Macroeconomics MCQs
Macroeconomics MCQs
Macroeconomics MCQs
Out of these, best indicator to compare the economic progress of different countries, over the
time is:
a. Growth rate of Nominal Per Capita Income c. Growth rate of Per Capita Income at PPP
b. Growth rate of Real Per Capita Income d. All of the above
2. Most prominent component of of GDP measured with expenditure approach is
a. Consumption c. Govt Expenditures
b. Investment d. Net Exports
3. Which of the following is not included in gross investment?
a. Business and residential construction. c. Additions to business inventory.
b. Expenditures on consumer goods. d. Expenditures on machinery.
4. In a model in which there are household, business, government and foreign sectors, GDP is the
sum of:
a. Consumption, gross investment, government spending for goods and services and net
exports.
b. Consumption, net investment, government spending for goods and services and net
exports.
c. Consumption, gross investment, government spending for goods and services and gross
exports.
d. Wages, rent, interest, profit and depreciation.
5. Net Domestic Product ------------- Gross Domestic Product
a. > c. =
b. < d. Could be any
6. In short run, there is a trade off between inflation and ………….
a. GDP c. Unemployment
b. Purchasing Power of economic agents d. None of above
7. Agents bear a cost of Boom in the shape of
a. Low unemployment c. Higher inflation
b. Higher incomes d. Lower inflation
8. When the marginal propensity to consume is 0.75, the multiplier has value of:
a. 5 c. 3
b. 4 d. 2
9. In usual IS curve, Price level is taken to as
a. Exogenously Fixed c. Exogenously determined but changing
b. Endogenously determined d. Can be both (a) and (c)
10. Which of the following will not result in an increase in the level of income?
a. An increase in autonomous spending. c. An increase in autonomous transfers.
b. A decrease in autonomous taxes. d. An increase in net tax revenues.
b. Goods such as tools, machinery, etc which are used to create final consumption goods
c. Goods and services that are consumed fully when purchased by the consumers
12. Intermediate goods are not included to calculate the final output because:
c. their value is included in final goods so they are not added to avoid the problem of double
counting
13. What does the term Gross investment mean while denoting a nation's economy?
a. GNP = GDP - net income from abroad b. GNP = GDP + net income from abroad
c. GNP = NNP - net income from abroad d. GNP = NNP + net income from abroad
18. Rapid increases in the price level during periods of recession or high unemployment are known as
a. slump. c. stagflation.
b. stagnation. d. inflation.
22. To transform GDP from market prices to basic prices it is necessary to:
23. The national income is initially in equilibrium. If there was an increase in exports, which of the
following change would restore national income to its initial equilibrium level
24. If personal income is Rs.2000, personal tax is Rs.120, transfer payments is Rs.200, undivided
corporate profit is Rs.150, social security contribution is Rs.80, disposable personal income will be
a. Rs.2080 c. 2310
b. 1880 d.1800
25. Which of the following are regarded as withdrawal from the circular flow of the income?
27. If the consumption function runs along the 450 line, the saving function will:
a. Lie along the 450 line c. Lie along the horizontal axis
28. The four main phases of a business cycle dos not include:
a. Depression c. Boom
b. Inflation d. Recession
a. Hyperinflation c. Depression
c. When there is an increase in the price level and/or the output of goods and services
a. $90 when disposable income is $100. c. $110 when disposable income is $100.
b. $100 when disposable income is $90. d. $180 when disposable income is $200.
a. Where inflation rate is equal to zero. c. Productivity growth rate is equal to zero.
a. A variable is endogenous when its value is determined by forces outside the model
c. A variable is exogenous when its value is determined by forces within the model.
d. A variable is autonomous when its value is determined by forces within the model.
36. In a model in which there are household, business, government and foreign sectors, GDP is the sum
of:
a. Consumption, gross investment, government spending for goods and services and net
exports.
b. Consumption, net investment, government spending for goods and services and net exports.
c. Consumption, gross investment, government spending for goods and services and gross
exports.
38. When nominal GNP is $1100 and real GNP is $1000, the GNP deflator is:
39. Suppose planned consumption equals $40+0.90(Y-T) and planned investment is $50. Autonomous
taxes are zero. The equilibrium level of income is:
40. Suppose planned saving equals -$40+0.20(Y-T) and planned investment is $60. Autonomous taxes
are zero. The equilibrium level of income is:
41. When the marginal propensity to consume is 0.75, the multiplier has value of:
a. 5 b. 4 c. 3 d. 2
True/False Questions
1. Any kind of income that is transferred to a person without any productive activity is not included
in GDP. True
2. Higher the value of a multiplier, smaller the stimulus needed to get desired output. True
3. Primary objective of stabilization policy is to promote economic growth and welfare.
False (to minimize business cycles fluctuations)
4. Policy instruments of stabilization policy (including monetary and fiscal policies) operate through
aggregate demand management. True
5. When actual real GDP is above natural real GDP, there is an issue of unemployment is the
economy. False: the issue is of increasing inflation
6. According to the 'paradox of thrift,' increased efforts to save will cause a decrease in income and
an overall decrease in saving. True
7. If injections are less than withdrawals at the full-employment level of national income, there is
an inflationary gap. False; a deflationary gap.
8. The accelerator theory of investment says that induced investment is determined by the level of
aggregate demand. False; the level of national income.
9. The diagram that shows the money received and paid out by each sector of the economy is the
income-price diagram. False; circular flow diagram.
10. Cyclical unemployment is the unemployment that occurs during recessions and depressions.
True
11. The output Gap and Unemployment Gap move in the opposite direction if an economy has a
constant rate of inflation. False (In case of the constant inflation rate, the
economy will be on its potential level and unemployment will be equal to the natural rate of
unemployment. Thus both gaps will be zero).
12. The value of multiplier depends on the behavior of endogenous variables True
13. Govt use Demand side management policies to controL Business cycle fluctuations. True
14. The personal income is different from national income as the former is payments to individuals,
plus retained income from the corporate sector, less adjustments and later measures national
level income to persons and non profit corporations
False (The personal income is income to persons and nonprofit organizations)
15. The Keynesian Cross explains the determination of national income when actual expenditures of
an economy equal to income level or production of an economy.
False (When planned expenditures equal to Income)
16. Unemployment rate is calculated as 𝑈=𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑𝑐𝑖𝑣𝑖𝑙𝑎𝑖𝑛
𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑+𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑. Major drawback of this definition is that it overestimates social
distress associated with state of being unemployed. False (underestimates)
17. Value of intermediate goods is not included in GDP to avoid double counting. True
18. Primary objective of stabilization policy is to promote economic growth and welfare.
False (to minimize business cycles fluctuations)
19. Policy instruments of stabilization policy (including monetary and fiscal policies) operate through
aggregate demand management. True
20. When net exports are positive, receivables from rest of the world exceed payables to the rest of
the world. This means domestic economy is net lender global financial market. True
21. Government debt and deficit are stock variables. False (debt: stock; deficit: flow)
22. One of the key assumptions of Keynesian Cross model is that price level is fixed. This implies that
aggregate supply is fixed so that impact of changes in demand gets translated into changes in
output. False (aggregate supply is not fixed; it’s perfectly elastic)
23. In Keynesian Cross model, equilibrium takes place where output, 𝑌 equals planned spending,
𝐸𝑃. Unintended inventory investment, 𝐼𝑢 is zero at equilibrium. True
24. Planned expenditure, 𝐸𝑃 is identically equal to total output, 𝑌 implying that these two
magnitudes are always equal to each other by definition. False (Total expenditure)
25. If total output, 𝑌 is greater than planned expenditure, 𝐸𝑃 then there exist unsold goods in
economy. This implies positive amount of unintended inventory investment, 𝐼𝑢. True
Case Study
Suppose you are working in Pakistan Bureau of Statistics. A committee is formed to calculate and
release figures on different kind of National Income Accounts, including Gross Domestic Product, Gross
National Product, Net Domestic Product, Net National Product and National Income at factor cost i.e.
National Income that is transferred to owners of factors of production. The committee members gather
information from different departments and one of the members Mr. A is tasked to compile all that
information and report the final figures on different accounts. Seeing your good knowledge on National
income accounts and computational skills, the boss makes you assistant to Mr. A. Mr. A could only
compute Gross Domestic Product as 9256 billion rupees before he had to take some leaves due to some
domestic issues. To avoid deadline, he requested you to complete the report and forward it to him. He
also gives you following information he got from other members
Solution
GNP = GDP – Payment of factor income to rest of the world + factor income received from rest of the
world = 9256 – 322 + 302 = 9236
NDP = GDP – Depreciation = 9256 – 1136 = 8120
NNP = GNP – Depreciation = 9236 – 1136 = 8100
NI = NDP – Indirect Taxes + Subsidies = 8120 – 604 + 0 = 7516
CASE STUDY
Please show necessary calculations. You have the following information on 3 countries:
b) How long will it take until Soccerland and Handeggland have the same GDP?
c) Soccerland’s population is not happy that, eventually, Handeggland is going to have higher GDP than
their country. They feel that they are a much better country, so they are going to work harder to ensure
that Handeggland will never catch up with Soccerland. If Soccerland new growth rate is constant every
year, what is the minimum growth rate that ensures that Soccerland will always have a higher GDP than
Handeggland?
d) Neverland’s ambition is to host the World Cup. At the beginning of 2017, its GDP was 2,000 and it was
growing at 10% a year. Moreover, it will keep this pace until it hosts the World Cup. In order to host
such a big event, Neverland’s GDP must be at least 6,000. After the moment it reaches that GDP level, it
will host the World Cup in the beginning of the next year available for the event (remember that the
World Cup takes place every four years, in the years: 2014, 2018, 2022, etc.) During the year that
Neverland hosts the World Cup, their GDP will grow at 75%. Then, everything returns to normal, and
their GDP will keep growing at 10% a year forever onwards.
ii) Suppose the Federation no longer requires Neverland to have a minimum GDP of 6,000 in order to
host the World Cup, and instead it lets Neverland host the World Cup in 2018. How does your answer
compare to part i), i.e., would Neverland be able to attain a GDP of 20,000 earlier, later or at the same
time as in part i)? (1 mark)
Case Study
The unemployment rate rose from 3.9 percent in December 2000 to 4.9 percent in August 2001 and to
6.3 percent in June 2003. The unemployment rate then began to decline. By January 2005,
unemployment had fallen back to 5.2 percent. What caused the recession, and what ended it?
The recession began with the end of the bubble in the stock market. During the 1990s, many stock-
market investors became optimistic about information technology, and they bid up stock prices,
particularly of high-tech companies. With hindsight, it is fair to say that this optimism was excessive.
Eventually, the optimism faded, and stock prices fell by about 25 percent from August 2000 to August
2001. The fall in the stock market reduced household wealth, which in turn reduced consumer spending.
In addition, when the new technologies started to appear less profitable than they had originally
seemed, investment spending fell.
The third event that put downward pressure on aggregate demand was a series of corporate accounting
scandals. During 2001 and 2002, several major corporations, including Enron and World Com, were
found to have misled the public about their profitability. When the truth became known, the value of
their stock plummeted. Even honest companies experienced stock declines, as stock-market investors
became less trustful of all accounting data. This fall in the stock market further depressed the demand
side of the economy.
Policymakers were quick to respond to these events. As soon as the economic slowdown became
apparent, the Federal Reserve pursued expansionary monetary policy. Money growth accelerated, and
interest rates fell. The federal funds rate (the interest rate on loans between banks that the Fed uses as
its short-term policy target) fell from 6.5 percent in December 2000 to 1.0 percent in June 2003. At the
same time, with the president’s urging, Congress passed a tax cut in 2001, including an immediate tax
rebate, and another tax cut in 2003.
Q#1. Explain the fluctuations in the unemployment rate with the help of fluctuations in the GDP of an
economy.
Answer: Any deviation of Actual Real GDP from Potential Real GDP creates the deviation in the Actual
and Natural rate of Unemployment but with an opposite direction. If Actual real GDP will be more than
potential level of GDP, then the unemployment rate will be less than the natural rate of unemployment
of that economy.
Q #.2 Explain graphically that how excessive optimism and series of corporate accounting scandals affect
the economy.
Answer: The aggregate demand (planned expenditure curve) will shift downward and income level of
the economy will reduce.
Q #. 3 Explain with the help of theory and graph that how an increase in Money supply will affect the
equilibrium in the economy?
Answer: Lower interest rates stimulated spending by reducing the cost of borrowing that will put the
pressure on aggregate demand by increasing the level of consumption and investment expenditures.
The curve of planned expenditure will shift upward.
Q #. 4 Show the effect of tax cut on the income level of the economy and unemployment by graphically.
Answer: The tax cut will increase the consumption and investment level in the economy. In the result of
this aggregate demand curve (Planned expenditure curve) will shift upward.
Case Study
eBay runs an online marketplace with over 220 million registered users who buy and sell 2.4 billion
items a year, ranging from children’s toys to oil paintings. In December 2007, one eBay user auctioned
off a 1933 Chicago World’s Fair pennant. The winning bid was just over $20.
eBay is traded on the New York Stock Exchange, employs hundreds of people, and has a market value of
about $40 billion. With regard to eBay, what do you think gets counted as part of current GDP?
That 1933 pennant, for example, does not get counted. The production of that pennant was counted
back in 1933. The many cartons of K’nex bricks sent from one home to another don’t count either. Their
value was counted when the bricks were first produced. What about a newly minted Scrabble game?
One of the interesting features of eBay is that it has changed from being a market in which individuals
market their hand-me-downs to a place that small and even large businesses use as a sales site. The
value of the new Scrabble game would be counted as part of this year’s GDP if it were produced this
year.
So do any of eBay’s services count as part of GDP? eBay’s business is to provide a marketplace for
exchange. In doing so, it uses labor and capital and creates value. In return for creating this value, eBay
earns fees to the sellers that use its site.
1. Should a 1933 pennant auctioned at eBay be counted in GDP? Why or why not?
Ans. No. GDP includes only currently produced goods and services. Value of 1933 pennant has already
been counted in 1933 GDP.
2. Mention the necessary condition for Scrabble game to be counted in current year’s GDP.
Ans. The Scrabble game should be produced within the country in the current year.
Ans. Earnings of eBay should be included in GDP because eBay provides services of connecting buyers
with sellers. Important thing is to distinguish between eBay earnings (profits) and sales.