All Free Economics MCQs with Answers
Every Economics question in the bank, across all chapters, each with the correct answer and a written explanation. Free and unlimited, with no account needed.
4,037 questions · page 68 of 202
- A. a hyperinflation
- B. a depression
- C. stagflation
- D. a recession
Explanation: On the steep part of the aggregate-supply curve, maintaining a constant interest rate may require the central bank to keep expanding the…
Correct answer: a hyperinflation- A. both monetary and fiscal policy are ineffective
- B. monetary policy is effective but fiscal policy is ineffective
- C. monetary policy is ineffective but fiscal policy is effective
- D. both monetary and fiscal policy are effective
Explanation: A vertical investment-demand curve means investment does not respond to interest-rate changes, so monetary policy has little effect…
Correct answer: monetary policy is ineffective but fiscal policy is effective- A. a reduction in the taxes banks pay on their profits.
- B. an increase in the required reserve ratio
- C. an increase in the discount rate
- D. the Central bank buying government securities in the open market
Explanation: When the central bank buys government securities, it injects reserves into the banking system, expanding the money supply and lowering…
Correct answer: the Central bank buying government securities in the open market- A. the money and labor markets
- B. the goods and labor markets
- C. the goods market
- D. the money markets
Explanation: The money market equates money demand with money supply, and their intersection determines the equilibrium interest rate.
Correct answer: the money markets- A. the goods and labor markets.
- B. the goods market
- C. the money markets
- D. the money and labor market
Explanation: The goods market determines equilibrium output where planned expenditure equals actual output.
Correct answer: the goods market- A. a positive relationship between the interest rate and the quantity of money demanded
- B. a negative relationship between the price level and the quantity of money demanded
- C. a negative relationship between the level of aggregate output and the quantity of money demanded
- D. a negative relationship between the interest rate and the quantity of money demanded
Explanation: The speculative demand for money varies inversely with the interest rate: people prefer holding money when rates are low and bonds when…
Correct answer: a negative relationship between the interest rate and the quantity of money demanded- A. Transactions motive
- B. precautionary motive
- C. profit motive
- D. speculation motive
Explanation: The speculation motive involves choosing between money and bonds based on expected interest-rate movements.
Correct answer: speculation motive- A. A sale of government securities by the central bank
- B. An increase in the level of aggregate output
- C. An increase in the discount rate
- D. A decrease in the price level
Explanation: A lower price level increases real money balances, shifting the money-market balance toward a lower interest rate.
Correct answer: A decrease in the price level- A. How much cash do you wish you could have?
- B. How much wealth would you like?
- C. How much income would you like to earn?
- D. What proportion of your financial assets do you want to hold in non-interest-bearing forms
Explanation: Demand for money means the share of financial wealth people prefer to keep in liquid, non-interest-bearing forms such as currency and…
Correct answer: What proportion of your financial assets do you want to hold in non-interest-bearing forms- A. increase the money supply because it is now cheaper for banks to borrow from the central bank
- B. decrease the money supply because it will now be more expensive for business firms and consumers to borrow money
- C. Not change the money supply because banks already have excess reserves they cannot lend
- D. Decrease the money supply because it is now cheaper for banks to borrow from the central bank instead instead of buying government securities
Explanation: With excess reserves already available and no willingness by firms or consumers to borrow, cheaper central-bank credit does not create…
Correct answer: Not change the money supply because banks already have excess reserves they cannot lend- A. Assisting Banks that are in a difficult financial position
- B. Auditing the various agencies and department of the government
- C. Loaning money to other countries that are friendly to the UK.
- D. Issuing new bonds to finance the PSBR.
Explanation: A central bank can support banks facing financial difficulty, acting as lender of last resort to protect the banking system.
Correct answer: Assisting Banks that are in a difficult financial position- A. savings accounts
- B. Travelers checks
- C. Currency held outside banks
- D. Automatic-transfer savings accounts
Explanation: Savings accounts are generally included in broad money, such as M2, but not narrow money, such as M1.
Correct answer: savings accounts- A. precious metals
- B. commodity money
- C. fiat money
- D. barter items
Explanation: Fiat money has little or no intrinsic value as a commodity, but it is accepted because the government declares it legal tender and users…
Correct answer: fiat money- A. bills of exchanges
- B. government bonds
- C. Treasury bills
- D. Capital bills
Explanation: Government securities with maturities exceeding one year are generally called government bonds.
Correct answer: government bonds- A. The banks will increase their lending
- B. The short-term interest rate at which the economy's commercial banks lend to and borrow from each other will fall and the central bank may be expected to reduce the supply of liquidity to the banks
- C. The short-term interest rate at which the economy's commercial banks lend to and borrow from each other will rise and the long-term interest rate may be expected to rise as a result
- D. the long-term interest rate in the economy will rise and the central bank will raise its interest rate in response
- E. The short-term interest rate at which the economy's commercial banks lend to and borrow from each other will rise and the central bank may be expected to increase the supply of liquidity to the banks.
Explanation: A shortage of liquidity makes banks compete for funds, pushing up the short-term interbank interest rate.
Correct answer: The short-term interest rate at which the economy's commercial banks lend to and borrow from each other will rise and the central bank may be expected to increase the supply of liquidity to the banks.- A. fiat, commodity and deposit money
- B. Open-market operations reserve requirements and the refinancing rate
- C. The money supply, government purchases and taxation
- D. Government expenditures taxation and reserve requirements
- E. Coin, currency and demand deposits
Explanation: The standard monetary-policy instruments are open-market operations, reserve requirements, and the central bank's policy or refinancing…
Correct answer: Open-market operations reserve requirements and the refinancing rate- A. Rs 4,000
- B. Rs 5,000
- C. Rs 1,000
- D. Rs 0
Explanation: With a 20 percent reserve ratio, the simple deposit multiplier is 1/0.20 = 5.
Correct answer: Rs 5,0001358. Which of the following policy actions by a central bank is likely to increase the money supply ?
- A. Increasing the refinancing rate
- B. All of these will increase the money supply
- C. Buying government bonds in open market operations
- D. Increasing reserve requirements
Explanation: Buying government bonds injects reserves into the banking system, enabling banks to create more deposits and loans.
Correct answer: Buying government bonds in open market operations- A. Rs 10,00
- B. Rs 1,000
- C. Rs 9,000
- D. Rs 0
Explanation: Moving an existing Rs1,000 deposit from one bank to another changes the location of the deposit, not the total amount of deposits in the…
Correct answer: Rs 0- A. Money supply will increase because Banca Solida will increase its loans
- B. The effect on money supply cannot be determined from the information given
- C. Money supply will decrease because the loans will have to be repaid
- D. Money supply will be unchanged because the central bank has made no policy changes
Explanation: Reducing the reserve ratio from 25 percent to 12.5 percent permits the bank to lend a larger fraction of its deposits, increasing the…
Correct answer: Money supply will increase because Banca Solida will increase its loans