All Free Economics MCQs with Answers

• A. is not sufficiently stimulating or contracting the economy at any time
• B. is effective
• C. is stimulating or contracting the economy at the wrong times
• D. is desirable

Explanation: The switchback analogy refers to policy effects arriving after economic conditions have changed because of time lags.

• A. the same as it is for fiscal policy
• B. much shorter than it is for fiscal policy
• C. mush longer than it is for fiscal policy
• D. unrelated to central bank action

Explanation: Monetary policy can generally be changed by a central bank decision, whereas fiscal policy often requires lengthy legislative and…

• A. GDP decrease rapidly
• B. GDP remains unchanged
• C. GDP decrease slightly
• D. GDP increase

Explanation: In the usual countercyclical relationship, a growing GDP raises tax receipts and lowers transfer payments, causing the budget deficit to…

• A. increase; increase
• B. decrease; increase
• C. increase; decrease
• D. decrease; decrease

Explanation: During expansion, unemployment-related benefits and similar government expenditures fall, while tax revenue rises as incomes and profits…

• A. taxes paid by firms and households to the government minus the cost of collecting the taxes
• B. Taxes paid firms and households to the government minus the transfer payments made to firms and household
• C. Taxes paid by firms and households to the government plus transfer payments made to firm and households
• D. government expenditures minus government revenues

Explanation: Net taxes equal taxes collected from households and firms minus transfer payments made to them.

• A. increase the minimum reserve asset ratio.
• B. buy government securities on the open market
• C. raise interest rates
• D. sell government securities on the open market

Explanation: Buying government securities injects reserves into commercial banks, increasing their capacity to lend and lowering interest-rate…

• A. credit rationing
• B. government borrowing drives up interest rates
• C. Bank of England controls on commercial bank lending
• D. what the government borrows cannot be used for private investment

Explanation: Financial crowding out occurs when government borrowing increases the demand for loanable funds, pushing up interest rates and reducing…

• A. Margaret Thatcher
• B. Ronald Reagan
• C. Milton Friedman
• D. John Maynard Keynes

Explanation: Milton Friedman’s monetarist approach gives the money supply a central role in stabilising aggregate demand and the price level.

• A. Money multiplier
• B. liquidity ratio
• C. bank's line of credit
• D. required reserve ratio

Explanation: The money multiplier is the multiple by which deposits or the money supply can expand from an initial increase in bank reserves.

• A. the time that it takes for policy makers to recognize the existence of boom of bust
• B. the time needed for parliament to agree to a tax cut.
• C. the time that is necessary to put the desired policy into effect
• D. the time that it takes for the economy to adjust to the new conditions after a new policy has been implemented

Explanation: The response lag is the time between implementing a stabilisation policy and the economy’s reaction to it.

• A. delays in the response of the economy is stabilization policy
• B. the foreign response to price changes
• C. the change in exports and imports prices
• D. the change in exchange rates

Explanation: Stabilisation policies often work with a delay because households, firms, interest rates, and output do not adjust immediately.

• A. exchange rates to be insensitive to the differential rates of inflation between countries
• B. the currencies of relatively high-inflation countries to depreciate
• C. the currencies of relatively high inflation countries to appreciate
• D. the currencies of relatively low inflation countries to depreciate

Explanation: With floating exchange rates, a country experiencing relatively higher inflation tends to lose international competitiveness, reducing…

• A. a weakening of a currency
• B. A depreciation of a currency
• C. An appreciation of a currency
• D. a debasement of a currency

Explanation: An appreciation is an increase in the value of a currency relative to another currency under a floating-rate system.

• A. has no predictable effect on the price of the pound sterling?
• B. does not affect the price of the pound sterling
• C. tends to appreciate the pound sterling
• D. tends to depreciate the pound sterling

Explanation: Under a floating exchange-rate model, fiscal expansion can raise interest rates and attract foreign capital, increasing demand for…

• A. floating exchange rates
• B. pegged exchange rates
• C. managed exchange rates
• D. fixed exchange rates

Explanation: A floating exchange rate is determined primarily by market forces of supply and demand, without a fixed official value.

• A. of essentially fixed exchange rates under which each country agreed to intervene in the foreign exchange market when necessary to maintain the agreed upon value of its currency
• B. in which the value of currencies was fixed in terms of a specific number of ounces of gold, which in turn determined their values in international trading
• C. of floating exchange rates determined of the supply and demand of one nation's currency relative to the currency of other nations
• D. That prohibited governments from intervening in the foreign exchange markets

Explanation: Bretton Woods created an essentially fixed but adjustable exchange-rate system in which countries intervened to maintain agreed currency…

• A. exchange rate
• B. balance of trade
• C. terms of trade
• D. currency valuation

Explanation: The exchange rate is the price of one currency expressed in units of another currency.

• A. forward contracts occur in a specific locations-for example, the Chicago Mercantile Exchange
• B. futures contracts have negotiable delivery dates
• C. forward contracts can be tailored in amount and delivery date to the need of importers of exporters
• D. futures contracts involve no brokerage fees or other transactions costs

Explanation: Forward contracts are privately negotiated and can be customised for the amount and delivery date required by an importer or exporter.

• A. destabilizing
• B. stabilizing
• C. inflationary
• D. deflationary

Explanation: Speculation is stabilizing when traders bet against a currency movement, selling when its price is rising excessively and buying when it…

• A. $0.0909
• B. $0.1002
• C. $0.2826
• D. $1.1024

Explanation: If $1 equals 11 pesos, the dollar value of 1 peso is the reciprocal: $1 ÷ 11 = $0.0909.