder in a state-owned energy provider?

Options:

A.

The industry regulator

B.

A firm selling equipment to the energy provider

C.

Customers of the energy provider

D.

The government

Question 38

The Phillips curve shows that the government

Options:

A.

cannot use monetary policy to reduce the level of unemployment without causing a rise in interest rates.

B.

can only use fiscal policy to reduce the rate of unemployment in the short run but not in the long run.

C.

can only use expansionary policy to reduce the level of unemployment if it is prepared to accept a higher rate of inflation.

D.

in the long run expansionary fiscal and monetary policy can only lead to higher inflation and higher unemployment.

Question 39

Which of the following best describes a project that has a negative Net Present Value?

Options:

A.

A loss making project

B.

A project that doesn't make enough profit to pay the interest on the money borrowed to invest in it

C.

A project that doesn't make sufficient returns to fully compensate investors for the funds they invest in it

D.

A project that will only start making profits after the present year has finished

Question 40

Which global financial institution is responsible for making long term loans to assist developing countries to invest and develop?

Options:

A.

The IMF

B.

The World Bank

C.

The World Trade Organization

D.

The G20

Question 41

Which ONE of the following would appear as a debit item on a country's balance of payments current account?

Options:

A.

Overseas investment by a domestic multinational company

B.

Expenditure in the country by an overseas visitor

C.

A flow of company profits to the parent company based in another country

D.

Payment by an overseas company for services provided in the country

Question 42

A country is a net oil exporter and the demand for oil overseas is price inelastic. A substantial increase in the world price of oil would tend to

Options:

A.

Improve the country's balance of payments on current account

B.

Improve the price competitiveness of manufacturing firms in the country

C.

Cause the country's terms of trade to deteriorate

D.

Increase GDP but not GNP in the country

Question 43

A trade agreement that removes all import tariffs between member countries, sets up common external tariffs against non-members, but does not advance toward economic integration is called

Options:

A.

an economic union.

B.

a customs union.

C.

a free trade area.

D.

a common market

Question 44

The Competition and Markets Authority is a regulatory body in the UK. In 2017, the CMA found the proposed merger of Heineken and Punch Pubs in breach of its competition laws. Heineken and Punch Pubs have agreed

to divest in pubs in areas where they are the two dominant pub companies.

Which of the following are ways in which consumers might directly benefit from this decision?

Select ALL that apply.

Options:

A.

Heineken/Punch Pubs will not be able to charge excessive prices for alcoholic beverages served at their pubs

B.

There will be a greater variety of pubs for consumers to choose from in certain areas

C.

Heineken will divest in a certain number of pubs where the merger would have created monopolies

D.

The companies' divestment of pubs in certain areas could lead to the closure of the majority of pubs in said area

E.

The CMA will use this decision as a precedent for others in the future

Question 45

RubTech has decided to build a new rubber production facility just outside the semi-rural town of Pettisbury. The majority of workers at the plant are to be sourced from abroad.

Which of the following could potentially be negative externalities of the decision to build the production facility?

Options:

A.

Production processes

B.

Rood congestion

C.

The decision to source workers from abroad

D.

Antisocial behaviour

E.

The high unemployment rate in the local area

F.

The poor infrastructure in the local area

Question 46

The interest rate at TrowBank is currently running at 7%. The number of customers borrowing to invest has fallen drastically.

Which of the following explains why this is the case?

Select ALL that apply.

Options:

A.

The high interest rate means that it is more expensive to borrow to invest

B.

Many customers have decided to save rather than invest due to the high interest rate

C.

The high interest rate means customers are less confident about investing

D.

The high interest rate has caused prices to rise, meaning customers have not got enough disposable cash to make investments

E.

The high interest rate has resulted in customers' purchasing power decreasing

Question 47

Other things being equal, an increase in a country's balance of payments deficit on current account means that

Options:

A.

Import prices must be falling

B.

The volume of goods exported must be falling

C.

Aggregate demand is falling

D.

The difference between government spending and tax revenue is growing

Question 48

Since its release. Bob Aker's 'Cooking to Go' has sold the following number of copies each Q1:

2X13:200

2X14:430

2X15:530

2X16:450

Using these figures and the equation, y (trend) = 500 + 20x, which of the following is the mean seasonal average of sales of Bob Aker's 'Cooking to Go' for Q1 over the last four years?

Calculate all the final and answer and all intermediate workings to 2 dp.

0.77

0.85

1.02

4.5

0.63

Options:

Question 49

West Morton Rail has calculated that the number of passengers travelling on their railway increases during school holidays, while the inverse is true for most other railways in the country.

Which of the following is the most likely reason for this unusual correlation?

Options:

A.

West Morton Rail is a heritage railway, meaning it will receive more passengers as rates of tourism increase during the school holidays

B.

West Morton Rail is situated in a town where there are very few schools

C.

West Morton Rail has a special discount for passengers using their service during the school holidays

D.

West Morton Rail receives less revenue than other railway services

Question 50

Beth wants to take out an annuity in order to be able to leave more money to her children when she passes away. She has looked at three annuities with different payout rates.

Annuity A pays out £5340 each year over 14 years

Annuity B pays out £4900 each year over 9 years

Annuity C pays out £5445.64 each year over 20 years

The current interest rate is 8%.

Of these, which annuity would have the highest net present value and hence pay out more money for Beth over its lifetime?

Options:

A.

£53,460.10

B.

£44,024.23

C.

£30,609.75

D.

£60,455.63

Question 51

The economy of Country V is initially in equilibrium at a level of national income and employment denoted by Y, at price level denoted by P If there is an increase in aggregate demand, indicate on the graph below the new equilibrium point in the economy.

Options:

Question 52

TrowPlan Ltd. is planning on growing their business through expanding their real estate holdings. In order to do this, they have taken out a bank loan of £2 million. This loan is to be repaid by TrowPlan Ltd. over a period of

14 years with an interest rate of 10%. However, there are rumours of recession in the banking sector, and the economic uncertainty caused by Britain's vote to leave the EU continues to decrease the value of pound

sterling.

In these circumstances, which of these options would be the least suitable course of action for TrowPlan Ltd. to take?

Select ALL that apply.

Options:

A.

Take out the loan without any guarantee or security so as to see whether interest rates lower in the near future

B.

Take out an interest rate guarantee and wait until the economic situation becomes clearer before taking out a Forward Rate Agreement

C.

Take out a Forward Rate Agreement to fix the interest rate repayable on the £2 million loan

D.

Take out an interest rate option and wait to buy an interest rate future until the economic situation becomes clearer

E.

Buy an interest rate future in order to fix the interest rate repayable on the £2 million loan

Question 53

The government has set a maximum house price due to a massive house price rise in the last decade. This is denoted by the line Q1Q2 on the graph.

Which of the following may occur in light of the introduction of the maximum house price as it appears on the graph?

Select ALL that apply.

Options:

A.

There will be a shortage of housing supply in Lingford.

B.

A 'black market' may develop in housing, meaning the maximum price is ignored.

C.

There will be a surplus of housing supply in Lingford.

D.

Landowners will continue to build residential properties at the same rate as before the maximum price was implemented.

E.

It is not likely that the maximum house price will need some sort of reform in the near future.

Question 54

VapNat, an e-cigarette store, has experienced a steep decline in sales over the past six months, despite the economy in general performing well.

Which of the following are most likely to have contributed to such a decline?

Select ALL that apply.

Options:

A.

Social factors

B.

Tech nological factors

C.

Legal factors

D.

Environmental factors

E.

Political factors

F.

Economic factors

Question 55

A regressive tax is defined as one where:

Options:

A.

The amount of tax paid by a taxpayer falls as income rises

B.

The rate of tax is different for different income levels

C.

The proportion of income paid in tax rises as income falls

D.

The tax is levied on expenditure not income

Question 56

The share price of Quench Drinks has been steadily falling for several years despite steady sales and a slight market share increase over the last 5 years. They have been criticised for being full of sugar and not

capitalising on the health food trend.

Quench are starting to face pressure from their shareholders to push the share price back up.

Which of the following would be most likely to improve Quench's standing in the soft drinks market?

Select ALL that apply.

Options:

A.

Release a new protein shake, QuenchFit

B.

Publishing an advert in a major magazine promoting QuenchFit and the benefits of healthy living

C.

Relocate the company to a country with less strict public health guidelines

D.

Continue as normal

E.

Appoint a new CEO

Question 57

An estimation regression is developed to test the linear relationship between the size of student population at a university and monthly sales of a nearby bookshop The correlation coefficient is equal to 0.9.

Options:

Question 58

Which of the following is also known as the International Bank for Reconstruction and Development?

Options:

A.

The European Central Bank

B.

The World Trade Organisation

C.

The International Monetary Fund

D.

The World Bank

Question 59

The following ogive shows the cumulative frequency of the ages of a small sample of entrepreneurs.

Which THREE of the following statements are true?

Options:

A.

Four entrepreneurs were aged between 30 and 40

B.

The sample included 10 entrepreneurs

C.

The sample did not include any entrepreneurs older than 65.

D.

Two entrepreneurs were aged between 40 and 50

E.

The sample did not include any entrepreneurs younger than 20

F.

Most entrepreneurs were younger than 40.

Question 60

For a typical business, which of the following is NOT a potential benefit of globalisation?

Options:

A.

Lower cost sites for the location of production

B.

Simultaneously improved terms of trade for all countries

C.

Wider sources of supply for inputs.

D.

Larger markets for outputs

Question 61

Which THREE of the following can be used to reduce the principal-agent problem in business organisations?

Options:

A.

Requiring managers to uphold detailed disclosure and reporting practices

B.

Introducing bonuses related to the profit performance of the business.

C.

Implementing a 'top-down' decision-making process.

D.

Implementing a share distribution scheme.

E.

Requiring managers to take into account the interests of external stakeholders.

Question 62

Which of the following is correct regarding data?

Data can be recorded as:

(1) numbers.

(2) symbols.

(3) raw facts.

Options:

A.

(1)only

B.

(3) only

C.

(1)and

D.

(1),(2)and(3)

Question 63

industrial action is more likely to occur within a large organisation than a small organisation, due to senior management becoming re managers becoming complacent, as well as shop floor hostility. The effect of this will be an increasing average cost as production

The statement above is most closely describing an example of which of the following?

Options:

A.

External diseconomy of scale.

B.

Internal diseconomy of scale

C.

Internal economy of scale

D.

External economy of scale

Question 64

Based on a trade balance between Country A and Country B over a ten year period, the underlying trend of the trade balance is represent equation

-114.027 -1.47x

where x is the time period expressed in years.

Assuming an additive forecasting model, with a seasonal factor of 82 6, then the forecast for year 2016, in whole units is:

Options:

Question 65

The use of hedging is to reduce or eliminate exposure to which of the following?

1. Credit risk

2. Economic risk

3. Transaction risk

4. Transition risk.

Options:

A.

1, 3 and 4

B.

1, 2 and 4

C.

2, 3 and 4

D.

1, 2 and 3

Question 66

What does the term 'equity financing' mean?

Options:

A.

A company financing a short term cash flow shortage by borrowing from a financial intermediary.

B.

A company investing its excess liquidity by purchasing shares.

C.

A company selling off some of its tangible assets to pay for debts.

D.

A company financing its liquidity deficit by issuing shares.

Question 67

Which TWO of the following are positive impacts for a national economy which hosts a multinational company's (MNC) production facilities within their country"?

Options:

A.

Mobile MNCs mean that operations can easily be transferred from one economy to another.

B.

MNCs provide employment opportunities in other countries for skilled workers from the host country.

C.

Local producers can copy superior processes from the MNC which raises productivity within the recipient economy.

D.

Direct financial investment should improve economic welfare as capital is transferred to economies where the marginal rate of return on capital is highest

E.

MNCs can use transfer pricing to ensure taxes are minimised within a recipient economy.

Question 68

Which of the following organisational arrangements is an example of a multinational corporation (MNC)?

Options:

A.

An insurance company based in Country E opens a sales office in Country F in order to service the local market

B.

A music production company based in Country C signs a contract with an artist's management company based in Country D.

C.

A retailer based in Country G uses an online retail platform in order to sell goods to customers in Country H.

D.

A chain of restaurants based in Country B signs a franchise agreement with a company that intends to open restaurants in Country A.

Question 69

What is the mam objective or the PESTEL framework?

Options:

A.

To identify the key factors in the business environment that are likely to affect a company's performance

B.

To identify the key determinants of a company's profitability

C.

To identify the key people who should be involved in a company's decision making process

D.

To identify the key external stakeholders that are likely to be impacted by a company's activities.

Question 70

Which THREE of the following are objectives of corporate governance?

Options:

A.

To ensure that managers have attractive compensation packages

B.

To implement clear career progression routes for employees

C.

To ensure that customers' needs are addressed

D.

To ensure that a company is run in a legal and ethical manner

E.

To implement incentives for managers to pursue long term financial sustainability

F.

To increase transparency in company reporting

Demo: 70 questions
Total 468 questions