ECO403 QB MCQs1

Macroeconomics (Eco 403)
Lesson 1
The study of the economy as a whole is known as:
Welfare economics
Mathematical economics
Macroeconomics
Microeconomics
Macroeconomics discusses issues relating to:
Demand and supply at an individual level

How individual consumer and firm maximize their satisfaction?
Study of individual components like firm production
Unemployment, inflation, interest rate and productivity
In any economy resources are:
Abundant
Proper
Scarce
Fixed
Scarcity exists in society when the resources are:
Abundant
Limited
Growing
Proper
According to economists, for decision making, people respond to:
Incentives
Laws
Offers
Traditions
Which of the following statement best describes the trade?
Trade has no effect on anyone

Trade can make everyone better off
Trade cannot make everyone better off
Trade is not necessary for countries
Markets are usually a good way to organize:
An economic activity
Household activity
Social activity
Uneconomic activity
Prices rise in an economy when the government prints:
Less money
Saving certificates
Treasury bills
Too much money
Society faces a short run tradeoff between inflation and:
Unemployment
Employment
Growth
Exchange rate
Which of the following topic is concerned with the study of macroeconomics?
Inflation
Elasticity
Marginal rate of substitution
Indifference curve
Lesson 2
The expression, "There's no such thing as a free lunch," means:
Everyone has to pay for his lunch

No one has time for a good lunch anymore
The person consuming a good must always pay for it
To get one thing, we usually have to give up another thing
In economics the term, "There's no such thing as a free lunch," describes the
concept of:
Efficiency
Consumption
Scarcity
Trade offs
Economists define efficiency as the society gets:
Complete fairness
Equal Satisfaction
Maximum from its scarce resources
The most that it can from its unlimited resources
One word definition of equity would be:
Completeness
Efficiency
Fairness
Similar
Which one is important for decision making in economics?
Comparing costs and benefits of alternatives

Comparing tax collection and tax impose
Comparing total cost and marginal cost
Comparing real and nominal GDP
How People make decision at the margin?
By calculating monetary cost

By comparing cost and benefits
By experience
Follow others
Which of the following principle best define the cost of next best alternative
forgone?
Principle of opportunity cost

Principle of marginal utility
Principle of total utility
Principle of diminishing return
When the market fails to allocate resources efficiently then this term is called:
Bankruptcy
Disequilibrium
Market failure
Recession
Which of the following observation is made by the Adam Smith?
Households and firms interacting in markets act as if guided by an “invisible

hand.”
Households decide what to buy and who to work for
Marginal changes in costs or benefits motivate people to respond
There is no such thing as a free lunch
The term “Invisible hand” is given by:
A. W. Philips
Adam Smith
Milton Friedman
John Maynard Keynes
An externality is defined as:
Ability of a single person or firm to unduly influence market prices

Action of one person’s on his own well being
Market fails to allocate resources efficiently
The impact of one person or firm’s actions on the wellbeing of a bystander
Ability of a single person or a firm to influence market prices is known as:
An externality
Efficiency
Market power
Productivity
Amount of goods and services produced from each hour of a worker’s time is
known as:
Consumption
Competition
Efficiency
Productivity
The Curve which demonstrates the tradeoff between inflation and unemployment
is named as the:
Demand curve
Lorenz curve
Phillips curve
Production possibility curve
Lesson 3
Which of the following is an important issue in macroeconomics?
Ali’s decision to work or stay at home

Prices of cars in Karachi
Policy deals with monopoly
Policies regarding government budget deficit
Which of the following is used in Economic models?
Show the relationships between economic variables

Explain the economy’s behavior
Devise policies to improve economic performance
All of the above
A curve which shows negative relationship between quantities demanded and

price is known as:
Demand Curve
Supply Curve
Consumption Curve
Investment Curve
A curve which shows positive relationship between quantities supplied and price
is known as:
Demand Curve
Supply Curve
Consumption Curve
Investment Curve
All of the given below shift the demand curve for cars to right EXCEPT:
The factory raise bonus to its employees

The price of cars increases
The price of petrol falls
Wealth of the consumers increase
If the price of Nokia mobile phone decreases then:
The quantity demanded of Nokia Phone increases

The quantity demanded of Nokia phone decreases
The price of Samsung mobile phone increases
Consumer’s real income decreases
If the price of steel increases then:
Market price of cars decreases

No effect on quantity supply of cars
The quantity supply of cars decreases
The quantity supply of cars increases
Demand curves are derived while holding constant:
Income, tastes, and the price of the good

Income and tastes
Tastes and the price of other goods
Income, tastes, preferences and the price of other goods
If cost of production will increase then supply curve will:
Vertical
Horizontal
Shift outwards
Shift inwards
If the price of inputs to produce corn goes down then supply curve will:
Vertical
Horizontal
Shift outwards
Shift inwards
In an economic model, exogenous variable is:
Determined within the workings of the model

Does not change in any time
Identified outside the workings of the model
No effect on the working of model
In an economic model, endogenous variable is:
Identified within the workings of the model

Does not change in any time
Identified outside the workings of the model
No effect on the working of model
In the model of supply and demand for cars which of the following is an
exogenous variable?
Aggregate income
Price of car
Quantity demand of cars
Quantity supplied of cars
In the model of supply and demand for cars which of the following is an
endogenous variable?
Aggregate income
Price of steel (input)
Quantity demanded of cars
None of the above
The prices that adjust in the long run in response to market shortages or
surpluses are known as:
Flexible Prices
Nominal Prices
Relative Prices
Sticky Prices
Flexible prices can be describes as:
The prices that cannot change over time

The prices that adjust in the long run in response to market shortages or
surpluses
The Prices that adjust slowly in response to market shortages or surpluses
The prices are flexible and adjust to equate supply and demand
Sticky prices can be described as:
The Prices that cannot change over time

The prices that adjust in the long run in response to market shortages or surpluses
The Prices that adjust slowly in response to market shortages or surpluses
The prices are flexible and adjust to equate supply and demand
The period in which many prices adjust sluggishly in response to supply and
demand imbalances is called:
Current period
Long run period
Recession period
Short run period
If the price of Nestle Juice increases then:
The quantity demanded of Nestle juice will increase

The quantity demanded of Nestle juice will decrease
The price of Shezan juice will decrease
Nestle juice consumers face an increase in income
Lesson 4
Which of the following is true for circular flow model?
Households provide the services of labor to firm

Households provide the production to firm
Household provide both supply and demand for goods
Firm provide the services of labor to firm
The correct option for circular flow model is?
Firm supply goods (Bread) to households

Household supply goods to firms
Households provide the production to firm
Household provide both supply and demand for goods
Circular flow diagram shows income flows from:
Firm to firm
Firm to households
Household to household
Markets to firm
Which of the following diagram shows the flow of income, expenditures, goods
and services between markets?
Income flow diagram

Circular flow diagram
Demand supply diagram
Income production diagram
Which of the following is government’s official measure to compute output of an

economy?
Depreciation
Gross Domestic product
Net National Product
Value added
Total market value of all goods and services produced within the Country during
a given period of time is known as:
Disposable income
Gross domestic product
Net national product
National income
Which of the following is counted in GDP?
The sale of a used laptop

The purchase of used car
The sale of old farmhouse
The purchase of new house
The goods which are NOT included in the calculation of GDP are:
Used goods
Final goods
Capital goods
None of the above
Value of firm’s output less the value of intermediate goods is known as:
Value added of firm

Inventory of firm
Final good
Capital good
Value added of a firm is equals to:
Value of firm’s output less the value of intermediate goods

Value of firm’s output plus the value of intermediate goods
Value of firm’s output multiply the value of intermediate goods
Value of firm’s output divided by the value of intermediate goods
The goods that are not counted in GDP are called:
Capital goods
Intermediate goods
Final goods
Recently produce goods
Imputed value is used to estimate:
The value of goods which have not market prices

The value of all final goods and services produce in an economy
The value of the firm’s output less the value of the intermediate goods
The value of inventories keeps in stores
The goods which have not market prices are estimated by their:
Imputed value
Value of intermediate goods
Value added
Value of final goods
The value of final goods and services measured at current prices is known as:
Nominal GDP
Real GDP
GDP Deflator
Component of GDP
Which of the following is value of final goods and services measured at constant
set of prices?
Nominal GDP
Real GDP
GDP Deflator
Component of GDP
Nominal GDP measures the value of final goods and services at:
Current prices
Constant prices
Present time
Corrected for tax changings
Real GDP measures the value of goods and services at:
Current prices
Constant prices
Present time
Corrected for tax changings
Lesson 5
GDP deflator is equal to:
Nominal GDP / real GDP x 100

Real GDP / nominal GDP x 100
Real GDP / real GDP x 100
Nominal GDP / 100
If in 2000, Nominal GDP is 500 and real GDP is 400 then GDP deflator is:
100
125
150
175
If in 2014, Nominal GDP is 1500 and real GDP is 1000 then GDP deflator is:
100
125
150
200
The rate of change of GDP Deflator (price level) is known as:
Inflation rate
Nominal GDP
Real GDP
Value added
Which of the following is also called the implicit price deflator for GDP?
GDP deflator
Nominal GDP
Real GDP
Consumer price index
If in 2001, the GDP deflator was 100 and in 2002, the GDP deflator was 103.5 then
Inflation rate will be
3.3%
3.4%
3.5%
3.6%
If in 2002, the GDP deflator was 102.8 and in 2003, the GDP deflator was 112.1
then Inflation rate will be:
8%
8.5%
9%
9.1%
The GDP deflator was 100 in the year 2012 and was 110 in year 2014. From this
information, we can conclude that:
The price level increased by 10 percent from 2012 to 2014

The price level increased by 20 percent from 2012 to 2014
The price level decreased by 5 percent from 2012 to 2014
We cannot judge price increases from changes in the GDP deflator
The expenditure approach measures GDP by adding:
Consumption, Investment, govt. spending and net exports

Business fixed investment and Residential fixed investment
Government spending, net exports and Investment
Consumption, Investment and Net exports
National income account identity which shows GDP is represented by following

equation:
Y = GDP
Y = C + I + G + NX
GDP = GNP - NX
Y = C + G + NX
In calculating GDP, consumption expenditures are the payment by households

for consumption of:
Goods and services

Goods but not services
Services but not goods
Goods only
Which of the following is best defined the term “Investment”?
Spending on newly produce capital goods

Spending on eatable goods
Spending on clothing
Consumption expenditures on goods
Which of the following is included in investment?
Business fixed investment

Residential fixed investment
Inventory investment
All of the above
Spending on new capital is known as:
Investment
Savings
Demand
Supply
Which of the following is/are an example of an investment?
Ali buys for himself a house (9 years old)

Saleem built a brand-new house
Baber buys Rs10 million in ABC stock from someone
All of the above
Which of the following is a stock variable?
GDP
Income
Savings
Money
An example of flow variable is:
GDP
Employment
Capital
Government debt
A variable that is defined for an instant in time is known as:
Stock variable
Flow variable
Independent variable
Dependent variable
A variable that is defined for a period of time is known as:
Flow variable
Stock variable
Independent variable
Dependent variable
Lesson 6
Which of the following is the best description of GDP?
GDP= GNP- net factor income from abroad

GDP= NNP- net income from abroad
GDP=NNP+ net income from abroad
GDP= GNP- national income
GNP minus net factor income from abroad is equal to:

National income
Disposable income
GDP plus net income from abroad gives:
Gross national product

National income
Disposable income
Which of the following measure should have a larger value for Pakistan?

National income
Disposable income
Net National Product can be calculated by subtracting which of the following from
GNP?
Depreciation
Transfer payments
Indirect business taxes
Corporate profits
National income is equal to:
Net national product – indirect business tax

Net national product + indirect business tax
Net national product x indirect business tax
Net national product / indirect business tax
If GNP is $1000 billion and depreciation is $100 billion then net national product
is:
$800 billion
$850 billion
$900 billion
$950 billion
If GNP is $2000 billion and depreciation is $300 billion then net national product
is:
$1600 billion
$1700 billion
$1800 billion
$1900 billion
Disposable personal income is equal to:
Personal income – Tax

National income – tax
GNP - Depreciation
Personal income + tax
The index to measure the overall level of prices is known as:

GDP deflator
Producer price index
Value index
Consumer price index is measure the:
Overall level of prices

Saving rate
Average level of prices
Tax rate
If the CPI changes from100 in 2000 to 105.7 in 2001, what is the rate of inflation?
5.6%
5.7%
5.8%
5.9%
Cost of living of households can be compared with the help of:

UN weighted index
Value index
Volume index
Consumer price index is published by:
Federal bureau of statistics

Federal Reserve board
Department of the treasury
Bureau of economic analysis
Composition of employed and unemployed persons is known as:
Labor force
Employment rate
Not employed
Adult population
Percentage of the labor force that is unemployed is known as:
Unemployment rate
Labor force participation rate
Employment rate
Okun’s law
The total numbers of individuals who are working at a paid job are classified as:
Adult population
Employed
Labor force
Unemployed
Which of the following shows the negative relationship between unemployment

and real GDP?
Inflation rate
Law of diminishing returns
Natural rate of unemployment
Okun’s law
Lesson 7
Which of the following option is best to determine firm’s output?
Advertising
Inputs and technology
Inputs and outputs
Management
Which of the following is best describing the slope of labor curve?
Average product of labor

Marginal product of labor
Real wage rate
Total product of labor
Which of the following is a factor of production?
Capital
Investment
Wage
Profit
Which of the following is NOT a factor of production?
Capital
Land
Labor
Investment
Which one of the group best represents the basic factors of production?
Land, labor, capital, entrepreneurship

Labor, technology, money, management skills
Land, natural resources, labor, capital
Money, labor, capital, political skills
The Production function is describing by which statement?
Determination of demand for goods and services

Relationship between input prices and output prices
Relationship between input prices and input quantities
Technological relationship between Input and output quantities
Technological relationship between inputs and output quantities is known as:
Production function
Consumption function
Investment function
Demand function
Which of the following statement is describing constant returns to scale?
Doubling the inputs used leads to doubling the output

Increasing the inputs used leads to decreasing the output
Decreasing the inputs used leads to increasing the output
Output remains constant over time
If “output doubles when the amounts of all factor inputs double” is known as:
Constant returns to scale

Increasing returns to scale
Decreasing returns to scale
Diminishing marginal utility
The marginal product of labor in any production process is defined as:
The extra output produces using an additional unit of labor

The extra output produce divided by unit of labor
The extra output produces minus the capital stock
The average output produces by firm
The extra output produces using an additional unit of labor is known as:

Marginal product of capital
Marginal production
Marginal utility
The distribution of national income among factors of production is determined

by:
Factor prices
Factor Output
Price of output
Nominal wage
Which of the following is the price of capital?

Rental rate
Wage rate
Land rate
Profit rate
Rental rate is the price of:
Capital
Labor
Land
Entrepreneur
Wage is the price of:
Capital
Labor
Land
Entrepreneur
Which of the following idea best describe the demand for labor?
Firm hires each unit of labor if the cost does not exceed the benefit
Firm hires each unit of labor if the cost exceeds the benefit
Firm hires each unit of labor if real wage is less than MPL
None of the given options
Factor prices are determined by supply and demand in:
Factor market
Money market
Loanable fund market
Financial market
Lesson 8
The law of diminishing marginal returns states as an input is increased to certain

amount of a fixed factor, beyond some point:
The marginal product rises

The total product falls
The marginal product falls
The average product rises
The firm’s demand curve for renting capital is known as:

Diminishing marginal returns
Marginal product
The firm’s demand curve for labor is known as:

Diminishing marginal returns
Marginal product
Marginal product of capital (MPK) curve is:
Firm’s demand curve for renting capital

Firm’s supply curve for renting capital
Firm’s demand curve for labor
Firm’s supply curve for labor
Marginal product of labor (MPL) curve is:
Firm’s demand curve for labor

Firm’s supply curve for labor
Firm’s demand curve for renting capital
Firm’s supply curve for renting capital
Which of the following is price of labor?
Interest
Profit
Rental rate
Wage
For maximize profits a firm hires labor up to the point, where?
MPK=R/P
MPL=MPK
W/P=R/P
MPL=W/P
When there is a decrease in labor supply, “real” wages are likely to:
Increase
Decrease
Remain same
Change
For maximize profits a firm chooses capital up to the point, where?
MPL=W/P
MPK=R/P
MPL=MPK
MPK=W/P
Which of the following theory states that “each factor input is paid its marginal
product”?
The neoclassical theory of distribution

The classical theory of distribution
Real business cycle theory
Theory of interest rate
Which of the following equation best define the total labor income?
R/P x K
R/P x L
W/P x L
W/P x K
Total capital income can be denoting as:
R/P x K
R/P x L
W/P x L
W/P x K
Which of the following production function has constant returns to scale?
Y = MPL x L + MPK x K
Y < MPL x L + MPK x K
Y > MPL x L + MPK x K
Y ≠ MPL x L + MPK x K
Lesson 9
Which of the following is component of aggregate demand?
Consumption
Capital
Interest rate
Wage rate
Personal consumption depends on:
Disposable income
National income
Net national income
Transfer payments
Disposable income is equal to:
Total income – total taxes

Total income + total taxes
Total income x total taxes
Total income / total taxes
The relationship between consumption and disposable income is:
Positive
Negative
Fixed
Zero
Keynesian consumption function can be written as:
C = C(Y – T)
C + C(Y – T)
C – C(Y – T)
C = C(Y +T)
Which of the following is slope of consumption function?
Marginal propensity to consume

Marginal propensity to save
Which of the following is cost of borrowing fund?
Wage rate
Profit
Rent
Interest rate
The rate of change in consumption due to one unit change in disposable income
is known as:
MPC
MPS
MPL
MPK
Which of the following is return on capital?
Interest rate
Wage rate
Profit rate
Rent
Which of the following relationship is observed between investment and interest

rate?
Negative
Positive
Vertical
Zero
An economy is known as “closed economy” when it experience zero:
Consumption
Net exports
Investment
Govt expenditures
Firms borrow from loanable fund market to finance spending on:
Plant & equipment

Consumption goods
Consumption services
New house
Which of the following is the price of loanable fund?
Real interest rate

Investment
Money
Savings
Which of the following is also known as the demand curve for loanable funds?
The investment curve

The consumption curve
The Supply curve
Indifference curve
The supply of loanable funds comes from:
Savings
Demand
Consumption
Interest rate
National saving is composed of:
Private saving + public saving

Private saving + consumption
Public saving – private saving
Demand + supply
Government is having budget deficit, when:
Taxes < Govt expenditures

Taxes > Govt expenditures
Taxes = Govt expenditures
Taxes are fixed
Lesson 10
When Govt deficit increases, it reduce savings, this causes the real interest rate
to:
Fall
Rise
Zero
No change
“A rise in the general level of prices of goods and services in an economy” is

known as:
Deflation
Inflation
Recession
Stability
Inflation is best defined as:
Rise in the general level of prices of goods and services

Fall in the general level of prices of goods and services
Rise in production of goods and services
Fall in production of goods and services
Percentage increase in the average level of prices is known as:
Inflation rate
Wage rate
Interest rate
Discount rate
Which of the following school of thought assumes that prices are flexible and
markets are clear?
Classical
Neo classical
Keynesian
Monetarists
Which of the following is stock of assets that can be readily used to make
transactions?
Money
Interest
Investment
Savings
Which of the following is function of money?
Medium of exchange
Unit of account
Store of value
All of the above
The "medium of exchange" function means money is used:
To buy goods and services

Measure prices and values
To accumulate purchasing power
As the common denominator of prices
When money is used to transfers purchasing power from the present to the
future, it is called as:
Store of value
Medium of exchange
Unit of account
Store of purchasing power
Money which has no an intrinsic value is known as:
Fiat money
Commodity money
Gold coins
Silver currency
Money which has intrinsic value is known as:
Fiat money
Commodity money
Gold coins
Silver currency
Gold coins are example of which type of money?
Commodity money
Fiat money
Paper money
Currency
The ease with which money is converted into other things, goods and services is
called:
Money’s liquidity
Commodity money
Fiat money
Currency
Which of the policy is conducted by country’s central bank to control supply of

money?
Monetary policy
Fiscal policy
Trade policy
Price control policy
The quantity of money available in the economy is known as:
Interest rate
Money supply
Money demand
Savings
Which of the following policy increases the total supply of money in the
economy?
Contractionary fiscal policy

Contractionary monetary policy
Expansionary fiscal policy
Expansionary monetary policy
State bank control the money supply through following monetary tools EXCEPT:
Discount rate
Open market operation
Reserve requirements
Tax
Which of the following term is describing the “buying and selling of treasury
bills”?
Discount rate
Demand deposits
Open market operation
Reserve requirements
A simple theory linking the inflation rate to the growth rate of the money supply is
called:
Quantity theory of money

Theory of demand and supply
Growth theory
Investment theory
The rate at which money circulates is known as:
Commodity money
Gold coins
Fiat money
Velocity
Lesson 11
Which of the following is included in M1 money supply?
Demand deposits
Saving deposits
Small time deposits
Large time deposits
Which of the following is a money demand function?

d
M
( ) ¿ kY
P
D=f ( P)
S=f ( P)
I =f (i)
Which of the following functions describe “how much money people wish to hold
for each rupee of income?”
Money demand function

Money supply function
Demand function
Supply function
Which of the following predicts a one-for-one relation between changes in the

money growth rate and changes in the inflation rate?
Investment theory
Interest theory
Theory of demand
The revenue raised from printing money is called as:
Seigniorage
Inflation
Devaluation
Deflation
Seigniorage is defined as:
The revenue rose from printing money

Average increase in price level
The rate at which money circulates
Buying and selling of treasury bills
Inflation is caused by which of the following?
Seigniorage
Fall in prices
Fall in demand
Lower cost of production
Which of the following is like a tax on people who hold money?
Deflation
Inflation
Interest rate
Seigniorage
Inflation is like a tax on people who hold:
Money
Saving certificates
Durable goods
Non-durable goods
Real interest rate is equal to:
Nominal interest rate - inflation

Nominal interest rate + inflation
Nominal interest rate x inflation
Nominal interest rate - deflation
Interest rate which is not adjusted for inflation in known as?
Compound interest rate

Capital interest rate
Nominal interest rate
Real interest rate
According to fisher effect, an increase in inflation rate causes an equal increase

in:

Real interest rate
Price level
Standard of living
Which of the following is fisher equation?
Nominal interest rate = real interest rate + inflation rate

Real interest rate = nominal interest rate - inflation rate
Inflation rate = nominal interest rate + real interest rate
Inflation rate = nominal interest rate - real interest rate
Lesson 12
Suppose in an economy, money supply is growing at 5% and output is growing at
2% per year, then inflation rate would be?
1%
3%
5%
7%
Suppose in an economy, money is growing at 8% per year and output is growing

at 5 % per year then the inflation rate in that economy would be:
3%
5%
13%
40%
Suppose in an economy, money supply is growing at 10% and output is growing

at 4% per year, then inflation rate would be?
3%
6%
14%
40%
If the real interest rate is 4% and inflation rate is 3%, nominal interest rate would
be?
1%
5%
7%
12%
If nominal interest rate is 10% and inflation rate is 4 %, then real rate of interest
is?
2%
6%
14%
40%
If the real interest rate is 8% and the nominal interest rate is 15%, this implies an
expected inflation rate of:
2%
7%
23%
120%
Which of the following is ex ante real interest rate?
Nominal interest rate - expected inflation rate

Nominal interest rate - actual inflation rate
Nominal interest rate + actual inflation rate
Nominal interest rate + expected inflation rate
Which of the following is ex post real interest rate?
Nominal interest rate - expected inflation rate

Nominal interest rate - actual inflation rate
Nominal interest rate + actual inflation rate
Nominal interest rate + expected inflation rate
Which of the following equations is correct?
Nominal interest rate = real interest rate - inflation

Real interest rate = nominal interest rate + inflation
Real interest rate = nominal interest rate × inflation
Real interest rate = nominal interest rate - inflation
Which of the following equations is correct?
Nominal interest rate = real interest rate + inflation

Real interest rate = nominal interest rate / inflation
Real interest rate = nominal interest rate × inflation
Nominal interest rate = real interest rate - inflation
Which of the following relationship is exist between nominal interest rate and
demand for money?
Fixed
Negative
Positive
Zero
Which of the following is an opportunity cost of holding money?

Ex ante real interest rate
Ex post real interest rate
Inflation rate
Which of the following is most liquid asset?
Checks
Demand deposits
Money
Saving certificates
The point where supply of real money balance is equal to demand for real money
balance is known as:
Disequilibrium
Decrease in supply
Equilibrium
Increase in demand
Which of the following option will be happen if people expect next year’s price to
be higher?
Expected inflation will rise

Interest rate will reduce
Expected inflation reduce
Unemployment will reduce
Lesson 13
In the long run the real wage is determined by labor supply and:

Price level
In the short run, inflation reduces real wages, when nominal wages are:
Fixed by contracts
Variable
Zero
None of the above
Which of the following is the cost and inconveniences of reducing money

balances to avoid the inflation tax?
Menu cost
Marginal cost
Shoe leather cost
Total cost
Shoe leather cost as an inflationary problem is the cost of:
Changing prices incur to firms

Inconveniences of reducing money balances to avoid the inflation tax
Different firms change their prices at different times, leading to relative price distortions,
Leather company
Which of the following is cost of expected inflation?
Shoe leather cost

Menu cost
Relative price distortions
All of the above
Menu cost in relation to inflation is cost of:
Changing prices incur to firms

Changing prices incur to households
Changing styles
Changing lifestyle
Which of the following is known as relative price distortion?
Cost of changing prices incur to firms

Transfer wealth from borrowers to lenders
Different firms change their prices at different times
Market inefficiencies
Which of the following is the cost of changing prices incur to firms?
Average cost
Menu cost
Shoe leather cost
Total cost
When inflation is higher in an economy, then menu cost will be:
Fall
Fixed
Rise
Zero
When price distortions exist in a society it brings microeconomic:
Efficiencies
Equilibrium
Inefficiencies
Stability
Higher uncertainty due to high inflation rate makes risk averse people:
Better off
Happy
Stable
Worse off
In which of the following cases purchasing power is transferred from lenders to

borrowers?
Actual inflation is higher than expected inflation

Actual inflation is lower than expected inflation
Expected inflation is higher than actual inflation
Expected inflation and actual inflation is same
Purchasing power is transferred from borrowers to lenders if:
Actual inflation is higher than expected inflation

Actual inflation is lower than expected inflation
Expected inflation is higher than actual inflation
Expected inflation and actual inflation is same
Hyperinflation exists in society when:
Inflation rate is greater than or equal to 20%

Inflation rate is greater than or equal to 50%
Inflation rate is less than or equal to 40%
Inflation rate is less than or equal to 30%
Excessive money supply growth in an economy creates:
Deflation
Hyperinflation
Inflation
Stability
Which of the following is solution to hyperinflation?
Increasing money supply

Increase expenditures
Stop printing money
Tax cut
Lesson 14
Which of the following variables measured in physical units is known as:
Nominal
Exogenous
Endogenous
Real
All of the following statements refer to real variables except:
Quantity of output produced

Output earned per hour of work
Dollars per hour of work
Output earned in future by lending one unit of output today
All of the given options refer to nominal variables except:
Dollars per hour of work

Quantity of output produced
Dollars earned in future by lending one dollar today
The amount of dollars needed to buy a representative basket of goods
Variables which are measured in money units are called:
Independent
Nominal
Real
Dependent
Which of the following variable is nominal variable?
Price level
Quantity of output
Real wage
Real interest rate
Which of the following is known as theoretical separation of real and nominal

variables in the classical model?
Classical dichotomy
Closed economy
Neutrality of money
Open economy
“Changes in the money supply do not affect real variables” is known as?
Classical dichotomy
Fisher effect
Neutrality of money
A country has a trade surplus equal to NX if:
NX > 0
NX < 0
NX = 0
EX - IM
A country has a trade deficit equal to – NX if:
NX > 0
NX < 0
NX = 0
EX - IM
Which of the following is a national income identity in an open economy?
Y = C + I + G + NX
Y= C + I + G - NX
Y= C + I + G
Y= C + I
Which among the following is a national income identity in closed economy?
Y= C + I + NX
Y= C + I + G
Y= C + I + G + NX
Y= C + I + G - NX
Difference between domestic saving and domestic investment is called as:
Net foreign investment

Domestic investment
Trade surplus
Trade deficit
When domestic savings are greater than domestic investment, then country is a:
Net lender
Net borrower
Gross exporter
Gross importer
When domestic savings are less than domestic investment, then country is a:
Net borrower
Net lender
Gross exporter
Gross importer
In an open economy, a country is a net lender if:
Domestic savings are greater than domestic investment

Domestic savings are less than domestic investment
Domestic savings are equal to domestic investment
Domestic savings are equal to zero
A country is a net borrower in an open economy, if:
Domestic savings are greater than domestic investment

Domestic savings are less than domestic investment
Domestic savings are equal to domestic investment
Domestic investment is equal to zero
If national output Y = 2,000 and domestic spending on all domestic and foreign
goods and services equals 1500, then net exports NX will be equal to:
0
400
500
600
Which of the following is the assumption of capital flows?
Domestic and foreign bonds are perfect substitutes

Economy is small
Perfect capital mobility
All of the above
Lesson 15
If S-I and NX are exactly equal to zero i-e the value of imports equals the value of
exports then we have:
Trade surplus
Trade deficit
Balanced trade
No trade at all
The situation when a country’s imports are more than it exports is known as:
A trade deficit
A trade surplus
An expansion
A recession
A trade deficit is a situation when a country’s:

Imports > Exports
Imports < Exports
Exports > Imports
Exports = Imports
Which of the among options show trade surplus of a country?

Exports > Imports
Exports < Imports
Imports > Exports
Exports = Imports
The situation when a country’s exports are more than its imports is known as:
A trade deficit
A trade surplus
An expansion
A recession
The relative price of domestic currency in terms of foreign currency is known as:
Flexible exchange rate
Fixed exchange rate
Nominal exchange rate
Real exchange rate
Which of the followings refer to nominal exchange rate?
The relative price of domestic currency in terms of foreign currency

The absolute price of foreign currency in terms of domestic currency
The relative price of domestic goods in terms of foreign goods
The absolute price of foreign goods in terms of domestic goods
The relative price of domestic goods in terms of foreign goods is known as:
Fixed exchange rate

Real exchange rate
Which of the following is true about real exchange rate?
The relative price of domestic goods in terms of foreign goods

The absolute price of foreign goods in terms of domestic goods
The relative price of domestic currency in terms of foreign currency
The absolute price of foreign currency in terms of domestic currency
Formula to calculate real exchange rate (Ɛ) can be written as:
If the price of burger in Pakistan is P* = 200rs and the price in USA is P = $100.
Nominal exchange rate, e = 120rs/$. Real exchange rate will be:
50
60
70
80
Suppose the price of pen in Pakistan is P* = 100 Rs and in USA is P = $50.
Nominal exchange rate, e = 110 Rs/$. Real exchange rate will be:
25
55
100
150
The market exchange rate adjusted for prices is known as:
Fixed exchange rate

Real exchange rate
Which of the following is an example of nominal exchange rate?
Japanese pen per USA pen

Pak burger per UK burger
Rupees per dollar
UAE mobile per UK mobile
As the real exchange rate of Pakistani rupees increases:
Pakistani goods become expensive relative to foreign goods

Pakistan net exports fall
The Pakistan trade surplus decreases
All of the given options
Lesson 16
Which of the following relationship exist between real exchange rate and net
exports?
Fixed
Inverse
Positive
Zero
The inverse relationship between net exports and real exchange rate is known as:
Net export function
Net import function
Trade function
At high values of real exchange rate (Ɛ), home goods become:
Cheaper
Expensive
Unavailable
None of above
Home goods become expensive at:
High values of real exchange rate

Low values of real exchange rate
Zero values of real exchange rate
High values of nominal exchange rate
When real exchange rate (Ɛ) is relatively low, home goods become:
Expensive
In expensive
Unavailable
Highly demanding
At any given value of real exchange rate (Ɛ), import quota will decrease imports
and:
Increase net exports

Decrease net exports
No change in net exports
Zero net exports
Which of the following expression shows real exchange rate?
(Exchange rate + domestic price level) / Foreign price level

(Real exchange rate × domestic price level) / Foreign price level
(Nominal exchange rate × domestic price level) × Foreign price level
(Nominal exchange rate × domestic price level) / Foreign price level
Which of the following equation shows nominal exchange rate?
(Real exchange rate x foreign price level) / Domestic price level

(Real exchange rate + foreign price level) / Domestic price level
(Real exchange rate × domestic price level) / Foreign price level
(Real exchange rate / domestic price level) / Foreign price level
Which of the following is also known as net export curve in foreign exchange
market?
Demand for dollar curve

Supply of dollar curve
Demand curve
Supply curve
Which of the following is also known as capital outflow curve in foreign exchange
market?
Demand for dollar curve

Demand curve
Supply curve
Supply of dollar curve
A net export is equal to:
Exports – imports
Imports – exports
Exports + imports
Imports – trade deficit
Exports minus imports are known as:
Net exports
Net imports
Net income
Import quota
An economy with international trade is known as:

A classical economy
An open economy
A closed economy
A Keynesian economy
An economy without international trade is known as:
A closed economy
An open economy
A classical economy
A Keynesian economy
Lesson 17
A doctrine that states that goods must sell at the same (currency-adjusted) price
in all countries is known as:
Purchasing power parity

Real exchange rate
Interest rate parity
According to purchasing power parity, goods must sell at the:
Same (currency-adjusted) price in all countries

Different (currency-adjusted) price in all countries
Different price in different countries
Minimum price in all countries
Arbitrage is defined as:
The law of one price

The law of different prices
Law of demand
Law of supply
Which of the following terms refer to “The law of one price”?
Arbitrage
Exchange rate
Interest rate
Discounting
In purchasing power parity which of the following exchange rate adjusts to

equalize the cost of basket of goods across countries?
Nominal
Real
Fixed
Flexible
Which of the following is nominal exchange rate between two countries in

purchasing power parity doctrine?
e = P*/P
e = P/P*
e = P* + P
e = P* - P
Which of the following is reason in the real world for not holding purchasing
power parity?
International arbitrage not possible

International arbitrage is possible
Goods of different countries are substitutes
Free trade zone
Which of the following is the average rate of unemployment around which the
economy fluctuates?

Frictional unemployment
Structural unemployment
Cyclical unemployment
The labor market is in steady state, if the unemployment rate is:
Constant
Increasing
Decreasing
Average
Suppose s is rate of job separation, f is rate of job finding, E is employed worker

and U is unemployed worker. The steady state condition in labor market is equal
to:
sxE=fxU
sxE-fxU
sxE+fxU
sxE/fxU
Labor force is composed of:
Unemployed plus employed people

Employed – unemployed people
Only Unemployed people
Only employed people
Unemployment rate is equal to:
Labor Force / Population

Unemployed / Employed + Unemployed
Employed + Unemployed
Labor Force + Not in Labor Force
Economists define the unemployed as individuals who are:
Not currently working but are actively looking for work

Working but looking for a different job
Not currently working
Working less than their desired amount of time
Which of the following is reason of unemployment in the economy of nation-1?
Wage rigidity
Increase in foreign direct investment in nation-1
Increase in government expenditure
Decrease in taxes
The time which takes workers to search for a job is known as:
Involuntary unemployment
Which of the following is reason for frictional unemployment?
Workers have different abilities, preferences

Jobs have different skill requirements
Geographic mobility of workers not rapid
All of above
Lesson 18
Which of the following kind of unemployment occurs due to the sectoral shifts in
economy?
Friction unemployment
Frequent smaller sectoral shifts in our economy contribute to:
Natural unemployment
Frictional unemployment occurs in an economy due to:
Sectoral shifts
Rapid geographic mobility of workers
Workers have same abilities
Workers are fully skilled
Formula of unemployment rate is given as:
Unemployed / Labor force

Labor force / Unemployed
Employed / Labor force
Employed + unemployed
If the number of unemployed people is 200 and the number of employed people is
300, what is the unemployment rate?
30%
40%
45%
50%
If the number of unemployed people is 300 and the number of employed people is
400, what will be the labor force?
100
400
700
1200
If the number of people classified as unemployed is 700 and the number of

people classified as employed is 800, what will be the labor force?
100
1500
2500
5600
Which one of the following is Not the reason of wage rigidity?
Minimum wage laws

Labor unions
Efficiency wages
Interest rate
Which of the following is reason of wage rigidity?
Minimum wage laws

Labor unions
Efficiency wages
All of the above
Labor union exercise monopoly power for their members to secure:
Higher wages
Lower wages
Inefficiency
Unemployment
The labor market is in steady state or in long run equilibrium, if the

unemployment rate is:
Constant
Increasing
Decreasing
Negative
Which of the following is reason for unemployment?
Union wage exceeds equilibrium wage

Union wage less than equilibrium wage
Improvement in technical education
Improvement in efficiency of workers
Theory in which high wages increase worker productivity is known as:
Efficiency wage theory

Investment theory
Interest theory
Demand theory
Formula of natural rate of unemployment U/L is written as:
s/s + f
s /s - f
s/f
s +f / s
Lesson 19
Which of the given model shows how growth in capital stock, in labor force and
advance in technology interact in an economy?
Solow growth model

Demand supply model
Investment model
Interest rate model
An economist who won Noble prize for contribution to the study of economic
growth was:
Robert Solow
A.W. Philips
Adam Smith
J.M Keynes
Which of the following is an assumption of Solow growth model?
Capital is no longer fixed

Labor is no longer fixed
The consumption function is simpler
All of the above
The process by which inputs and production technology are transformed into
outputs is known as:
Allocation
Production
Consumption
Investment
Which of the following is production function in aggregate terms?
Y = F (K, L)
y = F (k)
y = F (l)
Y/k= 0
The production function exhibits constant returns to scale is best describe by:
zY = F (zK, zL)
Y/L = F (K/L, 1)
Y/K = F (L/K, 1)
y = f (k)
In Solow growth model which of the following makes capital stock smaller?
Depreciation
Investment
Savings
Remittances
In Solow growth model which of the following makes capital stock bigger?
Investment
Depreciation
Consumption
None of the above
The fraction of capital stock that wears out each period is known as:
Depreciation
Investment
Consumption
Savings
Change in capital stock is equal to:
Investment – depreciation
Depreciation – investment
Investment + depreciation
Consumption + savings
Which one of the following consumption function is correct in Solow growth

model?
c = (1–s) y (per worker)
c = (1+s) y (per worker)
c = (1–s)/ y (per worker)
c = (1*s) y (per worker)
The national income identity in per works term in Solow growth model is written
as:
Y=C+I
y=c+i
Y = C/L + I
Y/L = C - I
Which one of the following income per person in Solow growth model is correct?
y = f (k)
Y=f
Y=f+i
Y=f+s
Lesson 20
Fraction of income that is saved is known as:
Consumption
Depreciation
Interest
Saving
The Solow growth model describes:
How savings, population growth and technological changes affect output

How output is determined with fixed factor of production
How output is determined at a point in time
How to control inflation rate
A model which describes how savings, population growth and technological

changes affect output is known as:
Solow growth model

Harrod Domar model
Endogenous growth model
Demand supply model
Which of the following shows a steady state in Solow growth model with no
population growth?
The amount of capital per worker remains constant over time

Investment per worker equals depreciation per worker
Saving per worker equals depreciation per worker
In the Solow growth model, delta sign (δ) shows:
The break-even investment

The depreciation rate
Capital per worker
Saving rate
With no population growth, the steady-state level of capital per worker will
increase whenever:
The amount of investment per worker decreases
The depreciation rate increases
The saving rate increases
Which of the following is causing to grow capital stock in Solow growth model?
An Increase in saving rate

Decrease in saving rate
Decrease in investment
An Increase in depreciation
In Solow growth model, which of the following is leading towards a new steady
state?
Growing capital stock

Decrease in saving rate
Increasing inflation rate
Increasing interest rate
Using Solow model with no population growth, in the steady state the capital
stock per worker remains constant because investment equals:
Depreciation
Consumption
Output per worker
Input per worker
Economic development and growth of a country depends on:
Natural resources
Capital formation
Size of the market
Y = F (K, L) is known as:
Production function
Demand function
Supply function
In the Solow growth model, which one of the following is correct?
Delta sign (δ) shows depreciation rate

Delta sign (δ) shows saving rate
Delta sign (δ) shows investment rate
Delta sign (δ) shows steady state
In Solow model an increase in the saving rate rises investment causing the:
Capital stock to grow toward a new steady state

Consumption level to grow toward a new steady state
Stock exchange to grow toward a new steady state
Deprecation stock to grow toward a new steady state
Solow model predicts that countries with higher rates of saving and investment
will have higher levels of:
Capital and income per worker in the long run

Capital and income per worker in the short run
Capital, investment and income per worker in the short run
Capital per worker in the very short run
Lesson 21
According to the golden rule in Solow model, best steady state has:
Highest consumption per person

Highest production per worker
Lowest consumption per person
Lowest production per worker
According to Solow model, Economic well-being depends on:
Consumption
Depreciation
Interest
Demand
The golden rule level of capital stock k*gold denotes the steady states with the
highest level of:
Consumption per worker

Level of output per worker
Growth rate of consumption
Growth rate of output
In Solow growth model which of the following is slope of production function

f (k*)?

Depreciation
Investment
Interest rate
Which of the following is required for policymakers to adjust to achieve the

golden rule?
Saving
Inflation
Interest
Depreciation
In Solow model with no population growth and no technological change steady

state consumption is at its biggest level when?
Labor equals capital

MPK equals depreciation rate
MPL equals depreciation
Capital equals zero
To explain sustained economic growth in Solow model which of the following
sources of growth need to incorporate?
Population growth only

Technological progress only
Population and technological progress
Depreciation
The amount of investment necessary to keep capital constant in Solow model is

known as:
Break-even investment
Actual investment
Total investment
Depreciation
The Solow growth model with population growth predicts in the long run:
Higher population growth leads to lower output per worker

How output is determined with fixed factor of production
How output is determined at a point in time
None of the above
Let “L” is labor force, “n” is rate of population growth then which of the following
formula is used to calculate population growth in Solow model?
ΔL / L = n
ΔL + L = n
L – ΔL = n
L – ΔL = n
Suppose labor force (L) = 100 in a year and population are growing at 2 %( n =
0.02) per year then change in labor force (ΔL) will be:
1
2
3
4
Suppose labor force (L) = 200 in a year and population are growing at 3% per year
(n=0.03) then change in labor force (ΔL) will be:
2
4
6
8
If steady state capital per worker (K*) is greater than golden rule of capital
(K*gold) then increasing consumption requires:
Fall in saving
Rise in saving
Increase inflation
Decrease inflation
If steady state capital per worker (K*) is less than golden rule of capital (K*gold)
then increasing consumption requires:
Increase in savings
Fall in savings
Increase inflation
Decrease inflation
Lecture 22
Labor augmenting technological progress in Solow model increases labor
efficiency at the exogenous rate:
g
k
l
n
In Solow growth model with labor augmenting technological progress, L x E

shows:
Capital per effective worker

Number of effective workers
Output per effective worker
Output per worker
In the Solow growth model with technological growth, which one is correct?
L x E = number of effective workers

L X E = output per effective worker
L X E = capital per effective worker
L X E = technological progress
Which of the following production function shows labor augmenting

technological progress in Solow model?
Y = F (K)
Y = F (L)
Y = F (K, L x E)
Y = F (L, K + E)
In the Solow growth model with technological growth rate, y = Y/ (LxE) shows:

Output per worker
Capital per worker
In the Solow growth model with technological growth rate, k = K/ (LxE) shows:

Output per worker
Capital per worker
In the Solow growth model with technological growth, which one is correct?
y = Y / LE = output per effective worker

y = Y / LE = capital per effective worker
y = Y / LE = Investment per effective worker
y = Y / LE = Deprecation per effective worker
Which one is correct in the Solow growth model with technological growth?
k = K / LE = capital per effective worker

k = K / LE = output per effective worker
k = K / LE = labor per effective worker
k = K / LE = investment per effective worker
In the Solow growth model with technological growth, production function per
effective worker is:
y = f (k)
Y = F (K)
Y + f (k)
Y- F (k)
In the Solow growth model with technological growth, saving and investment per
effective worker is:
s y = s f (k)
s y + s f (k)
s y - s f (k)
s y / s f (k)
In the Solow growth model with technological growth, c* is maximized when:
MPK = δ + n + g
MPK = δ + n + k
MPK = δ + n + c
MPK = δ + c + i
In the golden rule steady state, the marginal product of capital net of depreciation
equals population growth rate plus:
Rate of technological progress
Rate of labor progress
Rate of consumption progress
Rate of efficiency of per worker in progress
In the Solow growth model with population growth “n” and labor-augmenting
technological progress “g, the consumption per worker (C*) is maximized when?
MPK = (δ + n + g)
MPK > (δ + n + g) k*
MPK < (δ + n + g)
MPK = 0
In the Solow growth model, persistent increase in standard of living is due to:
Technological progress
Increase in taxes
Population growth
None of the above
In the Solow model the formula for the golden rule capital stock, C* in terms of k*
with technological progress is:
C* = f (k*) – (δ+n+g) k*
C*= f (k*) – δk*
C*= f (k*) + δk*
C*= k - f (k*)
In Solow growth model If (MPK −δ) > (n + g), it shows we are below the Golden
Rule steady state and we should:
Increase savings
Reduce savings
Increase consumption
None of the above
In Solow growth model if (MPK −δ) < (n + g), it shows we are above the Golden
Rule steady state and we should:
Reduce savings
Increase savings
Decrease consumption
None of the above
Lecture 23
To increase the saving rate government should:
Reduce budget deficit

Reduce budget surplus
Increase tax rate
Reduce incentives for savings
Which of the followings is policy to increase the saving rate?
Reduce govt budget deficit

Increase incentive
Reduce taxes which reduce savings
All of the above
In the real world, which of the followings is type of capital?
Private capital stock

Public infrastructure
Human capital
All of the given
The knowledge and skills that workers acquire through education is known as:
Human capital
Private capital
Public capital
Capital gain
In technological progress, encourage innovation by granting temporary

monopolies to inventors of new products are known as:
Patent laws
Tax incentives
Industrial policy
Copyright
Keeping in view the Solow model, which of the followings is included in

technological progress?
Patent laws
Tax incentives for R & D
Industrial policy
All of the above
Solow growth model ‘steady state exhibits:

Balanced growth
Unbalanced growth
Production inefficiency
Consumption
According to Solow model, in a steady state, capital labor ratio K/Y should be:
Constant
Increasing
Decreasing
Negative
Countries with higher capital per worker also tend to have higher:
Production efficiency
Unbalanced growth
Consumption efficiency
A theory in which the growth rate of productivity and living standard is

endogenous is known as:
Endogenous growth theory

Exogenous growth theory
Solow growth model
Keynesian cross
Which of the followings term encourages capital accumulation?
Production efficiency
Unbalanced growth
Low level of consumption
The production function for endogenous growth model can be written as:
Y=AK
y = f (k)
Y = F (K)
Y + f (k)
Y = AK is a production function of:
Endogenous growth model

Exogenous growth model
Solow growth model
Keynesian cross
In endogenous growth theory, MPK is:
Constant
Diminish
Increasing
Negative
In Solow growth model, MPK is:
Constant
Diminish
Increasing
Negative
Lecture 24
In which of the followings time horizon, prices are flexible?
Long run
Short run
Immediately
Future
In the long run, prices are:
Flexible
Sticky
Negative
Zero
In short run, many prices are:
Sticky
Flexible
Negative
Zero
The relationship between the price level and the quantity of output demanded is
known as:
Aggregate demand curve

Aggregate supply curve
Investment curve
Consumption curve
Aggregate demand curve is best described by the relationship between price

level and:
The quantity of output demanded

The quantity of output supplied
Investment
Interest rate
An increase in the price level causes a fall in real money balances (M/P), is shown
by:
Downward sloping AD curve

Upward sloping AD curve
Downward sloping AS curve
Upward sloping AS curve
In downward sloping AD curve, an increase in the price level causes a:
Fall in real money balance

Increase in real money balance
No change in real money balance
Increase in demand for goods
According to classical, In the long run, output is determined by:
Technology only
Factor demand only
Factor supplies and technology
Factor demand and technology
According to classical, the level of output at which the economy’s resources are
fully employed is known as:
Natural level of output

Increasing level of output
Decreasing level of output
Constant level of output
Full employment is best described by:
Unemployment is equal to its natural rate

Unemployment is greater to its natural rate
Unemployment is less then to its natural rate
Unemployment is equal to 50 percent
Unemployment is equal to its natural rate is known as:
Full employment
No employment
50 % employment
Voluntary employment
The shape of long run aggregate supply curve is:
Vertical
Horizontal
Positive slope
Negative slope
In classical macroeconomic theory, which of the followings curve does not

depend on price level?
Long run aggregate supply curve

Short run aggregate supply curve
Demand curve
In classical macroeconomic theory, the shape of short run aggregate supply

curve is:
Vertical
Horizontal
Positive slope
Negative slope
In classical macroeconomic theory, horizontal shaped curve is known as:

Demand curve
In classical macroeconomic theory, vertical shaped curve is known as:

Demand curve
Lecture 25
Exogenous changes in aggregate demand or supply is called:
Shocks
Shortage
Surplus
Equilibrium
Shocks means, exogenous changes in aggregate demand and:
Aggregate supply
Investment
Consumption
Savings
Which of the followings options temporarily push the economy away from full
employment?
Shocks
Shortage
Surplus
Equilibrium
Which of the followings is example of supply shocks?
Bad weather reduces crop yields

Workers unionize, negotiate wage increases
New environmental regulations require firms to reduce emissions
All of the above
“Bad weather reduces crop yields” is an example of:

Supply shocks
Demand shocks
Boom
Recovery
If the money supply is held constant, then decrease in velocity would tend to:
Decrease in demand for goods and services
Increase in demand for goods and services
Decrease in supply for goods and services
No change in demand for goods and services
A negative demand shock shifts:
Aggregate demand curve to left:

Aggregate demand curve to right:
Aggregate demand curve to vertical:
Aggregate demand curve to horizontal:
Policy actions aimed at reducing the severity of short-run economic fluctuations

is known as:
Saving policy
Stabilization policy
Trade policy
Commercial policy
Predicted effects of the oil price shock are:
Inflation increases output decreases

Inflation decreases output decreases
Inflation increases output increases
Inflation decreases output increases
Central bank accommodates the shock by rising:
Aggregate demand
Aggregate supply
Demand
Supply
A supply shock such as an increase in the price of imported oil would tend to:
Increase output and reduce price level

Reduce production cost and prices of other goods
Fall in Output and employment
Increase output and employment
The oil price shock shifts the:

Short run aggregate supply curve to up
Short run aggregate supply curve to down
Aggregate demand curve to up
No change in short run aggregate supply curve
Lecture 26
Which of the followings is NOT true for long run?
Prices flexible
Prices fixed
Output determined by factors of production & technology
Unemployment equals its natural rate
Which of the followings is NOT true for short run?
Prices fixed
Prices flexible
Output determined by aggregate demand
Unemployment is negatively related to output
The Keynesian cross model is presented by:
J.M.Keynes
A.W.Philips
Adam smith
Alfred Marshal
Which of the following theory is presented by J.M.Keynes?
Keynesian cross model

Utility theory
Price theory
In the simple closed economy, Keynesian cross model planned expenditures are
equal to:
E=C+I+G
E = C + I+ T+NX
E = C + I + G + NX
E=C+G
Actual expenditures are equal to:
Economy’s GDP
Consumption
Investment
Govt expenditure
In Keynesian cross model, equilibrium condition occurs where:
Actual expenditure > planned expenditures

Actual expenditure < planned expenditures
Actual expenditure = planned expenditures
Actual expenditure + planned expenditures
The increase in income resulting from Rs.1, increase in Govt expenditure is

known as
Tax multiplier
Income multiplier
Investment multiplier
Government purchases multiplier
The formula for Govt purchases multiplier is given as:
1/1 – MPC
1 – MPC
-MPC / 1
1 + MPC
If MPC = 0.8 then what will be the value of Govt purchases multiplier?
1
2
5
8
A graph of all combinations of rate of interest and output that result in goods
market equilibrium is known as:
IS curve
LM curve
Demand curve
Supply curve
Lecture 27
Which of the following is negatively sloped curve?
IS curve
LM curve
Supply curve
Consumption curve
The IS curve shows that when income increases, interest rate must fall to restore
equilibrium in:
Goods market
Money market
Labor market
Loanable fund market
The IS curve:
Slopes downward
Slopes upward
Is horizontal
Is vertical
At any value of rate of interest, increase in government expenditures leads to

shift the IS curve to:
Right
Left
Down
Unchanged
Theory of liquidity preferences is presented by:
John Maynard Keynes

A.W.Philips
Robert Solow
Adam Smith
A simple theory in which the interest rate is determined by money supply and
money demand is known as:
Theory of liquidity preference

Theory of investment
Endogenous growth theory
Exogenous growth theory
In theory of liquidity preference, the supply of real money balance is:
Fixed
Increasing
Decreasing
Zero
In theory of liquidity preference, demand for real money balance is equal to:
(M/P) d = L(r)
(M/P) d + L(r)
(M/P) d - L(r)
(M/P) d / L(r)
Which of the following adjusts to equate the supply and demand for money?
Interest rate
Saving rate
Investment rate
Discount rate
Graph of all combinations of rate of interest and output that equate the supply
and demand for real money balances is illustrate as:
IS curve
LM curve
Supply curve
Consumption curve
The LM curve is:

Negative slope
Positive slope
Horizontal
Vertical
Which of the following curve is positively sloped curve?
IS curve
LM curve
Demand curve
Investment curve
Lecture 28
Which of the following curve represents equilibrium in goods market?
IS curve
LM curve
Demand curve
Supply curve
Which of the following curve represents equilibrium in money market?
IS curve
LM curve
Demand curve
Supply curve
An increase in government purchases shift the IS curve to:
Rightward
Leftward
Horizontal
Vertical
An increase in money supply shifts the LM curve to:
Right
Left
Up
Unchanged
Exogenous changes in the demand for goods & services are known as:
IS shocks
LM shocks
Shortage
Surplus
Exogenous changes in the demand for money are known as:
IS shocks
LM shocks
Shortage
Surplus
Which of the following is an example of IS shock?
A wave of credit card fraud increases demand for money

More ATMs reduce money demand
Change in households’ wealth
The Internet reduce money demand
The equation is best describe the equilibrium in
Money market
Goods market
Labor market
Capital market
Which of the following equation shows the equilibrium in money market?
Lecture 29
When drawn on a graph with income along the horizontal axis and the interest
rate along the vertical axis, the IS curve generally:
Is vertical
Is horizontal
Slopes upward
Slopes downward
When drawn on a graph with income along the horizontal axis and the interest
rate along the vertical axis, the LM curves generally:
Is vertical
Is horizontal
Slopes upward
Slopes downward
A decrease in the price level leads to money balance (M/P) to increase will shift
the LM to:
Upward and to the right

Downward and to the right
Downward and to the left
Upward and to the left
A movement along the AD-curve from right to left is equivalent to:
A shift of the IS-curve to the right due to a decrease in interest rates

A shift of the LM-curve to the left due to decrees in real money balances
A shift of the LM-curve to the right due to an increase in nominal money supply
A movement along the LM-curve to right due to an increase real money balances
The AD - curve will shift to the right if:
Central bank increases money supply

Central bank restrict money supply
Autonomous savings increases
Consumption level decreases
Effect of expansionary fiscal policy is that:
IS curve shifts to right

IS curve shifts to left
LM curve shift to right
LM curve shift to left
IS curve shifts to right side due to:

Expansionary fiscal policy
Contractionary fiscal policy
Monetary policy
Trade policy
Leftward shift of the IS curve indicates that there is:
Negative IS shock
Excess demand for goods
Excess supply of money
Decrease in taxes
In IS – LM model an increase in tax rate should move the:
IS curve left
IS curve right
LM curve right
LM curve left
In IS – LM model a decrease in tax rate should move the:

IS curve left
IS curve right
LM curve right
LM curve left
Which of the following variables links the market for goods and services and
market for real money balances?
Nominal money supply

Price level
Interest rate
Lecture 30
Which of the following model portrays the relationship between the nominal
exchange rate and the economy output?
Mundell Fleming model

IS LM model
Keynesian cross
Macroeconomic model
The Mundell-Fleming model portrays the relationship between the nominal

exchange rate and:
Economy output
Investment
Consumption
Interest rate
Mundell Fleming model is an extension of:
Macroeconomic model
Input output model
IS - LM model
Keynesian cross
The key assumption of Mundell - Fleming model is:
Small open economy

Closed economy
Large economy
Large closed economy
Foreign currency per unit of domestic currency is known as:

Real exchange rate
Fixed exchange rate
Floating exchange rate
Nominal exchange rate is described as:
Foreign currency
Domestic currency
Foreign currency per unit of domestic currency
Domestic currency per unit of foreign currency
In Mundell Fleming model IS* curve is expressed by the equation Y = C(Y-T) + I(r*)
+ G + Nx (e), where Nx (e) should be expressed as:
Net exports depend negatively on the exchange rate

Net exports depend positively on the exchange rate
Net export does not depend on the exchange rate
Net exports are zero
In a small open economy with floating exchange rate, a fiscal expansion:
Leaves income unchanged

Increases income
Decreases income
Negative income
At any given value of nominal exchange rate, a fiscal expansion shifting IS* to
the:
Right
Left
Unchanged
Vertical
In a small open economy with perfect capital mobility, fiscal policy is utterly
incapable of affecting:
Real GDP
Investment
Interest rate
Exchange rate
In closed economy fiscal policy crowds out investment by causing the interest
rate to:
Rise
Low
Zero
Negative
In small open economy fiscal policy crowds out net exports by causing the
exchange rate to:
Appreciate
Decline
Zero
Negative
In a small open economy under floating exchange rate, an increase in money
supply shifts LM* to:
Right
Left
Unchanged
Horizontal
Under a system of floating exchange rate a monetary expansion by the central

bank would cause the exchange rate to:
Decline
Rise
Zero
Negative
In Mundell- Fleming model, monetary policy affects output by affecting one or

more components of:
Aggregate demand
Aggregate supply
Supply function
Lecture 31
The Mundell - Fleming model predicts that, under floating exchange rate a tariff or
quota:
Reduces imports
Increase imports
Reduce exports
Increase exports
Which of the following options reduces imports?
Trade restrictions
Trade benefits
Exchange rate appreciation
Which of the following options reduces exports?
Trade restrictions
Trade benefits
Exchange rate appreciation
Which of the following options created “sectoral shifts” which cause frictional
unemployment?
Import restrictions
Export restrictions
Economic development
Growth policy
Under which system of exchange rate the country’s central bank stands ready to
buy or sell the domestic currency for foreign currency at a predetermined rate?
Fixed exchange rate

Floating exchange rate
Real exchange rate
In an open economy with a fixed exchange rate, a fiscal expansion would raise?
Nominal exchange rate (e)

Real exchange rate
Interest rate
Discount rate
Mundell - Fleming model predicts under a system of floating exchange rate:

Fiscal policy is ineffective
Monetary policy is ineffective
Fiscal policy is effective
No policy effects
Mundell - Fleming model predicts under a system of fixed exchange rate:
Fiscal policy is ineffective

Monetary policy is effective
Fiscal policy is effective
No policy effects
In Mundell - Fleming model, under system of floating exchange rate a fiscal

expansion would increase:
Output
Real exchange rate
Net exports
In Mundell - Fleming model, under system of floating exchange rate a monetary

expansion would increase:
Output
Real exchange rate
Investment
In Mundell - Fleming model, under system of floating exchange rate an import

restriction would increase:
Output
Real exchange rate
Net exports
In Mundell - Fleming model, under system of fixed exchange rate an import

restriction do not effect on:

Output
Net exports
All of the given
In Mundell - Fleming model, under system of fixed exchange rate a monetary
expansion do not effect on:
Output
Net exports
All of the given
Lecture 32
The central bank may try to prevent the depreciation by reducing the:
Money supply
Money demand
Interest rate
Discount rate
Which of the following reduce the real money supply?
Depreciation
Price of exports
Decrease in price level
Appreciation
Consumers might respond to the increased risk by holding:
More money
Less money
No money
Bonds
Floating exchange rate allows monetary policy to be used to pursue the goal of:
Stable growth
High inflation
Unstable growth
Unemployment
Fixed exchange rate allows monetary policy to:
Avoid uncertainty
Avoid volatility
Prevent hyperinflation
All of the given
Which of the following is model of aggregate supply?
The sticky – wage model

The imperfect - information model
The sticky- price model
Which of the following equation shows the three models of aggregate supply?
The equation shows the:
Model of aggregate demand

Investment function
Three models of aggregate supply
Which of the following model assumes that firms and workers negotiate contracts
and fix the nominal wage?

Solow model
The equation shows the:
Solow model
Which of the following is equation of Sticky – wage model?

In sticky - wage model, unemployment and output are at their natural rates if:
In Sticky – wage model, real wage is less than its target if:
In Sticky – wage model, real wage exceeds its target if:
Which of the following model implies that the real wage should be counter –
cyclical?
Solow model
Lecture 33
Which of the following is assumption of imperfect – information model?
All wages and prices perfectly flexible

All markets are clear
Each supplier produces one good, consumes many goods
Reasons for sticky prices in sticky – price model is:
Menu costs
Long-term contracts between firms and customers
Firms do not wish to annoy customers with frequent price changes
In imperfect - information model, supply of each good depends on its:
Relative price
Absolute price
Current price
Future price
The nominal price of the good divided by the overall price level is known as:
Relative price
Absolute price
Current price
Future price
In sticky – price model, an individual firm’s desired price is given as:
p = P + α(Y - Ȳ)
p + P + α(Y - Ȳ)
p - P + α(Y - Ȳ)
p / P + α(Y - Ȳ)
The equation p = P + α(Y - Ȳ) shows an individual firm’s desired price in:
Solow model
Lesson 34
Which of the following states that inflation depends on expected inflation?
Philips curve
Investment curve
Demand curve
Supply curve
The deviation of the actual rate of unemployment from the natural rate is known
as:
Voluntary unemployment
The Philips curve in its modern form states, that the inflation rate depends on:
Expected inflation
Supply shocks
All of the given
Which of the following equation shows Philips curve?

e
= - β (µ - µn) +v
e
+ - β (µ - µn) +v
e
- - β (µ - µn) +v
e
/ - β (µ - µn) +v
e
= - β (µ - µn) +v is the equation of:
Philips curve
Consumption curve
Aggregate supply curve
Which of the following equation shows the short run aggregate supply curve?
Y = Ȳ + α (P – Pe)
Y + Ȳ + α (P – Pe)
Y - Ȳ + α (P – Pe)
Y / Ȳ + α (P – Pe)
Y = Ȳ + α (P – Pe) is the equation of:

Philips curve
Consumption curve
Short run aggregate demand curve
Output is related to unexpected movements in the price level is known as:
Philips curve
Investment curve
Unemployment is related to unexpected movements in the inflation rate is known

as:
Philips curve
Investment curve
An approach that assumes people form their expectations of future inflation

based on recently observed inflation is known as:
Adaptive expectation
Rational expectation
Future expectation
Current expectation
Inflation resulting from supply shocks is known as:
Cost – push inflation

Demand – pull inflation
Stagflation
Hyperinflation
Inflation resulting from demand shocks is known as:
Cost – push inflation

Demand – pull inflation
Stagflation
Hyperinflation
In the short run, policy makers face a trade - off between inflation and:
Unemployment
Employment
Demand
Supply
Increase in expected inflation shifts the short run Philips curve to:
Upward
Downward
Unchanged
Vertical
The percentage of a year’s real GDP that must be foregone to reduce inflation by
1 percentage point is known as
Sacrifice ratio
Discount ratio
Price ratio
Commodity ratio
An approach that assumes the people base their expectations on all available
information, including information about current & prospective future policies is:
Adaptive expectation
Rational expectation
Future expectation
Current expectation
If the sacrifice ratio is 5, then reducing inflation by 4 points requires a loss of:
1% of one year’s GDP

Which of the following is the cost of disinflation?
Lost GDP
Lost NNP
Demand
Supply
Lecture 35
Which of the following is component of domestic debt?
Permanent debt
Floating debt
Unfunded debt
Which of the following is included in permanent debt?
Market loans
Federal government bonds
National funds bonds
Income tax bonds and prize bonds are components of:
Permanent debt
Floating debt
Unfunded debt
Foreign debt
Which of the following is component of floating debt?
Market loans
Income tax bonds
Prize bonds
Treasury bills
Market treasury bills are component of:
Permanent debt
Floating debt
Unfunded debt
Foreign debt
Which of the followings is component of unfunded debt?
Saving certificates
Saving accounts
Postal life insurance
GP fund is component of:
Permanent debt
Floating debt
Unfunded debt
Foreign debt
Government budget deficit is equal to:
Govt spending – Govt revenue

Govt spending + Govt revenue
Govt spending x Govt revenue
Govt spending / Govt revenue
An accurate assessment of government’s budget deficit requires accounting for

the governments:
Assets
Liabilities
Assets and liabilities
Debt
A budget procedure that accounts for assets as well liabilities is called:
Capital budgeting
Govt debt
Govt expenditures
Govt assets
To measure governments overall indebtness, Government budget deficit is equal

to:
Change in debt – change in assets

Change in debt + change in assets
Change in debt x change in assets
Change in debt / change in assets
Changes occur automatically in response to a fluctuating economy is known as:
Business cycle
Recession
Depression
Fluctuations
Which of the following option shows the recession?
Decrease in income → decrease in personal taxes

Increase in income → decrease in personal taxes
Decrease in income → increase in personal taxes
Increase in income → increase in personal taxes
In recession period, government budget deficit:
Increases
Decreases
Unchanged
Zero
Lecture 36
Which of the following option stimulates consumer spending and reduce national
savings?
Tax cut
Increase in taxes
Budget deficit
Budget surplus
The reduction in saving raises the interest rate, which crowds out:
Investment
Taxes
Consumption
Production
The Solow growth model shows that lower investment leads to lower steady state
capital stock and:
Lower output
Higher output
Lower demand
Higher demand
In Solow growth model, change in capital stock is equal to:
Investment + depreciation
Investment - depreciation
Investment x depreciation
Investment = depreciation
When national savings falls, people borrow from abroad causing a:
Trade deficit
Trade surplus
Budget deficit
Budget surplus
Forward-looking consumers perceive that a lower tax now means:
Higher tax later

Lower tax later
Zero tax
Tax cuts are simply:
Tax postponement
Higher tax
Lower tax
Zero tax
According to Ricardian equivalence, government debt is equivalent to:
Future taxes
Current taxes
Past taxes
No taxes
According to Ricardian equivalence, if consumers are forward looking, future

taxes are equivalent to:
Future taxes
Current taxes
Past taxes
No taxes
According to Ricardian equivalence, financing government by debt is equivalent

to financing it by:
Taxes
Investment
Savings
Expenditures
The Ricardian view assumes that consumers base their spending on:
Current income
Current taxes
Future expected income
Current and expected future income
When a government cuts current taxes and raises future taxes, it is giving tax
payers:
A loan
An incentive
A reward
Lecture 37
The consumption function was presented by:
John Maynard Keynes

A.W.Philips
Robert Solow
Alfred Marshall
Which of the following is Keynes conjectures?

Average propensity to consume
Income is primary determinant of consumption
The amount consumed out of an additional dollar of income is between zero and
one is known as:

Multiplier
Accelerator
The ratio of consumption to income is known as:

Marginal product
Average product
Which of the following is consumption function?
is the equation of?
Production function
Demand function
Supply function
Which of the following is a property of consumption function?
The marginal propensity to consume c is between zero and one

The average propensity to consume falls as income rises
Consumption is determined by current income
Average propensity to consume is best described by:
C/Y
C +Y
C-Y
CxY
The sensitivity of the change in consumption with respect to change in income is

known as:
MPC
APC
MC
AC
Which of the following economist predicted about secular stagnation during

World War II?
Simon Kuznets
John Maynard Keynes
A.W.Philips
Robert Solow
The consumption function which shows that APC did not vary systematically with
income is known as:
Long run consumption function

Short run consumption function
Which of the following economist developed the model which analyzed how
rational, forward looking consumers make intertemporal choices?
Simon Kuznets
John Maynard Keynes
A.W.Philips
Irving Fisher

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Macroeconomics (Eco 403)

The study of the economy as a whole is known as:

Macroeconomics discusses issues relating to:

Demand and supply at an individual level

In any economy resources are:

Scarcity exists in society when the resources are:

According to economists, for decision making, people respond to:

Which of the following statement best describes the trade?

Trade has no effect on anyone

Prices rise in an economy when the government prints:

Society faces a short run tradeoff between inflation and:

Which of the following topic is concerned with the study of macroeconomics?

The expression, "There's no such thing as a free lunch," means:

Everyone has to pay for his lunch

Economists define efficiency as the society gets:

One word definition of equity would be:

Which one is important for decision making in economics?

Comparing costs and benefits of alternatives

How People make decision at the margin?

By calculating monetary cost

Principle of opportunity cost

Which of the following observation is made by the Adam Smith?

Households and firms interacting in markets act as if guided by an “invisible

The term “Invisible hand” is given by:

An externality is defined as:

Ability of a single person or firm to unduly influence market prices

Ability of a single person or a firm to influence market prices is known as:

Which of the following is an important issue in macroeconomics?

Ali’s decision to work or stay at home

Which of the following is used in Economic models?

Show the relationships between economic variables

A curve which shows negative relationship between quantities demanded and

The factory raise bonus to its employees

If the price of Nokia mobile phone decreases then:

The quantity demanded of Nokia Phone increases

Market price of cars decreases

Demand curves are derived while holding constant:

Income, tastes, and the price of the good

If cost of production will increase then supply curve will:

In an economic model, exogenous variable is:

Determined within the workings of the model

In an economic model, endogenous variable is:

Identified within the workings of the model

Flexible prices can be describes as:

The prices that cannot change over time

Sticky prices can be described as:

The Prices that cannot change over time

If the price of Nestle Juice increases then:

The quantity demanded of Nestle juice will increase

Which of the following is true for circular flow model?

Households provide the services of labor to firm

The correct option for circular flow model is?

Firm supply goods (Bread) to households

Circular flow diagram shows income flows from:

Income flow diagram

Which of the following is government’s official measure to compute output of an

Which of the following is counted in GDP?

The sale of a used laptop

Value added of firm

Value added of a firm is equals to:

Value of firm’s output less the value of intermediate goods

The goods that are not counted in GDP are called:

Imputed value is used to estimate: