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A negative production externality, such as factory pollution, leads to a market outcome where:
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2026 Statistics
Key Facts: IAI CB2 Exam
3h 15m
Exam Duration
IAI CB2 syllabus
45%
Microeconomics Weight
IAI CB2 syllabus
45%
Macroeconomics Weight
IAI CB2 syllabus
20/60/20
Knowledge/Application/Higher
IAI CB2 syllabus
100
Practice Questions
OpenExamPrep set
Core
Subject Group
IAI Core Principles
IAI Subject CB2 Business Economics is a Core Principles paper sat as a written examination of 3 hours 15 minutes. The syllabus weights microeconomics and macroeconomics at roughly 45% each, with about 10% on economic principles and history, and assessment skills split approximately 20% knowledge, 60% application, and 20% higher order. CB2 mirrors the IFoA CB2 syllabus applied to the India context, including the Reserve Bank of India monetary framework. The IAI does not publish a fixed question count or a fixed pass percentage; the pass mark is set each diet. This free set drills the same syllabus through 100 multiple-choice questions.
Sample IAI CB2 Practice Questions
Try these sample questions to test your IAI CB2 exam readiness. Each question includes a detailed explanation. Start the interactive quiz above for the full 100+ question experience with AI tutoring.
1In economics, the opportunity cost of a decision is best defined as:
A.The value of the next-best alternative forgone
B.The sum of all alternatives that were not chosen
C.The accounting cost recorded in financial statements
D.The total money spent on the chosen option
Explanation: Opportunity cost is the benefit lost from the single next-best alternative given up when a choice is made. It captures the real economic sacrifice of a decision, which may differ from the monetary or accounting cost.
2Which statement best distinguishes positive economics from normative economics?
A.Positive economics makes value judgements; normative economics is fact-based
B.Positive economics is about objective, testable statements; normative economics involves value judgements
C.Both are purely subjective and cannot be tested
D.Positive economics applies only to firms; normative economics applies only to governments
Explanation: Positive economics deals with objective statements that can in principle be tested against evidence (what is). Normative economics involves value-based opinions about what ought to be and cannot be settled by data alone.
3Adam Smith's concept of the 'invisible hand' refers to:
A.Cartels coordinating prices to maximise consumer welfare
B.Government intervention guiding markets to efficient outcomes
C.Self-interested individuals in competitive markets unintentionally promoting overall economic benefit
D.Central banks controlling the money supply
Explanation: Smith argued that individuals pursuing their own self-interest in competitive markets are led, as if by an invisible hand, to allocate resources in ways that benefit society as a whole. It is a foundational idea of classical free-market economics.
4A production possibility frontier (PPF) that is bowed outward (concave to the origin) reflects:
A.Decreasing opportunity cost as output expands
B.Zero opportunity cost because resources are unlimited
C.Constant opportunity cost between the two goods
D.Increasing opportunity cost as more of one good is produced
Explanation: A concave PPF shows that as production of one good rises, increasing amounts of the other good must be sacrificed because resources are not perfectly adaptable. This rising trade-off is the law of increasing opportunity cost.
5Keynesian economics is most associated with which policy prescription during a recession?
A.Active fiscal stimulus to raise aggregate demand and employment
B.Strict adherence to the gold standard and money-supply targets
C.Allowing wages and prices to fall freely with no intervention
D.Reducing government spending to balance the budget
Explanation: Keynes argued that in a recession, deficient aggregate demand can leave economies stuck below full employment, and that government should use fiscal stimulus (higher spending or tax cuts) to boost demand. This contrasts with the classical reliance on self-correcting markets.
6The law of demand states that, other things equal, as the price of a normal good rises:
A.Quantity demanded rises
B.Quantity demanded falls
C.Demand shifts to the right
D.Quantity demanded stays constant
Explanation: The law of demand describes an inverse relationship between price and quantity demanded, holding other factors constant. A higher price reduces the quantity buyers are willing and able to purchase, producing a downward-sloping demand curve.
7Which of the following would cause the demand curve for tea to shift to the right?
A.A rise in the price of tea
B.A fall in the price of tea
C.A rise in the price of coffee, a substitute for tea
D.An increase in the cost of producing tea
Explanation: A higher price of a substitute good (coffee) makes tea relatively more attractive, increasing demand for tea at every price and shifting its demand curve right. Changes in the good's own price cause movement along the curve, not a shift.
8If a 10% rise in the price of a good leads to a 25% fall in quantity demanded, the price elasticity of demand is:
A.Unit elastic, with a coefficient of 1.0
B.Perfectly inelastic, with a coefficient of 0
C.Inelastic, with a coefficient of 0.4
D.Elastic, with a coefficient of 2.5
Explanation: Price elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in price: 25% / 10% = 2.5 (ignoring the sign). A coefficient above 1 means demand is price elastic.
9For a good with price-elastic demand, a firm that lowers its price will see total revenue:
A.Rise, because quantity demanded rises proportionately more than price falls
B.Stay unchanged, because elasticity is irrelevant to revenue
C.Fall to zero immediately
D.Fall, because quantity rises less than price falls
Explanation: When demand is elastic (coefficient greater than 1), the percentage increase in quantity exceeds the percentage fall in price, so total revenue (price times quantity) rises after a price cut. This is the key link between elasticity and pricing decisions.
10Two goods have a cross-price elasticity of demand of +1.8. This indicates the goods are:
A.Complements
B.Substitutes
C.Unrelated
D.Inferior goods
Explanation: A positive cross-price elasticity means that a rise in the price of one good increases demand for the other, which is the defining feature of substitutes. The larger the positive value, the closer the substitute relationship.
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