Free Macroeconomics MCQs with Answers

• A. previous decisions
• B. absolute income
• C. relative income
• D. permanent income

Explanation: Keynes's absolute-income hypothesis links consumption mainly to current absolute income, with consumption rising as income rises.

• A. exogenous
• B. constant
• C. endogenous
• D. independent

Explanation: An endogenous variable is determined within the model by its equations and relationships.

• A. Reduce the interest rate
• B. Increase the interest rate
• C. Increase inflation
• D. Decrease deflation

Explanation: With a reduced money supply, liquidity becomes scarcer relative to demand, so the equilibrium interest rate tends to rise.

• A. Increase aggregate demand
• B. Increase savings
• C. Decrease consumption
• D. Decrease exports

Explanation: Lower interest rates reduce the cost of borrowing, encouraging consumption and investment.

• A. Past income
• B. Current income
• C. Disposable income
• D. permanent income

Explanation: Friedman's permanent-income hypothesis states that consumption depends mainly on expected long-term or permanent income, not merely on…

• A. Lagging indicators
• B. Flashing indicator
• C. Coincidental indicators
• D. Leading indicators

Explanation: Leading indicators change before the wider economy and therefore help predict its next movement.

• A. Zero
• B. Negative
• C. Where the marginal social benefit = the marginal social cost
• D. Total social costs are minimised

Explanation: Growth is socially optimal when the additional social benefit from more growth equals its additional social cost.

• A. Money supply is more difficult to control in a currency union.
• B. The inflation-unemployment trade-off is more unstable in a currency union
• C. All of these answers describe problems for monetary policy in a currency union
• D. The interest rate may be higher than is appropriate for economic conditions in some countries while it's lower than is appropriate in some others monetary policy must be one size fits all

Explanation: A common monetary policy cannot suit every member of a currency union because countries may face different economic conditions, making the…

• A. None of these answers All of them are asymmetric macroeconomic shocks
• B. A sudden and substantial fall in the worldwide demand for French wine
• C. An epidemic of an animal disease in a country that significantly reduces the country's agricultural output
• D. A sudden and substantial rise in prices on the world oil market

Explanation: A worldwide rise in oil prices affects countries broadly and is therefore a common, or symmetric, shock.

• A. None of these arguments they are all arguments in support of the UK joining the UMU
• B. The characteristics of the UK housing market make UK consumers expenditure very sensitive to changes in interest rates
• C. The UK risks exclusion from the Euroland capital market with damaging consequences with damaging
• D. The UK needs to be a member of the EMU in order to continue to attract such large share of foreign direct investment in EU countries

Explanation: High interest-rate sensitivity in the UK housing market can make a single eurozone interest rate unsuitable for UK conditions, so it is an…

• A. the stability and growth pack
• B. the European solidarity packs
• C. the exchange rate mechanism pact
• D. the responsibility and growth pack

Explanation: The Stability and Growth Pact was adopted by EMU members to constrain excessive deficits and fiscal free riding within the monetary union.

• A. The eurozone has a higher degree of labour mobility than the USA and labour law is much less restrictive in the erozone than in the USA On these measures the eurozone is more likely to be an OCA than is the USA
• B. The eurozone has a lower degree of labour mobility than the USA and labour law is much more restrictive in the erozone than in the USA On these measures the eurozone is less likely to be an OCA than is the USA
• C. The eurozone has a higher degree of labour mobility than the USA but labour law is much more restrictive in the erozone than in the USA On these measures it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA
• D. The eurozone has a lower degree of labour mobility than the USA and labour law is much less restrictive in the erozone than in the USA On these measures it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA

Explanation: Compared with the USA, the eurozone has lower labour mobility and more restrictive labour-market rules, making it less able to adjust to…

• A. All of the reasons given in these answers are correct
• B. real wages fall rapidly in a recession and the economy moves quickly back to long run equilibrium so limiting the duration of the recession even when exchange rate adjustment is not possible
• C. workers will move from a country in which aggregate demand falls to other countries of the currency union, and so unemployment remains lower than it otherwise would
• D. real wages fall and so offset the inflationary effect of switching from the old currency to the new common currency

Explanation: With flexible real wages, wages can fall during a recession, helping employment and allowing the economy to return more quickly to…

• A. A high degree of labour mobility between the tow countries
• B. An increase in government spending in country (A)
• C. A depreciation in the foreign exchange value of the common currency
• D. A low degree of capital mobility between the two countries

Explanation: When demand shifts from country A to B, workers can move from A to B, reducing unemployment in A and preventing excessive wage and price…

• A. demand pull inflation tax elasticity
• B. interest rates, financial liberalization
• C. interest rates, tax rates
• D. tax rates, government spending

Explanation: Fiscal policy works through changes in government spending and tax rates.

• A. demand for government spending on public goods goes due to lack of financial backup through tax collection
• B. consumer business and government demand for goods and services in excess of an economy's capacity to produce
• C. a shortage of demand for goods and services in excess of supply during depression
• D. demand for public goods is greater than demand for consumer goods

Explanation: Demand-pull inflation occurs when total consumer, business, and government demand exceeds the economy's capacity to produce goods and…

• A. ratchet inflation
• B. inflationary expectations
• C. import substitution
• D. demand pull inflation

Explanation: Ratchet inflation describes a price level that rises when demand increases but does not fully fall when demand later weakens, so prices…

• A. are central banks
• B. are branches of commercial banks
• C. use fiscal policy to influence GDP
• D. loan money to most of LDC commercial banks

Explanation: The Bank of England and the Federal Reserve are the central banks of the United Kingdom and the United States, respectively.

• A. reserve, unemployment
• B. money supply, interest rate
• C. taxes, exchange rate
• D. stock price, minimum wage

Explanation: The main operating variables of monetary policy are the money supply and interest rates.

• A. reduction, increase
• B. reduction, reduction
• C. increase, reduction
• D. increase , increase

Explanation: Lower interest rates make borrowing cheaper, so the availability and use of consumer credit generally increase while its cost decreases.