All Free Economics MCQs with Answers

• A. investment + tax + exports
• B. savings + government expenditure + exports
• C. investment + government expenditure + imports
• D. investment + government expenditure + exports

Explanation: Injections add spending to the circular flow and consist of investment, government expenditure and exports, written as I + G + X.

• A. the slump to the expansion
• B. peak to peak
• C. peak to trough
• D. trough to peak

Explanation: A complete business cycle runs from one peak through a contraction and trough to the next peak.

• A. wholesale price index (WPI)
• B. Consumer price index (CPI)
• C. GDP deflator
• D. Producer price index (PPI)

Explanation: The GDP deflator measures the price level of all domestically produced final goods and services relative to a base year.

• A. economic theory to explain the simultaneous increases in inflation and unemployment during the 1970s
• B. The classical model to explain the prolonged existence of high unemployment during the Great Depression
• C. fine tuning during the 1960s
• D. the economy to grow at a rapid rate during the 1950s

Explanation: Keynesian macroeconomics gained prominence because classical theory could not explain the prolonged mass unemployment of the Great…

• A. imperfectly competitive markets:
• B. Only the long run adjustments to equilibrium in the economy
• C. The functioning of individual industries and the behavior of individual decision-making units business firms and households
• D. the economy as a whole

Explanation: Macroeconomics examines aggregate variables and the performance of the economy as a whole, such as total output, employment and inflation.

• A. reduce inflation with little or no increase in unemployment
• B. Increase inflation but would decrease unemployment by an unusually large amount
• C. increase inflation with little or no decrease in unemployment
• D. reduce inflation but it would increase unemployment by an unusually large amount

Explanation: With rational expectations, a credible contraction is incorporated into wage and price decisions quickly, lowering expected and actual…

• A. Shifts the short-run Phillips curve downward and make the unemployment inflation trade-off less favorable
• B. Shifts the short run Phillips curve upward and makes the unemployment inflation trade-off more favorable
• C. Shifts the short run Phillips curve upward and makes the Unemployment inflation trade off more favorable
• D. Shifts the short run Phillips curve downward and makes the unemployment inflation trade off more favorable

Explanation: Cheaper foreign oil lowers firms’ production costs, reducing inflation at each unemployment rate and shifting the short-run Phillips curve…

• A. An increase in the minimum wage
• B. An increase in the expected inflation
• C. An increase in the price of foreign oil
• D. An increase in the aggregate demand

Explanation: A higher minimum wage can raise structural unemployment, increasing the natural rate and shifting the vertical long-run Phillips curve to…

• A. The economy will experience an increase in inflation
• B. The economy will experience a decrease in inflation
• C. Inflation will be unaffected if price expectations are unchanging
• D. None of these answers

Explanation: In the short run, expansionary policy raises aggregate demand, increasing output and inflation while reducing unemployment.

• A. a higher rate of inflation is associated with a lower unemployment rate
• B. a higher rate of growth in output is associated with a lower unemployment rate
• C. a higher rate of inflation is associated with a higher unemployment rate
• D. a higher rate of growth in output is associated with a higher unemployment rate.

Explanation: Along a short-run Phillips curve, stronger demand tends to raise inflation and employment, so the unemployment rate falls.

• A. the trade-off between inflation and unemployment
• B. The trade-off between output and unemployment
• C. The positive relationship between output and unemployment
• D. The positive relationship between inflation and unemployment

Explanation: The original Phillips curve showed an inverse short-run relationship between wage or price inflation and unemployment.

• A. an increase in the level of output
• B. a decrease in the unemployment rate
• C. an increase in the rate of inflation
• D. All of these answers

Explanation: Repeated expansionary monetary policy cannot permanently keep unemployment below its natural rate because expectations adjust upward.

• A. a reduction in output of 20 percent
• B. a reduction in output of 5percent
• C. a reduction in output of 15 percent
• D. a reduction in output of 35 percent

Explanation: The inflation reduction is 7 minus 3, or 4 percentage points. With a sacrifice ratio of 5, the required output loss is 5 × 4 = 20 percent.

• A. in the long run the unemployment rate returns to the natural rate, regardless of inflation
• B. Unemployment is always below the natural rate
• C. Unemployment is always above the natural rate
• D. Unemployment is always equal to the natural rate

Explanation: The natural-rate hypothesis states that monetary or inflation changes may affect unemployment temporarily, but in the long run…

• A. Unemployment is equal to the natural rate of unemployment
• B. People will reduce their expectations of inflation in the future
• C. Unemployment is greater than the natural rate of unemployment
• D. Unemployment is less than the natural rate of unemployment

Explanation: If actual inflation exceeds expected inflation, real wages are lower than anticipated, encouraging firms to hire more and reducing…

• A. shifts the short run Phillips curve downward and the unemployment inflation trade-off is less favorable.
• B. shifts the short-run Phillips curve upward and the unemployment inflation trade-off is more favorable
• C. Shift the short-run Phillips curve downward and the unemployment inflation trade-off is more favorable
• D. Shifts the Short run Phillips curve upward and the unemployment inflation trade-off is less favorable

Explanation: Higher expected inflation shifts the short-run Phillips curve upward because a given unemployment rate is associated with higher actual…

• A. is vertical
• B. is negatively sloped
• C. has a slope that is determined by how fast people adjust their price expectations
• D. is positively sloped

Explanation: Once people fully adjust their expectations, inflation no longer keeps unemployment away from its natural rate.

• A. decreases unemployment
• B. decrease growth
• C. increases unemployment
• D. decreases inflation

Explanation: In the short run, stronger aggregate demand raises both the price level and real output.

• A. The sum of the growth rate of output and the inflation rate
• B. The sum of the natural rate of unemployment and the actual rate of unemployment
• C. The sum of the inflation rate and the central bank's refinancing rate
• D. The sum of the unemployment rate and the inflation rate

Explanation: The misery index is a simple indicator formed by adding the unemployment rate to the inflation rate.

• A. capitalism exploits the worker and socialism exploits the property owner
• B. capitalism relies on the market to make economic decisions and socialism uses central planning
• C. capitalism grows through rent seeking and socialism grows through government direction
• D. capitalism relies on consumer satisfaction to dictate choices and socialism relies on producer satisfaction

Explanation: Capitalism mainly coordinates production through market prices and private decisions, whereas socialism relies on central planning to…