All Free Economics MCQs with Answers

• A. the discount rates
• B. the level of aggregate output
• C. the interest rates
• D. the inflation rates

Explanation: The opportunity cost of holding non-interest-bearing money is the interest income forgone, so it rises when interest rates rise.

• A. Profit motive
• B. Precautionary motive
• C. Transactions motive
• D. speculation motive

Explanation: The transactions motive is the desire to hold money for ordinary purchases of goods and services.

• A. An increase in the interest rate
• B. An increase in the level of aggregate output
• C. A decrease in the price level
• D. An increase in the supply of money

Explanation: A higher level of aggregate output creates more transactions, so people need larger money balances and demand more money.

• A. change in a certain direction
• B. remain constant
• C. fall
• D. rise

Explanation: When money demand exceeds money supply, people try to obtain money by selling interest-bearing assets.

• A. reduce
• B. have no effect on
• C. increase
• D. double

Explanation: The money multiplier depends on banks converting excess reserves into loans and deposits.

• A. required reserve ratio
• B. profit margin
• C. excess reserves
• D. net worth

Explanation: Required reserves are the amount a bank must retain under the reserve requirement, while any reserves above that amount are excess…

• A. an asset
• B. capital
• C. net worth
• D. a liability

Explanation: A customer’s checking deposit is a claim against the bank, while the bank must repay or transfer it on demand, so it appears as a…

• A. barter money
• B. currency value
• C. legal tender
• D. commodity money

Explanation: Legal tender is money that the government requires creditors to accept for settling debts.

• A. rise by an amount that depends on the bank's reserve ratio
• B. rise by less than the amount of the deposit
• C. fall by exactly the amount of the deposit as long as the bank does not change its reserve ratio
• D. fall by exactly the amount of the deposit as long as the bank does not change its reserve ratio
• E. be unchanged

Explanation: The bond purchase creates bank reserves, and when the seller deposits the proceeds, banks can use excess reserves to create additional…

• A. the money supply increases by more than Rs 1,000
• B. the money supply increase by less than Rs 1,000
• C. the money supply decrease by less than Rs 1,000
• D. the money supply decrease by more than Rs 1,000
• E. The money supply is unaffected

Explanation: Depositing Rs 1,000 changes the form of money from currency held by the public to a bank deposit.

• A. The interest rate at Which commercial banks lend to and borrow from each other
• B. The interest rate the European Central Bank pays on reserves
• C. The interest rates the public pays when borrowing from banks
• D. The interest rates the European Central Bank charges on loans to banks
• E. He interests rate banks pay on the public's deposits

Explanation: The refinancing rate is the central bank’s lending rate on loans to commercial banks, known in different systems by names such as the…

• A. assets
• B. deposits
• C. loans
• D. government bonds

Explanation: Reserve requirements specify the minimum fraction of customer deposits that banks must retain as reserves rather than lend out.

• A. 4
• B. 20
• C. 25
• D. 5

Explanation: With a reserve ratio of 20 percent, the simple money multiplier is the reciprocal of the ratio: 1 ÷ 0.20 = 5.

• A. A debit card is not really money because it is only a means of transferring money between accounts
• B. All the wealth that people hold, in whatever form, should be considered as money
• C. Wealth held in the current account you hold with your bank is almost as convenient for buying things as wealth held in your wallet so the wealth in current accounts should be included in measures of money
• D. In a complex economy it is not easy to draw a clear dividing line between assets that should be considered as money and those that should not

Explanation: Money is a particularly liquid asset used as a medium of exchange, not all wealth held by people.

• A. Paper euros
• B. gold
• C. Silver coins
• D. cigarettes

Explanation: Paper euros are fiat money because their value comes from legal and public acceptance rather than from a valuable material backing such as…

• A. Lawyer services purchased by a home buyer
• B. The purchase of a new Nissan produced in Sunderland
• C. Copper purchased by tap manufacturer Bristan
• D. A new art gallery purchased by the city of Newcastle
• E. Lawn care services purchased by a home owner.

Explanation: Copper bought by Bristan is an intermediate input, so counting its value separately would double-count its contribution when the final tap…

• A. foreign; domestic
• B. current year; base year
• C. domestic; foreign
• D. base year; current year
• E. intermediate; final

Explanation: Real GDP uses base-year prices to isolate changes in output from inflation, while nominal GDP uses current-year prices.

• A. Rs50
• B. Rs100
• C. Rs650
• D. Rs500

Explanation: Because the shoes are final goods sold to consumers, their Rs500 selling value is counted in GDP, while the leather and thread are…

• A. intermediate goods
• B. final goods and services
• C. manufactured goods
• D. inferior goods and services
• E. normal goods and services

Explanation: GDP totals the market value of final goods and services produced within a country's borders during a period.

• A. intermediate production
• B. Net National Product
• C. Investment
• D. depreciation
• E. consumption

Explanation: Depreciation is the measured loss in value of plant and equipment caused by wear, obsolescence, or use during production.