All Free Economics MCQs with Answers

• A. The charities economy
• B. The demand side of the country
• C. The underground economy
• D. the supply side of the economy

Explanation: Reaganomics was based largely on supply-side economics, aiming to expand production through tax cuts, deregulation and incentives to work…

• A. There is no income effect when tax rates are changed
• B. The income effect of a wage change is greater than the substitution effect of a wage change.
• C. There is no substitution effect when tax rates are changed
• D. The substitution effect of a wage change is greater than the income effect of a wage change

Explanation: A tax reduction raises the after-tax wage and makes working relatively more attractive than leisure, producing a substitution effect that…

• A. An increase in the minimum wage that would cause consumer spending to increase
• B. Investment tax credits for businesses to encourage investment
• C. Restrictions placed on the amount that can be imported
• D. An increased in government spending that would lead to increased aggregate demand

Explanation: Investment tax credits reduce the cost of acquiring capital and encourage firms to invest, which expands productive capacity.

• A. The upturn
• B. The peeking out
• C. The expansion
• D. The recession

Explanation: During a recession, firms face weak sales and try to reduce inventories or stocks to avoid storage and financing costs.

• A. an inflationary gap
• B. hysteresis
• C. A deflationary gap
• D. hyperinflation

Explanation: Withdrawals exceeding injections reduce aggregate expenditure and income below the full-employment level, creating a deflationary gap.

• A. Rs80 million
• B. Rs20 million
• C. Rs 15 million
• D. Rs26.67 million

Explanation: With no government or foreign sector, the spending multiplier is 1/(1−MPC) = 1/0.25 = 4.

• A. automatic stabiliser
• B. multiplier
• C. elasticity coefficient
• D. marginal propensity of the autonomous variable

Explanation: The multiplier measures how much equilibrium output changes in response to a change in an autonomous expenditure variable.

• A. 1/investment multiplier
• B. 1-(1/injections multiplier
• C. MPS + MPT + MPM
• D. the proportion of national income that is withdraw from the circular flow of income

Explanation: The marginal propensity to withdraw is the part of an additional unit of income not returning to consumption, represented by MPS + MPT +…

• A. decrease
• B. remain constant
• C. increase
• D. either increase or decrease depending on the size of the change in investment

Explanation: A higher MPS means a larger share of each additional income round is saved rather than spent again.

• A. previous decisions
• B. absolute income
• C. relative income
• D. permanent income

Explanation: Keynes's absolute-income hypothesis links consumption mainly to current absolute income, with consumption rising as income rises.

• A. exogenous
• B. constant
• C. endogenous
• D. independent

Explanation: An endogenous variable is determined within the model by its equations and relationships.

• A. Reduce the interest rate
• B. Increase the interest rate
• C. Increase inflation
• D. Decrease deflation

Explanation: With a reduced money supply, liquidity becomes scarcer relative to demand, so the equilibrium interest rate tends to rise.

• A. Increase aggregate demand
• B. Increase savings
• C. Decrease consumption
• D. Decrease exports

Explanation: Lower interest rates reduce the cost of borrowing, encouraging consumption and investment.

• A. Past income
• B. Current income
• C. Disposable income
• D. permanent income

Explanation: Friedman's permanent-income hypothesis states that consumption depends mainly on expected long-term or permanent income, not merely on…

• A. Lagging indicators
• B. Flashing indicator
• C. Coincidental indicators
• D. Leading indicators

Explanation: Leading indicators change before the wider economy and therefore help predict its next movement.

• A. Zero
• B. Negative
• C. Where the marginal social benefit = the marginal social cost
• D. Total social costs are minimised

Explanation: Growth is socially optimal when the additional social benefit from more growth equals its additional social cost.

• A. Money supply is more difficult to control in a currency union.
• B. The inflation-unemployment trade-off is more unstable in a currency union
• C. All of these answers describe problems for monetary policy in a currency union
• D. The interest rate may be higher than is appropriate for economic conditions in some countries while it's lower than is appropriate in some others monetary policy must be one size fits all

Explanation: A common monetary policy cannot suit every member of a currency union because countries may face different economic conditions, making the…

• A. None of these answers All of them are asymmetric macroeconomic shocks
• B. A sudden and substantial fall in the worldwide demand for French wine
• C. An epidemic of an animal disease in a country that significantly reduces the country's agricultural output
• D. A sudden and substantial rise in prices on the world oil market

Explanation: A worldwide rise in oil prices affects countries broadly and is therefore a common, or symmetric, shock.

• A. None of these arguments they are all arguments in support of the UK joining the UMU
• B. The characteristics of the UK housing market make UK consumers expenditure very sensitive to changes in interest rates
• C. The UK risks exclusion from the Euroland capital market with damaging consequences with damaging
• D. The UK needs to be a member of the EMU in order to continue to attract such large share of foreign direct investment in EU countries

Explanation: High interest-rate sensitivity in the UK housing market can make a single eurozone interest rate unsuitable for UK conditions, so it is an…

• A. the stability and growth pack
• B. the European solidarity packs
• C. the exchange rate mechanism pact
• D. the responsibility and growth pack

Explanation: The Stability and Growth Pact was adopted by EMU members to constrain excessive deficits and fiscal free riding within the monetary union.