MCQ questions, only one correct answers

1. Which of the following is false regarding GDP?

A. GDP can be measured in three ways: production, income and expenditure

B. If measured correctly, all three ways of measuring GDP are equivalent

C. The production method aggregates total production across all industries

D. The income method aggregates income accruing to all factors of production, i.e., labor, capital and land

E. The expenditure method aggregates spending in the economy, which consists of consumption, investment, government spending and net export

2. Short- to medium term fluctuations in the economy (i.e., business cycles) are primarily driven by changes (or shocks) to:

A. Underlying trend growth

B. Aggregate supply

C. Inflation expectations

D. All of the above

E. None of the above

3. In most economies, the most volatile (variable) part of aggregate demand is:

A. Private consumption

B. Private investment

C. Government spending

D. Exports

E. Imports

4. An economy has a negative output gap when:

A. Actual GDP is lower than potential GDP

B. Actual GDP growth is lower than potential GDP growth

C. Potential GDP is lower than actual GDP

D. Potential GDP growth is lower than actual GDP growth

E. None of the above

5. In a closed economy version of the Keynesian multiplier model, if the marginal propensity to consume (MPC) is greater than zero but less than one, the spending multiplier is:

A. Greater than zero but less than one

B. Equal to one

C. Greater than one

D. Uncertain

E. None of the above

6. The expenditure multiplier measures:

A. The number of steps it takes for the economy to move from one equilibrium to another

B. The rise in saving resulting from a rise in income

C. The change in investment resulting from a change in income

D. The change in consumption resulting from a change in income

E. None of the above

7. Monetary policy tends to be less effective when:

A. Money demand is insensitive to interest rate

B. Investment is sensitive to interest rate

C. The LM curve is steep

D. All of the above

E. None of the above

8. Fiscal policy tends to be less effective when:

A. Money demand is insensitive to interest rate

B. Investment is sensitive to interest rate

C. The IS curve is flat

D. All of the above

E. None of the above

9. Empirical evidence suggest that the fiscal multiplier is:

A. Smaller when there is a negative output gap

B. Larger when there is a negative output gap

C. Smaller when there is a positive output gap

D. Larger when there is a positive output gap

E. B. and C.

10. If investment becomes less responsive to changes in the interest rate, then:

A. The IS curve will become flatter

B. The LM curve will become flatter

C. The IS curve will become steeper

D. The LM curve will become steeper

E. Both the IS curve and LM curve will become flatter

11. If output rises while the price level falls, the economy is most likely is being hit by:

A. A positive demand side shock

B. A negative demand side shock

C. A positive supply side shock

D. A negative supply side shock

E. B. and D.

12. Other things equal, a fall in price (or inflation) expectation causes:

A. The aggregate demand curve to shift up, raising output and the price level

B. The aggregate demand curve to shift down, reducing output and price level

C. The aggregate supply curve to shift down, raising output and the price level

D. The aggregate supply curve to shift down, raising the output and reducing the price level

E. The aggregate supply curve to shift up, lowering output and raising the price level

13. If an economy is hit by a transitory adverse supply side shock:

A. It is not advisable for the government implement demand-boosting policies as they will worsen inflation

B. The government should introduce policies to encourage productivity increases on the supply side, thus increasing output and price (or inflation) expectation

C. Demand boosting policies will help restore full employment output, but at a "cost" of raising the price level

D. Demand boosting policies will help restore full employment output without any further change in the price level, as the economy was initially below full employment output

E. None of the above

14. If there is an adverse demand side shock (e.g. a sharp decline in consumer and business confidence) and the government refrains from implementing any macro stabilization policy, the economy:

A. Will be permanently stuck at below full-employment output

B. Will quickly "self-correct" to full employment output if wage and price are flexible

C. Will quickly "self-correct" to full employment output if wage and price are "sticky"

D. Will quickly "self-correct" if wage is flexible but price is "sticky"

E. Will quickly "self-correct" if wage is sticky but price is flexible

15. A central bank can ease monetary policy by:

A. Selling bond in an open market operation and thereby increase bank reserves

B. Selling bond in an open market operation and thereby decrease bank reserves

C. Buying bonds in an open market operation and thereby increase bank reserves

D. Buying bonds in an open market operation and thereby decrease bank reserves

E. Raise the required reserve ratio

16. The Phillips curve, which links unemployment rate to inflation rate, broke down after the 1960s because:

A. Supply side shocks (oil shocks) became more frequent and severe

B. Demand shocks became more frequent and severe

C. A. and B.

D. Inflation expectation became unstable

E. Labor market conditions became more uncertain

17. Inflation tends to rise when:

A. The output gap is positive, i.e., aggregate demand exceeds potential output

B. The economy is buffeted by a series of adverse supply shocks (e.g. rising oil or food price)

C. Inflation expectations rise

D. All of the above

E. None of the above

18. If the market interest rate equals the "natural" rate, it is likely that:

A. Aggregate demand equals potential output

B. Desired savings equals desired investment

C. Inflation will be constant

D. All of the above is true

E. None of the above is true

19. Other things equal, the "natural" rate of interest will fall if:

A. Supply of saving falls

B. Household consumption rises

C. Investment demand rises

D. All of the above

E. None of the above

20. Financial condition measures:

A. The gap between the market interest rate and the policy rate

B. The gap between short term interest rates and long-term interest rates

C. The gap between the market exchange rate and the equilibrium exchange rate

D. All of the above

E. None of the above