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Multiple Choice Questions 1.

Which one of the following would not be included in the calculation of the gross national product (GNP)? a. b. c. d. Purchase of a new home An automotive workers wages A doctors fee Purchase of ordinary shares. Answer: 2. D

Under the income approach, gross national product (GNP) is measured as a. b. c. d. Depreciation charges and indirect business taxes + Wages + Rents + Interest + Profits Net income earned abroad. Wages + Rents + Interest + Profits. Depreciation charges and indirect business taxes + Wages + Rents Interest + Profits. Wages + Rents + Interest profits + Net income earned abroad. Answer: A

3.

Assume that real gross national product (GNP), measured in Year 1 pesos, rose from P3,000 billion in Year 1 to P4,500 billion in Year 10. Assume also that the price index rose from 100 to 200 during the same period. The GNP for Year 1 expressed in terms of Year 10 prices is a. b. c. d. P1,500 billion. P3,000 billion P4,500 billion. P6,000 billion. Answer: D

Supporting analysis/computation: Between Year 1 and Year 10, the price index doubled (from 100 to 200). Thus, the nominal value of Year 1 GNP (P3,000 billion) must also be doubled when restated in Year 10 terms. The Year 1 GNP in Year 10 prices is P6,000 billion. 4. When the addition to capital goods in an economy exceeds the capital consumption allowance, the economy has experienced a. Negative net investment.

b. c. d.

Equilibrium investment. Positive gross investment. Positive net investment. Answer: D

5.

When gross investment <List A> depreciation, the share capital economy is <List B> List A List B a. Exceeds Shrinking b. Equals Shrinking c. Equals Growing d. Is less than Shrinking Answer: D

6.

In national income terms, aggregate demand is the a. b. c. d. Demand for money by the community in a period of employment Total expenditure on capital goods by entrepreneurs during full employment. Demand that is needed if a countrys economy is to optimum level and the level of investment is to be raised. Total expenditure on consumer goods and investment, government and foreign expenditure, during a given period. Answer: D

7.

Assume an economy has a real gross national product (GNP) of billion and an annual growth rate of 3%. Real GNP, over a period, will increased by a. b. c. d. P27 billion. P27.81 billion. P54 billion. P54.81 billion. Answer: D

8.

The financial transactions for a country with values stated in billions of pesos appear in the next column. Gross national product (GNP) Transfer payments Corporate income taxes P4,000 500 50

Social Security contributions Indirect business taxes Personal taxes Undistributed corporate profits Depreciation Net income earned abroad for the country Net domestic product is a. P3,500 b. P3,450 c. P3,290 d. P3,475 Answer: A

200 210 250 25 500 0

Supporting analysis/computation: Net domestic product (NDP) is defined as gross national product (GNP) minus consumption of fixed capital (depreciation). GNP is the total market value of all final goods and services produced in an economy during a specified period of time. It excludes the market value of goods and services produced outside the country but include domestic production by foreign-owned resources. NDP equals P3,500 (P4,000 GNP P500 depreciation). 9. For a given level of tax collections, price, and interest rates, a decrease in governmental purchases will result in a(n) a. b. c. d. Increase in aggregate demand. Increase in aggregate supply. Decrease in aggregate demand. Decrease in aggregate supply. Answer: 10. C

The trough of a business cycle is generally characterized by a. Shortages of essential raw materials and rising costs. b. Increasing purchasing power and increasing capital in investments. c. Rising costs and an unwillingness to risk new investments. d. Unused productive capacity and an unwillingness to risk investments. Answer: D

11.

During the recessionary phase of a business cycle,

a. b. c. d.

The purchasing power of money is likely to decline rapidly. The natural rate of unemployment will increase dramatically. Potential national income will exceed actual national income. Actual national income will exceed potential national income. Answer: C

12.

Approximately how many years will it take for real gross national product (GNP) to double if a nationals real GNP is growing by 3% per year? a. b. c. d. 20 years. 23 years. 36 years. 40 years. Answer: B

Supporting analysis/computation: The rule of 70 provides an approximation of how long an amount to take to double given a percentage annual rate of increase. Using 70, the economy should double in approximately 23 years at a grow 3% annually (70 / 3 = 23) 13. Which of the following may provide a leading indicator of increasing in gross domestic product? a. b. c. d. A reduction in the money supply. A decrease in the issuance of building permits. An increase in the timeliness of delivery by vendors. An increase in the average hours worked per weak workers. Answer: 14. D

The Keynesian analysis of monetary and fiscal policy a. b. c. d. Assumes the economy is stable and self-regulating. Places primary emphasis on monetary policy. Assumes that velocity is stable. Focuses on aggregate expenditures. Answer: D

15.

Given the following data, what is the marginal propensity to consume?

Level of Disposable Income P40,000 48,000 a. b. c. d. 1.33 1.26 0.95 0.75 Answer: D Consumption P38,000 44,000

Supporting analysis/consumption: The marginal propensity to consume is the percentage of additional income that is consumed, not saved. Thus, if disposable income increases by P8,000 (P48,000 P40,000). And consumption increases by P6,000 (P44,000 P38,000), the marginal propensity to consume is 75% (P6,000 / P8,000). 16. At an income level of P300, this consumer has a marginal propensity to consume of <List A> and an average propensity to save of <List B>. List A List B a. 0.40 0.47 b. 0.40 0.53 c. 0.60 0.47 d. 0.60 0.53 Answer: C

Supporting analysis/computation The marginal propensity to consume is the increase in consumption the increase in income. Thus, it equals [(P160 P130) / (P300 P200)] = 0.60. The average propensity to save equals the difference between savings and consumption, divided by level of income. Thus, it equals 0.47. 17. If an increase in government purchases of goods and services billion causes equilibrium GNP to rise by P80 billion, and if total and investment are constant, the marginal propensity to consume disposable income is a. b. 0.75 0.25

c. d.

1.25 4.00 Answer: A

Supporting analysis/computation: The multiplier is defined as the change in income with respect to demand. With taxes and investment held constant, the multiplier is one divided by an expression equal to one minus the marginal propensity to consume. The multiplier here is 4 (P80 billion / P20 billion). Substantial into the formula for the multiplier, a marginal propensity to consume results. 18. Economists and economic policy makers are interested in the effect because the multiplier explains why a. b. c. d. A small change in investment can have a much larger impact on gross national product Consumption is always a multiple of savings. The money supply increases when deposits in the banking increase. The velocity of money is less than one. Answer: 19. A

The national government budget deficit is the a. b. c. d. Total accumulation of the governments surpluses and deficit Excess of local and national spending over their revenues. Amount by which the national governments expenditures exceed its revenues in a given year. Amount by which liabilities exceed assets on the governments balance sheet. Answer: C

22.

If a government were to use only fiscal policy to stimulate the economy from a recession, it would a. b. c. d. Raise consumer taxes and increase government spending. Lower business taxes and government spending. Increase the money supply and increase government spending. Lower consumer taxes and increase government spending. Answer: D

23.

If personal consumption expenditures increase from P720 billion to 760 billion when disposable income increases from P900 billion to 950 billion, the marginal propensity to consume equals a. b. c. d. 0.20 0.40 0.60 0.80 Answer: D

Supporting analysis/computation: The marginal propensity to consume is the change in consumption divided by the change in income. The change in consumption is P40 billion, change in income is P50 billion. Hence, the marginal propensity to consume equals 0.80 (P40 billion / P50 billion). 24. If personal consumption expenditures increase from P720 billion to 760 billion when disposable income increases from P900 billion to 980 billion, the marginal propensity to save equals a. b. c. d. 0.20 0.40 0.50 0.80 Answer: C

Supporting analysis/computation: The marginal propensity to save is the change in savings divided by the change in income. The change in consumption is P40 billion, change in income is P80 billion. Thus, the change in savings is also P40 billion marginal propensity to save must therefore equal 0.5 (P40 billion / P80 billion). 28. Assume an economy in which the marginal propensity to consume is 90%. Based on the multiplier effect, if there is an increase in government spending of P100, by what amount would equilibrium gross national product increase? a. b. c. d. P100 P90 P190 P1,000 Answer: D

29.

Assume an economy in which the marginal propensity to consume is 90%. Based on the tax multiplier, if there is an increase in taxes of P100, by what amount would equilibrium gross national product decrease? a. b. c. d. P90 P100 P900 P1,000 Answer: C

31.

Which of the following instrument of monetary policy is the most important means by which the money supply is controlled? a. b. c. d. Changing the reserve ratio. Open-market operations. Manipulation of government spending. Changing the discount rate. Answer: B

32.

Trios Bank has deposit liabilities of P100,000, reserves of P40,000 and a required reserve ratio of 20%. Therefore, Trios Bank and the banking system can increase loans, respectively, by how much? a. b. c. d. P20,000 and P100,000 P27,000 and P135,000 P20,000 and P80,000 P27,000 and P108,000 Answer: A

33.

The money supply in a nations economy will decrease following a. b. c. d. Open-market purchases by the nations central bank A decrease in the discount rate. An increase in the reserve ratio. A decrease in the margin requirement. Answer: C

34.

One problem with using monetary policy to stabilize business cycles is the time it takes for economists to recognize that a recession is occurring. This is known as the: a. b. c. d. Operational lag. Recognition lag. Administrative lag. Keynesian lag. Answer: B

35.

Unemployment that is caused by a mismatch between the composition of the labor force (in terms of skills, occupation, industries, or geographic location) and the makeup of the demand for labor is called a. b. c. d. Real wage unemployment Deficient-demand unemployment Frictional unemployment Structural unemployment Answer: D

36.

What is the rate of inflation from one year to the next if the consumer price index was 110 in one year and 118 in the next year? a. b. c. d. 7.0% 7.3% 8.0% 18.0% Answer: B

Supporting analysis/computation: The rate of inflation is measured by dividing the change in the price level by the level in the earlier year. Thus, 8 / 110 = 7.3% 37. The rate of unemployment caused by changes in the composition of employment opportunities over time is referred to as the a. b. c. d. Frictional unemployment rate. Cyclical unemployment rate. Structural unemployment rate. Full employment unemployment rate.

Answer: 38.

The most effective fiscal policy program to help reduce demand-pull inflation would be to a. b. c. d. Decrease the rate of growth of the money supply. Increase both taxes and government spending. Decrease taxes and increase government spending. Increase taxes and decrease government spending. Answer: D

42.

A period of rising inflation a. b. c. d. Increases the price level, which benefits those who are entitled to receive specific amounts of money. Enhances the positive relationship between the price level and the purchasing power of money. Will not be affected by contracts that include the indexing of payments. Increases the price level, which is negatively related to the purchasing power of money. Answer: D

43.

Two examples of indirect taxes are a. b. c. d. Taxes on business and rental property and personal income taxes. Sales taxes and Social Security taxes paid by employees. Sales taxes and excise taxes. Social Security taxes paid by employees and personal income taxes. Answer: C

44.

Which of the following is not an advantage of the value-added tax? a. b. c. d. It provides an incentive for cost control. It provides an incentive for saving. It is beneficial to new businesses. It is simple to calculate and enforce. Answer: C

45.

Government spending is known to affect the economy. The crowding-out effect refers to the <List A> impact of an expansionary fiscal policy on <List B>

a. b. c. d.

List A Positive Positive Negative Negative Answer: D

List B The money multiplier Investment The money multiplier Investment