All Free Economics MCQs with Answers

• A. free trade area
• B. customs union
• C. common market
• D. monetary union

Explanation: The United States uses a single currency and monetary authority across its states, so it represents a monetary union.

• A. free trade area
• B. customs union
• C. common market
• D. monetary union

Explanation: A free-trade area removes internal trade barriers but allows each member to retain its own tariffs against nonmembers.

• A. customs union
• B. free trade area
• C. reciprocal trade agreement
• D. monetary union

Explanation: The European Monetary Union uses a common currency and a coordinated monetary authority among participating members.

• A. variable levies
• B. export subsidies
• C. trigger prices
• D. countertrade

Explanation: The Common Agricultural Policy used export subsidies to dispose of surplus EU agricultural output in foreign markets.

• A. free trade area
• B. customs union
• C. common market
• D. economic union

Explanation: A common market combines a customs union with the free movement of labor and capital among member countries.

• A. increase American farm exports to the EU
• B. decrease American farm exports to the EU
• C. lowered the price of American farm exports to the EU
• D. not affected the price of American farm exports to the EU

Explanation: EU agricultural protection under the Common Agricultural Policy restricts competing imports and gives domestic EU producers an advantage…

• A. Capital
• B. land
• C. skilled labor
• D. unskilled labor

Explanation: NAFTA increased competition from relatively labor-abundant Mexico, putting downward pressure on US wages for unskilled labor.

• A. highly competitive
• B. highly noncompetitive
• C. small in economic importance
• D. geographically distant

Explanation: Trade creation is more likely when member economies are highly competitive because integration replaces inefficient domestic production…

• A. one country will always have 2 percent more real GDP/person than the other
• B. the standard of living in the country growing at 4 percent will start to accelerate away from the slower growing country due to compound growth
• C. the standard of living in the two countries will converge
• D. Next year the country growing at 4 percent will have twice the GDP/person as the country growing at 2 percent

Explanation: With compound growth, the country growing at 4 percent increases its output per person faster each year, so its standard of living…

• A. that monetary policy affects aggregates demand
• B. that markets do not clear quickly
• C. that fiscal policy affects aggregate demand
• D. of rational expectations.

Explanation: New classical macroeconomics relies heavily on rational expectations, meaning people use available information when forecasting economic…

• A. it is difficult to measure the value of nominal GDP over time
• B. there has been very little fluctuation in the money supply over time.
• C. it is difficult to measure the demand for money over time
• D. whether velocity is constant or not may depend on how the money supply is measure.

Explanation: Velocity is calculated as nominal GDP divided by the money supply, so conclusions about whether it is stable can change with the…

• A. an equal percentage change in nominal DGP.
• B. an equal percentage change in real GDP
• C. a larger percentage change in nominal GDP
• D. a smaller percentage change in nominal

Explanation: The quantity equation is MV = PY, so if velocity and real output are treated as fixed, a given percentage change in money produces the…

• A. assume that this year's inflation rate will be the same as last year's inflation rate
• B. merely guess at the inflation rate.
• C. assume that this year's inflation rate will be equal to the average inflation rate over the past 10 years
• D. Use all available information in forming their expectations.

Explanation: Rational expectations are formed by using all relevant available information, including current policies and economic conditions.

• A. Rational-expectations hypothesis
• B. Passive-expectations hypothesis
• C. adaptive expectations hypothesis
• D. lagged-expectations hypothesis.

Explanation: The rational-expectations hypothesis says people use an economic model and all available information to forecast the future.

• A. fine tuning
• B. monestarism
• C. microeconomics foundations of macroeconomics
• D. the classical model

Explanation: Fine-tuning means using government fiscal and monetary policies to adjust aggregate demand and stabilise the macroeconomy.

• A. the behaviour of trade unions.
• B. the quantity of money
• C. price and wages
• D. the level of aggregate demand for goods and services

Explanation: Keynes argued that firms employ workers according to expected sales, so employment is governed by effective aggregate demand for goods and…

• A. the level of aggregate demand for goods and services.
• B. prices and wages
• C. interest rates
• D. the quantity of money

Explanation: In the classical model, flexible prices and wages clear the labour market, so employment is determined primarily by price and wage…

• A. new-Keynesian.
• B. post-Keynesian.
• C. classical economists.
• D. Keynesian.

Explanation: Classical economists viewed unemployment largely as a labour-market disequilibrium that could be reduced when wages became flexible.

• A. monetarists.
• B. keynesians
• C. post-keynesians
• D. new classical school

Explanation: Post-Keynesians emphasise uncertainty, confidence, institutions and the role of effective demand in determining output and employment.

• A. Keynesians
• B. post-keynesians
• C. monetarists
• D. new classical school

Explanation: New classical economists assume rapidly clearing markets and rational expectations, so anticipated monetary expansion changes prices…