All Free Economics MCQs with Answers

• A. The eurozone has a higher degree of labour mobility than the USA and labour law is much less restrictive in the erozone than in the USA On these measures the eurozone is more likely to be an OCA than is the USA
• B. The eurozone has a lower degree of labour mobility than the USA and labour law is much more restrictive in the erozone than in the USA On these measures the eurozone is less likely to be an OCA than is the USA
• C. The eurozone has a higher degree of labour mobility than the USA but labour law is much more restrictive in the erozone than in the USA On these measures it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA
• D. The eurozone has a lower degree of labour mobility than the USA and labour law is much less restrictive in the erozone than in the USA On these measures it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA

Explanation: Compared with the USA, the eurozone has lower labour mobility and more restrictive labour-market rules, making it less able to adjust to…

• A. All of the reasons given in these answers are correct
• B. real wages fall rapidly in a recession and the economy moves quickly back to long run equilibrium so limiting the duration of the recession even when exchange rate adjustment is not possible
• C. workers will move from a country in which aggregate demand falls to other countries of the currency union, and so unemployment remains lower than it otherwise would
• D. real wages fall and so offset the inflationary effect of switching from the old currency to the new common currency

Explanation: With flexible real wages, wages can fall during a recession, helping employment and allowing the economy to return more quickly to…

• A. A high degree of labour mobility between the tow countries
• B. An increase in government spending in country (A)
• C. A depreciation in the foreign exchange value of the common currency
• D. A low degree of capital mobility between the two countries

Explanation: When demand shifts from country A to B, workers can move from A to B, reducing unemployment in A and preventing excessive wage and price…

• A. demand pull inflation tax elasticity
• B. interest rates, financial liberalization
• C. interest rates, tax rates
• D. tax rates, government spending

Explanation: Fiscal policy works through changes in government spending and tax rates.

• A. demand for government spending on public goods goes due to lack of financial backup through tax collection
• B. consumer business and government demand for goods and services in excess of an economy's capacity to produce
• C. a shortage of demand for goods and services in excess of supply during depression
• D. demand for public goods is greater than demand for consumer goods

Explanation: Demand-pull inflation occurs when total consumer, business, and government demand exceeds the economy's capacity to produce goods and…

• A. ratchet inflation
• B. inflationary expectations
• C. import substitution
• D. demand pull inflation

Explanation: Ratchet inflation describes a price level that rises when demand increases but does not fully fall when demand later weakens, so prices…

• A. are central banks
• B. are branches of commercial banks
• C. use fiscal policy to influence GDP
• D. loan money to most of LDC commercial banks

Explanation: The Bank of England and the Federal Reserve are the central banks of the United Kingdom and the United States, respectively.

• A. reserve, unemployment
• B. money supply, interest rate
• C. taxes, exchange rate
• D. stock price, minimum wage

Explanation: The main operating variables of monetary policy are the money supply and interest rates.

• A. reduction, increase
• B. reduction, reduction
• C. increase, reduction
• D. increase , increase

Explanation: Lower interest rates make borrowing cheaper, so the availability and use of consumer credit generally increase while its cost decreases.

• A. demand for money, interest rate
• B. interest rate equilibrium money supply
• C. demand for money equilibrium money supply
• D. interest rate, demand for money

Explanation: When a central bank fixes the interest rate, it must allow the money supply to adjust to whatever level is needed to maintain that rate.

• A. lender of less resort
• B. financial intermediation
• C. Open Market operations
• D. Financial regulation

Explanation: Open-market operations are central-bank purchases or sales of government securities.

• A. narrow, banks, building societies
• B. wide, banks insurance companies
• C. Narrow, banks insurance companies
• D. Wide, banks building societies

Explanation: M4 is a broad or wide measure of money because it includes liquid deposits held with banks and building societies.

• A. fall
• B. increase
• C. not change
• D. None of these

Explanation: A higher interest rate raises the opportunity cost of holding non-interest-bearing money, so people reduce their real money balances…

• A. Unchanged
• B. Larger
• C. Smaller
• D. Unstable

Explanation: The money multiplier rises when banks and the public hold smaller cash reserves, because a larger fraction of deposits is available for…

• A. printing it
• B. issuing debit cards
• C. accepting cheques
• D. lending out part of their deposits

Explanation: Commercial banks create deposit money when they lend part of their deposits, because the loan is credited to a borrower's account and…

• A. money market for the given level of the money supply
• B. money market for different combinations of interest rates and output
• C. goods market for the given level of government spending
• D. goods market for the given interest rate

Explanation: Every point on the LM curve shows money-market equilibrium for a particular combination of income or output and the interest rate, given…

• A. money supply curve
• B. LM curve
• C. money demand curve
• D. IS curve

Explanation: The LM curve represents money-market equilibrium and normally slopes upward: higher output increases money demand, requiring a higher…

• A. goods market for the given interest rate
• B. goods market for the given level of government spending
• C. money market for the given level of the money supply
• D. money market for the given value of aggregate output

Explanation: Each point on the IS curve represents equilibrium in the goods market for a particular interest rate and corresponding level of output.

• A. incomes
• B. overseas investment
• C. imports
• D. interest rates

Explanation: Expansionary government spending can increase demand for loanable funds, pushing the interest rate upward and reducing private investment.

• A. fiscal drag
• B. investment blight
• C. crowding-out
• D. the Thatcher effects

Explanation: Crowding out occurs when government borrowing or spending raises interest rates or absorbs available funds, causing private investment to…