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- December 7, 2024
Question 41
What does a contractionary fiscal policy do?
a) Decreases government spending and increases taxes
b) Increases government spending and lowers taxes
c) Increases the money supply
d) Reduces interest rates
Answer: a) Decreases government spending and increases taxes
Explanation: Contractionary fiscal policy is used to reduce inflation by decreasing aggregate demand, usually through reduced government spending and higher taxes.
Question 42
What is a key difference between absolute and comparative advantage?
a) Absolute advantage is based on lower opportunity cost
b) Comparative advantage is based on productivity alone
c) Comparative advantage is based on lower opportunity cost
d) Absolute advantage focuses on international trade
Answer: c) Comparative advantage is based on lower opportunity cost
Explanation: Comparative advantage refers to producing a good at a lower opportunity cost, while absolute advantage refers to producing more of a good with the same resources.
Question 43
How does expansionary monetary policy affect interest rates?
a) It raises interest rates
b) It reduces interest rates
c) It has no effect on interest rates
d) It increases both interest rates and inflation
Answer: b) It reduces interest rates
Explanation: Expansionary monetary policy increases the money supply, which lowers interest rates and encourages borrowing and investment.
Question 44
What is the impact of an increase in productivity on the long-run aggregate supply (LRAS) curve?
a) It shifts the LRAS curve to the left
b) It shifts the LRAS curve to the right
c) It lowers potential GDP
d) It decreases aggregate demand
Answer: b) It shifts the LRAS curve to the right
Explanation: An increase in productivity allows the economy to produce more output with the same resources, shifting the LRAS curve to the right and increasing potential GDP.
Question 45
What is the effect of inflation on purchasing power?
a) Increases purchasing power
b) Decreases purchasing power
c) Has no effect on purchasing power
d) Stabilizes purchasing power
Answer: b) Decreases purchasing power
Explanation: Inflation erodes the purchasing power of money, meaning that each unit of currency buys fewer goods and services over time.
Question 46
What happens when the Federal Reserve buys government securities?
a) The money supply decreases
b) The money supply increases
c) Interest rates rise
d) Inflation decreases
Answer: b) The money supply increases
Explanation: When the Federal Reserve buys government securities, it injects money into the economy, increasing the money supply and lowering interest rates.
Question 47
What causes a movement along the supply curve?
a) A change in the price of inputs
b) A change in technology
c) A change in the price of the good itself
d) A change in government regulations
Answer: c) A change in the price of the good itself
Explanation: A movement along the supply curve occurs when there is a change in the price of the good, holding all other factors constant.
Question 48
What is the role of the Federal Funds Rate?
a) It determines the interest rates on mortgages
b) It influences the interest rates banks charge each other for overnight loans
c) It is the rate the government charges for borrowing
d) It sets the rate for government bonds
Answer: b) It influences the interest rates banks charge each other for overnight loans
Explanation: The Federal Funds Rate is the interest rate at which banks lend to each other overnight, and it is a key tool in monetary policy.
Question 49
What is a price ceiling?
a) The minimum price allowed by law
b) The maximum price allowed by law
c) The price set by market equilibrium
d) The average price of goods in the market
Answer: b) The maximum price allowed by law
Explanation: A price ceiling is a legal limit on how high the price of a good can be, often set to make essential goods more affordable.
Question 50
What does the term “fiat money” mean?
a) Money backed by a commodity like gold
b) Money that has intrinsic value
c) Money that has no intrinsic value but is declared legal tender by the government
d) Money issued by private banks
Answer: c) Money that has no intrinsic value but is declared legal tender by the government
Explanation: Fiat money has no intrinsic value; its value is derived from government regulation or law, such as modern paper currency.
