Chartered Accountancy, Institute of Chartered Accountants of Pakistan (Scheme 2025) · Business and Economic Insights
ICAP PRC-3 Macroeconomics: basic concepts: practice questions with answers
6 free exam-style questions on Macroeconomics: basic concepts for ICAP PRC-3 Business and Economic Insights. Try each one, then open the answer to read the explanation. Fincora has 12 original questions on this syllabus area.
Question 1
Country R measures its GDP by the expenditure method. Which of the following transactions during FY2026-27 would be included in Country R's GDP for that year?
- A Monthly pensions paid by the government to retired civil servants
- B A household's purchase of a newly built house completed this year
- C A household's purchase of a three-year-old car from a neighbour
- D Wheat flour bought by a bakery and used in bread sold this year
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Answer: B. GDP measures the market value of final goods and services produced in the economy during the period.
- Transfer payments (pensions, cash grants, scholarships) are excluded: no current output is produced in exchange.
- Second-hand sales are excluded: the item was produced (and counted) in an earlier year. Any dealer's commission would count, but a private sale between neighbours adds nothing.
- Intermediate goods (flour used to bake bread) are excluded to avoid double counting; only the final bread, or equivalently the value added at each stage, is counted.
- A newly built house is final output of the year and is recorded as investment (I) in GDP = C + I + G + (X − M).
Question 2
Daryabad Cement operates a factory in Country R. The factory is wholly owned by investors resident in Country S. This year it earned profits of Rs 2 billion, all of which were paid to its foreign owners. Take GNP = GDP + net factor income from abroad. How are these profits treated in Country R's national accounts?
- A Included in Country R's GDP and also in Country R's GNP
- B Included in Country R's GDP but not in Country R's GNP
- C Included in Country R's GNP but not in Country R's GDP
- D Excluded from both Country R's GDP and Country R's GNP
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Answer: B. GDP is a domestic (geographic) measure: all output produced within Country R's borders, whoever owns the factory. The factory's output is therefore in Country R's GDP.
GNP (called GNI in Pakistan's current national accounts) is a national measure: GDP plus factor income received from abroad by residents, minus factor income paid to non-residents. The Rs 2 billion profit paid to owners in Country S is factor income paid abroad, so it reduces Country R's GNP relative to its GDP. (It would be part of Country S's GNP.)
Question 3
Which of the following would shift Country R's consumption function upwards, so that households consume more at EVERY level of disposable income?
- A A rise in national income that lifts households' disposable income
- B A rise in interest rates that increases the reward for saving
- C A rise in share and property prices that adds to household wealth
- D Widespread fear among workers of losing their jobs next year
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Answer: C. The consumption function C = a + bY links consumption to disposable income. A change in income moves households along the function.
The function shifts when a determinant other than current income changes, such as:
- wealth (higher share or property prices: shift up);
- interest rates and the availability of credit (higher rates: shift down);
- expectations about future income and jobs (pessimism: shift down);
- attitudes to thrift, and the distribution of income.
Only the rise in household wealth shifts the function upwards.
Question 4
Which of the following is an example of induced investment, as the term is used in Keynesian analysis?
- A A charitable trust builds a hospital it planned years ago, whatever income does
- B The government builds a dam as part of a long-term national water plan
- C A firm adopts a newly invented process just because the technology is now available
- D A packaging firm buys extra machines because rising incomes have lifted orders
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Answer: D. Autonomous investment is independent of the level of (or change in) national income: it is driven by long-term plans, public policy, innovation and new technology, population growth and similar factors.
Induced investment varies with income and output: when national income and sales rise, firms need more capacity and invest to provide it (the idea behind the accelerator). The packaging firm buying machines because orders have risen with incomes is induced investment. Other determinants of investment include the interest rate, expected returns (the marginal efficiency of capital) and business confidence.
Question 5
Firms in Country R keep a fixed capital-output ratio of 3. National output grew by Rs 60 billion last year and is forecast to grow by only Rs 25 billion this year. Using the simple accelerator principle, which statement is correct?
- A Induced net investment rises because this year's output will be higher
- B Induced net investment stays at Rs 180 billion as output is still rising
- C Induced net investment falls from Rs 180 billion to Rs 75 billion
- D Induced net investment turns negative because output growth has slowed
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Answer: C. Accelerator principle: induced net investment = capital-output ratio × change in output.
| Year | Change in output | Induced net investment |
|---|---|---|
| Last year | Rs 60 billion | 3 × 60 = Rs 180 billion |
| This year | Rs 25 billion | 3 × 25 = Rs 75 billion |
Output is still growing, but more slowly, so investment falls sharply. This is why investment is the most volatile component of spending and why a slowdown in growth (not only a fall in output) can trigger a fall in investment.
Question 6
Country R's economy has been in recession for a year. An economist wants an indicator that usually turns upward BEFORE real output starts to recover. Which indicator should she watch?
- A The monthly unemployment rate
- B Quarterly real GDP growth figures
- C The annual CPI inflation rate
- D Monthly new building permits
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Answer: D. Business-cycle indicators are classified by their timing relative to the cycle:
- Leading (turn before the economy): new orders, building permits, stock prices, consumer and business confidence.
- Coincident (move with the economy): real GDP, industrial production, employment.
- Lagging (turn after the economy): unemployment rate, CPI inflation, interest rates on loans.
To spot a turning point from trough to recovery in advance, the economist needs a leading indicator.
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