All Free Economics MCQs with Answers

• A. has no intrinsic value
• B. has intrinsic value
• C. is used exclusively in the economies of western Europe and north America
• D. is used as reserves to back fiat money

Explanation: Commodity money is itself a valuable good, such as gold, silver, or cattle, so it has intrinsic or non-monetary value.

• A. hedge against inflation
• B. Medium of exchange
• C. unit of account
• D. Store of value

Explanation: The standard functions of money are medium of exchange, unit of account, and store of value.

• A. higher interest rates
• B. lower expected future profits
• C. more expensive capital goods
• D. All of the above

Explanation: Investment demand falls when borrowing costs rise, expected profits decline, or capital goods become more expensive.

• A. rise; increase, increase
• B. rise, falls, increase
• C. rise, increase, falls
• D. rise, falls, falls

Explanation: Higher interest rates can reduce the market value of interest-sensitive assets and household wealth, while also making borrowing more…

• A. a change in the real money supply
• B. a change in real income
• C. a change in competition in the banking industry
• D. any of the above

Explanation: Money-market equilibrium depends on both real money supply and money demand; real income shifts demand, while banking competition can…

• A. bank deposits, building society deposits
• B. Currency in circulation, banks cash reserves
• C. retail sight deposits building society deposits
• D. retail deposits, wholesale deposits

Explanation: The monetary base, or high-powered money, consists of currency held by the public plus commercial banks' reserves at the central bank.

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

Explanation: Higher real income increases the volume of transactions people undertake, so they generally want to hold more real balances for payments.

• A. bank opening hours, the proportion of weekly paid employee's interest rates
• B. the price level interest rates real income
• C. The time of year bank opening hours the price level
• D. The proportion of weekly paid employees the time of year real income

Explanation: Demand for money depends mainly on the price level, interest rates, and real income.

• A. State Bank of Pakistan Issue Department
• B. Money + bank cards + credit cards
• C. Cheques + money + bank cards + credit cards
• D. Currency in circulation plus bank deposits

Explanation: The money supply includes currency held by the public plus bank deposits, especially demand deposits used for payments.

• A. Control the money supply
• B. Provide notes and coins for trade
• C. Make a profit
• D. Provide a cheque clearing system

Explanation: A commercial bank operates primarily to earn profit, mainly by accepting deposits and lending funds at interest.

• A. flat; steep
• B. flat; flat
• C. steep; flat
• D. steep; steep

Explanation: Monetarists generally assume investment is quite responsive to interest rates, making the IS curve relatively flat, while money demand is…

• A. the economy moves up the LM curve
• B. The LM curves shifts to the left
• C. The economy moves down the LM curve
• D. The LM curve shift to the right

Explanation: An increase in the money supply shifts the LM curve to the right because more money is available at each interest rate.

• A. be reduced
• B. not be affected
• C. fall to zero
• D. be increased

Explanation: When investment is more interest-sensitive, a rise in interest rates causes a larger fall in investment.

• A. Suffer even more
• B. not be reduced as much as it would have been
• C. be replaced by foreign investment
• D. be replaced by consumer spending

Explanation: Higher government spending raises interest rates and can crowd out private investment, but a simultaneous monetary expansion shifts LM…

• A. downward sloping over all levels of output
• B. upward sloping over all levels of output
• C. horizontal until it reaches full capacity and then becomes vertical
• D. vertical until it reaches full capacity and then becomes horizontal

Explanation: In the simple Keynesian model, spare capacity allows firms to increase output at a roughly fixed price, so aggregate supply is horizontal…

• A. decrease the money supply
• B. increase the money supply
• C. increase the demand for money
• D. decrease the demand for money

Explanation: Higher government spending shifts the IS curve right and would raise the interest rate.

• A. is determined in the goods market and influences the level of planned investment and thus the money market
• B. is determined in the money market and influences the level of planned investment and thus the goods market
• C. is determined in the goods market and has no influences on the money market
• D. is determined in the money market and has no influence on the goods market

Explanation: The interest rate is determined by the interaction of money demand and money supply in the money market.

• A. contractionary fiscal policy
• B. expansionary monetary policy
• C. contractionary monetary policy
• D. expansionary fiscal policy

Explanation: Expansionary monetary policy increases the money supply to lower interest rates, encourage spending and investment, and raise aggregate…

• A. aggregate output increases the demand for money increase the interest rate increase planned investment
• B. money supply increases the interest rate decrease planned investment increases aggregate output increases and money demand increase
• C. money supply increases the interest rate increase planned investment increases aggregate output increases and money demand increases
• D. money demand increases the interest rate decreases planned investment increases aggregate output increases and money demand increases

Explanation: An expansionary monetary policy raises the money supply, lowers the interest rate, increases planned investment, and raises aggregate…

• A. the rate at which current consumption can be exchanged for future consumption
• B. the price of borrowing money
• C. The opportunity cost of holding money
• D. the return on money that is saved for the future

Explanation: Holding money means giving up the interest that could have been earned by holding an interest-bearing asset, so the interest rate is the…