Free Macroeconomics MCQs with Answers

• A. 1/MPS
• B. 1/(1+ MPC)
• C. 1 - MPC
• D. 1/MPC

Explanation: With no government or foreign sector, the simple spending multiplier is 1 divided by the marginal propensity to save, and MPS equals 1…

• A. aggregate output equals consumption minus investment
• B. saving equals consumption
• C. Planned aggregate expenditure equals aggregate output
• D. planned aggregate expenditure equals consumption

Explanation: Macroeconomic equilibrium occurs when planned aggregate expenditure equals actual aggregate output, so firms have no unintended buildup or…

• A. the fiscal stance
• B. the tax multiplier
• C. the marginal tax propensity
• D. the average tax propensity

Explanation: The marginal propensity to tax measures the fraction of an additional unit of income that is paid as tax.

• A. the average amount of income that is saved
• B. the fraction of a change in income that is saved
• C. the ratio of saving to income
• D. the ratio of income to saving

Explanation: MPS measures the part of an additional unit of income that is saved, so it is the change in saving divided by the change in income.

• A. The marginal propensity to consume.
• B. The amount of income when consumption is zero
• C. The average consumption level
• D. The amount of consumption when income is zero

Explanation: In C = a + bY, b measures the increase in consumption caused by an additional unit of income, so it is the marginal propensity to consume.

• A. aggregate investment
• B. aggregate expenditure
• C. aggregate demand
• D. aggregate output

Explanation: Aggregate output is the total value or quantity of goods and services produced in an economy during a period.

• A. Is perfectly interest elastic
• B. Is perfectly interest inelastic
• C. Means that an increase in money supply leads to a fall in the interest rate
• D. Means that an increases in the money supply leads to an increases in the interest rate

Explanation: In a liquidity trap, people are willing to hold any additional money at the prevailing very low interest rate, making money demand…

• A. The marginal propensity to consume is constant
• B. The economy is at full employment
• C. There is a constant relationship between net investment and the rate of change of output
• D. The multiplier is constant

Explanation: The accelerator principle links net investment to changes in output, so a constant relationship between the two is its central assumption.

• A. GDP increase
• B. Inflation is likely to increase
• C. Stock levels are likely to increase
• D. Investment in equipment is likely to increase

Explanation: When sales and output growth slow unexpectedly, firms may find that production exceeds sales, causing inventories or stock levels to…

• A. National income will increase
• B. National income will decrease
• C. National income will stay in equilibrium
• D. Price will fall

Explanation: When injections exceed withdrawals, aggregate expenditure is greater than current output, causing firms to reduce inventories and increase…

• A. Decrease tax receipts
• B. Worsen the balance of trade
• C. Automatically cause an increase in government spending
• D. causes an increase in injections into the economy

Explanation: Higher national income generally produces higher tax receipts because taxable incomes and spending tend to rise.

• A. The charities economy
• B. The demand side of the country
• C. The underground economy
• D. the supply side of the economy

Explanation: Reaganomics was based largely on supply-side economics, aiming to expand production through tax cuts, deregulation and incentives to work…

• A. There is no income effect when tax rates are changed
• B. The income effect of a wage change is greater than the substitution effect of a wage change.
• C. There is no substitution effect when tax rates are changed
• D. The substitution effect of a wage change is greater than the income effect of a wage change

Explanation: A tax reduction raises the after-tax wage and makes working relatively more attractive than leisure, producing a substitution effect that…

• A. An increase in the minimum wage that would cause consumer spending to increase
• B. Investment tax credits for businesses to encourage investment
• C. Restrictions placed on the amount that can be imported
• D. An increased in government spending that would lead to increased aggregate demand

Explanation: Investment tax credits reduce the cost of acquiring capital and encourage firms to invest, which expands productive capacity.

• A. The upturn
• B. The peeking out
• C. The expansion
• D. The recession

Explanation: During a recession, firms face weak sales and try to reduce inventories or stocks to avoid storage and financing costs.

• A. an inflationary gap
• B. hysteresis
• C. A deflationary gap
• D. hyperinflation

Explanation: Withdrawals exceeding injections reduce aggregate expenditure and income below the full-employment level, creating a deflationary gap.

• A. Rs80 million
• B. Rs20 million
• C. Rs 15 million
• D. Rs26.67 million

Explanation: With no government or foreign sector, the spending multiplier is 1/(1−MPC) = 1/0.25 = 4.

• A. automatic stabiliser
• B. multiplier
• C. elasticity coefficient
• D. marginal propensity of the autonomous variable

Explanation: The multiplier measures how much equilibrium output changes in response to a change in an autonomous expenditure variable.

• A. 1/investment multiplier
• B. 1-(1/injections multiplier
• C. MPS + MPT + MPM
• D. the proportion of national income that is withdraw from the circular flow of income

Explanation: The marginal propensity to withdraw is the part of an additional unit of income not returning to consumption, represented by MPS + MPT +…

• A. decrease
• B. remain constant
• C. increase
• D. either increase or decrease depending on the size of the change in investment

Explanation: A higher MPS means a larger share of each additional income round is saved rather than spent again.