Economics Mcqs PDF

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 labor 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 price level.
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 work at 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 labor 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
9 Macroeconomics is the branch of economics that deals with

A. the economy.
B. imperfectly competitive markets.
C. only the long run adjustments to equilibrium in the economy.
D. the functioning of individual industries and the behavior 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 emphasized the theories of Keynes and de-emphasized the
Classical theory developed as the result 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 demoralized workers.
B. this would reduce the purchasing power of laborer’s as consumers. This in turn
would bleaker firms’ prospects of selling more goods, hence inducing them to cut their
investment (and hence labor) demand.
C. the unemployment was caused by frictional and structural factors.
D. wages would fall more than required to clear the labor market.
13 The practice of using fiscal and monetary policy to stabilize 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 demand for goods and services.
15 According to Keynes, the level of employment is determined by
A. interest rates.
16 According to the Classical model, unemployment

A. could not persist because wages would fall to eliminate the excess supply of labor.
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 of the 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 demanded are
A. market prices.
B. sticky prices.
C. fixed prices.
D. regulatory prices.
21 The economists who emphasized 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 could, 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 Great Depression 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 during the 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
behavior 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.
29 Say’s law states that:
A. Supply creates its own demand.
B. Demand creates its own supply.
C. There are no such things as a free lunch
D. Macroeconomic policy activism is essential to ensure full-employment.
30 The aggregate supply (AS) curve and aggregate demand (AD) curve in a realistic Keynesian
world are:
A. AS: fully horizontal; AD: downward sloping
B. AS: horizontal only till the full capacity level; AD: downward sloping
C. AS: vertical; AD: upward sloping
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 2001 to 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 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 higher investment, which in turn would
continue to cause multiplied increases in output.
D. All the above.
11. In the equation C = a + by, which describes the aggregate consumption function, 'a' stands
for
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 stabilizer.
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. 3/4
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. Rest. 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 national income,
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.
THE BIG FOUR: UNEMPLOYMENT, INFLATION, BALANCE OF PAYMENTS AND

GROWTH
UNEMPLOYMENT
1. If both the no. of unemployed people and the size of the labor 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 labor
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 labor force. On the other hand, people, already on the labor 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 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 jobs in 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 that is 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 labor market is that the wage adjustments that
are necessary to clear the labor 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 cashflows.
C. Worsened income inequality: inflation is a regressive tax on the people that does not consider
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 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 demand pressures in the 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 up warding 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.
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 rates.
B. pegged exchange rates.
C. fixed exchange rates.
D. managed exchange rates.
25. If the State Bank of Pakistan reduces the money supply, a floating exchange rate will help
in reducing inflation because
A. as the money supply is decreased, the interest rate will increase, and the price of both
Pakistani exports and Pakistani imports will rise.
B. as the money supply is decreased, the interest rate will increase, and the price of Pakistani
exports will rise and the price of Pakistani imports will fall.
C. as the money supply is decreased, the interest rate will increase, and the price of
Pakistani exports will fall and the price of Pakistani imports will rise.
D. as the money supply is decreased, the interest rate will increase, and the price of Pakistani
exports and Pakistani imports will fall.
26. 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
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 fueled 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 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 labor 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. independent
D. constant
36. An example of capital deepening, given an increasing L, would be:

A. K increases 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, 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 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 ______.
41. If the economy is approaching the trough phase of the business cycle, aggregate demand is
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 defense 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 taxpayer must
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 and 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.
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. behavior of shifting the tax to another 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 1st best world

B. If you live in a 2nd best world
C. If the tax rates on some of the items are prohibitively high
D. Either of the above
7. The automatic stabilization 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 State Bank of Pakistan 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 tradeable 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 State Bank of
Pakistan?
A. Monitoring the financial health of banks and non-bank financial institutions.
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 that are friendly to Pakistan.
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 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?1
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 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 are termed as:
A. Trade Surplus
B. Trade Deficit
C. Budget Surplus
D. None
5. Fiscal policy is the government programmed with respect to its:
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. Prime Minister is PhD in Macroeconomics

B. Aggregate Demand Equals Aggregate Supply
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 does 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.
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 of above.
7. Which is high powered money?
A. M1
B. M2
C. Mo
D. None
8. There are _________major instruments of monetary policy:
A. Three
B. Four
C. Five
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 increase
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
3. The increase in the Public-Sector Borrowing Requirement (PSBR) to almost £50 billion
this year will automatically lead to:
a. A higher rate of inflation

b. A fall in the rate of unemployment
c. An increase in the National Debt
d. A deterioration in the Balance of Payments
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 labor 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 over operations.
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 labor market is that the wage adjustments that
are necessary to clear the labor market occur:
a. Slowly.
b. Quickly.
c. Very infrequently.
d. Instantly.
14.Those that hold the classical view of the labor market are likely to believe that:
a. Monetary, but not fiscal policy will influence output and employment.
b. Both monetary and fiscal policy will influence output and employment.
c. Fiscal, but not monetary policy will influence output and employment.
d. Neither monetary nor fiscal policy will influence 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
ECO401 Economics Solved MCQs and Subjective Questions

(a) What were the Classical views about saving?
(b) What is the meaning of Paradox of thrift? Illustrate Paradox of thrift using a diagram.
(Marks 10)
SOLUTION:
Classical views about saving
Classical economist considered saving as a big virtue of society. They said it is very important
for the people to save because more they save, saving curve will shift towards right. This will
lower interest rate and will increase investment. Due to more investment in the economy, higher
will be the growth rate. So, the saving was engine of growth for classical economists.
Meanings of Paradox of Thrift
The reverse multiplier effect can be illustrated in the context of Keynes’s paradox of thrift, which
highlights the negative impact of higher saving in an economy in recession. Keynes said that such
thrift (or conservative saving behavior) would accentuate the recession. As people save more, they
will spend less. Firms will therefore produce less, and labor hiring will, as a result, fall, leading to
a decline in incomes. This decline would also happen in a multiplied fashion, causing a huge
decline in national income. The paradox lies in the fact that saving, while usually considered good
for any one individual, can be harmful to the overall economy if everyone started saving.
Illustration of Paradox of Thrift using a diagram
Paradox of thrift can be illustrated using withdrawals and injections approach to output
determination. Withdrawals and injections are taken on vertical axis and the output is taken on
horizontal axis.
If people start saving more for a rainy day or something else, the withdrawal function will shift
upwards because saving is a form of withdrawals. The withdrawal function will rise from w1to
w2. However, if the people save more, they will naturally be able to spend less. If the spending is
less, the firms will be able to produce less. There will thus be a multiplied fall in income. The
phenomenon of higher savings leading to lower national income is known as Paradox of Thrift
i.e., the movement of point c to point a in this diagram that is from output level Ye1 to Ye2
shows the paradox of thrift that is the disadvantage of being overly prudent.
But this is not all. Far from the extra saving encouraging more investment, the lower
consumption will discourage firms from investing. So, if investment falls, the J line will shift
from J to J’. So, there will again be a further multiplied fall in income from Ye2 to Ye3.So that
was another dimension of Keynes argument. Through all these different arguments, Keynes was
advocating the case of fiscal policy expansion in situation of recession.
Discuss the three core rules of elasticity.
(M - 05)
Rule # 01
If elasticity is between zero and one (0 < e < 1), it is said to be inelastic, if elasticity is greater than
one (e > 1), it is said to be elastic, if elasticity is equal to zero (e = 0), it is said to be unitary elastic
and if elasticity is equal to infinity (e = ∞), it is said to be infinitely elastic.
Rule # 02
If sign of income elasticity of demand is positive then good is normal and if sign is negative then
good is inferior.
Rule # 03
If sign of cross price elasticity of demand is positive then goods are substitutes of each other and
if the sign is negative then goods are compliments.
Total Marks =10
Highlight the correct option.
1. Marginal utility measures:
A. The slope of the indifference curve.

B. The additional satisfaction from consuming one more unit of a good.
C. The slope of the budget line.
D. The marginal rate of substitution.
2. Which of the following best expresses the law of diminishing marginal utility?
A. The more a person consumes of a product, the smaller becomes the utility which he
receives from its consumption.
B. The more a person consumes of a product, the smaller becomes the additional
utility which she receives because of consuming an additional unit of the product.
C. The less a person consumes of a product, the smaller becomes the utility which she
D. The less a person consumes of a product, the smaller becomes the additional utility
which he receives because of consuming an additional unit of the product.
3. A curve that represents all combinations of market baskets that provide the same level of
utility to a consumer is called:
A budget line.
An isoquant.
An indifference curve.
A demand curve.
4. The marginal rate of substitution:
A. May rise or fall, depending on the slope of the budget line.
B. Rises as you move downward along an indifference curve.
C. Falls as you move downward along an indifference curve.
D. Remains the same along a budget line.
5. Which of the following is a characteristic of the indifference curves?
A. They are concave to the origin.
B. They are convex to the origin.
C. Curves closer to the origin have the highest level of total utility.
D. Curves closer to the origin have the highest level of marginal utility.
6. In the diagram given below, the budget line is best represented by the line:
A. AB
B. AD
C. FG
D. DG
7. The endpoints (horizontal and vertical intercepts) of the budget line:
A. Measure its slope.

B. Measure the rate at which one good can be substituted for another.
C. Measure the rate at which a consumer is willing to trade one good for another.
D. Represent the quantity of each good that could be purchased if all the budget were
allocated to that good.
8. If prices and income in a two-good society double, what will happen to the budget line?
A. The intercepts of the budget line will increase.

B. The intercepts of the budget line will decrease.
C. The slope of the budget line may either increase or decrease.
D. There will be no effect on the budget line.
9. If Px = Py, then when the consumer maximizes utility,
A. X must equal Y.
B. MU(X) must equal MU(Y).
C. MU(X) may equal MU(Y), but it is not necessarily so.
D. X and Y must be substitutes.
10. The difference between what a consumer is willing to pay for a unit of a good and what
must be paid when actually buying it is called:
A. Producer surplus.
B. Consumer surplus.
C. Cost-benefit analysis.
D. Net utility.
Total Marks = 10
Highlight the correct option.
1. Which of following is a key assumption of a perfectly competitive market?
A. Firms can influence market price.

B. Commodities have few sellers.
C. It is difficult for new sellers to enter the market.
D. Each seller has a very small share of the market.
2. A firm maximizes profit by operating at the level of output where:
A. Average revenue equals average cost.

B. Average revenue equals average variable cost.
C. Total costs are minimized.
D. Marginal revenue equals marginal cost.
3. The demand curve facing a perfectly competitive firm is:
A. Downward-sloping and less flat than the market demand curve.

B. Downward-sloping and flatter than the market demand curve.
C. Perfectly horizontal.
D. Perfectly vertical.
4. The monopolist has no supply curve because:
A. The quantity supplied at any price depends on the monopolist's demand curve.
B. The monopolist's marginal cost curve changes considerably over time.
C. The relationship between price and quantity depends on both marginal cost and average cost.
D. There is a single seller in the market.
5. A doctor sizes up patients' income and charges wealthy patients more than poorer
ones. This pricing scheme represents a form of:
A. First-degree price discrimination.

B. Second-degree price discrimination.
C. Third-degree price discrimination.
D. Pricing at each consumer’s reservation price.
6. For which of the following market structures is it assumed that there are barriers to entry?
A. Perfect competition
B. Monopolistic competition
C. Monopoly
D. All the above
7. A market with few entry barriers and with many firms that sell differentiated products is:
A. Purely competitive.
B. A monopoly.
C. Monopolistically competitive.
D. Oligopolistic.
8. Welfare economics is a branch of economics dealing with:
A. Social issues.
B. Normative issues.
C. Political issues.
9. ___________________ are goods that people must get a flavor of before they can consider
buying them.
A. Experience goods.
B. Geffen goods.
C. Normal goods.
10. Which of the following does not refer to macroeconomics?
A. The study of aggregate level of economic activity.

B. The study of causes of unemployment.
C. The study of causes of inflation.
D. The study of the economic behavior of individual decision-making units such as
consumers, resource owners and business firms.
Total Marks = 10
Fill in the blanks with appropriate words.
1. The balance of payments (BOPs) is an accounting record of a country’s transactions with the
rest of the world.
2. Any transaction which causes the supply curve of dollars to shift to the right is recorded with
a positive sign on the BOPs.
3. A growth rate of between 2-3% is considered normal for mature developed countries.
Fiscal deficits and debt are often reported as a ratio of GDP.

There are two dimensions to the debate over taxation: equity and efficiency.
6. The relationship between tax rate and tax revenue collection can be summarized in the Laffer
curve diagram.
7. Disposable income is obtained by subtracting income tax from total income.
8. Money or paper currency serves at least three functions: it is a medium of exchange, a store of
value and a unit of account.
9. Monetary policy can be defined as the central bank’s programmed, often changing daily,
regarding the direct or indirect control (through interest rates) of monetary conditions in the
economy with a view to managing aggregate demand and inflation.
10. Any balance sheet has two sides: assets and liabilities
1. Which of the following would shift the demand curve for new textbooks to
the right?
a. A fall in the price of paper used in publishing texts.
b. A fall in the price of equivalent used text books.
c. An increase in the number of students attending college.
d. A fall in the price of new text books.
2. Which of these measures the responsiveness of the quantity of one good demanded to an
increase in the price of another good?
a. Price elasticity.
b. Income elasticity.
c. Cross-price elasticity.
d. Cross-substitution elasticity.
3.Assume that the current market price is below the market clearing level. We would expect:
a. A surplus to accumulate.
b. Downward pressure on the current market price.
c. Upward pressure on the current market price.
d. Lower production during the next time.
4.The income elasticity of demand is the:
a. Absolute change in quantity demanded resulting from a one-unit increase in income.
b. Percent change in quantity demanded resulting from the absolute increase in income.
c. Percent change in quantity demanded resulting from a one percent increase in
income.
d. Percent change in income resulting from a one percent increase in quantity demanded.
5. Which of the following statements about the diagram below is true?

a. Demand is infinitely elastic.
b. Demand is completely inelastic.
c. Demand becomes more inelastic the lower the price.
d. Demand becomes more elastic the lower the price.
6. In the long run, new firms can enter an industry and so the supply elasticity tends to
be:
a. More elastic than in the short-run.
b. Less elastic than in the short-run.
c. Perfectly elastic.
d. Perfectly inelastic.
a. A budget line.
b. An isoquant.
c. An indifference curve.
d. A demand curve.
8. The magnitude of the slope of an indifference curve is:
a. Called the marginal rate of substitution.
b. Equal to the ratio of the total utility of the goods.
c. Always equal to the ratio of the prices of the goods.
d. All the above.
9. Which of the following is a positive statement?
a. Intermediate microeconomics should be required of all economics majors to build a solid

foundation in economic theory.
b. The minimum wage should not be increased, because to do so would increase
unemployment.
c. Smoking should be restricted on all airline flights.
d. None of the above.
10. A supply curve reveals:
a. The quantity of output consumers is willing to purchase at each possible market price.
b. The difference between quantity demanded and quantity supplied at each price.
c. The maximum level of output an industry can produce, regardless of price.
d. The quantity of output that producers are willing to produce and sell at each possible
market price.
1) Given the following table, what would Firm A, which is a firm operating in a duopoly
(along with firm B) do, if it were following a maximin strategy?
(p stands for profit or payoff) STRATEGY FOR FIRM A
Not lower price Lower price
STRATEGY FOR Not lower price pA = Rs 400m pA = Rs 300m

FIRM B
Lower price pA = Rs 100m pA = Rs 200m
A. Lower its price

B. Not lower its price
C. We do not have information on pB so we cannot answer the question
D. None of the above
2) Which of the following would NOT constitute a pure public good?

A. National defense.
B. A new national holiday.
C. Free health service.
D. National environmental protection.
3) One of the characteristics of a public good, X, is that it is “non-rival”. It means:

A. It is not possible to exclude anyone from using (or benefiting from) X.
B. There is no substitute for X.
C. One person’s use of X does not affect another person’s ability to use (or
benefit from) X.
4) Why might advertising exceed its socially optimal level?

A. Because the marginal social costs of advertising are less than the marginal private
costs.
B. Because private firms do not or cannot incorporate marginal external costs
when deciding how much to advertise.
C. The marginal external benefit to advertising is not considered by firms.
5) If MSBX > MPBX, what can the government do to align the market outcome with the
social optimum:
A. Impose a consumption tax.
B. Impose a production tax.
C. Provide a consumption subsidy.
D. Provide a production subsidy
6) If the VMP for labor > the MRP for labor, and there is no government intervention, you
can conclude that the underlying market structure is:
A. a monopoly.
B. perfect competition.
C. not perfect competition.
D. none of the above.
7) A backward bending labor supply curve (roughly similar in shape to an inverted C)

obtains when the income effect of a wage rise (beyond a certain wage level) dominates the
substitution effect. If it was also the case that the income effect of a wage reduction (below a
certain wage level) dominated the substitution effect, what would the complete labor supply
curve roughly look like in “wage-hours worked” space?
A. a 3.
B. an inverted 3.
C. an S.
D. an inverted S.
8) A firm is considering the project of buying an ice-cream producing machine costing Rs.
1,000,000 that will serve for 10 years and then have a scrap value of Rs. 110,000 at the end
of 10 years. If the present value of the net ice-cream sales revenues that the machine will
generate is Rs. 900,000, then, assuming a 10% annual discount rate:
A. the firm should not buy the machine because the NPV associated with the
overall project is negative.
B. the firm should be indifferent between buying and not buying because the NPV of
the overall project is zero.
C. The firm should buy the machine because the NPV of the overall project is
positive.
9) If the quarterly rent from a house is Rs. 5,000, the annual interest rate is fixed at 5%, and
housing market conditions are stable, what would you expect the market price of the house to
be?
A. Rs. 100,000
B. Rs. 200,000
C. Rs. 400,000
D. Rs. 800,000
10) There are many differences between labor and land as factors of production, for e.g.:
A. Labor cannot be purchased like land, it can only be rented.

B. There is no obvious reason why landowners will reduce the supply of land when
the rental price of land goes up.
C. The decision to hire labor does not directly depend on the interest rate.
D. All the above.
11) Information products are unique in that the marginal cost of __________ the product is
virtually zero.
A. producing
B. distributing
C. accessing
D. all the above
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 labor 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 price level.
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 work at 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 labor market.
7 A cut in the income tax rate designed to encourage household consumption is an example of
8 A cut in the tax rate designed to reduce the cost of capital and hence encourage business
investment is an example of
9 Macroeconomics is the branch of economics that deals with

A. the economy.
B. imperfectly competitive markets.
C. only the long run adjustments to equilibrium in the economy.
D. the functioning of individual industries and the behavior 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.
11 Macroeconomic theory that emphasized the theories of Keynes and de-emphasized the
Classical theory developed as the result 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 demoralized workers.
B. this would reduce the purchasing power of laborer’s as consumers. This in
turn would bleaker firms’ prospects of selling more goods, hence inducing them
to cut their investment (and hence labor) demand.
C. the unemployment was caused by frictional and structural factors.
D. wages would fall more than required to clear the labor market.
13 The practice of using fiscal and monetary policy to stabilize 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.
15 According to Keynes, the level of employment is determined by

A. interest rates.
16 According to the Classical model, unemployment

A. could not persist because wages would fall to eliminate the excess supply of
labor.
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 of the 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 demanded are
A. market prices.
B. sticky prices.
C. fixed prices.
D. regulatory prices.
21 The economists who emphasized 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 could, 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 Great Depression 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 during the 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 behavior 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.
29 Say’s law states that:

A. Supply creates its own demand.
B. Demand creates its own supply.
C. There are no such things as a free lunch
D. Macroeconomic policy activism is essential to ensure full-employment.
30 The aggregate supply (AS) curve and aggregate demand (AD) curve in a realistic
Keynesian world are:
A. AS: fully horizontal; AD: downward sloping
B. AS: horizontal only till the full capacity level; AD: downward sloping
C. AS: vertical; AD: upward sloping
D. AS: horizontal; AD: vertical
1. A price taker is:
A. A firm that accepts different prices from different customers.

B. A consumer who accepts different prices from different firms.
C. A firm that cannot influence the market price.
D. Both (b.) and (c.).



E. 5. Compared to the equilibrium price and quantity sold in a competitive market, a
monopolist will charge a ______________ price and sell a ______________ quantity:
A. Higher; larger
B. Lower; larger
C. Higher; smaller
D. Lower; smaller

8. For which of the following market structures is it assumed that there are barriers to
entry?
C. Monopoly
D. All the above
B. A monopoly.
D. Oligopolistic.

1. The study of economics is primarily concerned with:
A. Demonstrating that capitalistic economies are superior to socialistic economies.

B. Determining the most equitable distribution of society's output.
C. Keeping private businesses from losing money.
D. Choices which are made in seeking to use scarce resources efficiently.
2. Opportunity cost is:
A. That which we forego, or give up, when we make a choice or a decision.

B. A cost that cannot be avoided, regardless of what is done in the future.
C. The additional cost of producing an additional unit of output.
D. The additional cost of buying an additional unit of a product.
3. Periods of less than full employment corresponds to:

A. Points outside the ppf. (production possibility frontier).
B. Points inside the ppf.
C. Points on the ppf.
D. Either points inside or outside the ppf.
4. In a free-market economy the allocation of resources is determined by:
A. votes taken by consumers

B. a central planning authority
C. Consumer preferences
D. the level of profits of firms
5. A firm produces chairs. An economist working for the firm predicts that 'if people's
incomes rise next year, then the demand for our chairs will increase, ceteris paribus.' The
accuracy of the economist's prediction depends on whether the chairs that firm produces:
A. Have many complementary goods.

B. Have few substitutes.
C. Have few complementary goods.
D. Are normal goods.
6. According to law of demand, a demand curve is:
A. Horizontal
B. Vertical
C. Downward sloping
D. Directly related to law of supply
7. A rational decision maker will take only those actions for which the marginal benefit:
A. Is positive.
B. Is at its maximum level.
C. Is less than marginal cost.
D. Is greater than or equal to the expected marginal cost.
8. All the following are determinants of supply except:
A. Price
B. Income levels
C. Objectives of the firm
D. Level of technology
9. Normative economics:
A. Deals solely with the facts

B. Is never studied in the colleges
C. Involves opinions and interpretations
D. Is clearly preferable to positive economics
10. The transformation of resources into economic goods and services is:
A. Technical efficiency
B. Input
C. Production
D. Increasing returns
1. The price elasticity of demand is defined as the absolute value of the ratio of:
A. Price over quantity demanded.

B. Change in price over change in quantity demanded.
C. Percentage change in price over the percentage change in quantity demanded.
D. Percentage change in quantity demanded over the percentage change in price.
2. If a good is a luxury, its income elasticity of demand is:
A. positive and less than 1

B. negative but greater than -1
C. positive and greater than 1
D. zero
3. A resource is something that:
A. Is used to produce goods and services.

B. Is provided by nature, not made by society.
C. Exists in unlimited quantities.
D. Must be produced by a firm.
4. If the cross-price elasticity between home personal computers and video game units for
TV is positive, one can conclude that
A. These products are substitutes for one another.

B. These products complement one another.
C. These products are over-priced.
D. Consumers are irrational.
5. As one moves along a convex isoquant, which of the following does not change?
A. The marginal rate of technical substitution.

B. The capital-labor ratio.
C. The marginal product of labor relative to the marginal product of capital.
D. The level output produced.
6. Of the following goods, the one where the law of diminishing marginal utility is least likely
to apply is:
A. Water.
B. Cigarettes.
C. Toothpaste.
D. Rap music.
7. The optimal purchasing rule states that total utility is maximized when a consumer:
A. Consumes as much as possible of all good.

B. Consumes the same quantities of all goods.
C. Completely uses up their income.
D. Consumes to the point where the marginal utility per dollar spent on all goods is the
same.
8. Which of the following pairs come closest to being complementary goods?

A. Apples and oranges.
B. Cameras and films.
C. A free hotel room and a free meal.
D. Cream and milk.
9. A Giffen good:
A. Is a good that people buy more of as their incomes fall.

B. Is a good which people buy more of as its price increases.
C. Is a good on which people spend a small portion of their income.
D. Has a vertical demand curve.
10. When an industry expands its costs of production will:
A. Increase.
B. Decrease.
C. stay the same.
D. none 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
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. Prime Minister is PhD in Macroeconomics
B. Aggregate Demand Equals Aggregate Supply
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
If
TR = 100q – 4q2
TC = 50 + 20q
Find out the value of output at which profit is maximized.

Solution:
Profit is maximized at the point where
MC = MR
MC function can be found by taking derivative of total cost function. i.e.:
MC = d TC / dQ
MC = 20
MR function can be found by taking derivative of total revenue (TR) function i.e.:
MR = d TR / dQ
= 100 – 8Q
As profit is maximized at the point where MR = MC, so by equating values of MC and MR
function, we get,
MR =MC
100 – 8Q = 20
8Q = 100 – 20
8Q = 80
Q = 10
The equation for total profit is
Tñ = TR – TC
= 100Q – 4Q2 - (50 + 20Q)
= 100Q – 4Q2 – 50 – 20Q
= -4Q2 + 80Q – 50
Putting Q = 10, we get,
Tñ = - 4(10)2 + 80 (10) – 50
= -400 + 800 -50
Tñ = 350
So profit is maximized where output is 10 and the maximum profit is 350.
5. Under conditions of Keynesian equilibrium:
A. aggregate demand equals aggregate supply
B. aggregate demand equals national income
C. both A and B
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 higher investment, which in
turn would continue 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' stands
for
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. 3/4
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 national income,
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
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 jobs in 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 that is 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 cashflows.
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 in the
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 upwarding 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.
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.
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 rates.

B. pegged exchange rates.
C. fixed exchange rates.
D. managed exchange rates.
25. If the State Bank of Pakistan reduces the money supply, a floating exchange rate will help
in reducing inflation because
A. as the money supply is decreased, the interest rate will increase, and the price of both
Pakistani exports and Pakistani imports will rise.
B. as the money supply is decreased, the interest rate will increase, and the price of Pakistani
exports will rise and the price of Pakistani imports will fall.
C. as the money supply is decreased, the interest rate will increase, and the price of
Pakistani exports will fall and the price of Pakistani imports will rise.
D. as the money supply is decreased, the interest rate will increase, and the price of Pakistani
exports and Pakistani imports will fall.
26. 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
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 fueled 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 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 labor 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. independent
D. constant
36. An example of capital deepening, given an increasing L, would be:
A. K increases 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, 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 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

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 ______.

41. If the economy is approaching the trough phase of the business cycle, aggregate demand is

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
1) ----------------- is the entire satisfaction one derives from consuming goods or services:
A. Total utility
B. Scarcity
C. Marginal utility
D. Rationing
2) The law of diminishing marginal utility states that:
A. As consumer consumes more and more units of any commodity, the utility
that consumer derives from each additional unit falls
B. As consumer consumes more and more units of any commodity, the utility
that consumer derives from each additional unit rises
C. As consumer consumes more and more units of any commodity, the utility
that consumer derives from each additional unit remains the same
D. As consumer consumes less and less units of any commodity, the utility
that consumer derives from each additional unit falls
4) Marginal utility measures:
A. The slope of the indifference curve
B. The additional satisfaction from consuming one more unit of a good
C. The slope of the budget line
D. The marginal rate of substitution
5) ----------------- is the difference between willingness to pay and what the consumer must
pay:
A. Total Utility
B. Consumer surplus
C. Producer surplus
D. Total product
6) -------------- is the ratio of the probability of success to the probability of failure:
A. Input output ratio
B. Odds ratio
C. Price earnings ratio
D. Price sales ratio
7) ------------------- operate under the principle of law of large numbers:
A. Banks
B. Insurance companies
C. Government sponsored enterprises
D. None of the given options
8) The optimum consumption point for the consumer is a point where:
A. The slopes of the indifference curve and budget line are equal
B. The slopes of the indifference curve and total product are equal
C. The slopes of the total utility curve and budget line are equal
D. The slopes of the total product curve and total utility curve are equal
9) A curve that represents all combinations of market baskets that provide the same level of
A. A budget line
B. An isoquant
C. An indifference curve
D. A demand curve
10) The slope of an indifference curve reveals that:
A. The preferences are complete
B. The marginal rate of substitution of one good for another good
C. The ratio of market prices
D. That preferences are transitive
11) The law of diminishing returns applies to
A. The short run only
B. The long run only
C. Both the short and the long run
D. Neither the short nor the long run
12) In the long run:
A. All inputs are fixed
B. All inputs are variable
C. At least one input is variable and one input is fixed
D. At most one input is variable and one input is fixed
13) According to the law of diminishing returns
A. The total product of an input will eventually be negative
B. The total product of an input will eventually decline
C. The marginal product of an input will eventually be negative
D. The marginal product of an input will eventually decline
14) The slope of the total product curve is the
A. Average product
B. Slope of a line from the origin to the point
C. Marginal product
D. Marginal rate of technical substitution
15) The short run is
A. Less than a year
B. Three years
C. However long it takes to produce the planned output
D. A time in which at least one input is fixed
16) The marginal product of an input is
A. Total product divided by the amount of the input used to produce this amount
of output
B. The addition to total output that adds nothing to profit
C. The addition to total output due to the addition of one unit of all other inputs
D. The addition to total output due to the addition of the last unit of an input,
holding all other inputs constant
17) Average product is defined as:
A. Total product divided by the total cost
B. Total product divided by marginal product
C. Total product divided by the variable input
D. Marginal product divided by the variable input
18) Marginal product crosses the horizontal axis (is equal to zero) at the point where:
A. Average product is maximized
B. Total product is maximized
C. Diminishing returns set in
D. Output per worker reaches a maximum
19) The law of diminishing returns refers to diminishing
A. Total returns
B. Marginal returns
C. Average returns
D. All the given options
20) The law of diminishing returns assumes that
A. There is at least one fixed input
B. All inputs are changed by the same percentage
C. Additional inputs are added in smaller and smaller increments
D. All inputs are held constant
1- Since TR= P×Q, suppose a perfectly competitive firm increases its
production from 10 units to 11 units. If the market price is $20 per unit, total
revenue for 11 units is:
A. $20
B. $200
C. $210
D. $220
2- The profit-maximizing level of output for a perfectly competitive firm
occurs where:
A. Marginal revenue equals marginal cost
B. Total revenue equals total cost
C. Average revenue equals average total cost
D. Average revenue equals average variable cost
3- A downward-sloping demand curve exists for:
A. A monopoly, but not for a perfectly competitive firm
B. A perfectly competitive firm, but not for a monopoly
C. Both a monopoly and a perfectly competitive firm
D. Neither a monopoly nor a perfectly competitive firm
4- Average revenue for a monopolist is:
A. Greater than price
B. Less than price
C. Less than marginal revenue
D. Greater than marginal revenue
5- Food chains are operating in Pakistan like Mc Donald, KFC and Pizza Hut
etc. These food chains sell their products in different countries at different
prices. This is an example of:
A. First-degree price discrimination
B. Second-degree price discrimination
C. Third-degree price discrimination
D. Monopolistic competition
6- You go to the market to purchase mangoes. Suppose 1 KG of mangoes =
Rs. 45. If you purchase 1 KG of mangoes, seller will not discount the rate.
But if you purchase mangoes in bulk amount then he will sell you at lower
price. This is an example of:
A. First-degree price discrimination
B. Second-degree price discrimination
C. Third-degree price discrimination
D. Monopolistic competition
7- Which of the following is true for both perfect and monopolistic
competition?
A. Firms produce a differentiated product
B. Firms face a downward sloping demand curve
C. Firms produce a homogeneous product
D. There is freedom of entry and exit in the long run
8- A feature of monopolistic competition that makes it like monopoly
is the:
A. Inability to influence the price
B. Downward sloping demand curve
C. Ease of entry into the industry
D. Horizontal marginal revenue curve
9- Monopolistic competition is a market structure characterized by:
A. A single buyer and several sellers
B. A product with no close substitutes
C. Barriers to entry and exit
D. Differentiated products
10- A feature of oligopoly that makes it like monopoly is the:
A. Inability to influence the price
B. Downward-sloping demand curve
C. Freedom of entry into the industry
D. Horizontal marginal revenue curve
11- The market structure in which each firm is independent in decisions is
known as:
A. Monopolistic competition
B. Oligopoly
C. Perfect competition
D. Monopoly
12- In the kinked demand curve model, if one firm reduces its price:
A. Other firms will also reduce their price
B. Other firms will compete on a non-price basis
C. Other firms will raise their price
D. All the given options
13- The origins of classical economics can be traced to the work of:
A. Karl Marx
B. Milton Friedman
C. John Maynard Keynes
D. Adam Smith
14- Say’s Law is a proposition underlying classical economics stating that:
A. Supply creates its own demand
B. Leakages are greater than injections
C. Unemployment is a common condition
D. Consumption expenditures are a function of disposable income
15- According to classical economics, the economy was unlikely to
experience:
A. Full employment
B. Flexible wages and prices
C. Equality between saving and investment
D. High rates of unemployment
16- Classical economics was replaced as the dominant theory of
macroeconomic analysis by:
A. Monetarism
B. Rational expectations
C. Keynesian economics
D. Neoclassical economics
17- Keynesian economics was largely developed to address the economic
problems of the:
A. Stagflation of the 1970s
B. Great Depression of the 1930s
C. English industrial revolution of the late 1700s
D. American industrial revolution of the late 1800s
18- Keynesian economics was the predominant economic theory:
A. Prior to the late 1700s
B. From the late 1700s to the early 1900s
C. From the 1930s to the 1970s
D. Since the 1970s
19- Keynesian economics rejected the classical assumption that:
A. Supply creates its own demand
B. Prices and wages are inflexible
C. Self-correction takes a long time
D. Consumption expenditures depend on disposable income
20- Aggregate demand curve is downward sloping due to the:
A. Interest rate effect
B. Wealth effect
C. International purchasing power effect
D. All the given option
21- A primary implication of Keynesian economics is:
A. The best government is the least government
B. Flexible wages and prices ensure full employment
C. Self-correction is the best way to eliminate unemployment
D. Economic instability is best corrected through the interference of
government
22- Demand-management policies are designed to shift the:
A. Aggregate Demand curve
B. Aggregate Supply curve
C. Philips curve
D. Production possibilities curve
23- Aggregate supply is the relation between real production and:
A. Scarcity
B. The price level
C. Aggregate expenditures
D. Foreign trade
24- The long-run aggregate supply curve is:
A. Downward sloping
B. Upward sloping
C. Vertical at the full-employment level
D. Horizontal at the full-employment level
25- A leftward shift of the SRAS curve is a (n):
A. Increase in long-run aggregate supply
B. Decrease in long-run aggregate supply
C. Increase in short-run aggregate supply
D. Decrease in short-run aggregate supply
1. The slope of an indifference curve reveals:
a. That preferences are complete.

b. The marginal rate of substitution of one good for another good.
c. The ratio of market prices.
d. That preferences are transitive.
3. An increase in income, holding prices constant, can be represented as:
a. A change in the slope of the budget line.

b. A parallel outward shift in the budget line.
c. An outward shift in the budget line with its slope becoming flatter.
d. A parallel inward shift in the budget line.
a. The intercepts of the budget line will increase.

b. The intercepts of the budget line will decrease.
c. The slope of the budget line may either increase or decrease.
d. There will be no effect on the budget line.
5. An individual consumes only two goods, X and Y. Which of the following expressions
represents the utility maximizing market basket?
a. MRSxy is at a maximum.
b. Px/Py = money income.
c. MRSxy = money income.
d. MRSxy = Px/Py.
6. Which of the following is true regarding income along a price consumption curve?
a. Income is increasing.
b. Income is decreasing.
c. Income is constant.
d. The level of income depends on the level of utility.
7. An individual with a constant marginal utility of income will be
a. Risk averse.
b. Risk neutral.
c. Risk loving.
d. Insufficient information for a decision.
8. A function that indicates the maximum output per unit of time that a firm can produce,
for every combination of inputs with a given technology, is called:
a. An isoquant.
b. A production possibility curve.
c. A production function.
d. An iso cost function.
9. The short run is:
a. Less than a year.

b. Three years.
c. However long it takes to produce the planned output.
d. A time in which at least one input is fixed.
10. The rate at which one input can be reduced per additional unit of the other input, while
holding output constant, is measured by the:
a. Marginal rate of substitution.

b. Marginal rate of technical substitution.
c. Slope of the is cost curve.
d. Average product of the input.
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 increase
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
3. The increase in the Public-Sector Borrowing Requirement (PSBR) to almost £50

billion this year will automatically lead to:
A higher rate of inflation
a. A fall in the rate of unemployment
b. An increase in the National Debt
c. A deterioration in the Balance of Payments
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 labor 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 over operations.
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 labor market is that the
wage adjustments that are necessary to clear the labor market occur:
a. Slowly.
b. Quickly.
c. Very infrequently.
d. Instantly.
14. Those that hold the classical view of the labor market are likely to believe that:
a. Monetary, but not fiscal policy will influence output and employment.
b. Both monetary and fiscal policy will influence output and employment.
c. Fiscal, but not monetary policy will influence output and employment.
d. Neither monetary nor fiscal policy will influence 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
a. Multiplier effect:
An effect in economics in which an increase in spending produces an increase in national income
and consumption greater than the initial amount spent.
The multiplier effect describes how an initial change in spending ripples through the economy to
generate a larger change in real GDP. It occurs because of the interconnectedness of the economy,
where a change in Haslett's spending will generate more income for Davidic, who will in turn
spend more, generating additional income for Grimes.
b. The MPC is directly (positively) related to the size of the multiplier.
Total utility:
“Total utility is the satisfaction achieved by consuming all the units of the
commodity considered at a time. For example, if we are considering four units of commodity at
present, the total satisfaction derived by the consumption of all the four units will be called total
utility”.
Marginal utility:
“Marginal utility is the change in total utility, when an additional unit of the
commodity will be consumed”.
The law of diminishing marginal utility:
The law of diminishing marginal utility is based on observations from daily life.
The more a person consumes the commodity, the less is the commodity important for him because
the desire to consume the commodity may gradually be fulfilled. This observation may be stated
as a law, i.e.
Definition:
“The additional benefit which a person derives from an increase of his stock of a thing diminishes
with every increase in the stock he already has”.
In simple words, “the marginal utility of a commodity diminishes as a consumer consumes greater
amount of that commodity”.
b. Since disposable income is either consumed or saved, the average propensity to consume plus
average propensity to save must equal 1. i.e.
APS + APC = 1
OR
APC = 1 – APS.
Difference between Short-Run and Long-Run:
Short run is a period in which at least one of the factors of production is fixed or unchangeable;
long run is a period in which all the factors of production used in the production are flexible. The
actual length of the short run and long-run can vary considerably from industry to industry.
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 of above.
7. Which is high powered money?
A. M1
B. M2
C. Mo
D. None
8. There are _________major instruments of monetary policy:
A. Three
B. Four
C. Five
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
(a) What were the Classical views about saving?

(b) What is the meaning of Paradox of thrift? Illustrate Paradox of thrift using a diagram.
Classical views about saving
Classical economist considered saving as a big virtue of society. They said it is
very important for the people to save because more they save, saving curve will shift towards
right. This will lower interest rate and will increase investment. Due to more investment in the
economy, higher will be the growth rate. So, the saving was engine of growth for classical
economists.
Meanings of Paradox of Thrift
The reverse multiplier effect can be illustrated in the context of Keynes’s paradox of thrift, which
highlights the negative impact of higher saving in an economy in recession. Keynes said that such
thrift (or conservative saving behavior) would accentuate the recession. As people save more, they
will spend less. Firms will therefore produce less, and labor hiring will, as a result, fall, leading to
a decline in incomes. This decline would also happen in a multiplied fashion, causing a
huge decline in national income. The paradox lies in the fact that saving, while usually considered
good for any one individual, can be harmful to the overall economy if everyone started saving.
Illustration of Paradox of Thrift using a diagram
Paradox of thrift can be illustrated using withdrawals and injections approach to output
determination. Withdrawals and injections are taken on vertical axis and the output is taken on
horizontal axis.
If people start saving more for a rainy day or something else, the withdrawal function will shift
upwards because saving is a form of withdrawals. The withdrawal function will rise from w1to
w2. However, if the people save more, they will naturally be able to spend less. If the spending is
less, the firms will be able to produce less. There will thus be a multiplied fall in income. The
phenomenon of higher savings leading to lower national income is known as Paradox of Thrift
i.e., the movement of point c to point a in this diagram that is from output level Ye1 to Ye2
shows the paradox of thrift that is the disadvantage of being overly prudent.
But this is not all. Far from the extra saving encouraging more investment, the lower
consumption will discourage firms from investing. So, if investment falls, the J line will shift
from J to J’. So, there will again be a further multiplied fall in income from Ye2 to Ye3.So that
was another dimension of Keynes argument. Through all these different arguments, Keynes was
advocating the case of fiscal policy expansion in situation of recession.
Discuss the three core rules of elasticity.
Rule # 01
If elasticity is between zero and one (0 < e < 1), it is said to be inelastic, if elasticity is greater than
one (e > 1), it is said to be elastic, if elasticity is equal to zero (e = 0), it is said to be unitary elastic
and if elasticity is equal to infinity (e = ∞), it is said to be infinitely elastic.
Rule # 02
If sign of income elasticity of demand is positive then good is normal and if sign is negative then
good is inferior.
Rule # 03
If sign of cross price elasticity of demand is positive then goods are substitutes of each other and
if the sign is negative then goods are compliments.
1. Marginal utility measures:
A. The slope of the indifference curve.

B. The additional satisfaction from consuming one more unit of a good.
C. The slope of the budget line.
D. The marginal rate of substitution.
2. Which of the following best expresses the law of diminishing marginal utility?
A. The more a person consumes of a product, the smaller becomes the utility which he
B. The more a person consumes of a product, the smaller becomes
the additional utility which she receives because of consuming an additional unit of
the product.
C. The less a person consumes of a product, the smaller becomes the utility which she
D. The less a person consumes of a product, the smaller becomes the additional utility
which he receives because of consuming an additional unit of the product.
A budget line.
An isoquant.
An indifference curve.
A demand curve.
4. The marginal rate of substitution:
A. May rise or fall, depending on the slope of the budget line.
B. Rises as you move downward along an indifference curve.
C. Falls as you move downward along an indifference curve.
D. Remains the same along a budget line.
5. Which of the following is a characteristic of the indifference curves?
A. They are concave to the origin.
B. They are convex to the origin.
C. Curves closer to the origin have the highest level of total utility.
D. Curves closer to the origin have the highest level of marginal utility.
6. In the diagram given below, the budget line is best represented by the line:
A. AB
B. AD
C. FG
D. DG
7. The endpoints (horizontal and vertical intercepts) of the budget line:
A. Measure its slope.

B. Measure the rate at which one good can be substituted for another.
C. Measure the rate at which a consumer is willing to trade one good for another.
D. Represent the quantity of each good that could be purchased if all the budget were
allocated to that good.
A. The intercepts of the budget line will increase.
B. The intercepts of the budget line will decrease.
C. The slope of the budget line may either increase or decrease.
D. There will be no effect on the budget line.
9. If Px = Py, then when the consumer maximizes utility,
A. X must equal Y.
B. MU(X) must equal MU(Y).
C. MU(X) may equal MU(Y), but it is not necessarily so.
D. X and Y must be substitutes.
10. The difference between what a consumer is willing to pay for a unit of a good and what
must be paid when actually buying it is called:
A. Producer surplus.
B. Consumer surplus.
C. Cost-benefit analysis.
D. Net utility.




6. For which of the following market structures is it assumed that there are barriers to entry?
C. Monopoly
D. All the above
B. A monopoly.
D. Oligopolistic.
8. Welfare economics is a branch of economics dealing with:
A. Social issues.
B. Normative issues.
C. Political issues.
9. ___________________ are goods that people must get a flavor of before they can consider
buying them.
A. Experience goods.
B. Geffen goods.
C. Normal goods.

1. The balance of payments (BOPs) is an accounting record of a country’s transactions with
the rest of the world.
2. Any transaction which causes the supply curve of dollars to shift to the right is recorded with
a positive sign on the BOPs.
3. A growth rate of between 2-3% is considered normal for mature developed countries.
Fiscal deficits and debt are often reported as a ratio of GDP.

There are two dimensions to the debate over taxation: equity and efficiency.
6. The relationship between tax rate and tax revenue collection can be summarized in the Laffer
curve diagram.
7. Disposable income is obtained by subtracting income tax from total income.
8. Money or paper currency serves at least three functions: it is a medium of exchange, a store of
value and a unit of account.
9. Monetary policy can be defined as the central bank’s programmed, often changing daily,
regarding the direct or indirect control (through interest rates) of monetary conditions in the
economy with a view to managing aggregate demand and inflation.
10. Any balance sheet has two sides: assets and liabilities
Basic Economics MCQs l Demand

1. Usually a requirement curve could have the form:
1. Horizontal
2. Vertical
3. Downward sloping
4. Upward sloping
2. Regulation of demand exhibits relation between:
1. Earnings and value of commodity

2. Value and amount of a commodity
3. Earnings and amount demand
4. Amount demanded and amount equipped
3. That is an assumption of legislation of demand:
1. Value of the commodity mustn’t change

2. Amount mustn’t change
3. Provide mustn’t change
4. Earnings of shopper mustn’t change
4. That is an assumption of legislation of demand:

2. Amount mustn’t change
3. Provide mustn’t change
4. Earnings of shopper mustn’t change
5. If amount demanded is totally unresponsive to modifications in value, demand is:
1. Inelastic
2. Unit elastic
3. Elastic
4. Completely inelastic
6. Different issues equal, if has extra substitutes, its value elasticity of demand is:
1. Bigger
2. Smaller
3. Zero
4. Unity
7. Value of a product falls by 10% and its demand rises by 30%. The elasticity of demand is:
1. 10%
2. 30%
3. 3%
4. 13%
8. If elasticity of demand may be very low it exhibits that the commodity is:
1. A necessity
2. A luxurious
3. Has little significance in complete finances
4. (a) and (c) above
9. The next are causes of shift in demand EXCEPT the one:
1. Change in revenue
2. Change in value
3. Change in style
4. Change in costs of substitutes
10. When demand is completely inelastic, a rise in value will lead to:
1. A lower in complete income

2. A rise in complete income
3. No change in complete income
4. A lower in amount demanded
11. If demand is unitary elastic, a 25% will increase in value will lead to:
1. 25% change in complete income

2. No change in amount demanded
3. 1% lower in amount demanded
4. 25% lower in amount demanded
12. Regardless of value, Sofia at all times spends Rs. 100 per week on ice cream, we conclude that:
1. Elasticity of demand is zero

2. Elasticity of demand is 1
3. Elasticity of demand is infinite
4. The legislation of demand has been violated
13. When cross elasticity of demand is a big constructive quantity, one can conclude that:
1. The nice is regular

2. The nice is inferior
3. The nice is a substitute
4. The nice is a complement
14. If demand is inelastic, a change within the value:
1. Will change the amount in similar route

2. Will change complete income in similar route
3. Will change complete income in the wrong way
4. Won’t change amount
15. Which one is the idea of legislation of demand?

2. Amount demanded mustn’t change
3. Costs of substitutes mustn’t change
4. Demand curve have to be linear
16. Which of the next is a requirement operate?
1. Q + 4P = 20
2. Q = 35 + 3P
3. Q – 2P – 15 = zero
4. 5P – Q = four
17. Zubair has a particular style for faculty canteen is hotdogs. The proprietor of the canteen doubles
the costs of hotdogs. Zubair didn’t reply to the rise in costs and stored on demanding an identical
quantity of hotdogs. His demand for hotdogs is:
1. Completely elastic
2. Completely inelastic
3. Elastic
4. Much less elastic
18. Value and demand are positively correlated in case of:
1. Requirements
2. Comforts
3. Giffen items
4. Luxuries
19. The elasticity of demand of sturdy items is:
1. Lower than unity

2. Larger than unity
3. Equal to unity
4. Zero
20. The elasticity of demand of sturdy items is:
1. Extra elastic
2. Much less elastic
3. Zero elastic
4. Infinite elastic
21. Raees Ahmad purchased 50 litres of petrol when his month-to-month revenue was Rs. 25,000.
Now his month-to-month revenue has risen to Rs. 50,000 and he purchases 100 litre of petrol. His
revenue elasticity of demand for petrol is:
1. 1
2. 100%
3. Lower than one
4. Multiple
22. When value elasticity of demand for regular items is calculated, the worth is at all times:
1. Constructive
2. Destructive
3. Fixed
4. Larger than one
23. Earnings elasticity of demand for regular good is at all times:
1. 1
2. Multiple
3. Destructive
4. Constructive
24. Demand is an operate of:
1. Value
2. Amount
3. Provide
4. None of those
25. If value and complete income transfer in the identical route, then demand is:
1. Inelastic
2. Elastic
3. Unrelated
4. Completely elastic
Solutions; Demand MCQs
1 2 3 4 5 6 7 8 9 10 11 12 13
C B D D A C A B B D B C B
14 15 16 17 18 19 20 21 22 23 24 25
C A B C B A A B D A A C
1. Income elasticity of demand for an inferior good is:

(a)Positive (b)Zero (c)Both (a) & (b) (d)None of these
2. Convexity means averages are ________________ than extremes:
(a) Worse (b) Positive (c) Better (d)None of these
3. Sum of MPC and MPS equals:
(a)2 (b)3 (c)4 (d)None of these
4. During the Liquidity Trap, LM curve is:
(a)Less elastic (b)Positive (c)Perfectly elastic (d)None of these
5. The dominant factor of production is:
(a)Energy (b)Labour (c)Technology (d)None of these
6. GDP deflator is a ratio between:
(a)Input prices (b)Output prices (c)Both (a) & (b) (d)None of these
7. During monopoly, the equilibrium condition is:
(a)MC=P (b)MC>MR (c)MC=MR (d)None of these
8. During perfect competition, the firm would earn a normal profit when:
(a)AC>AR (b)AR
9. Roy’s identity is applied on:
(a)Food (b)Bread (c)Utility (d)None of these
10. The following is the narrowest measure of supply of money:
(a)M2 (b)M3 (c)M1 (d)None of these
11. A positive externality in which a consumer wishesto possess a good in part because others do:
(a)Supply (b)Concavity (c)Money demand (d)None of these
12. The profit function is of:
(a)Homogeneous of degree = 1 (b)Homogeneous of degree = 2
(c)Homogeneous of degree = 0 (d)None of these
13. The derivative of cost function withrespect to output price provides:
(a) Input supply function (b)Output supply function
(c)Both (a) & (b) (d)None of these
14. A strategy that is optimal, no matter what an opponent does:
(a)Dominant firm (b)Duopoly (c)Dominant strategy (d)None of these
15. A devaluation of a currency takes place under
(a)Flexible exchange rate (b)Fixed exchange rate
(c)Clean floating system (d)None of these
16. Nominal interest rate is:
(a)Inflation minus Tax (b)Tax plus Indirect Tax
(c)Real interest rate minus Inflation (d)None of these
17. An un-anticipated increase in money supply is neutral during:
(a)Short run period (b)Medium run period
(c)Both (a) & (b) (d)None of these
18. A rise in general price level shifts the LM curve:
(a)Down and to the right (b)Up and to the left
(c)Positively sloped (d)None of these
19. Decrease in tax shiftsthe IS curve:
(a)Down and to the left (b)Negatively sloped
(c)Up and to the right (d)None of these
20. Gross National Product is:
(a)GDP – NNP (b)NFA – GNI (c)GDP – NX (d)None of these
21. Foreign aid comprises of:
(a)Grants (b)Loans (c)Both (a) and (b) (d)None of these
22. Per capita income of Pakistan during the fiscal year 2011-12 was:
(a)$ 1258 (b)$1372 (c)$1025 (d)$ 1050 (e)None of these
23. The GINI coefficient is measure of:
(a)Inequality (b)Poverty (c)Growth (d)Development (e)None of these
24. During the last decade income inequality in rural areas of Pakistan has:
(a)Increased (b)Decreased (c)Remained unchanged (d)None of these
25. The share of agriculture in GDP is:
(a)21% (b)10% (c)12% (d)17% (e)None of these
26. During 1970’s the planning was concerned to:
(a)Industrial planning (b)Export promotion (c)Import substitution
(d)Structural planning (e)None of these
27. National Savings as a percent of GDP during 2011-2013 was:
(a)10.7 (b)13.1 (c)9.5 (d)8.8 (e)None of these
28. The growth rate of manufacture sector during 2011-12 was:
(a)1.7% (b)4.1% (c)5.2% (d)3.6% (e)None of these
29. The best measure of economic development among following is:
(a)NNP (b)HDI (c)GDP (d)All of these (e)None of these
30. The main objective of Monetary or fiscal policy is:
(a)Economic stablization (b)Efficiency (c)Both (a) and (b) (d)None of these
31. Direct taxes during 2011-12 were around of total tax revenue.
(a)37% (b)63% (c)15% (d)None of these
32. Public debt as a percent of GDP for 2011-12 was:
33. Govt. of Pakistan borrows from:
(a)Internal sources (b)External sources (c)Pakistani banks
(d)All of these (e)None of these
34. Growth rate of agriculture sector during 2011-12 was:
(a)3.1% (b)5.4% (c)2.9% (d)2.1% (e)None of these
35. Nationalization of industries took place during the regime of:
(a)ZA Bhutto (b)Zia ul Haq (c)Ayub Khan (d)None of these
36. Development economics is concerned with:
(a)Efficient allocation of scarce resources (b)Economic, social and political institutions.
(c)Imperfect resource and commodity markets. (d)(a) and (b) only (e)None of these
37. The last land reforms in Pakistan were introduced in:
(a)1972 (b)1977 (c)1981 (d)1958 (e)None of these
38. IMF advances loan for:
(a)Construction (b)Balance of payment (c)Travelling (d)None of these
39. Sixth five year plancovers the period:
(a)1965-70 (b)1960-65 (c)1988-93 (d)1983-88 (e)None of these
40. The unemployment rate in Pakistan during 2010-11 was:
41) Demand curve in case of Giffen good is:
(a) Negatively sloped (b) Vertical
(c) Positively sloped (d) None of these
42) Price consumption curve in case of complementary goods is:
(a) Downward sloping (b) Vertical
(c) Upward sloping (d) None of these
43) In case of two goods, following utility approach, a consumer is in equilibrium when:
(a) MUx/Px = MUy/Py (b) MUx/Px < MUy/Py
(c) MUx/Mx > MUy/Py (d) Both (b) and (c)
44) In short run:
(a) Labour is variable (b) Both labour and capital are variable
(c) Both labour and capital fixed (d) None of these
45) When MC is equal to AC, the AC:
(a) Increases (b) Decreases
(c) Remains constant (d) None of these
46) Normal profit, excess profit and loss of the firm depends on level of:
(a) Average costs in short run (b) Total costs in short run
(c) Marginal costs in short run (d) All of these
47) In case of perfect competition, the sellers are:
(a) Two (b) A few
(c) Very large (d) None of these
48) The firm is in equilibrium when:
(a) Slope of TC = Slope of TR (b) Slope of TC is less than slope of TR
(c) Slope of TC is more than slope of TR (d) None of these
49) The Marginal Revenue Product of labour MRPLis:
(a) MR x MP (b) MR / MP
(c) MR – MP (d) Both (b) and (c)
50. In case of imperfect competition the MRPLis the:
(a) Supply of labour curve (b) Demand for labour curve
(c) Both of these (d) None of these

Economics Mcqs PDF

Uploaded by

Copyright:

Available Formats

Economics Mcqs PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Economics Mcqs PDF

Uploaded by

Copyright:

Available Formats

INTRODUCTION TO MACROECONOMICS AND THE DIFFERENT SCHOOLS OF

2 Aggregate supply is the total amount

3 The total demand for goods and services in an economy is known as

6 Involuntary unemployment means that

9 Macroeconomics is the branch of economics that deals with

16 According to the Classical model, unemployment

21 The economists who emphasized wage-flexibility as a solution for unemployment were

22 According to the Classical economists, the economy

23 Monetarism became popular because it could, unlike Classical or Keynesian economics,

27 Neo-Classical theories were an attempt to explain

MACROECONOMIC DATA AND VARIABLES, NATIONAL INCOME ACCOUNTING

Questions 1-3 are based on the following information about an economy:

Consumer price index (2002) = 132

1. By how much has real GDP grown from 2001 to 2002?

3. Based on the above information, we can say that:

4. In the circular flow of income, Keynesian equilibrium obtains when

5. Under conditions of Keynesian equilibrium:

6. Which of the following is a determinant of consumption

7. Which is the most volatile component of aggregate demand

8. Which of the following is not an obvious or direct determinant of a country’s imports

10. Which of the following is not true?

12. Total consumption divided by total income gives us:

14. As the MPS increases, the multiplier will

15. In macroeconomics, equilibrium is defined as that point at which

THE BIG FOUR: UNEMPLOYMENT, INFLATION, BALANCE OF PAYMENTS AND

A. the existence of disguised unemployment

3. Which of the following is not a cost of voluntary unemployment?

A. potential output of the economy is greater than actual output

The above statement is an answer to which question?

A. Why is the AJ curve more elastic than the LF curve?

7. Cyclical unemployment is the

8. The natural rate of unemployment is generally thought of as the

10. According to Keynesian economists, those who are not working

11. The index used most often to measure inflation is the

13. Which of the following is not a major cost of inflation:

15. According to the monetarists, the measured unemployment rate can

19. If inflationary expectations increase, the short-run Phillips curve will

22. Which of the following statements is necessarily TRUE?

26. The fall (rise) in value of one currency relative to another is

30. The J-curve effect refers to the observation that

A. an increase in the size of the labor force.

34. When referring to economic growth, we normally refer to:

A. growth in actual real per capita output

36. An example of capital deepening, given an increasing L, would be:

37. The neo-classical growth model says that:

RELATIONSHIPS BETWEEN THE BIG FOUR

38. The length of a business cycle would be measured from

A. Reduce government spending and revalue the exchange rate

FISCAL POLICY AND TAXATION, MONEY AND MONETARY POLICY, IS-LM

1. A government’s attempt to reduce its defense expenditure is an example of (I), while a

B. fiscal policy. monetary policy.

C. incomes policy. incomes policy.

2. According to the Laffer curve, as tax rates increase, tax revenues

A. Both horizontal equity and vertical equity

4. A 15% VAT is a(n):

5. Tax incidence is the

A. If you live in a 1st best world

A. printing rupees (borrowing from the central bank)