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- December 7, 2024
Question 21
What is a comparative advantage in trade?
a) The ability to produce goods more efficiently than others
b) The ability to produce goods at a lower opportunity cost
c) The ability to trade without tariffs
d) The ability to produce more goods with fewer resources
Answer: b) The ability to produce goods at a lower opportunity cost
Explanation: Comparative advantage refers to the ability of a country to produce a good at a lower opportunity cost than another country, making trade beneficial.
Question 22
What is crowding out?
a) When private investment decreases due to higher government borrowing
b) When government spending increases private investment
c) When inflation decreases private consumption
d) When higher wages reduce employment
Answer: a) When private investment decreases due to higher government borrowing
Explanation: Crowding out occurs when government borrowing drives up interest rates, reducing the availability of funds for private investment.
Question 23
How do wages typically react to an inflationary gap in the long run?
a) Wages increase
b) Wages decrease
c) Wages remain constant
d) Wages fluctuate randomly
Answer: a) Wages increase
Explanation: In the long run, an inflationary gap (when actual GDP exceeds potential GDP) leads to upward pressure on wages as employers compete for labor.
Question 24
What is the primary function of money as a medium of exchange?
a) It stores value
b) It measures wealth
c) It facilitates trade
d) It sets interest rates
Answer: c) It facilitates trade
Explanation: As a medium of exchange, money allows people to trade goods and services without the complications of bartering.
Question 25
What is an example of an automatic stabilizer in fiscal policy?
a) Progressive income taxes
b) Discretionary government spending
c) Fixed interest rates
d) National debt repayments
Answer: a) Progressive income taxes
Explanation: Automatic stabilizers, like progressive taxes, naturally adjust to economic conditions by reducing tax burdens during recessions and increasing them during booms.
Question 26
What happens in the long run when a recessionary gap exists?
a) Wages increase
b) Wages decrease
c) Prices decrease
d) Interest rates decrease
Answer: b) Wages decrease
Explanation: In the long run, a recessionary gap (when actual GDP is below potential GDP) leads to lower wages as there is less demand for labor.
Question 27
What is the goal of open market operations?
a) To control inflation directly
b) To stabilize unemployment
c) To influence interest rates and the money supply
d) To raise taxes
Answer: c) To influence interest rates and the money supply
Explanation: Open market operations involve the Federal Reserve buying and selling government securities to control the money supply and influence interest rates.
Question 28
What type of unemployment occurs when workers are temporarily between jobs?
a) Cyclical unemployment
b) Structural unemployment
c) Frictional unemployment
d) Seasonal unemployment
Answer: c) Frictional unemployment
Explanation: Frictional unemployment happens when workers are in transition between jobs or are entering the labor market for the first time.
Question 29
What is the effect of a lower interest rate on aggregate demand?
a) Decreases aggregate demand
b) Increases aggregate demand
c) Has no effect on aggregate demand
d) Lowers investment
Answer: b) Increases aggregate demand
Explanation: Lower interest rates make borrowing cheaper, encouraging businesses to invest and consumers to spend, thereby increasing aggregate demand.
Question 30
What is the result of a price ceiling being set below the equilibrium price?
a) Surplus
b) Shortage
c) Equilibrium
d) No effect
Answer: b) Shortage
Explanation: A price ceiling set below the equilibrium price causes a shortage because the quantity demanded exceeds the quantity supplied at the lower price.
Question 31
What is inflation?
a) An increase in the unemployment rate
b) A decrease in consumer spending
c) A general rise in prices over time
d) A decrease in the money supply
Answer: c) A general rise in prices over time
Explanation: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time.
Question 32
What is the Phillips curve’s main trade-off?
a) Between wages and productivity
b) Between unemployment and inflation
c) Between investment and consumption
d) Between government spending and tax revenue
Answer: b) Between unemployment and inflation
Explanation: The Phillips curve illustrates the inverse relationship between unemployment and inflation, where lower unemployment often leads to higher inflation and vice versa.
Question 33
What does monetary policy primarily aim to control?
a) The labor market
b) Government spending
c) The money supply and interest rates
d) Trade deficits
Answer: c) The money supply and interest rates
Explanation: Monetary policy involves managing the money supply and interest rates to achieve macroeconomic objectives like controlling inflation and stabilizing the currency.
Question 34
What happens when the price of a substitute good rises?
a) The demand for the related good decreases
b) The demand for the related good increases
c) The demand for the related good remains constant
d) The supply of the related good decreases
Answer: b) The demand for the related good increases
Explanation: When the price of a substitute good rises, consumers tend to switch to the related good, increasing its demand.
Question 35
What is a progressive tax?
a) A tax that remains the same regardless of income
b) A tax that decreases as income increases
c) A tax that increases as income increases
d) A tax that only applies to investments
Answer: c) A tax that increases as income increases
Explanation: A progressive tax system imposes a higher tax rate on higher-income earners and a lower rate on lower-income earners.
Question 36
What causes a movement along the demand curve?
a) A change in income
b) A change in preferences
c) A change in the price of the good itself
d) A change in the price of a complementary good
Answer: c) A change in the price of the good itself
Explanation: A movement along the demand curve occurs when the price of the good changes, while other factors like preferences and income remain constant.
Question 37
What is real GDP?
a) GDP adjusted for inflation
b) The sum of all government expenditures
c) GDP measured at current prices
d) The total value of intermediate goods
Answer: a) GDP adjusted for inflation
Explanation: Real GDP measures the value of all goods and services produced in an economy, adjusted for inflation, to provide a clearer picture of economic growth.
Question 38
What does a vertical long-run aggregate supply (LRAS) curve represent?
a) Constant unemployment
b) The natural rate of unemployment
c) Economic growth
d) Full employment output
Answer: d) Full employment output
Explanation: The LRAS curve is vertical because, in the long run, the economy's output is determined by available resources, technology, and full employment, not by price levels.
Question 39
What does the law of diminishing returns state?
a) Additional input leads to increased output at an increasing rate
b) Additional input eventually leads to less additional output
c) Additional input always leads to more efficient production
d) Additional input has no effect on output
Answer: b) Additional input eventually leads to less additional output
Explanation: The law of diminishing returns states that as more of a variable input (like labor) is added to a fixed input (like land), the additional output from each new unit of input will eventually decrease.
Question 40
How is unemployment measured?
a) By counting everyone without a job
b) By dividing the number of unemployed people by the labor force
c) By dividing the number of employed people by the population
d) By counting only those actively seeking work
Answer: b) By dividing the number of unemployed people by the labor force
Explanation: The unemployment rate is calculated by dividing the number of unemployed individuals (who are actively seeking work) by the total labor force.
