INTRODUCTION TO MACROECONOMICS AND THE DIFFERENT SCHOOLS
OF THOUGHT
1 A study of how
increases in the minimum wage rate will affect the national unemployment rate
is an example of
A. descriptive economics.
B. normative economics. C.
macroeconomics. D. microeconomics.
2 Aggregate supply is
the total amount
A. of goods and services produced in an economy. B. produced by the government.
C. of products produced by a given industry. D. of labour supplied by all households.
3 The total demand
for goods and services in an economy is known as
A. aggregate demand.
B. national demand. C. gross
national product. D. economy-wide
demand.
4 Deflation is
A. an increase in the overall level of economic
activity. B. an increase in the
overall pricelevel.
C. a decrease in the overall level of economic
activity. D. a decrease in the
overall price level.
5 A recession is
A. a period of declining prices. B. a period during which aggregate
output declines.
C. a period of declining unemployment. D. a period of falling trade
volumes.
6 Involuntary
unemployment means that
A. people are not willing to workat the going wage rate.
B. at the going wage rate, there are people who want to work
but cannot find work .
C. there are some people who will not work at the going wage
rate.
D. there is excess demand in the labour market.
7 A cut in the income
tax rate designed to encourage household consumption is an example of
A. expansionary demand-side policy. B. contractionary demand-side policy.
C. expansionary supply-side policy. D. contractionary supply-side policy.
8 A cut in the tax
rate designed to reduce the cost of capital and hence encourage business
investment is an example of
A. expansionary demand-side policy. B. contractionary demand-side policy.
C. expansionary supply-side policy. D. contractionary supply-side policy.
9 Macroeconomics is
the branch of economics that deals with
A. the economy as a whole. B. imperfectly competitive
markets.
C. only the long run adjustments to equilibrium in the
economy.
D. the functioning of individual industries and the
behaviour of individual decision-making units- business firms and households.
10 A group of modern economists who believe that price and
wage rigidities do not provide the only rationale for macroeconomic policy
activism are called:
A. New-Keynesians.
B. Keynesians. C.
Monetarists. D. The Classical school.
11 Macroeconomic theory that emphasised the theories of
Keynes and de-emphasised the Classical theory developed as theresult of the
failure of
A. economic theory to explain the simultaneous increases in
inflation and unemployment during the 1970s. B. fine tuning during the 1960s. C. the economy to grow at a rapid rate
during the 1950s.
D. the Classical model to explain the prolonged existence of
high unemployment during the Great Depression .
12 Keynes believed
falling wages were not a solution to persistent unemployment because
A. falling wages demoralised workers.
B. this would reduce the purchasing power of labourers as
consumers. This in turn wouldbleaken firms’ prospects of selling more goods,
hence inducing them to cut their investment (and hence labour) demand.
C. the unemployment was causedby frictional and structural
factors.
D. wages would fall more than required to clear the labour
market.
13 The practice of
using fiscal and monetary policy to stabilise the economy is known as
A. fine tuning of demand
B. monetarism C. laissez faire
economics D. supply side economics
14 According to
Classical models, the level of employment is determined primarily by
A. interest rates.
B. the level of prices.
C. the level of aggregate supply in the economy
D. the level of aggregate demandfor goods and services.
15 According to
Keynes, the level of employment is determined by
A. interest rates.
B. the level of prices. C. the
level of aggregate supply in the economy
D. the level of aggregate demandfor goods and services.
16 According to the
Classical model, unemployment
A. could not persist because wages would fall to eliminate
the excess supply of labour.
B. could persist for long periods of time because wages are
not flexible.
C. could be eliminated only through government
intervention. D. could never exist.
17 To get the economy
out of a slump, Keynes believed that the government should
A. increase both taxes and government spending. B. increase taxes and/or decrease
government spending. C. cut
both taxes and government spending.
D. decrease taxes and/or increase government spending .
18 Aggregate demand
refers to the total demand for all domestically produced goods and services in
an economy generated from
A. the household and government sectors. B. the household sector.
C. all sectors except the rest of the world. D. all sectors including the rest ofthe
world.
19 Government
policies that focus on increasing production rather than demand are called:
A. fiscal policies.
B. monetary policies. C.
incomes policies. D. supply-side
policies.
20 Prices that do not
always adjust rapidly to maintain equality between quantity supplied and
quantity demandedare
A. market prices.
B. sticky prices. C. fixed
prices. D. regulatory prices.
21 The economists who
emphasised wage-flexibility as a solution for unemployment were
A. Monetarists. B.
New-Keynesians. C. Classical
economists. D. Keynesians.
22 According to the
Classical economists, the economy
A. requires fine tuning to reach full employment. B. should not be left to market forces.
C. will never be at full employment. D. is self correcting.
23 Monetarism became
popular because it was able to, unlike Classical or Keynesian economics,
explain
A. stagflation in the late 1970s. B. demand-pull inflation in the 1960s.
C. low growth rates in the 1950s.
D. the prolonged existence of high unemployment during the
Great Depression.
24 Keynes’
explanation for low firm investment during the GreatDepression was
A. low savings, which placed a constraint on investment
B. high real borrowing rates, which discouraged firm
borrowing
C. high savings, which left consumers with less money to
spend on goods and serviced produced by firms D. A permanent change in Europe ’s corporate ownership structures.
25 Rapid increases in
the price level during periods of recession or high unemployment are known as
A. slump. B.
stagnation . C. stagflation. D. inflation.
26 The hypothesis
that people know the 'true model' of the economy and that they use this model
and all available information to form their expectations of the future is the
A. rational-expectations hypothesis. B. active-expectations hypothesis. C. static-expectations hypothesis. D. adaptive-expectations hypothesis.
27 Neo-Classical
theories were an attempt to explain
A. how unemployment could have persisted for so long
duringthe Great Depression.
B. the stagflation of the 1970s.
C. why policy changes that are perceived as permanent have
more of an impact on a person's behaviour than policy changes that are viewed
as temporary.
D. the increase in the growth rate of real output in the
1950s.
28 A group of modern
economists who believe that markets clear very rapidly and that expanding the
money supply will always increase prices rather than employment are the
A. New-Keynesians.
B. Keynesians. C.
Monetarists. D. The Classical
school.
29 Say’s law states
that:
A. Supply creates its own demand. B. Demand creates its own supply.
C. There is no such things as a free lunch
D. Macroeconomic policy activism is essential to ensure
full-employment.
30 The AS curve and AD curve in a realistic Keynesian world
are:
D. AS: horizontal; AD: vertical
MACROECONOMIC DATA
AND VARIABLES, NATIONAL INCOME ACCOUNTING AND EQUILIBRIUM IN A KEYNESIAN
ECONOMY
Questions 1-3 are based on the following information
about an economy:
Consumer price index (2002) = 132
Consumer price index (2001) = 110
Nominal GDP (2002) = $60bn
Nominal GDP (2001) = $50bn
Population (2002) = 7mn
Population (2001) = 6mn
Net factor income from abroad (2002) = +$3bn
Net factor income from abroad (2001) = -$2bn
1. By how much has real GDP grown from 2001 to 2002?
A. -10% B.
12.5% C. 20% D. 0%
2. By how much has per capita nominal GNP changed from
2001to 2002?
A. -10% B.
12.5 C. 20% D. 0%
3. Based on the above information, we can say that:
A. Poverty has fallen in the country B. Per capita real GDP is falling
C. Income inequality has worsened D. Real growth in the informal
sector is 0%
4. In the circular flow of income, Keynesian equilibrium
obtains when
A. All the individual sectors are in equilibrium: S=I, T=G,
M=X
B. The aggregate injections equal aggregate withdrawals
S+T+M = I+G+X
C. There is no inflation or unemployment
D. The interest rate and exchange rate are at their market
clearing levels
5. Under conditions of Keynesian equilibrium:
A. aggregate demand equals aggregate supply B. aggregate demand equals national income
C. both A and B
D. none of the above
6. Which of the following is a determinant of consumption
A.
expectations about future prices B. level of indebtedness of consumers
C. the
price level
D. all of the above
7. Which is the most volatile component of aggregate demand
A. Net exports B.
consumption C. investment D. government spending
8. Which of the following is not an obvious or direct
determinant of a country’s imports
A. real exchange rate
B. income C. tariff rates D. interest rate
9. When consumption is 650, income is 750; when consumption
is 620, income is 700. Assuming there is no government, I=100, net exports are
10, what is the level of equilibrium income?
A. 500 B. 625 C. 775 D. 850
10. Which of the following is not true?
A. Starting from no growth, a positive output growth rate
would be associated with even higher rates of investment (the accelerator
effect)
B. Higher investment causes a multiplied increase in income
C. Such increases in income would continue to induce
higherinvestment, which in turn wouldcontinue to cause multiplied increases in
output.
D. All of the above.
11. In the equation C = a + bY, which describes the
aggregate consumption function, 'a' standsfor
A . the amount of consumption when income is zero. B. the marginal propensity to consume.
C. the amount of consumption when income is Maximum. D. the average consumption level.
12. Total consumption divided by total income gives us:
A. the average propensity to consume . B. the marginal propensity to
save.
C. the marginal propensity of expenditure. D. the marginal propensity to
consume.
13 Disposable income is the part of households' income left
after the deduction of
A. pension contributions. B. income tax and social security
payments. C. income tax. D. savings.
14. As the MPS increases, the multiplier will
A. increase. B.
either increase or decrease depending on the size of the change in investment.
C. remain constant.
D. decrease.
15. In
macroeconomics, equilibrium is defined as that point at which
A. planned aggregate expenditure equals aggregate output . B. planned aggregate expenditure equals
consumption. C. aggregate output equals
consumption minus investment. D. saving
equals consumption.
16. The ratio of the
change in the equilibrium level of output to a change in some autonomous
component of aggregate demand is the
A. elasticity coefficient. B. multiplier .
C. marginal propensity of the autonomous variable. D. automatic stabiliser.
17. Assuming there
are no taxes (and no foreign sector), if the MPC is .8, the multiplier is
A. 2.5. B. 8. C. 5 D. 2.
18. Assuming the net
income tax rate is 25% (and there is no foreign sector), if the MPC is 0.8, the
multiplier is
A. 2.5. B. 8. C. 5. D. 2.
19. Assuming there is
no foreign sector, if the multiplier is 3, and the net income tax rate is 20%,
the MPC is
A. ¾ B. 4/5 C. 5/6 D. 6/7
20. Assume there is
no government or foreign sector. If the MPC is .75, a Rs.20 billion decrease in
planned investment will cause aggregate output to decrease by
A. Rs. 80 billion. B.
Rs. 20 billion. C. Rs. 26.67 billion. D. Rs. 15 billion.
21. According to the
'paradox of thrift,' increased efforts to save will cause
A. an increase in income and an increase in overall saving.
B. a decrease in income and an overall decrease in saving.
C. a decrease in income but an increase in saving.
D. an increase in income but no overall change in saving.
22. If injections are
less than withdrawals at the full-employment level of nationalincome, there is
A. an inflationary gap. B. equilibrium. C.
a deflationary gap. D.
hyperinflation.
23. The accelerator
theory of investment says that induced investment is determined by
A. the rate of change of national income. B. expectations.
C. the level of national income. D. the level of aggregate demand.
24. The diagram that
shows the money received and paid out by each sector of the
economy is the
A. income-price diagram.
B. income-expenditures diagram.
C. circular flow diagram.
D. aggregate demand-aggregate supply diagram.
UNEMPLOYMENT
1. If both the no. of unemployed people and the size of the
labour force increase by 10,000, then
A. the unemployment rate will remain the same. B. the unemployment rate will increase.
C. the unemployment rate will decrease. D. we cannot tell.
2. Which of the following could be a reason for the problem
of “lack of jobs” being overestimated:
A. the existence of disguised unemployment B. people are underemployment
C. people holding only one job (as opposed to multiple jobs) D. the existence of child labour
3. Which of the following is not a cost of voluntary
unemployment?
A. potential output of the economy is greater than actual output B. government loses tax revenue
C. firms lose (potential) revenues due to operating below
capacity
D. mental stress undergone by the unemployed persons
4. “Because higher wages are less likely to induce people
who are structurally or physically unable to participate on the labour force.
On the other hand people already on the labour force are more likely to respond
to higher wages by accepting jobs.”
The above statement is an answer to which question?
A. Why is the AJ curve more elastic than the LF curve B. Why is the LF curve not totally
vertical
C. Why is the AJ curve not completely vertical
D. Why is it difficult to completely remove the horizontal
distance between the AJ and LF curves
5. Which of the following would constitute sound government
policy if you subscribed to the Monetarist view on unemployment?
A. increase aggregate demand through monetary or fiscal
policy
B. reduce the obstacles to downward wage rigidity (like
unions, unemployment benefits, minimum wage legislations etc.)
C. Reduce the marginal income tax rate (to increase the
incentive to work) D. All of
the the above
6. The persistence of a phenomenon, such as unemployment,
even when its causes have been removed is called
A. The paradox of thrift.
B. hysteresis. C. structural
unemployment. D. ceteris paribus.
7. Cyclical
unemployment is the
A. portion of unemployment that is due to changes in the
structure of the economy that result in a significant loss of job sin certain
industries.
B. unemployment that results when people become discouraged
about their chances of finding a job so they stop looking for work.
C. portion of unemployment thatis due to seasonal factors.
D. unemployment that occurs during recessions and
depressions.
8. The natural rate
of unemployment is generally thought of as the
A. ratio of the frictional unemployment rate to the cyclical
unemployment rate.
B. sum of frictional unemployment and cyclical unemployment.
C. sum of frictional unemployment and structural
unemployment.
D. sum of structural unemployment and cyclical unemployment.
9. One of the tenets
of the Classical view of the labour market is that the wage adjustments that
are necessary to clear the labour market occur
A. slowly. B.
instantly. C. very infrequently. D. very quickly.
10. According to Keynesian economists, those who are not
working
A. have given up looking for a job, but would accept a job
at the current wage if one were offered to them.
B. are too productive to be hired at the current wage. C. have chosen not to work at the market
wage.
D. are unable to find a job at the current wage rate.
INFLATION
11. The index used
most often to measure inflation is the
A. consumer price index.
B. wholesale price index. C.
student price index. D. producer price
index.
12. If you were the owner of a cycle manufacturing firm,
would you be particularly worried if wage inflation were higher than price
inflation?
A. No. Because you would still be able to sell your goods at
the higher price.
B. Yes. Because the cost of your input is growing faster
than the revenue obtained from your output
C. Yes. Because both price and wage inflation are bad.
D. No. Because any loss to the firm will be offset by the
gain to the workers.
13. Which of the following is not a major cost of inflation:
A. Resource wastage: as people spend time and money to guard
against the “purchasing power erosion” effects of inflation, while firms suffer
menu costs (i.e. the costs of frequently issuing “revised” price lists).
B. Uncertainty: firms defer investment when inflation is
high and volatile as the latter complicates predicting future cash flows.
C. Worsened income inequality: inflation is a regressive tax
on the people that does not take into account the taxpayers’ “ability to pay”.
As such, there is a redistribution of wealth from the poor to the rich.
D. Money printing costs: inflation requires more currency
notes to be printed and this raises the government’s printing costs.
14. In the long run,
the Phillips curve will be vertical at the natural rate of unemployment if
A. the long-run supply curve is horizontal at the natural
rate of inflation.
B. the long-run aggregate demand curve is vertical at
potential GDP.
C. the long-run aggregate demand curve is horizontal at the
natural rate of inflation.
D. the long-run aggregate supply curve is vertical at
potential GDP.
15. According to the
monetarists, the measured unemployment rate can
A. be reduced below the natural rate only in the short run,
and not without inflation.
B. be reduced below the natural rate only in the long run,
and only if the price level is constant.
C. be reduced below the natural rate only in the short run,
and only if the price level is constant.
D. be reduced below the natural rate only in the long run,
and not without inflation.
16. If the prices of all inputs seem to be rising, can you
be absolutely sure that it is cost-push inflation?
A. No, because cost-push inflation is caused by an increase
in the cost of only one input.
B. Yes, because that is exactly the definition of cost-push
inflation.
C. No, because such a situation can also be caused by
particular demand pressures inthe economy.
D. Yes, because this is exactly what happens in stagflation.
17. The quantity
theory of money implies that, provided velocity of money is constant, a given
percentage change in the money supply will cause
A. an equal percentage change in nominal GDP. B. a larger percentage change in nominal
GDP.
C. an equal percentage change in real GDP. D. a smaller percentage change in nominal
GDP.
18. If input prices
adjusted very slowly to output prices, the Phillips curve would be
A.downward sloping.
B.vertical or nearly vertical. C.upward
sloping. D.horizontal or nearly
horizontal.
19. If inflationary
expectations increase, the short-run Phillips curve will
A. become vertical.
B. become upward sloping. C.
shift to the right. D. shift to the
left.
BALANCE OF PAYMENTS
20. The record of a country's transactions in
goods, services, and assets with the rest of the world is its _____________;
while the difference between a country's merchandise exports and its
merchandise imports is the ____________.
A. current account; trade balance. B. capital account; balance of payments.
C. balance of trade; capital account. D. balance of payments; balance of trade.
21. Assuming there is no government intervention in the
foreign exchange market, which of the following statements must clearly be
FALSE, given that?
A. If the capital account is in surplus, then the current
account is likely to be in deficit.
B. If the current account is in deficit, then the capital
account is likely to be in surplus.
C. If the current account is in balance, the capital account
is also likely to be in balance.
D. None of the above.
22. Which of the
following statements is necessarily TRUE?
A. A country runs a current account deficit if it imports
more goods and services than it exports.
B. The sum of the current and capital accounts must be zero.
C. If both the current and capital accounts are in surplus,
the exchange rate must appreciate.
D. None of the above.
23. All currencies other than the domestic currency of a
given country are referred to as
A. reserve currencies.
B. near monies. C. foreign
exchange. D. hard currency.
24. Exchange rates that are determined by the unregulated
forces of supply and demand are
A.floating exchange rate.
B.pegged exchange rates. C.fixed exchange rates. D.managed exchange rates.
25. The fall (rise) in value of one currency relative to
another is
A. a floating (fixing) of the currency. B. an appreciation
(depreciation) of a currency.
C. a depreciation (appreciation) of a currency. D. a strengthening (weakening) of a
currency.
27. If purchasing power parity prevails absolutely in a two
country world, the real exchange rate between the two countries should be:
A. 1. B.
constantly changing. C. relatively
stable, but not constant D. none
of the above
28. The interest parity equation implies that there is a
general tendency for:
A. exchange rates to be insensitive to the differential
rates of interest between countries.
B. the currencies of relatively low-interest countries to
appreciate.
C. the currencies of relatively high-interest countries to
appreciate.
D. the currencies of relatively low-interest countries to
depreciate.
Note that currencies with low rates of interest also
typically have low inflation rates. This follows from the Fischer equation
which maintains that the nominal interest rate = real interest rate + expected
inflation.
29. Which of the following is (are) correct statement(s)
about the current account deficit?
A. A current account deficit is bad, if it is being caused
by excessive consumer spending
B. A current account deficit is bad, if it is fuelled by
high fiscal deficits
C. A current account deficit is good, if it is caused by the
excess of productive domestic investment over domestic savings
D. All of the above
30. The J-curve
effect refers to the observation that
A. GDP usually decreases before it increases after a
currency depreciation.
B. GDP usually decreases before it increases after a
currency appreciation.
C. the trade balance usually gets worse before it improves
after a currency appreciation.
D. the trade balance usually gets worse before it improves
after a currency depreciation.
31. If Japan
exports more direct investment capital abroad than expected, then the yen will
tend to
A. appreciate. B.
fluctuate more than if exports were lower.
C. depreciate. D. not be
affected.
32. Today is Tuesday morning. If currency dealers expect the
value of the dollar to fall by 10% on Wednesday, then, ceteris paribus, what
will happen by the end of today to the Rs./dollar exchange rate? It will:
A. Rise by more than 10%.
B. Rise by exactly 10%. C. Fall
by less than 10%. D. Remain constant.
Hint: Use your common sense. Think of “yourself” as a
currency trader and then answer the question, based on your future expectation
and the incentive it creates.
GROWTH
33. According to traditional thinking on the subject, which
of the following would not generate economic growth in an economy?
A. an increase in the size of the labour force. B. an increase in the productivity of
capital.
C. a move to more capital intensive production methods
D. discovery of a major mineral resource in the country
34. When referring to
economic growth, we normally refer to:
A. growth in actual real per capita output B. growth in potential real per
capita output
C. growth in actual nominal per capita output D. growth in potential real per capita
output
35. A variable whose value is determined by the model of
which it is a part is termed ___________.
A. endogenous B.
exogenous C. dependent D. independent
36. An example of capital deepening, given an increasing L,
would be:
A. K increases so as to maintain a constant K/L B. K increases so much that K/L increases
C. K remains constant so that L/K increases D. K falls, so as to reduce K/L
37. The neo-classical
growth model says that:
A. poor countries should catch-up(or converge to) with
richer countries
B. higher savings (or rates of capital accumulation) cannot
raise a country’s steady state growth rate
C. the steady state growth rate of real output depends on
the sum of the (exogenous) growth rates in population and technical
progress. D. All of the
above.
RELATIONSHIPS BETWEEN THE BIG FOUR
38. The length of a business cycle would be measured from
A. peak to trough.
B. trough to peak. C. peak to
peak. D. the slump to the
expansion.
39. If the economy is in the expansionary phase of the
business cycle, aggregate demand is likely to be ______ , unemployment is
likely to be ______ , inflation is likely to be ______ , and the current
account of the balance of payments is likely to be moving towards ______.
A. rising; falling; rising; deficit B. static; low; rising; deficit
C. falling; falling; falling; surplus D. falling; rising; falling; surplus
40. If the economy is at the peak of the business cycle,
aggregate demand is likely to be ______ , unemployment is likely to be ______ ,
inflation is likely to be ______ , and the current account of the balance of
payments is likely to be moving towards ______.
A. rising; falling; rising; deficit B. static; low; rising;
deficit
C. falling; falling; falling; surplus D. falling; rising; falling;
surplus
41. If the economy is approaching the trough phase of the
business cycle, aggregate demand is likely to be ______ , unemployment is
likely to be ______ , inflation is likely to be ______, and the current account
of the balance of payments is likely to be moving towards ______.
A. rising; falling; rising; deficit B. static; low; rising; deficit
C. falling; falling; falling; surplus D. falling; rising; falling; surplus
42. Which of the following is not true regarding the effects
of growth on the balance of payments and vice versa?
A. Generally, growth raises incomes which will translate
into higher consumption and higher imports, causing the current account of the
BOPs to deteriorate.
B. If growth is “export-led”, it will boost the current
account surplus of the BOPs.
C. If the current account deficit reflects an underlying
private sector resource deficit, it is likely to be bad for future growth.
D. If the current account reflects rising imports of
military equipment by the government, it might not be beneficial for economic
growth.
43. A country has high inflation and is running a current
account deficit. What should it do in the context of the Salter-Swan diagram?
A. Reduce government spending and revalue the exchange rate
B. Increase government spending and devalue the exchange
rate
C. Reduce the money supply and devalue the exchange rate
D. Increase government spending and revalue the exchange
rate
FISCAL POLICY AND TAXATION, MONEY AND MONETARY POLICY, IS-LM
APPROACH
1. A government’s
attempt to reduce its defence expenditure is an example of (i) , while a government effort to raise
interest rates is an example of (ii) .
(i) (ii)
A. monetary policy. fiscal policy.
B fiscal policy monetary policy.
C
incomes policy. incomes
policy.
D
supply-side policy supply-side
policy..
2. According to the Laffer curve, as tax rates increase, tax
revenues
A. decrease continuously.
B. initially decrease and then increase.
C. rise continuously. D. initially increase and then
decrease.
3. The government imposes a new income tax legislation under
which every male taxpayermust pay 15% of his income as taxes, while every
female taxpayer must pay 20% of her income as taxes. Such tax legislation
violates which equity principle?
A. Both horizontal equity & vertical equity B. Vertical
equity only C. Horizontal equity
only D. Neither
4. A 15% VAT is a(n):
A. Proportional income tax. B. Fixed excise duty. C. Ad valorem indirect tax. D. None of the above.
5. Tax incidence is the
A. ultimate distribution of a tax's burden . B. measure of the impact the tax has on
employment and output. C. behaviour of
shifting the tax toanother party.
D. structure of the tax.
6. You know that all taxes are distortionary. Under what
conditions will this knowledge lead you to oppose the imposition of every
single tax in the economy?
A. If you live in a 1 st best world B. If you live in a 2 nd best world
C. If the tax rates on some of the items are prohibitively
high D. Either of the above
7. The automatic stabilisation function of fiscal policy
ensures that government expenditures ______ (i) ______ and government revenues
_____ (ii) _____ during recessions.
(i) (ii)
A. decrease decrease
B. decrease increase
C. increase decrease
D. increase increase
8. Let us say assume the Pakistani government is facing a fiscal
deficit. Which of the following would not constitute a possible method of
financing this deficit?
A. printing rupees (borrowing from the central bank) B. selling dollars in the foreign exchange
market
C. imposing new taxes or raising existing tax rates D.Borrowing from an international financial
institution
9. Which of the following is not a correct argument against
a fiscal policy expansion – say a tax cut –aimed at lifting aggregate demand?
A. The expansion might become pro-cyclical ex-post, given
the lag time required to change fiscal policy.
B. Fiscal policy works with a lag, thus a tax cut introduced
today would not have an expansionary effect on aggregate demand till many
months later.
C. The fiscal expansion would increase distortion in the
economy.
D. Lower taxes would increase the government’s borrowing
requirement, which in turn would cause interest rates to rise, which in turn
would i) cause the exchange rate to appreciate, which in turn would cause the
current account to move into deficit, and ii) crowd out private investment.
10. The increase in base money divided by the corresponding
induced increase in commercial bank deposits is the
A. bank's line of credit.
B. reserve ratio. C. current
ratio. D. money multiplier.
11. If the RBI wished
to pursue a 'tight' monetary policy, it would
A. lower the required reserve ratio and the statutory
liquidity ratio. B. lower interest
rates .
C. buy government securities on the open market. D. sell government securities on the
open market.
12. An item designated as money that is intrinsically
worthless could be
A. a currency note.
B. a silver coin. C. a barter
item. D. any tradable commodity.
13. A checking deposit (or current account) held at a
commercial bank is considered __________ of that bank.
A. an asset. B. net
worth. C. a liability. D. capital.
14. Which of the following activities is one of the
responsibilities of the RBI
A. Monitoring the financial health of banks and non-bank
financial insitutions .
B. Auditing the various agencies and departments of the
government.
C. Issuing bonds on international capital markets to finance
the fiscal deficit.
D. Loaning money to other countries
15. A bank has excess
liquidity reserves to lend but is unable to find a willing borrower. This
will__________ the size of the money multiplier.
A. reduce B.
increase C. have no effect on D. double
16. The quantity of money demanded increases with income.
Thus if income increases, the opportunity cost of holding money must go up in
order to reduce money demand and re-establish equilibrium in the money market.
This relation is captured by:
A. an upward sloping LM curve. B. a downward sloping L curve.
C. a downward sloping IS curve. D. the circular flow of money in the
economy.
17. When economists
speak of the 'demand for money,' which of the following questions are they
asking?
A. How much cash do you wish you could have? B. How much wealth would you like?
C. How much income would you like to earn?
D. What proportion of your financial assets do you want to
hold in non-interest bearing forms?
18. Which of the following will not cause money supply to
expand, given a fully floating exchange rate regime and a fixed supply of
dollars in the market
A. The central bank buying foreign currency in the foreign
exchange market
B. redemption of central bank liquidity paper C. build-up of commercial banks’ deposits
held with the central bank D. decrease
in the central bank discount rate
19. Which of the
following events will lead to a decrease in the demand for money?
A. An increase in the level of aggregate output. B. A decrease in the supply of
money.
C. A decrease in the interest rate. D. A decrease in the
price level.
20. Which of the following is neither a determinant of the
slope of the IS curve nor a determinant of the slope of the LM curve?
A. the sensitivity of interest rates to investment B.
the sensitivity of money demand to income
C. the sensitivity of money demand to interest rates D. the sensitivity of income to
investment
21. Given a Keynesian world, a cut in taxes coupled with a
lower reserve ratio for banks would have what effect on equilibrium income and
interest rate?
A. Both income and the interest rate will remain unchanged
B. income will come down, but the interest rate will go up
C. income will go up, but the effect on the interest rate
cannot be predicted
D. interest rates will go down, but the effect on income
cannot be predicted
22. If the government increases its spending, but this
causes prices to rise, what will “eventually” happen to the equilibrium income
and interest rate?
A. Both income and the interest rate will remain unchanged
B. income will come down, but the interest rate will go up
C. income will go up, but the effect on the interest rate
cannot be predicted
D. interest rates will go down, but the effect on income
cannot be predicted
23. If the income elasticity of money demand and the
Keynesian multiplier, both increase in an economy (ceteris paribus), how will
the relative effectiveness of monetary and fiscal policy change?
A. Fiscal policy will become relatively more effective than
monetary policy
B. Fiscal policy will become relatively less effective than
monetary policy
C. The relative effectiveness of fiscal and monetary policy
will remain unchanged
D. Both fiscal and monetary policy will become more
effective.
24. The intersection of the IS and LM curves captures:
A. the equilibrium of the demand and supply sides of the
economy
B. the equivalence of monetary and fiscal policy C. joint equilibrium in the goods and
money markets
D. all of the above
1. Disposable Income is obtained by subtracting _____________taxes
from personal income:
A. Indirect Taxes B.
Direct Taxes C. Subsidies D. None
2. Per capita income is obtained by dividing National Income
by:
A. Total labor Force in the Country B. Unemployed Youth in the Country
C. Total population of that country. D. None
3. The investment demand curve shows the relationship
between the levels of:
A. Investment and Consumption B. Consumption and Interest Rate
C. Investment and Interest Rate D. None
4. The situation in which the imports are greater than
exports is termed as:
A. Trade Surplus B.
Trade Deficit C. Budget
Surplus D. None
5. Fiscal policy is the government programme with respect to
it’s:
A. Steel Mill Privatization B. Unemployment Reduction C. Expenditure and Tax revenue D. None
6. Imports for any economy are considered as:
A. Injections B.
Leakages C. Brain Drain D. None
7. The accelerator is a related concept which formalizes the
investment response to:
A. Consumption B. Interest
rate C. Output D. None
8. According to Keynes macroeconomic equilibrium is attained
when:
A. S = I. B. AD=
AS C. Inflation Exists
in Economy. D.None
9. There are __________________methods of measuring GDP:
A. Four B. Three C. Five D. None
10. Intermediate goods are meant for:
A. Direct use by the consumers B. further processing
C. The term do not exist D. None
1. Fiscal policy refers to:
A. The actions of the central bank in controlling the money
supply.
B. The spending and taxing policies used by the government
to influence the economy.
C. The government's regulation of financial intermediaries. D. None of the given options.
2. Disposable income is:
A. Total income plus transfer payments B. Total income minus saving.
C. Total income plus net taxes. D. Total income minus
net taxes.
3. The deficit tends to decrease when:
A. GDP decreases slightly.
B. GDP decreases rapidly. C. GDP increases. D. GDP remains unchanged.
4. Money or paper currency serves at least ______________
functions:
A. Four B. Three C. Five
D. Seven
5. The economic logic behind granting central banks
independence from government in the conduct of monetary policy is:
A. To eliminate seignior age. B. To allow open market operations.
C. To enhance the credibility of monetary policy. D. None of the above.
6. An expansionary fiscal policy can:
A. Raise the national debt. B. Decrease the national debt C. Have no
effect on national debt. D. None
7. Which is high powered money?
A. M1 B. M2 C. M3 D. None
9. The rate at which central bank lends to commercial banks is known as:
A. Reserve rate. B.
Discount rate. C. Open market operation. D. None.
10. Identify the three motives of money demand:
A. Accumulative, speculative, precautionary B. Speculative, transaction,
precautionary
C. Precautionary special, transaction D. None
1. If, in a fully employed, closed economy, the supply of
money and the velocity of circulation of money both increase, then in the short-run.
a. Unemployment of factors will result b. Real national output will expand
c. The volume of transactions will lincrease d. The average level of prices will rise
2. An increase in the rate of inflation which is not
accompanied by any change in the volume of consumer goods sold will
automatically increase the:
a. Revenue from Value Added Tax b. Level of company profits
c. Level of unemployment d. Average level of wages
4. The investment demand curve shows the relationship
between the levels of:
a. Investment and Consumption
b. Consumption and Interest Rate
c. Investment and Interest Rate
d. None
5. According to Classical models, the level of employment is
determined primarily by:
a. The level of aggregate demand for goods and services
b. Prices and wages.
c. Government taxation. d.
Government spending.
6. Which of the following is not an important variable in
growth accounting calculations?
a. Productivity growth
b. Money supply growth c. Labor
growth d. Capital growth
7. The per-worker production function relates:
a. Output per worker to capital per worker. b. Output per worker to production per
worker.
c. Output per worker to factors of production per worker
d. Production per worker to the size of the work force.
8. In a steady-state economy:
a. Net investment equals depreciation rate. b. Per capita capital stock grows at the
rate of labour growth.
c. Per capita capital stock remains constant. d. Net investment equals the consumption.
9. The war in Iraq sent oil prices spiraling
upwards, resulting in an increase in the overall price level. This is an
example of which type of inflation?
a. Cost-pull b. Cost-push c. Demand-pull d. Demand-push
10. The IMF is an agency charged with providing:
a. Technical assistance to stock market and financial market
problems.
b. Loans for post-World War II reconstruction.
c. Short‑term credit for international balance of payments
deficits.
d. Bonds denominated in U.S. dollars as a loan to LDCs.
11. In a portfolio investment:
a. Investors are directly involved in managing the
operations.
b. As in direct investment, investors export goods and
services abroad.
c. Investors transfer the technology to local investors.
d. Investors have no control overoperations.
12. Inflation:
a. Reduces both the purchasing power of the dollar and one's
real income
b. reduces the purchasing power of the dollar and increases
one's real income
c. Reduces the purchasing power of the dollar but may have
no impact on one's real income
d. Increases the purchasing power of the dollar and reduces
one's real income
13. One of the tenets of the classical view of the labour
market is that the wage adjustments that are necessary to clear the labour
market occur:
a. Slowly. b.
Quickly. c. Very infrequently. d. Instantly.
14. Those that hold the classical view of the labour market
are likely to believe that:
a. Monetary, but not fiscal policy will have an effect on
output and employment.
b. Both monetary and fiscal policy will have an effect on
output and employment.
c. Fiscal, but not monetary policy will have an effect on
output and employment.
d. Neither monetary nor fiscal policy will have an effect on
output and employment.
15. Potential GDP is the level of aggregate output:
a. That can be produced if structural unemployment is zero.
b. That can be produced at a zero unemployment rate.
c. That can be sustained in the long run, if the inflation rate
is zero.
d. That can be sustained in the long run without inflation.
16. Which school of economic thought suggested that one
possible cause of inflation was a 'push' from the cost side?
a. New classical economists. b. Monetarists. c. Marxists. d.
Keynesians.
17. An unspoken agreement between workers and firms that the
firm will not cut wages is known as:
a. An explicit contract.
b. An implicit or social contract.
c. Employment-at-will.
d. A relative-wage contract.
18. To offset the downswing in the business cycle, the
government announces a major increase in public expenditure.
a. Technological Unemployment
b. Demand Deficient Unemployment
c. Real Wage Unemployment
d. Regional Unemployment
19. The government puts pressure on trade unions to make pay
claims which are below the increase in productivity over the past year.
a. Frictional Unemployment
b. Technological Unemployment
c. Structural Unemployment
d. Real Wage Unemployment
20. In which case is total expenditure in an economy not
equal to total income?
a. If total saving is larger than total investment
b. If net exports are not zero
c. If inventory investment is negative
d. None of the above--they are always equal
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