Environment Business & Concepts 2 Class Questions 1. CPA-03291 Which of the following is not likely to cause a rightward shift in the aggregate demand curve? a. b. c. d. An increase in wealth. An increase in the level of real interest rates. An increase in government spending. An increase in the general level of confidence about the economic outlook. Explanation
CPA-03291
Choice "b" is correct. An increase in real interest rates increases the cost of capital, which shifts the aggregate demand curve to the left. Choice "a" is incorrect. An increase in wealth shifts the aggregate demand curve to the right. Choice "c" is incorrect. An increase in government spending shifts the aggregate demand curve to the right. Choice "d" is incorrect. An increase in consumer confidence shifts the aggregate demand curve to the right. 2. CPA-03307 Suppose real GDP is rising while the overall price level is falling. The most plausible explanation for this is: a. b. c. d. A shift left in the aggregate supply curve. A shift right in the aggregate supply curve. A shift left in the aggregate demand curve. A shift right in the aggregate demand curve. Explanation
Price Level SRAS0 SRAS1
CPA-03307
P0 P1
Y0
Y1
Real GDP
Choice "b" is correct. If the aggregate supply curve shifts to the right, real GDP would increase and the price level would fall. Choice "a" is incorrect. This would cause real GDP to fall, not rise. Choice "c" is incorrect. This would cause real GDP to fall, not rise. Choice "d" is incorrect. This would cause the overall price level to rise, not fall.
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Business Environment & Concepts 2 Class Questions 3. CPA-03396 Assume the following data for the U.S. economy in a recent year: Personal consumption expenditures Exports Government purchases of goods/services M1 Imports Gross private domestic investment Open market purchases by Federal Reserve a. b. c. d. $6,953 billion. $6,958 billion. $6,691 billion. $7,215 billion. Explanation $5,015 billion $ 106 billion $1,040 billion $ 262 billion $ 183 billion $ 975 billion $ 5 billion
Based on this information, which of the following was the U.S. GDP for the year in question?
CPA-03396
Choice "a" is correct. GDP = G + I + C + E (Exports - Imports) $1,040 billion + 975 billion + 5,015 billion + 106 billion 183 billion $6,953 billion
4. CPA-03404 What type of unemployment is shown when individuals do not have the qualifications or skills necessary to fill available jobs? a. b. c. d. Frictional. Natural. Cyclical. Structural. Explanation
CPA-03404
Choice "d" is correct. By the definition of structural unemployment. Choice "a" is incorrect. By the definition of frictional unemployment. Choice "b" is incorrect. Structural unemployment is just one part of the natural rate of unemployment. Choice "c" is incorrect. By the definition of cyclical unemployment.
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Business Environment & Concepts 2 Class Questions 5. CPA-03411 Deflation is best defined as: a. b. c. d. When the price of a particular good falls. A continuous rise in the overall price level. A continuous decline in real GDP. A continuous decline in the overall price level. Explanation
CPA-03411
Choice "d" is correct. Deflation is defined as a continuous or sustained decline in the overall price level. Choice "a" is incorrect. Deflation refers to a sustained decline in the overall price level, not the price of a particular good. Choice "b" is incorrect. This is the definition of inflation. Choice "c" is incorrect. Deflation refers to the overall price level, not changes in real GDP. 6. CPA-03395 An increase in the discount rate would cause: a. b. c. d. The money supply to increase and interest rates to fall. The money supply to decrease and interest rates to rise. The money supply to increase and interest rates to rise. The money supply to decrease and interest rates to fall. Explanation
CPA-03395
Choice "b" is correct. An increase in the discount rate discourages borrowing by member banks and thus decreases the money supply. A decrease in the money supply causes interest rates to rise. Choice "a" is incorrect. An increase in the discount rate causes the money supply to decrease, not increase. Choice "c" is incorrect. An increase in the discount rate causes the money supply to decrease, not increase. Choice "d" is incorrect. A decrease in the money supply causes interest rates to rise, not fall. 7. CPA-03412 If the nominal interest rate is 10% and the rate of inflation is 5%, the real interest rate is: a. b. c. d. 15% 2% 50% 5% Explanation
CPA-03412
Choice "d" is correct. The real interest rate is equal to the nominal interest rate minus inflation. Thus, the real interest rate = 10% - 5% = 5%.
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Business Environment & Concepts 2 Class Questions 8. CPA-03471 Which of the following is not true regarding strategic plans? a. b. c. d. Various levels of the organization will implement strategic plans differently. Continual re-evaluation and revision of strategic plans is necessary. The process of strategic planning begins with the creation of the plan. Strategic plans will vary by segment based on the characteristics of the segments. Explanation
CPA-03471
Choice "c" is the correct choice. The process of strategic planning actually begins with defining the firm's vision and mission statements and then moves to setting the goals and objectives of the firm before it considers creation of the strategic plan. Choices "a", "b", and "d" are all correct statements regarding strategic plans, so these would not be proper choices. 9. CPA-03667 Which one of the following changes will cause the demand curve for gasoline to shift to the left? a. b. c. d. The price of gasoline increases. The supply of gasoline decreases. The price of cars increases. The price of cars decreases. Explanation
CPA-03667
Choice "c" is correct. A shift left in any demand curve represents a decrease in demand (at all price levels) for that product. Because gasoline and cars are considered complementary goods, the demand for gasoline is directly impacted by the demand for cars. If the price for cars increases, the demand for cars will decrease, causing the demand for gasoline to decrease, and the gasoline demand curve to shift left. Choice "a" is incorrect. An increase in the price for gasoline will decrease the quantity demanded but will not affect overall demand across all price levels and quantities (as represented by a left shift in the demand curve). Choice "b" is incorrect. A change in the supply curve will not cause a shift in the demand curve. Choice "d" is incorrect. A decrease in the price of cars would have the opposite effect and cause a right shift in the demand curve.
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Business Environment & Concepts 2 Class Questions 10. CPA-03670 The competitive model of supply and demand predicts that a surplus can only arise if there is a: a. b. c. d. Maximum price above the equilibrium price. Minimum price below the equilibrium price. Maximum price below the equilibrium price. Minimum price above the equilibrium price. Explanation
S Higher Price Pe
CPA-03670
D QD Qe QS
Choice "d" is correct. The competitive model, above, predicts a surplus is created when supply exceeds quantity demanded at that price. Hence, a surplus occurs when minimum price is set above equilibrium. Choices "a", "b", and "c" are incorrect, per the graph and explanation above.
11. CPA-03497 Elasticity of demand or supply is: a. b. c. d. A measure of how flexible the firm is with respect to responding to the needs of the consumers. A measure of how flexible the demand or supply of a product is when preferences change. A measure of how sensitive the demand or for supply of a product is to a change in its price. A measure of how well a firm's strategic plan is able to adapt to changes in demand or supply. Explanation
CPA-03497
Choice "c" is correct. Elasticity of demand or supply is a measure of how sensitive the demand for or the supply of a product is to a change in its price. Choices "a", "b", and "d" are incorrect because they are all measures of the success of strategic planning, but they do not define elasticity of demand or supply.
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Business Environment & Concepts 2 Class Questions 12. CPA-03708 As the price for a particular product changes, the quantity of the product demanded changes according to the following schedule: Total Quantity Demanded 100 150 200 225 230 232 a. b. c. d. 0.20 10.00 0.10 5.00 Explanation Price per Unit $50 45 40 35 30 25
The price elasticity of demand for this product when the price decreases from $50 to $45 is:
CPA-03708
Choice "d" is correct. Price elasticity of demand is defined as the percentage change in quantity demanded resulting from a 1 percent change in price. Here:
Q2 Q1 Q1 P2 P1 P1 150 100 100 = 45 50 50 =
ep =
Price Elasticity = of Demand
50% 10%
= 5.00
or 5.00
Where: Q2 - New Quantity Demanded; Q1 = Old Q Demand. P2 - New Price; P1 = Old Price. An ep > 1.0 is relatively elastic demand.
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Business Environment & Concepts 2 Class Questions 13. CPA-03479 Under pure competition, strategic plans focus on: a. b. c. d. Profitability from production levels that maximize profits. Maintaining the market share and being responsive to market conditions related to sales price. Maintaining the market share and planning for enhanced product differentiation. Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume. Explanation
CPA-03479
Choice "b" is correct. Under pure (or perfect) competition, strategic plans include maintaining the market share and responsiveness of the sales price to market conditions. Choices "a", "c", and "d" are incorrect because they are characteristics of other types of market structures. 14. CPA-03493 Under oligopoly, strategic plans focus on: a. b. c. d. Profitability from production levels that maximize profits. Maintaining the market share and being responsive to market conditions related to sales price. Maintaining the market share and planning for enhanced product differentiation. Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume. Explanation
CPA-03493
Choice "d" is correct. Under oligopoly, strategic plans focus on maintaining market share and call for the proper amount of advertising (to ensure product differentiation) and ways to properly adapt to price changes or required changes in production volume. Choices "a", "b", and "c" are incorrect because they are characteristics of other types of market structures.
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Business Environment & Concepts 2 Class Questions 15. CPA-03583 A firm is in heavy competition with a rival firm, and its rivals are consistently able to effectively respond to changes in consumer preferences by making strategic moves in an effort to win over the buyers and gain competitive advantage. Which of the five forces that affect the competitive environment and profitability of a firm does this best demonstrate? a. b. c. d. Barriers to entry. Market competitiveness. Existence of substitute products. Bargaining power of customers. Explanation
CPA-03583
Choice "b" is correct. Market competitiveness is often the most significant of the five forces facing a firm. Firms need to be able to anticipate the strategic moves of rival firms. If a firm is in competition with other firms who are able to respond to changes in various components affecting business, the firm faces a strong competitive force of intensity of competition (market competitiveness). Choice "a" is incorrect. Barriers to entry are "hoops" or other obstacles that a firm must combat when it attempts to enter a new market. Choice "c" is incorrect. A firm faces heavy competition from substitute products when similar products exist in the marketplace, and consumers are easily able to switch from one product to another. Choice "d" is incorrect. Bargaining power of the customers relates to the ability of the customer to directly impact the profitability of the firm by increasing the negotiating power of the customer.
16. CPA-03602 Which of the following statements regarding competitive advantage is not correct? a. The two major forms of competitive advantage are differentiation and cost leadership. b. If the total costs of a firm are less than those of close rivals, then the firm has a competitive market advantage. c. Cost leadership advantage may best be obtained by a firm when a firm builds market share or matches the price of its rivals. d. Differentiation advantage may best be obtained by a firm when a firm builds market share or decreases its price. CPA-03602 Explanation
Choice "d" is correct, as it is not a correct statement. Differentiation advantage may best be obtained by a firm when a firm builds market share or increases (not decreases) its price. Choices "a", "b", and "c" are incorrect, as they are all true statements.
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Business Environment & Concepts 2 Class Questions 17. CPA-03609 When do differentiation strategies fail? a. The firm's product appeals to different people for different reasons. b. The value of the firm's premium does not exceed its cost. c. Customers are able to see (or perceive) a value in the firm's product compared to products of other firms. d. The various rival firms have chosen different features on which to differentiate their products. CPA-03609 Explanation
Choice "b" is correct. If a firm must pay a higher cost for the premium related to the differentiation than it is able to recoup in the market for that feature, then its profits will decrease, the firm will lose competitive advantage, and the differentiation strategy will fail. Choices "a", "c", and "d" are incorrect, as these are all situations in which differentiation strategies work well.
18. CPA-03620 Vertical integration is: a. A formal process in which two or more firms combine to provide for cost reductions they could not otherwise obtain on their own. b. An alliance with another firm that allows for economies of scale and sharing of costs in a less than formal manner. c. A strategy in which the firm attempts to gain competitive advantage by seeking to control the entire value chain (or a portion of it) within the same industry. d. A process in which the firm focuses on predicting the expected demand of consumers and then plans accordingly for it. CPA-03620 Explanation
Choice "c" is correct. Vertical integration is a strategy in which the firm attempts to gain competitive advantage by seeking to control the entire value chain (or a portion of it) within the same industry. Choice "a" is incorrect. A formal process in which two or more firms combine to provide for cost reductions they could not otherwise obtain on their own is called merger or acquisition, not vertical integration. Choice "b" is incorrect. An alliance with another firm that allows for economies of scale and sharing of costs in a less than formal manner is called a cooperative or a strategic alliance, not vertical integration. Choice "d" is incorrect. A process in which the firm focuses on predicting the expected demand of consumers and then plans accordingly for it is called supply chain management, not vertical integration.
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