All Free Economics MCQs with Answers

• A. frictional unemployment
• B. demand-deficient unemployment
• C. classical unemployment
• D. structural unemployment

Explanation: Contraction of an industry permanently reduces demand for some types of labour, leaving affected workers’ skills mismatched with available…

• A. Inflationary expectations
• B. unemployment
• C. the inflation rates
• D. wage rates

Explanation: Changes in expected inflation shift the short-run Phillips curve because workers and firms revise wage and price decisions.

• A. the inflation rate, interest rates
• B. the inflation rate, the unemployment rate
• C. interest rates, output
• D. output, employment

Explanation: The Phillips curve describes an inverse short-run relationship between inflation and unemployment: lower unemployment is generally…

• A. prices, wages, output and employment
• B. output prices, employment
• C. nominal money, the price level, output and employment
• D. nominal money output prices

Explanation: Under the quantity theory, a proportional increase in nominal money produces a proportional increase in the price level, while real output…

• A. exceeds
• B. fall below
• C. fluctuate around
• D. remain equal to

Explanation: In the classical model, output is fixed at potential by flexible prices and fully adjusting factor markets.

• A. the goods market
• B. the money markets
• C. the labor markets
• D. all of these

Explanation: The AD-AS intersection identifies the economy-wide equilibrium, combining equilibrium conditions in output demand, money-market…

• A. monetary growth
• B. better technology
• C. more capital
• D. higher labor supply

Explanation: Classical potential output depends on real productive capacity, such as technology, capital, and labor supply.

• A. higher, lower
• B. higher, higher
• C. lower, lower
• D. zero, zero

Explanation: The AD curve slopes downward in inflation-output space: higher inflation raises interest rates or reduces real money balances, weakening…

• A. a nominal money stock target
• B. a balanced budget
• C. an inflation target
• D. The pursuit of a target real interest rate

Explanation: A balanced budget is a fiscal-policy rule because it concerns government revenue and expenditure.

• A. the contention that workers in one industry may be unwilling to accept a wage cut unless they know that workers in other industries are receiving similar cuts
• B. employment contracts that stipulate workers' wages usually for a period of one to three years
• C. unspoken agreements between workers and firms that firms will not cut wages
• D. the incentive that firms may have to hold wages above the market clearing rate

Explanation: The relative-wage argument says workers resist a cut if they believe comparable workers elsewhere have not also suffered cuts, because the…

• A. Shifts in aggregate supply
• B. changes in export demand due to the state of the world economy
• C. business confidence
• D. business expectations

Explanation: Real business cycle theory attributes fluctuations mainly to real supply-side shocks, such as changes in technology or productivity.

• A. a high rate of inflation: along with a low rate of unemployment
• B. simultaneously low rates of inflation and unemployment
• C. simultaneously high rates of inflation and unemployment
• D. a high rate of unemployment along with a low rate of inflation

Explanation: The 1970s brought stagflation, the unusual combination of high inflation and high unemployment.

• A. Vertical or nearly vertical
• B. upward sloping
• C. downward sloping
• D. horizontal or nearly horizontal

Explanation: If input prices adjust rapidly to output prices, firms’ real costs and output do not change much when prices change, making aggregate…

• A. negative relationship between the inflation rate and labor demand
• B. positive relationship between labor supply and the inflation rate
• C. positive relationship between the inflation rate and the employment the
• D. negative relationship between the inflation rate and the unemployment rate

Explanation: The Phillips curve traditionally shows an inverse relationship between inflation and unemployment: higher inflation is associated with…

• A. that can be produced if structural unemployment is zero
• B. that can be produced at a zero-unemployment rate
• C. that can be sustained in the long run without inflation
• D. that can be sustained in the long run, if the inflation rate is zero

Explanation: Potential GDP is the economy’s sustainable output when resources are normally utilised and inflation is stable rather than accelerating.

• A. have chosen not to work at the market wage
• B. have given up looking for a job but would accept a job at the current wage if one were offered to them.
• C. are too productive to be hired at the current wage
• D. are unable to find a job at the current wage rate

Explanation: Classical economists assume flexible wages clear the labour market, so anyone not working at the market wage has chosen not to work at…

• A. a vertical (or almost vertical)
• B. a downward sloping
• C. a horizontal (or almost horizontal)
• D. an upward sloping

Explanation: The classical model assumes wages and prices adjust so the economy operates at potential output, making aggregate supply vertical or…

• A. minimum wage agreements
• B. trade
• C. scale economies
• D. insider-outsider distinctions
• E. efficiency wages
• F. all of the above

Explanation: Minimum wages, efficiency wages, insider-outsider effects, trade-related structural change and scale-related labour demand can all keep…

• A. price level, aggregate economy
• B. tax rate, government budget
• C. wage rate, labor market
• D. interest rate, market for loanable funds

Explanation: In the classical labor market, a wage above the equilibrium level creates excess labor supply, so more people want jobs than firms want to…

• A. shoe leather costs
• B. menu costs
• C. income redistribution
• D. uncertainly
• E. all of the above

Explanation: Inflation can impose shoe-leather costs, menu costs, arbitrary income redistribution, and uncertainty about future prices and returns.