Macroeconomics Questions and Answers

Q: Macro-economics is a study of economics that deals with :

Macroeconomics deals with firms, households, government and external sector.Macroeconomics studies the economy as a whole: national income, employment, the price level, growth and the balance of payments. Its models therefore include all four sectors of the circular flow: households, firms, the government (taxes and spending) and the rest of the world (exports and imports).Firms and households alone describe a simple two-sector model, not the full subject. Demand for a specific product is a microeconomic question, and the balance of payments is only one of the topics macroeconomics covers.

Q: The Demand-pull inflation exists when :

Demand-pull inflation exists when the level of aggregate demand grows faster than the supply.Demand-pull inflation is 'too much money chasing too few goods'. When spending by households, firms and government rises faster than the economy's capacity to produce, especially near full employment, the excess demand pulls up the general price level.Costs rising faster than output, dearer imports and higher oil prices all describe cost-push inflation, where higher costs of production push prices up from the supply side.

Q: The change in investment due to a change in income is known as :

The change in investment due to a change in income is the Accelerator.The accelerator principle says that induced investment depends on the change in income or output, because firms need more capital to produce more: \(I = v\,\Delta Y\), where v is the capital-output ratio. A rise in income therefore induces a larger change in investment.The multiplier runs the other way: it measures the change in income caused by a change in investment. Consumption is spending by households, and the IS curve shows combinations of income and interest rate at which goods-market equilibrium holds.

Q: A cut in income tax rate to encourage the household consumption is an example of :

A cut in income tax to encourage consumption is an Expansionary demand side policy.Lower income tax raises households' disposable income. If the aim is to increase their consumption spending, the policy works by raising aggregate demand, and since it adds to demand it is expansionary fiscal policy on the demand side.A contractionary policy would raise taxes or cut spending. Supply-side tax cuts aim at incentives to work, save and invest, raising productive capacity; the question states that the purpose here is to encourage consumption, so it is a demand-side measure.

Q: The short-run Phillips curve in case of an increase in inflationary expectations would result in :

The short-run Phillips curve would shift to right.In the expectations-augmented Phillips curve of Friedman and Phelps, each short-run curve is drawn for a given expected rate of inflation: \(\pi = \pi^{e} - \beta(u - u_{n})\). If expected inflation rises, every rate of unemployment is now associated with higher inflation, so the curve shifts up and to the right.A leftward shift would follow a fall in expected inflation. The vertical line is the long-run Phillips curve at the natural rate of unemployment, and the curve cannot stay unchanged when one of its shift factors changes.

Q: According to classical models, the level of employment is primarily determined by .............

In classical models employment is determined by the Level of aggregate supply.Classical economists held that the labour market clears at the real wage where labour demand equals labour supply, so the economy is at full employment. Employment and output are fixed by the supply side: technology, the capital stock and workers' willingness to work. Say's law ensures that this supply creates its own demand.Making employment depend on the level of demand for goods and services is Keynes's theory of effective demand. Prices and interest rates adjust in the classical model to keep the economy at full employment; they are not what determines the level of employment.

Q: Recession means :

Recession means a period during which aggregate output decreases.A recession is a phase of the business cycle in which real GDP falls, often taken as two consecutive quarters of decline, together with falling employment, incomes and investment.Rising prices describe inflation, not recession. Unemployment rises, rather than declines, in a recession. Trade usually contracts along with output, so a period of increased trade is not a recession either.

Q: A cut in tax rate for reducing the cost of capital and encouraging business investment is an example of ................. .

This is an expansionary supply side policy.Supply-side policies aim to raise the economy's productive capacity by improving incentives to work, save and invest. Cutting the tax rate to lower the cost of capital encourages firms to invest in machinery and plant, which expands potential output, so it is an expansionary supply-side measure.Demand-side policy works through aggregate demand, for example raising government spending or cutting income taxes to boost consumption. A policy that lowers the cost of capital and encourages investment is aimed at capacity, and it is expansionary, not contractionary.

Q: Which of the following has a positive impact on investment ?

The factor with a positive impact is an increase in expected inflation with unchanged nominal interest rate.Investment depends on the real interest rate, the nominal rate minus expected inflation. If expected inflation rises while the nominal rate stays the same, the real cost of borrowing falls, so more projects become profitable and investment rises.A higher nominal rate raises the cost of borrowing (A). A higher existing capital stock lowers the marginal product of new capital and so the need for more (B). An expected fall in demand lowers expected profits from new capacity (C). All three reduce investment.

Q: The opportunity cost of holding money is called as :

The opportunity cost of holding money is the nominal interest rate.Money (cash and most current deposits) earns little or no interest. By holding wealth as money instead of bonds, a person gives up the nominal interest the bonds would have paid. That forgone return is the opportunity cost, which is why money demand falls as the nominal interest rate rises.Inflation reduces the real value of money, but the relevant comparison is with bonds, whose nominal return already includes expected inflation. The real return on investment and savings are not the cost of holding money as such.

71.

Macro-economics is a study of economics that deals with :

A.Firms and households only
B.Firms, households, government and external sector
C.Demand for a specific product
D.Balance of payments

Exam Year(s)

MH SET - 2021, SET Exam - 2021,

Answer: B

Macroeconomics deals with firms, households, government and external sector.

Macroeconomics studies the economy as a whole: national income, employment, the price level, growth and the balance of payments. Its models therefore include all four sectors of the circular flow: households, firms, the government (taxes and spending) and the rest of the world (exports and imports).

Firms and households alone describe a simple two-sector model, not the full subject. Demand for a specific product is a microeconomic question, and the balance of payments is only one of the topics macroeconomics covers.

Discuss in Forum

72.

The Demand-pull inflation exists when :

A.Costs are increasing faster than output
B.The level of aggregate demand grows faster than the supply
C.The prices of imports are rising than the domestic goods
D.There is an increase in the oil prices

Exam Year(s)

MH SET - 2021, SET Exam - 2021,

Answer: B

Demand-pull inflation exists when the level of aggregate demand grows faster than the supply.

Demand-pull inflation is 'too much money chasing too few goods'. When spending by households, firms and government rises faster than the economy's capacity to produce, especially near full employment, the excess demand pulls up the general price level.

Costs rising faster than output, dearer imports and higher oil prices all describe cost-push inflation, where higher costs of production push prices up from the supply side.

Discuss in Forum

73.

The change in investment due to a change in income is known as :

A.Consumption
B.Multiplier
C.IS curve
D.Accelerator

Exam Year(s)

MH SET - 2021, SET Exam - 2021,

Answer: D

The change in investment due to a change in income is the Accelerator.

The accelerator principle says that induced investment depends on the change in income or output, because firms need more capital to produce more: \(I = v\,\Delta Y\), where v is the capital-output ratio. A rise in income therefore induces a larger change in investment.

The multiplier runs the other way: it measures the change in income caused by a change in investment. Consumption is spending by households, and the IS curve shows combinations of income and interest rate at which goods-market equilibrium holds.

Discuss in Forum

74.

A cut in income tax rate to encourage the 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

Exam Year(s)

MH SET - 2021, SET Exam - 2021,

Answer: A

A cut in income tax to encourage consumption is an Expansionary demand side policy.

Lower income tax raises households' disposable income. If the aim is to increase their consumption spending, the policy works by raising aggregate demand, and since it adds to demand it is expansionary fiscal policy on the demand side.

A contractionary policy would raise taxes or cut spending. Supply-side tax cuts aim at incentives to work, save and invest, raising productive capacity; the question states that the purpose here is to encourage consumption, so it is a demand-side measure.

Discuss in Forum

75.

The short-run Phillips curve in case of an increase in inflationary expectations would result in :

A.Shift to left
B.Shift to right
C.Vertical line
D.Being unchanged

Exam Year(s)

MH SET - 2021, SET Exam - 2021,

Answer: B

The short-run Phillips curve would shift to right.

In the expectations-augmented Phillips curve of Friedman and Phelps, each short-run curve is drawn for a given expected rate of inflation: \(\pi = \pi^{e} - \beta(u - u_{n})\). If expected inflation rises, every rate of unemployment is now associated with higher inflation, so the curve shifts up and to the right.

A leftward shift would follow a fall in expected inflation. The vertical line is the long-run Phillips curve at the natural rate of unemployment, and the curve cannot stay unchanged when one of its shift factors changes.

Discuss in Forum

76.

According to classical models, the level of employment is primarily determined by .............

A.Interest rates
B.Level of prices
C.Level of aggregate supply
D.Level of demand for goods and services

Exam Year(s)

MH SET - 2021, SET Exam - 2021,

Answer: C

In classical models employment is determined by the Level of aggregate supply.

Classical economists held that the labour market clears at the real wage where labour demand equals labour supply, so the economy is at full employment. Employment and output are fixed by the supply side: technology, the capital stock and workers' willingness to work. Say's law ensures that this supply creates its own demand.

Making employment depend on the level of demand for goods and services is Keynes's theory of effective demand. Prices and interest rates adjust in the classical model to keep the economy at full employment; they are not what determines the level of employment.

Discuss in Forum

77.

Recession means :

A.Period of increasing prices
B.Period during which aggregate output decreases
C.Period of declining unemployment
D.Period of increased trade

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: B

Recession means a period during which aggregate output decreases.

A recession is a phase of the business cycle in which real GDP falls, often taken as two consecutive quarters of decline, together with falling employment, incomes and investment.

Rising prices describe inflation, not recession. Unemployment rises, rather than declines, in a recession. Trade usually contracts along with output, so a period of increased trade is not a recession either.

Discuss in Forum

78.

A cut in tax rate for reducing the cost of capital and encouraging business investment is an example of ................. .

A.Expansionary demand side policy
B.Contractionary demand side policy
C.Expansionary supply side policy
D.Contractionary supply side policy

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: C

This is an expansionary supply side policy.

Supply-side policies aim to raise the economy's productive capacity by improving incentives to work, save and invest. Cutting the tax rate to lower the cost of capital encourages firms to invest in machinery and plant, which expands potential output, so it is an expansionary supply-side measure.

Demand-side policy works through aggregate demand, for example raising government spending or cutting income taxes to boost consumption. A policy that lowers the cost of capital and encourages investment is aimed at capacity, and it is expansionary, not contractionary.

Discuss in Forum

79.

Which of the following has a positive impact on investment ?

A.An increase in the nominal interest rate
B.A higher capital stock
C.An expected decline in the demand for goods
D.An increase in expected inflation with unchanged nominal interest rate

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: D

The factor with a positive impact is an increase in expected inflation with unchanged nominal interest rate.

Investment depends on the real interest rate, the nominal rate minus expected inflation. If expected inflation rises while the nominal rate stays the same, the real cost of borrowing falls, so more projects become profitable and investment rises.

A higher nominal rate raises the cost of borrowing (A). A higher existing capital stock lowers the marginal product of new capital and so the need for more (B). An expected fall in demand lowers expected profits from new capacity (C). All three reduce investment.

Discuss in Forum

80.

The opportunity cost of holding money is called as :

A.Nominal interest rate
B.Inflation
C.The real return on investment
D.Savings

Exam Year(s)

MH SET - 2023, SET Exam - 2023,

Answer: A

The opportunity cost of holding money is the nominal interest rate.

Money (cash and most current deposits) earns little or no interest. By holding wealth as money instead of bonds, a person gives up the nominal interest the bonds would have paid. That forgone return is the opportunity cost, which is why money demand falls as the nominal interest rate rises.

Inflation reduces the real value of money, but the relevant comparison is with bonds, whose nominal return already includes expected inflation. The real return on investment and savings are not the cost of holding money as such.

Macroeconomics Questions and Answers

Topics

Other Subjects

Tags: Macroeconomics Questions and Answers

About Us

Macroeconomics Questions and Answers

Topics

Other Subjects

Tags: Macroeconomics Questions and Answers

About Us

Stay informed about all important Dates & Notifications