KCM BBA: II (Section A and B) Sample Questions: Macroeconomics (MCQ:Multiple Choice Questions)

1 What is meant by the real rate of interest?A the rate charged by the central bank as lender of last resort.B the rate of interest adjusted for inflation.C the rate of interest expressed as an annual figure.D the rate of return on investment in industry.Ans: B-86-26

2 In a period of inflation, what should a government do if it wishes to maintain the real burden of taxation at its existing level?

A raise personal tax allowancesB raise the basic rate of income taxC reduces excise dutiesD reduces the rate of value added taxAns: B-116-36

3 All else remaining unchanged, which of the following would result in an outflow of capital funds from the UK?

A a fall in the UK rate of inflationB an expected appreciation of the £ exchange rateC an increase in foreign interest ratesD an increase in foreign pricesAns: C-142-33-n95

4 Which of the following must result in an increase in government revenue?A a switch from direct to indirect taxationB a switch from indirect to direct taxationC a period of rising incomes with indirect tax rates unchangedD a period of rising incomes with direct tax rates and allowance unchangedAns: D

5 To combat a rising crime rate, the government decides to recruit additional police officers who are paid a wage equal to that which they previously earned in the private sector.

As log as their previous jobs remain unfilled, what effect will the recruitment of the additional police officers have on national income and on economic welfare?

effect on national income effect on economic welfare

A increase unchangedB uncertain decreaseC unchanged decreaseD unchanged uncertainAns: D-198-21-j96

6 The diagram shows the equilibrium levels of national income in a closed economy with no government, at two levels of investment, I1 and I2.

Which

ratio gives the value of the multiplier?A TX C UZUZ XY

B UZ D XYTX OZ

Ans: C

7 Equilibrium income in the economy is the level of national income at whichA the balance of payments is evenly balanced.B there is no tendency for the national income to change.C the economy is producing the full employment national income.D the general level of prices remains stable.Ans: B

8 In an economy in which there is full employment, the marginal propensity to consume of pensioners is greater than that of taxpayers. Government expenditure on pensions is increased by £X million. To avoid an inflationary gap, taxation must be

A increased by more than £X million.B increased by £X million.C increased by less than £X million.D reduced by £X million.Ans: A-page 34-24

9 The table shows some data for an economy.

Investment

£m

Exports

£m

GovernmentExpenditure£m

Savings

£m

Imports

£m

Taxation

£m

NationalIncome£m

200 10050 1005050 500200 10050 12562.562.5600200 10050 1507575 700200 10050 17587.587.5800

T

S

XI2

I1

Z

Y

UO

national income

savi

ng /

inve

stm

ent

What is the equilibrium level of national income?A 500 B 600C 700 D 800Ans: D 34-25

10 Gross domestic product is equal to

A gross national product plus exports less imports.B gross national product plus imports less exports.C gross national product less net property income from abroad.D national income plus capital consumption.Ans: C

11 The following figures were estimated at the end of a strike.

$mValue of lost output 2000Value of extra leisure time to strikers 50Decrease in tax revenues 200Increase in social security payments 150Extra payments to police during strike 150

What was the resulting decrease in measured national income?A $1800mB $1850mC $1950mD $2050mAns: B -60-20

12 Given that the marginal propensity to consume is less than unity, then an increase in investment expenditure will lead to

A a change in the value of multiplier. B an equal increase in the national income.C a multiplier increase in the national income.D a fall in the propensity to save.Ans: C-60-22

13 The diagram shows the savings function in a given economy.Which of the following measures the marginal propensity to save?

A OW C UVWV OW

B TU D UVUV TU

Ans: D-60-2314 The table shows the consumption schedule of an economy.

Income(Y) $m

0 100200300400500

Consumption(C) $m

40110180250320390

Which equation represents the economy’s consumption function?A C = 0.7YB C = (0.7 + 40)YC C = 40 + 0.7YD C = -40 + 0.7YAns: C -60-24

15 The table gives information about an open economy with no government sector.

Income($ million)

Investment($ million)

Exports($ million)

Imports($ million)

Saving($ million)

100120

2222

2020

1012

2024

national income($)

S

V

U

W

T

O

savings($)

140160180200

22222222

20202020

14161820

28323640

What is equilibrium level of income?A $100 million C $140 millionB $120 million D $160 millionAns: C-60-25

16 The table shows annual inflation rates and interest rates for five years.

Which country experienced a fall in its real rate of interest between 1988 and 1989?Ans: C-60-26

17 Why might GNP per capita of different countries, measured in US $, be a poor indicator of comparative standards of living?

A a divergence in exchange rates from purchasing power parities.B a divergence in population growth rates.C a divergence rates of price and wage inflation.D a divergence in ratios of imports to national income.Ans: A-85-20

18 The first diagram shows an economy’s schedules of leakages and injections. Its trade balance schedule is shown in the second diagram.

S+ T+ M= saving + taxes + importsI+ G +X = investment + government expenditure + exportsY= national incomeX-M= exports – imports

CountryRates of inflationInterest rates

A USAB GermanyC Japan D UK

1988 19894.11.20.74.9

1988 19897.7 4.33.710.3

(-) (-)

Y(£m) Y(£m)150O

£m(+)

100O

£m(+)

X-M

S+T+M

I+G+X

If the full employment level of national income is £125m, what is the situation of the economy?A excess demand and a trade deficit.B excess demand and a trade surplus.C unemployment and a trade deficit.D unemployment and a trade surplus.Ans: D-85-21

19 What is the marginal propensity to consume?A the change in consumption divided by the change in income.B the change in income divided by the change in consumption.C the percentage change in consumption divided by the percentage change in income.D the percentage change in income divided by the percentage change consumption.Ans: A

20 The diagram shows schedules of injections and withdrawals with respect to national income.

Which ratio represents the value of the multiplier?

A XY C XZ XZ XY

B XY D YZYZ XY

Ans: B

21 What is meant by the real rate of interest?A the rate charged by the central bank as lender of last resort.B the rate of interest adjusted for inflation.C the rate of interest expressed as an annual figure.D the rate of return on investment in industry.Ans: B-86-26

22 What is the most abundant form of money(measured by value) in a developed economy?

A bank depositsB chequesC credit cardsD notes

withdrawals

injections 2

injections 1

national income

Y

Z

X

(-)

O

injections, withdrawals(+)

Ans: A-86-2923 According to Keynesian monetary theory, what would be the result of an increase in a government’s budget deficit which is financed by borrowing from the public?

A an increase in interest ratesB an increase in the money supplyC an increase in the price of government bondsD an increase in the quantity of money demanded for speculative purposesAns: A-86-30-94j

24 A country’s national debt consists of long term bonds which carry fixed annual interest payments.

What would reduce the real value of the national debt?A a government budget deficitB a reduction in interest ratesC an increase in the general price levelD central bank open market operations to contract the money supply Ans: C-88-36-94j

25 Which aggregate is the largest figure in a country’s national income accounts in a year in which both expenditure taxes ( net of subsidies) and net property income from abroad are positive?

A gross domestic product at factor cost B gross domestic product at market pricesC gross national product at factor costD gross national product at market pricesAns: D-113-20-n94

26 The table gives information about three countries in 1964 and 1984.

countryGNP(local currencies)

1964 1984

population(thousands)

1964 1984

prices(1964=100)

1984

123

5000 1800010000 2000025000 160000

5000 55003000 330010000 14000

300200400

From the data in the table, it can be deduced that real GNP per head

A fell in country 2 onlyB fell in countries 1 and 2 onlyC rose in countries 1 and 2 onlyD rose in all three countriesAns: A-113-21-n94

27 In the diagram a change in the pattern of saving in the economy causes a shift in the consumption function from C1 to C2.

What are the effects of this change?

multiplier marginalpropensity toconsume

A increases increasesB increases decreasesC increases unchangedD decreases increasesAns: A-114-22-n94

28 In the diagram YE indicates the equilibrium level of income corresponding to different levels of investment.

What does the slope of the line YE measure ?A the marginal propensity to saveB the investment multiplierC the rate growth of investmentD the rate of growth of national incomeAns: B-114-24-n94

29 Which of the following is most likely to cause an expansion of the money supply?A a budget deficit financed by borrowing from the central bank

C2

C1

national incomeO

expenditure

O investment

YE

equilibriumincome

B an increase in the public demand for notes and coinsC intervention by the government to support the external value of the currencyD open-market sales of government securities by the central bankAns: A-27-114-n94

30 Why is real per capita net national product not a reliable indicator of the economic well being of different countries?A it takes no account of capital depreciationB it takes no account of differences in the average number of hours workedC it takes no account of property income from abroad D it takes no account of the size of the population in different countriesAns: B-140-20-j95

31 An economy contains three industries.

Industry X uses imports costing £30 million to produce an output sold for £100 million to industry Y.

Industry Y, using no imports, sells goods to industry Z for £300 million and sells goods to a foreign country for £ 60 million.

Industry Z, also using imported goods costing £30 million, produces goods which it sells for £500 million to final consumers.

What is the gross domestic product of the economy?

A £440 million C £900 millionB £500 million D £960 millionAns: B-140-21-j95Solution: {(100-30)+(300-100+60)+(500-30-300)}=70+260+170=500

32 Which of the following explains how changes in national income may be brought by changes in investment?

A the acceleration principleB the investment functionC the marginal efficiency of capitalD the theory of the multiplierAns: D-140-22-j95

33 The table shows the level of consumption at various levels of national income for a closed economy with no government.

What happens to the average and marginal propensities to consume as income increases?

Average propensity to consume marginal propensity to consume

national income ( £ million )consumption ( £ million ) 101214161820

111213141516

A constant constantB falls constantC falls fallsD increases fallsAns: B-141-23-j95

34 Which of the following reduces the value of the multiplier?

A an increase in government expenditureB an increase in consumptionC an increase in the rate of taxationD an increase in the volume of exportsAns: C-141-24-j95

35 In a closed economy with no government, the value of the investment multiplier is 3.

By how much will consumption increase, if investment increases by £300?

A £100 C £600

B £200 D £900Ans: C-141-25-j95

36 A country experiences an increase in unemployment due to a deficiency of aggregate demand.

Assuming that tax rates and rates of unemployment benefit remain unchanged, what will be the effect on tax revenue and government expenditure?

tax revenue government expenditure

A decrease increaseB decrease no changeC increase decreaseD no change increaseAns: A-141-26-j95

37 Which of the following is a liability of a commercial bank?

A customer’s depositsB money at callC operational balances at the Bank of EnglandD treasury billsAns: A-141-28-j95

38 The table shows the annual percentage growth in the money supply, output and prices in the UK between 1982 and 1987.

annual percentagechanges in

198219831984198519861987

money supply

output (real GDP)

prices (GDP deflator)

10.4

1.8

7.1

9.7

4.2

4.6

9.3

2.7

4.0

15.0

3.4

6.8

18.0

3.4

3.3

22.8

5.3

5.0

Which statement is supported by this data?A The rate of growth of output rises as the rate of growth of money supply rises.B The rate of inflation rises as the rate of growth of output rises.C The real money supply declined steadily over the six years.D The income velocity of circulation of money is unstable.Ans: D-141-29-j95

39 Which of the following is the best measure of the true economic cost of an increase in unemployment?

A The loss of potential exports.B The money value of the additional social security benefits paid.C The goods and services the unemployed workers could have produced.D The effect on the incentive of other workers of the additional unemployment benefits.Ans: C

40 A country experiences a fall in unemployment.Other things being equal, what are the likely effects of this on indirect tax revenue, direct tax revenue and government spending?

Indirect tax direct tax governmentrevenue revenue spending

A increase increase increaseB increase increase decreaseC increase decrease decreaseD decrease increase increaseAns: B-62-37

41 Which of the following would encourage industrial expansion in a region of high unemployment?

A a rationing system for building development in that regionB a reduction in tax allowance on investmentC a requirement that only local labour be employedD an end to nationally negotiated wage ratesAns: D-88-39-94j

42 Which type of unemployment is associated with a deficiency in aggregate demand?

A cyclicalB frictionalC structuralD voluntaryAns: A-114-23-n94

43 If a government’s priority is to reduce the natural rate of unemployment ( NAIRU ), which measure would be inappropriate?

A a reduction in interest ratesB a reduction in rates of unemployment benefitsC the abolition of state- imposed minimum wage ratesD the introduction of travel allowances for unemployed workers to search for jobsAns: A-200-38-j96

44 All else remaining unchanged, which measure would be most likely to increase the natural level of unemployment?

A an increase in expenditure on education and trainingB an increase in the rate of unemployment benefitsC a reduction in the government budget deficitD a reduction in the general level of interest ratesAns: B-226-21-j96

45 The diagram shows the relationship between changes in the inflation rate and the level of unemployment.

Which statement is correct?

A At levels of unemployment above OU*, prices are falling.B At levels of unemployment below OU*, the inflation rate is increasing.C At a level of unemployment equal to OU*, the inflation rate is zero.D At a level of unemployment equal to OU*, the price level is stable.Ans: B-228-30-d96

44 Which of the following is an important principle of monetarist doctrine?

A The money stock is independent of savings.B There is a stable relationship between the money supply and money national income.C It is impossible for a government to take any action that will reduce unemployment.D People suffer from money illusion.Ans: B

45 The table shows how employment in five industries changed in a country between 1985 and

unemployment level

U*

_

O

change in the annual rate of inflation

+

2000.

1985 (thousand) 2000 (thousand)

banking and finance 2336 2881

distribution and catering 4678 5323

extraction of minerals 2278 1794

manufacturing 4102 3128

transport 2550 2304

According to the table, which type of employment has increased?A primaryB secondaryC tertiaryD totalANS:C

46 In 2001 some countries, including India and Pakistan, criticised the European Union forcontinuing to protect European farmers with a subsidy while expecting poorer African countriesnot to restrict trade.Identify the concepts that are not involved in this situation.A developing and developed economiesB free trade and protectionC market prices and official interventionD multi-nationals and public corporationsANS D

47 A commercial bank is appointed to act as a country’s central bank.What new function would it now have?A controlling monetary policyB dealing in foreign exchangeC ensuring security for loansD holding liquid assetsANS A

48 Which trade union action is most likely to have harmful effects on the productivity of a firm?A acceptance of new technologyB agreement to a bonus systemC opposition to planned redundanciesD participation in a profit-sharing schemeANS C

49 Nazmin Uddin works in a local office as a secretary three days a week. She lives with her parentsin a small apartment.Meer Ali owns a successful fitness centre that employs about twenty people and lives in a largehouse.Which is likely to be true?A Nazmin spends a smaller proportion of her income than Meer.

B Nazmin saves most of her income.C Nazmin would find it easier than Meer to borrow money.D Nazmin has a lower disposable income than Meer.ANS D

50 In a country, male workers on average earn more than female workers, although male andfemale workers receive equal pay for equal work.What could explain this?A Female workers are more experienced.B Female workers are more likely to achieve promotion.C Male workers are more likely to be in trade unions.D Male workers have fewer qualifications.ANS C

51 The table shows the proportion of income saved for different age groups.

age 15 - 29 30 - 39 40 - 49 50 - 62 62+

% of income saved –34 % – 4 % 18 % 29 % –23 %

What can be concluded from this data?A The youngest age group spends more than the oldest age group.B The 50 - 62 age group saves the highest proportion of its income.C The 50 - 62 age group has the highest level of income.D The older age groups earn more than the younger age groups.ANS B

52 There is an increase in interest rates.What is the likely effect on saving and borrowing?

saving borrowing

A falls falls

B falls rises

C rises falls

D rises rises ANS C

53 Which of the following is likely to be a disadvantage of economic growth?A Government tax revenue falls.B Resources are depleted.C The level of unemployment rises.D The standard of living of the population falls.ANS B

54 In a country where the government pays the unemployed a small weekly income, there is areduction in consumer expenditure and, as a result, unemployment increases.What will be the effect on tax revenue of the government and on government expenditure?

tax government

revenue expenditure

A decrease decrease

B decrease increase

C increase decrease

D increase increase

ANS B

55 Which of the following is an example of cyclical unemployment?A An airline cuts jobs in a world recession.B Cleaners lose their jobs as more machines are used.C Fishermen sell their boats owing to a reduction in fish stocks.D Hotels employ fewer people in the rainy period.ANS A

56 In constructing a retail price index, what is not used?A a base yearB the prices of a basket of goodsC the rate of interestD a weight given to each goodANS C

57 The table shows the percentage changes in income and consumer prices for four countries forone year.Which country is likely to have experienced the greatest increase in real income during the year?

country percentage change in income

percentage change in consumer prices

A Italy +13.0 +15.0

B France +12.5 +9.5

C UK +8.5 +5.0

D Germany +4.0 +4.0

ANS C

58 Inflation in Argentina fell from 400 % in the 1980s to 15 % in the 1990s.What could have been a result of this change?A falling pricesB fewer exports from ArgentinaC lower wage risesD a trade deficitANS C

59 The most common way of comparing the living standards of two countries is to study each country’sA average weekly working hours.B consumer expenditure.C GNP per head.

D national income.ANS C

60 Many developed countries are faced with an ageing population.What is the likely result of this?A a reduced dependency ratioB increased mobility of labourC increased spending on medical careD reduced tax levelsANS C

MCQ-CHAPTER-61. The table shows alternative price elasticities of demand for exports and imports of country X.

combinationexportsimportsABCD

0.50.81.52.5

0.51.21.51.5

There is a depreciation of the currency of country X.Assuming there are no supply bottlenecks, which combination of price elasticities offers the best prospect for an improvement in the balance trade?Ans: D -35-35

2. if M= the money supply, P= the general price level, Y= real national income and T= the volume of transactions, which of the following ratios represents the income velocity of circuation of money?

A M C MYPY P

B M D PY

PT MAns: D-61-29

3. What is meant by the real rate of interest?A the rate charged by the central bank as lender of last resort.B the rate of interest adjusted for inflation.C the rate of interest expressed as an annual figure.D the rate of return on investment in industry.Ans: B-86-26

7 In a given year the supply of money in an economy increased by 10%, the level of output increased by 10% and the level of prices remained constant.

Which statement must be true?A The income velocity of circulation of money must have increased by 10% over the year.B The income velocity of circulation of money must have stayed constant over the year.C There must have been a 10% fall in unemployment over the year.D There must have been a 10% rise in employment over the year.Ans: B-114-28-n94

8 What would enable UK manufacturers to increase their profit margins on their exports to the USA?

A a higher rate of inflation in the USA than in the UKB an appreciation of the sterling exchange rateC an increase in UK interest ratesD an increase in US tariffs on imported goodsAns: A-115-33-n94

9 In the absence of off-setting changes, what would be the effect of an appreciation in a country’s exchange rate?A an increase in the cost of imported raw materialsB an increase in the level of unemploymentC an increase in the rate of domestic inflationD an increase in the volume of manufacturing exportsAns: B-115-35-n94

10 In a period of inflation, what should a government do if it wishes to maintain the real burden of taxation at its existing level?

A raise personal tax allowancesB raise the basic rate of income taxC reduces excise dutiesD reduces the rate of value added taxAns: B-116-36-n94

11 Which combination of problem would be most likely to cause a government to increase taxation and raise interest rates?

A demand inflation and a balance of payments deficitB demand inflation and low investmentC unemployment and a balance of payments deficitD unemployment and imported inflationAns: A-173-36-d95

12 The table shows the price elasticities of demand for the exports and imports of three countries.

exports importscountry1 0.6 0.8country2 0.6 1.2

country3 1.2 1.4

Assuming there are no supply bottlenecks, in which of these countries would a depreciation of the currency result in an improvement in the balance of trade?

A country 1 onlyB countries 2 and 3 onlyC country 3 onlyD all three countriesAns: B-228-33-d96

Analyse Laffer’s Curve ( Microeconomics) from Taxation