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FMF CGE PRACTICE EXAM 2026-2027 BANK QUESTIONS
WITH DETAILED VERIFIED ANSWERS EXAM QUESTIONS
WILL COME FROM HERE (100% CORRECT ANSWERS A+
GRADED
Question 1
In a standard static CGE model, what assumption is typically made
about household savings behavior?
A) Savings are a fixed proportion of total income
B) Savings are determined by a constant marginal propensity to save
out of disposable income
C) Savings are determined by intertemporal optimization
D) Savings are always zero in equilibrium
Answer: B
Explanation: Most static CGE models, including the IFPRI standard
model, use a linear savings function where household savings are a
constant marginal propensity to save (MPS) out of after-tax income.
This contrasts with dynamic models which use intertemporal
optimization.
Question 2
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What does the Linear Expenditure System (LES) demand function imply
about household consumption?
A) All goods are gross complements
B) Income elasticities are unity for all goods
C) There is a subsistence minimum quantity for each good
D) It uses a Constant Elasticity of Substitution function
Answer: C
Explanation: The LES, derived from the Stone-Geary utility function,
introduces subsistence minima (or committed quantities). Households
first purchase this subsistence bundle, then allocate remaining
supernumerary income in fixed marginal budget shares.
Question 3
In the CES production function, what does the elasticity of substitution
measure?
A) The ease with which output can be substituted for inputs
B) The percentage change in the input quantity ratio in response to a
percentage change in their price ratio
C) The change in total factor productivity
D) The responsiveness of supply to output price changes
Answer: B
Explanation: The Constant Elasticity of Substitution (CES) parameter
quantifies how easily one factor (e.g., capital) can be substituted for
another (e.g., labor) when their relative prices change, holding output
constant.
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Question 4
If the Armington elasticity for a specific commodity is set to zero, what
does this imply?
A) Domestic and imported varieties are perfect substitutes
B) No imported variety of that good is used domestically
C) Domestic users demand imports and domestic goods in fixed
proportions, regardless of relative prices
D) The country is a price taker on world markets
Answer: C
Explanation: The Armington assumption treats imports and domestic
goods as imperfect substitutes. An elasticity of zero renders the
Armington composite a Leontief function, meaning the import-to-
domestic demand ratio is fixed.
Question 5
What is the numéraire in a classical CGE closure rule?
A) The consumer price index
B) The exchange rate
C) The producer price index
D) Government savings
Answer: A
Explanation: In CGE models, only relative prices are determined. A
numéraire is needed to fix the absolute price level. Typically, the
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Consumer Price Index (CPI) or a general price index serves as the
numéraire, with its value fixed, while other prices adjust relative to it.
Question 6
Under the "Johansen closure" for the labor market, what is assumed?
A) Real wages are fixed, and employment adjusts
B) Full employment with flexible real wages
C) Unemployment is fixed, and real wages adjust
D) Labor supply is perfectly elastic at a fixed nominal wage
Answer: A
Explanation: The Johansen closure reflects a Keynesian short-run view:
the real wage is exogenous (fixed or sticky), and the model
endogenously determines the level of employment, which can deviate
from full labor supply.
Question 7
In the standard CGE model, the government budget closure where
government savings is exogenous implies which adjustment
mechanism?
A) Government consumption adjusts endogenously
B) Direct tax rates adjust endogenously
C) The fiscal deficit determines government consumption
D) Government investment changes
Answer: B
FMF CGE PRACTICE EXAM 2026-2027 BANK QUESTIONS
WITH DETAILED VERIFIED ANSWERS EXAM QUESTIONS
WILL COME FROM HERE (100% CORRECT ANSWERS A+
GRADED
Question 1
In a standard static CGE model, what assumption is typically made
about household savings behavior?
A) Savings are a fixed proportion of total income
B) Savings are determined by a constant marginal propensity to save
out of disposable income
C) Savings are determined by intertemporal optimization
D) Savings are always zero in equilibrium
Answer: B
Explanation: Most static CGE models, including the IFPRI standard
model, use a linear savings function where household savings are a
constant marginal propensity to save (MPS) out of after-tax income.
This contrasts with dynamic models which use intertemporal
optimization.
Question 2
,2|Page
What does the Linear Expenditure System (LES) demand function imply
about household consumption?
A) All goods are gross complements
B) Income elasticities are unity for all goods
C) There is a subsistence minimum quantity for each good
D) It uses a Constant Elasticity of Substitution function
Answer: C
Explanation: The LES, derived from the Stone-Geary utility function,
introduces subsistence minima (or committed quantities). Households
first purchase this subsistence bundle, then allocate remaining
supernumerary income in fixed marginal budget shares.
Question 3
In the CES production function, what does the elasticity of substitution
measure?
A) The ease with which output can be substituted for inputs
B) The percentage change in the input quantity ratio in response to a
percentage change in their price ratio
C) The change in total factor productivity
D) The responsiveness of supply to output price changes
Answer: B
Explanation: The Constant Elasticity of Substitution (CES) parameter
quantifies how easily one factor (e.g., capital) can be substituted for
another (e.g., labor) when their relative prices change, holding output
constant.
,3|Page
Question 4
If the Armington elasticity for a specific commodity is set to zero, what
does this imply?
A) Domestic and imported varieties are perfect substitutes
B) No imported variety of that good is used domestically
C) Domestic users demand imports and domestic goods in fixed
proportions, regardless of relative prices
D) The country is a price taker on world markets
Answer: C
Explanation: The Armington assumption treats imports and domestic
goods as imperfect substitutes. An elasticity of zero renders the
Armington composite a Leontief function, meaning the import-to-
domestic demand ratio is fixed.
Question 5
What is the numéraire in a classical CGE closure rule?
A) The consumer price index
B) The exchange rate
C) The producer price index
D) Government savings
Answer: A
Explanation: In CGE models, only relative prices are determined. A
numéraire is needed to fix the absolute price level. Typically, the
, 4|Page
Consumer Price Index (CPI) or a general price index serves as the
numéraire, with its value fixed, while other prices adjust relative to it.
Question 6
Under the "Johansen closure" for the labor market, what is assumed?
A) Real wages are fixed, and employment adjusts
B) Full employment with flexible real wages
C) Unemployment is fixed, and real wages adjust
D) Labor supply is perfectly elastic at a fixed nominal wage
Answer: A
Explanation: The Johansen closure reflects a Keynesian short-run view:
the real wage is exogenous (fixed or sticky), and the model
endogenously determines the level of employment, which can deviate
from full labor supply.
Question 7
In the standard CGE model, the government budget closure where
government savings is exogenous implies which adjustment
mechanism?
A) Government consumption adjusts endogenously
B) Direct tax rates adjust endogenously
C) The fiscal deficit determines government consumption
D) Government investment changes
Answer: B
