,1. Which economic model posits that government intervention
can lead to a net increase in demand, output, and income during a
recession?
- A) Classical
- B) Keynesian
- C) Monetarist
- D) Supply-side
Correct Answer: B) Keynesian
Rationale: The Keynesian economic model suggests that during
a recession, government intervention in the form of increased
spending and lower taxes can stimulate demand, leading to
increased output and income.
2. In the context of the IS-LM model, an increase in government
spending would generally result in:
- A) A shift of the IS curve to the right
- B) A shift of the IS curve to the left
- C) A movement along the IS curve
- D) No shift in the IS curve
Correct Answer: A) A shift of the IS curve to the right
Rationale: In the IS-LM model, increased government spending
shifts the IS curve to the right, indicating higher levels of income
and output at each interest rate.
3. According to the classical dichotomy, which of the following is
NOT influenced by monetary factors?
- A) Nominal variables
- B) Real variables
- C) The price level
- D) Interest rates
Correct Answer: B) Real variables
Rationale: The classical dichotomy separates variables into
nominal (affected by monetary factors) and real (not affected by
, monetary factors). Real variables, like output and employment,
are determined by real factors, not monetary ones.
4. The concept of 'crowding out' in fiscal policy refers to:
- A) The reduction in private investment due to increased
government borrowing
- B) The expansion of private sector activity due to government
spending
- C) The displacement of domestic products by imported goods
- D) The outsourcing of government jobs to the private sector
Correct Answer: A) The reduction in private investment due to
increased government borrowing
Rationale: 'Crowding out' occurs when increased government
spending leads to higher interest rates, which in turn reduces
private investment.
5. The Phillips curve illustrates the relationship between:
- A) Inflation and unemployment
- B) Interest rates and exchange rates
- C) Fiscal policy and monetary policy
- D) Supply and demand
Correct Answer: A) Inflation and unemployment
Rationale: The Phillips curve represents the inverse relationship
between the rate of inflation and the rate of unemployment.
6. In the Solow growth model, the steady-state level of capital is
achieved when:
- A) Investment equals depreciation
- B) Savings equal consumption
- C) Government spending equals taxation
- D) Exports equal imports
Correct Answer: A) Investment equals depreciation
Rationale: The steady-state in the Solow growth model is
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