MEP – MCQs (First 10 sessions)

Q. Which of the following can be considered a final good?

a. The memory chips in your new smart phone
b. A share of IBM stock
c. Flour purchased at the store to bake cookies at home
d. Flour used by the bakery to bake cookies
e. A new car sold to Ola for use in their fleet of rental cars

Q. Divya sells a house she has owned for 5 years. To make it more marketable, she buys
carpeting and has it professionally installed, and buys wallpaper that she hangs herself. Which
items would be included in this year's GDP?
a. The sale price of the house
b. The sale price of the house, carpeting, and the installation fee for the carpet
c. The sale price of the house, carpeting and wallpaper, and the installation fee for the carpet
d. The sale price of the house, carpeting and wallpaper, the installation fee for the carpet, and
the opportunity cost of Divya's time
e. The sale price of the wallpaper and carpeting, and the installation fee for the carpet

Q. If nominal GDP, prices, and population all increase but real GDP remains the same then
a. Real GDP per capita will decrease
b. Real GDP per capita will increase
c. We cannot tell what will happen to real GDP per capita
d. The standard of living will increase
e. The standard of living will remain the same

Q. In 2020, Transylvania’s GDP was 6,931 million, GNP was 6,922 million, and NNP was
6,104 million. All numbers are in Transylvanian currency. We can conclude that
a. Depreciation was 827 million
b. Net factor income from abroad was 818 million
c. Net domestic product was 6,113 million
d. The addition to the capital stock was 9 million
e. Net factor income from abroad was 827 million
Solution details:
Depreciation = GNP – NNP = 6922 – 6104 = 818
Net factor income from abroad (NFA) = GNP – GDP = 6922 – 6931 = -9
Hence, NDP = NNP - NFA = 6104 - (-9) = 6113

Q. Which of the following is the most important variable for judging an economy's long-run
performance?
a. Growth in nominal GDP
b. Growth in real GDP
c. Growth in real GDP per capita
d. Growth in number of workers
e. Growth in the capital stock

Q. As per some estimates, India's share of world GDP fell from over 20% in 1500 to less than
5% in 1950. This necessarily means that,
a. India became a poorer country in this period
b. India became a richer country in this period
c. The size of the Indian economy fell during this period
d. Per capita GDP of India fell during this period
e. None of the above

Q. When the economy goes into a recession due to lack of aggregate demand, we can generally
expect that
a. Inflation will decrease while output will increase
b. Inflation will increase while unemployment will decrease
c. Inflation and output will increase
d. Inflation will decrease while unemployment will increase
e. None of the above

Q. Increases in unwanted business inventories are counted as

a. A decrease in the capital stock
b. An increase in consumption
c. An increase in investment
d. An increase in depreciation
e. None of the above

Q. Assume nominal GDP increased by 4.2% in the U.S. but by only 3.4% in Germany. We can
definitely conclude that
a. The standard of living of the people in the U.S. went up more than the standard of living of
the people in Germany
b. Real economic growth in the U.S. was higher than in Germany
c. Inflation in the U.S. was 0.8% higher than in Germany
d. Productivity growth in the U.S. was higher than in Germany
e. None of the above

Q. If Kelloggs, an American snack company, opens a new manufacturing facility in Brazil and
produces snacks which are sold in Asia, then Brazilʹs GDP ________ and U.S. GDP ________.
a. increases; does not change
b. does not change; increases
c. increases; decreases
d. increases; increases
e. decreases; decreases
Q. Assume you sold some of your government bonds, bought a used sofa, built a new house,
and took a vacation in Singapore using your past accumulated savings. Which of the following
is true?
a. Consumption will increase since you bought a used sofa
b. Consumption will increase since you spent money on food and hotel stay during your
vacation in Singapore
c. Government purchases will increase since you sold your government bonds
d. Investment will increase since you built a new house
e. Net exports will increase since you spent money on a vacation in Singapore

Q. Xi Jinping, a powerful Chinese businessman, along with his 40 countrymen visited

Ahmedabad in 2017 for about a week. In fact, he held several investment related talks and had
nice time on swings beside the Sabarmati River. India took extra care to look after this high
powered group. Which components of India’s GDP would be affected by this visit?
a. Consumption
b. Investment
c. Government spending
d. Net exports
e. All of the above

Q. Suppose that Vijay Sales buys a refrigerator from the manufacturer on November 15, 2018
for Rs.40,000, and that you then buy that refrigerator on April 15, 2019 for Rs.50,000. What is
the contribution to GDP in 2019-20?
a. GDP will increase by Rs.10,000
b. Rs.50,000 will be counted as Consumption (C) only
c. Rs.50,000 will be counted as Investment (I) only
d. Rs.10,000 will be counted as Consumption (C) only.
e. Rs.50,000 will be counted as Consumption (C) and (-)Rs.40000 will be counted as
Investment (I).
f. None of the above.
Solution details:
In 2018-19, 40,000 will be part of unsold stocks and is counted as part of investment. In
2019-20, due to the sale, the unsold stock (inventories) falls by 40,000 so ΔI = -40,000. The
consumer pays 50,000, hence ΔC = 50,000.
Overall, in 2019-20, ΔY = 50,000 – 40,000 = 10,000

Q. If prices go up
a. Inflation will always go up
b. Inflation may fall
c. Inflation may remain constant
d. All of the above
e. Only B and C

Q. If the nominal interest rate on a government bond is 6% and the rate of inflation is 4%,
what is your real rate of return on this government bond?
a. -2%
b. +2%
c. +4%
d. +6%
e. +10%

Q. If nominal GDP increased from Rs.8.0 trillion in the base year to Rs.8.4 trillion in the
following year and real GDP stayed the same, which is true?
a. The GDP-deflator increased from 100 to 110
b. The GDP-deflator increased from 80 to 100
c. The GDP-deflator increased from 100 to 120
d. Prices increased on average by 5 percent
e. Prices increased on average by 10 percent

Q. The difference between the GDP deflator and CPI index is

a. In terms of coverage of sectors of the economy
b. In the method of calculation with relation to the weighting
c. GDP deflator measures only deflation while CPI measures only inflation
d. B and C
e. A and B

Q. In a simple economy with no depreciation, no government, and no foreign sector, it is correct

to say that for any specified time period (say the month of June)
a. Y = C
b. C - I = S
c. Y - C = S
d. Y - C = S + I
e. Y = C + S – I

Q. Assume government purchases = $1,500, the budget deficit = $120, consumption = $4,800,
private domestic saving = $1,220, the trade deficit = $90, and transfer payments = $0. Which
of the following is true?
a. Private domestic investment is $1,190
b. National income is $7,400
c. Disposable income is $6,020
d. All of the above
e. Only (a) and (c)

Q. Which of the following identities is FALSE?

a. Y = C + I + G + NX
b. YD = Y - TA + TR
c. BS = TA - TR - G
d. I - S = (G - TA + TR) + NX
e. S + TA – TR = I + G + NX
Q. Assume that GDP = 4,800, consumption = 3,400, private domestic savings = 400,
government purchases = 1,200, and net exports = -120. Which of the following is true?
a. Disposable income is 3,800
b. Private domestic investment is 320
c. The budget deficit is 200
d. All of the above
e. Only A and C
Solution details:
Disposable income YD = C+S = 3400 + 400 = 3800
GDP, Y = C+I+G+NX
=> 4800 = 3400 + 1200 + I – 120
=> I = 320
Now, Taxes TA = Y – YD = 4800 – 3800 = 1000
=> BS = TA – G – TR = 1000 – 1200 = -200 (Budget deficit of 200)

Q. Assume the budget deficit increases. Which of the following can happen?
a. Private domestic saving can increase
b. Private domestic investment can decrease
c. Imports can increase
d. Exports can decrease
e. All of the above

Q. Assume the size of the budget deficit has decreased but the size of the trade deficit has
increased. Which of the following could be true?
a. Private domestic saving has decreased but private domestic investment has remained
the same
b. Private domestic investment has decreased but private domestic saving has remained the
same
c. Private domestic investment has increased but by less than increase in private domestic
saving
d. Private domestic saving has decreased but by less than decrease in private domestic
investment
e. None of the above

Q. In a Keynesian model of income determination, when intended spending is greater than

actual output, the adjustment to a new macro-economic equilibrium is based on changes in
a. Autonomous consumption
b. Unplanned inventories
c. Government spending
d. Net exports
e. All of the above

Q. Assume the size of the budget deficit has decreased but the size of the trade deficit has
increased. Which of the following could be true?
a. Private domestic saving has decreased but private domestic investment has remained
the same
b. Private domestic investment has decreased but private domestic saving has remained the
same
c. Private domestic investment has increased but by less than increase in private domestic
saving
d. Private domestic saving has decreased but by less than decrease in private domestic
investment
e. None of the above

Q. Consider an imaginary economy comprised of only two firms, a fishery farm that produces
raw fish and a fish restaurant. Suppose you are provided with the following information about
the two firms:

FISHERY FARM FISH RESTAURANT

Revenues Revenues
Sales to Households $10,000
Sales to Foreigners $10,000 Sales to
Sales to Fish Households
Restaurant $10,000 $50,000
Expenses Expenses
Wages $15,000
Wages
$10,000 Shrimp $10,000
Profits $20,000 Profits $25,000

The GDP of this economy is

a. $60,000
b. $65,000
c. $70,000
d. $75,000
e. $80,000

Q. If the saving function is S = - 400 + (0.25)YD, the marginal income tax rate is t = 0.2, and
the equilibrium level of income increases by 1,000, by how much will the consumption
change?
a. 250
b. 400
c. 600
d. 750
e. 800
Solution details:
C= YD-S = 400 + 0.75YD = 400 + 0.75(1-t)Y
ΔC = 0.75(1-t)* ΔY = 0.75*0.8*1000=600

Q. Suppose that the economy is characterized by the following structural Equations:

C = 160 + 0.6 (Y –T)
 I =150; G = 150; T = 100.
Where C is consumption, I is investment, G is Government expenditure, T is income tax and
Y is income or output. If tax falls to 50, by how much will equilibrium output rise and what is
the value of tax multiplier?
a. 125; 1.5
b. 100; 2
c. 125; 2.5
d. 75; 1.5
e. 110; 1.75
Solution details:
Lumpsum Tax Multiplier = -c/1-c = -0.6/(1-0.6) = - 0.6/0.4 = -1.5 (i.e., 1.5 in absolute terms).
Increase in Y = -1.5*ΔT = -1.5*(-50) = +75

Q. The original Phillips curve shows an inverse relationship between

a. the level of output and prices
b. the level of output and unemployment
c. the level of prices and employment
d. the rate of change in money wages and the rate of unemployment
e. the level of prices and wage rate changes

Q. If output is at its full-employment level, then

a. The actual unemployment rate is zero
b. The natural rate of unemployment is zero
c. There are no frictions in the labor market since wages have reached their market-clearing
level
d. There is still some positive level of unemployment due to frictions in the labor market
e. Nobody who is currently employed is looking for a new job

Q. The inflation-expectations-augmented Phillips curve implies that

a. unemployment is at its natural rate when expected inflation is equal to actual
inflation
b. stagflation occurs when expected inflation is below actual inflation
c. stagflation occurs when the short-run Phillips curve shifts left
d. the inflation rate is equal to the real output growth rate plus the monetary growth rate
e. the expected inflation rate is always equal to the monetary growth rate

Q. The direct (positive) relationship between change in inflation and change in cyclical
output is called
a. Okun's law
b. the Lucas curve
c. the Phillips curve
d. the replacement ratio
e. the sacrifice ratio
Q. The inverse relationship between change in unemployment and change in cyclical output
is called
a. Okun's law
b. the Lucas curve
c. the Phillips curve
d. the replacement ratio
e. the sacrifice ratio

Q. If the marginal product of capital is above the rental cost of capital (r+δ), then a firm
should
a. increase investment spending to increase the capital stock
b. decrease investment spending since any new investment projects will be unprofitable
c. leave investment spending at the current level since any additions to the existing capital
stock will not be profitable
d. undertake only replacement investments since any additions to the capital stock will not be
profitable
e. lower the actual capital stock by not replacing machines that have broken down in the
production process

Q. Assume a Cobb-Douglas production function in which the share of capital is a = 0.25 and
the share of labor is b = 0.75. If the rental cost of capital is rc = 10%, the desired capital stock
of a cost-minimizing firm should be equal to
a. K* = 0.25Y
b. K* = 0.75Y
c. K* = 2.5Y
d. K* = 3.0Y
e. K* = 7.5Y

Q. Assume the nominal interest rate is i = 10%, the real interest rate is r = 7%, and the rate of
depreciation d = 6%. What is the rental cost of capital?
a. 16%
b. 13%
c. 9%
d. 4%
e. 1%

Q. According to the life-cycle theory of consumption, an individual's

a. MPC [Marginal Propensity to Consume] out of wealth is fairly large
b. MPC out of labor income increases with increasing age, until it becomes zero at retirement
age
c. MPC out of transitory income is fairly small
d. Level of consumption will decrease if his/her retirement age is increased
e. None of the above
Q. According to the permanent-income theory, if individuals A and B have the same average
annual income but A's income fluctuates greatly from year to year while B receives an almost
even flow of income each year, then
a. A will spend less than B out of permanent income
b. B will spend less than A out of permanent income
c. A will weigh current income less heavily in making consumption decisions than B
d. B will weigh current income less heavily in making consumption decisions than A
e. A's consumption will always be less than B's

Q. The permanent-income hypothesis of consumption implies that

a. The short-run multiplier is smaller than the long-run multiplier
b. The short-run multiplier is larger than the long-run multiplier
c. The short-run multiplier is identical to the long-run multiplier
d. The long-run multiplier is equal to 1
e. The short-run multiplier is less than 1
Solution details:
PIH implies that MPCShort Run < MPCLong Run

=> (1- MPCShort Run) > (1- MPCLong Run)

1 1
=>(1− MPC <
ShortRun ) (1− MPCLongRun )

=> Short run multiplier < Long run multiplier

Q. A temporary tax change will significantly affect current consumption

a. Only if it does not come as a surprise
b. If liquidity constraints exist
c. Only for the elderly
d. As long as it does not lead to a budget deficit
e. None of the above

Q. If you are age 25, have no accumulated wealth, and have an expected average annual
income of 45,000, how much should you consume each year if you want to retire at age 65
and expect to live until age 75? You desire to leave no bequest to your children and to
consume an equal amount each year during your lifetime.
a. 40,000
b. 36,000
c. 32,000
d. 30,000
e. 28,000

Q. Crowding out occurs when

a. An increase in defense spending causes a decrease in consumption
b. Expansionary monetary policy fails to stimulate economic growth
c. Expansionary fiscal policy causes interest rates to rise, thereby reducing private
spending
d. Tax increases result in a drop in consumption
e. A policy designed to increase the budget surplus causes the economy to enter a recession

Q. If income taxes and money supply both increase, what is most likely to occur?
a. Income and the interest rate will both increase
b. Consumption and investment will both decrease
c. Income will decrease but the interest rate will increase
d. Investment will increase but consumption will decrease
e. Consumption will decrease but saving will increase

Q. In an IS-LM framework, fiscal expansion would be more effective in boosting real output
if,
a. The marginal propensity to consumer is higher
b. The proportional income tax rate is lower
c. The money demand-income sensitivity parameter (k) is lower
d. Only (a) and (b)
e. (a), (b) and (c)

Q. In the IS-LM model, the interest rate serves as a link between

a. Household saving and residential investment
b. Government spending and consumer spending
c. Actions of the central bank and changes in consumer spending
d. The goods market and the financial assets market
e. Domestic markets and foreign markets

Q. In an IS-LM model, any point that is to the left and below the IS-curve indicates a
situation where
a. There is excess demand for goods and services in the expenditure sector
b. There is excess supply of goods and services in the expenditure sector
c. The expenditure sector is in equilibrium but the money sector is not
d. There is excess demand for money in the money sector
e. There is excess supply of money in the money sector

Solution details:
At a point below the IS curve, such as point B (see figure below), output is same as a point on
the IS curve, such as point A. However, interest rate, i2, is lower at point B than point A, i1.
Consequently, the demand for investment and hence, the aggregate demand, is higher at point
B than A, leading to excess demand for goods and services.
Q. A decrease in autonomous investment
a. Results in a shift of the IS-curve to the left
b. Results in a shift of the IS-curve to the right
c. Occurs as we move along the IS-curve from right to left
d. Occurs as we move along the IS-curve from left to right
e. Is caused by an increase in government expenditures

Q. Monetary policy becomes less effective as

a. The marginal propensity to consume increases
b. The interest sensitivity of money demand decreases
c. The interest sensitivity of investment decreases
d. The LM-curve becomes steeper
e. The IS-curve becomes flatter

Q. If money supply is held constant, a cut in government transfer payments will eventually
cause interest rates to
a. Decline, enhancing the expansionary impact of the policy
b. Decline, decreasing the restrictive impact of the policy
c. Increase, decreasing the expansionary impact of the policy
d. Increase, decreasing the restrictive impact of the policy
e. Increase, enhancing the restrictive impact of the policy

Q. In an IS-LM model, an increase in the personal income tax rate will

a. Lower consumption and the interest rate but increase investment
b. Lower consumption and investment but increase the interest rate
c. Increase aggregate money demand and therefore cause interest rates to increase
d. Increase the expenditure multiplier
e. Decrease real money balances

Q. Fiscal policy becomes more powerful in changing the level of output as

a. Investment becomes more interest elastic
b. Money demand becomes more interest inelastic
c. Money demand becomes more income elastic
d. The marginal propensity to save gets smaller
e. The marginal propensity to consume gets smaller
Q. In an IS-LM model, if net exports is no longer assumed to be exogenous (that is, NX =
NXo), but instead is assumed to decrease as the level of income increases (that is, NX = NXo
- mY, with m > 0), then
a. The IS-curve will become steeper
b. The IS-curve will become flatter
c. The LM-curve will become steeper
d. The LM-curve will become flatter
e. The fiscal policy multiplier will become larger

Q. If the proportional income tax rate is cut and government purchases are also cut in a closed
economy (NX=0) to keep the budgetary balance intact, the following must hold in the new
IS-LM equilibrium:
a. Money supply increases
b. Real output remains unchanged
c. Change in private savings equals change in investment
d. IS curve shifts to the right
e. None of the above

Q. The IS-LM Equations are: IS: i=500-5Y and LM: i=4Y-400; Money Supply=200, Price=1.
Therefore, ‘h’, the sensitivity of money demand to the interest rate, is,
a. 0
b. 0.5
c. 2
d. 4
e. Cannot be ascertained

Q. In the IS-LM model, if we change the assumption that money supply is fixed but instead
assume that the amount of money supplied increases as the interest rate increases (upward
sloping money supply curve), then
a. The LM-curve will become flatter
b. The LM-curve will become steeper
c. The LM-curve will shift to the left
d. Monetary policy will be more effective
e. Both A and D

Q. Central banks generally conduct their monetary policy with two goals in mind: to keep
economic activity high and to keep inflation low; however, they have to recognize that
a. There is an inherent conflict between these goals
b. Economic activity can only be affected in the short run
c. They can control inflation fairly effectively but may not be able to influence GDP growth
d. A lower interest rate now may mean higher an inflation rate in the future
e. All of the above