1. Macroeconomics distinguishes between the real economy and the monetary economy.

2. During business cycles the opposite of a trough is a peak.

3. According to the analysis of the British economist John Maynard Keynes,... government demand
could be used to smooth fluctuations in aggregate output and income.

4. In order to influence spending on goods and services in the short-run, monetary policy is
directed at directly influencing interest rates.

5. "Inflation is generally procyclical" means the rate of inflation tends to rise in periods of high
economic growth and fall in periods of low economic growth".

6. Economics that passes judgment, or provides advice on policy actions is called normative
economics

7. An important indicator of a nation's well-being is...p> gross domestic product (GDP)

8. Until the First World War, prices were as likely to fall as they were to rise (trendless)

9. Which economist represents a very different point of view to that of Keynes? Adam Smith

10. From 2010 to 2015, real income per capita in Italy declined by 6%.

11. Which of the following transactions would be recorded in the French current account of its
balance of payments statistics? A French resident buys a Volkswagen car produced in Wolfsburg,
Germany

12. Which of the following national economic accounting identities is correct for national accounts
that include a private sector, a government sector and a foreign sector? c) (S-I) +(T-G)=(X-Z)
13. By "absorption" economists mean total domestic spending by households, firms and
governments on goods and services, both domestic and foreign.

14. Real GDP is a measure of a country's physical output.

15. An increase in the nominal GDP by 6% can correspond to a decrease of real GDP by 4% and an
increase of prices by 10%.

16. Suppose the current account is in deficit and the private financial account is balanced, then
either the country's exchange rate will depreciate or its monetary authorities will sell some of its foreign
exchange reserves.

17. Which of the following is NOT an example of a transfer payment in the sense of the national
income accounts? Dividends paid by corporations to stockholders.

18. Which of the following is NOT a leakage from the circular flow of income and expenditure
Government purchases

19. What of the following does NOT enter GDP? life expectancy

20. The difference between real and nominal GDP is nominal GDP uses actual price-levels.

21. One week, a firm receives £9,000 from its customers. It has to pay £1,000 in taxes on products
and £500 in other taxes on production; and it receives £100 in subsidies on products and £50 in other
subsidies. Which of the following equals £7,650? The value of its products sold at factor cost.

22. Return to the firm in question 1. Suppose that in the week concerned it adds £350 worth of
finished products to its inventories. Also, it buys £3,000 worth of intermediate products from other firms
but adds £300 worth of these to its inventories. What is its value added at factor cost? £5,300

23. Return to the firm in questions 1 and 2. Suppose that in the week concerned it pays
compensation to its employees of £5,000. What is its operating surplus? £300
24. GDP at factor cost equals the total value added at factor cost of all producers. Which of the
following can be used to discover this total? The total compensation of employees of all producers plus
the total operating surpluses of all producers.

25. Expenditure in an economy for one quarter of a year is as follows, all figures being at market
prices and in £ billion: Consumption expenditure by households 80, consumption expenditure by non-
profit institutions 5, consumption expenditure by general government 35, gross domestic fixed capital
formation 20, changes in inventories 6, acquisition less disposals of valuables 1, exports 40, imports 45.
What is GDP at market prices for that quarter? £142 billion

26. GDP at market prices in an economy one year is £1,500 billion. Net income from abroad is £20
billion, net current transfers paid abroad are £15 billion, and capital consumption is £150 billion. Which
of the following statements is false? Gross national disposable income at market prices is £1,535 billion.

27. Country A uses sterling and has a GDP per head of £30,000. Country B uses another currency. If
this is converted to sterling at the current exchange rate, its GDP per head is £5,000. Which of the
following statements is false? PPPs are the rates which ensure that the prices of all products in each
country are similar.

28. Suppose that, over time, the share of manufacturing industry in a country's GDP falls. Which of
the following statements is true? Neither 1 nor 2

29. Which of the following statements is true?

Total welfare is affected by many factors including economic welfare.

Economic welfare refers to living standards. Neither 1 nor 2

30. Suppose that over the course of a decade an economy had a stable population and real GNDI
increased by 20%. However, an economist estimates that economic welfare increased by less than 20%.
Which of the following would not be a factor that could help to explain this? Prices increased by more
than 20%.

31. Which of the following groups of people are not regarded as economically inactive? People who
want a job but do not have one.
32. Which of the following statements is false as far as the UK is concerned? The unemployment
rate for males is lower than the rate for females

33. If all the following events occurred in 2013, which one would put upward pressure on the rate of
natural unemployment in the UK in 2013? Much tighter regulations for the UK financial services industry

34. Which of the following will not cause the level of unemployment to settle above the level where
the aggregate supply curve of labour intersects the aggregate demand curve for labour? Hysteresis

35. What is the main reason that led classical economists to believe that the government need not
respond to a demand shock which led to unemployment? Economies never displayed demand-deficient
unemployment.

36. According to the idea of the neutrality of money, or the classical dichotomy, which of the
following statements describes the long-run effect of a rise in the money stock? It affects variables
expressed in nominal terms, notably prices, but not variables expressed in real terms, notably output
and unemployment.

37. According to the quantity theory of money, what long-run effect will a 10% rise in the money
stock have on the price level? The price level will rise by 10%.

38. Keynes suggested several reasons why the government should not rely on flexible real wages to
remove demand-deficient unemployment. Which of the following was not one of these reasons? Any
efforts by the government to increase demand in the economy would lead to higher real wages and so
increase unemployment.

39. Faced with a choice between fiscal and monetary policy to try and increase aggregate demand,
Keynes believed that fiscal policy would have more effect. Which of the following was not one of his key
reasons for holding this belief? Fiscal expansion was highly effective because of the balanced budget
multiplier.

40. Faced with a choice between fiscal and monetary policy to try and increase aggregate demand,
monetarists believed that monetary policy would have more effect. Which of the following was not one
of their key reasons for holding this belief? Monetary expansion might have considerable effect because
the demand for money is interest elastic.
41. Suppose Countries A and B use only labour as an input and produce only cloth and wheat. In A,
a worker in a day could produce 2 units of cloth or 4 units of wheat. In B, a worker in a day could
produce 3 units of cloth or 9 units of wheat. At present the countries do not trade. Which of the
following statements is false? Country A has an absolute advantage in cloth.

42. Return to the countries in question 1. Suppose trade opens up. Which of the following
statements is true? Country A will export cloth to B, and import wheat from B, and each country will be
able to consume more of both products than before.

43. Suppose Countries C and D use only labour as an input and produce only tables and tents. In A,
a worker in a week could produce 4 tables or 2 tents. In B, a worker in a week could produce 6 tables.
Initially the countries do not trade, and then trade opens up. Under which circumstances will country C
export tables? If a worker in country D could produce more than 3 tents a week.

44. Suppose two countries E and F use many inputs. Country E exports tractors and imports
televisions. Assuming there are no economies of scale, which of the following statements is true? If the
countries did not trade, then E would have a lower opportunity cost for tractors.

45. Which of the following statements is false? When two countries benefit from the opening up of
trade, all citizens in each country will benefit.

46. Suppose a small country imposes a tariff on a good. Which of the following statements is false?
Producer surplus from the good will decrease.

47. Suppose a large country imposes a tariff on a good. Which of the following statements is false?
The price for consumers rises from the pre-tariff situation by the amount of the tariff.

48. Which of the following arguments for trade barriers offers potential benefits to consumers? To
nurture infant industries by protecting them from cheaper imports.

49. Two large countries currently impose tariffs against each other. Each country would be better
off with free trade. Which of the following statements are true?Each country might think 'if the other
country maintains its tariff, we will be better off maintaining our tariff.' Each country may think 'if the
other country unilaterally abolishes its tariff, we may be better off maintaining our tariff. Both 1 and 2
50. Which of the following statements is false? Members of a free trade area agree to have uniform
tariffs on imports from non-members.

51. Suppose that aggregate demand has recently increased. This has taken output above the
potential level and it has also increased the price level. The government is keen to avoid any further
increases in the price level. Which of the following options should it avoid? Simply wait for the labour
market to return output to the potential level.

52. Which of the following is not a problem with discretionary policies? They need to be announced
in advance.

53. Suppose that growth and unemployment were at satisfactory levels. What target would be the
focus of the Bank of England's monetary policy? The expected inflation rate in two years' time.

54. Suppose a central bank is concerned about inflation and wishes to raise interest rates. Which of
the following instruments would it be inappropriate to use? Quantitative easing.

55. Suppose the Bank of England wishes to restrain inflation, so it increases Bank Rate. Which of the
following events will not be part of the monetary policy transmission process? The increased Bank Rate
will increase people's wealth.

56. To secure equity over time, which principle of government finance is generally recommended?
To finance government capital spending by loans and government current spending by taxes.

57. Which of the following statements is false? The last and current UK governments have favoured
trying to ensure that, each year, total government borrowing equals total net government investment.

58. Suppose the government of a country has a high level of debt. Which of the following
statements about this debt is false? If all the debt was in the form of bonds owned by the country's own
citizens, then the debt would not be a burden to the country's taxpayers.

59. Which of the following policies would not be used by a government which wished to increase
the quantity of labour that will be hired? An increase in firms' non-labour costs.
60. Which of the following policies would not be used by a government which wished to increase
the output per labour hour? Discouraging firms from investing in new capital.

61. Loss

62. Which of the following statements about the UK is false? Phillips curves have generally been
fairly stable since 1957.

63. Suppose inflation over the next year is expected to be 5%, and assume there are no supply
shocks. What rate of inflation will the short-run Phillips curve show at the natural rate of
unemployment? 5%

64. Which of the following explains why the long-run Phillips curve is drawn as a vertical line?
Because in the long run, the labour market will settle so that unemployment is at its natural rate.

65. Which of the following might shift the short-run Phillips curve to the left? An increase in the
labour force.

66. Which of the following would shift the long-run Phillips curve to the left? Improved technology
which increases labour demand.

67. Which of the following views is not characteristic of the monetarist approach to policies
regarding unemployment and inflation? To secure generally stable prices, governments should aim to
keep the money stock stable over time.

68. Which of the following statements about rational expectations is false? They imply that
unexpected changes in demand have long-lasting effects on both unemployment and the price level.

69. Suppose the labour market is away from equilibrium, with unemployment above the natural
rate. The new Keynesian view of inflation and unemployment offers several reasons why the labour
market can stay away from equilibrium for long periods. Which of the following is not one of these
reasons? Efficiency wages may hold wages below the equilibrium level.
70. Suppose a government instructs its central bank to operate a Taylor rule, and that the
government sets a credible inflation target. Which of the following statements is false? The central bank
will make its interest rate decisions solely by considering whether actual inflation goes above or below
the target

71. When statisticians discuss the distribution of income, which of the following figures do they look
at? The incomes each household would need to maintain its present living standard if it comprised just a
married or cohabiting couple.

72. Which of the following definitions of a household's income is false? Its post-tax income deducts
other taxes and adds in the value of government services received free of charge.

73. Which of the following statements about income inequality is false? If we compare the
distribution of two incomes, the one with the lower Gini coefficient is the more unequal.

74. Which of the following might help to make the distribution of original incomes more unequal? A
rise in the State Pension.

75. Which of the following might help to make original incomes less unequal? A rise in the demand
for unskilled labour.

76. Many rich people support government policies for redistribution. Which of the following would
not help to explain why they do so? Rich people may feel redistribution should be left to voluntary
donations

77. Which of the following statements is false? With each tax, the higher the rate, the larger the
revenue.

78. Which of the following statements about approaches to poverty is false? On every approach, a
doubling of the incomes of all households would reduce the number of people in poverty.

79. Suppose a UK newspaper headline reads 'government figures show that more children are in
poverty than was the case ten years ago'. What can we be sure of from this? The incomes of poorer
families have risen less over the last ten years than the incomes of average families.
80. Which of the following does not cause problems for the government in its efforts to reduce
poverty? The fact that housing is covered by separa

1. The first National Income calculation on a scientific basis in India is in the year 1931-32

2. NNP means GNP – depreciation

3. “Rest of the world” is the major element in Four sector model

4. Cotton yarns purchased by handloom worker is An intermediate good

5. “ Inflation is always and everywhere a monetary phenomenon” these are the famous words of
Milton Friedman

6. When the rise prices is very slow like that of a snail is called Creeping inflation

7. The concept of “ laissez-faire” was the contribution of Classical economist

8. “ Supply creates its own demand” is the idea of JB Say

9. Which of the following is not an assumption of classical theory Involuntary unemployment

10. Defects in SNA include All of the above

11. Green accounting accounts for All of the above

12. Quantity of money according to classical theory will determine the Price level
13. Under Keynesian cross model , rate of interest is Exogenous variable

14. Wage price flexibility is the contribution of which of the following economist? A C Pigou

15. According to Keynes what causes changes in inducement to invest by entrepreneurs? MEC and
rate of interest

16. The deficiency of aggregate demand during depression period leads to Involuntary
unemployment

17. In Keynesian model of income determination autonomous investment occurs due to Change in
social welfare programmes

18. Early Keynesian economists’ view is Money does not matters

19. Which among the following is not a tool of fiscal policy Bank rate

20. The formula for calculating simple multiplier is 1/1-MPC

21. The balanced budget multiplier in the Keynesian Cross Model is Equal to one.

22. The concept of multiplier was first developed by F A Khan

23. The formula for calculating investment multiplier is

∆Y

∆I

24. Which among the following does not have the application of multiplier Monetary policy

25. Which of the following Fisher’s equation of exchange is not correct MV=PR
26. The tendency of the people to believe the currency of nominal value at present to be equal to
purchasing power at a previous point is called Money illusion

27. The relationship between money supply and price level under Quantity theory of money is
Direct proportionate relationship.

28. In Keynes consumption theory the chief factor that determines consumption expenditure is
Disposable income

29. Under Keynes Psychological law of consumption the relationship between consumption and
income is Non-linear and proportional

30. Equation M=KPT is propounded by which of the following Cambridge economists Robertson

31. In equation C= a+by, the value of b lies between 0<b<1

32. The relation between APC and MPC in Keynes Psychological consumption function is MPC<APC

33. Under Keyne’s consumption function consumption is a function of income Stable d

34. Under Classical theory, demand for labour is the same as MP curve of labor

35. The reason for existence of proportional relationship between money stock and price level is
Full employment

36. Which among the following is not a feature of Keynesian theory? Wage price flexibility

37. Money on wings indicates Medium of exchange function of money

38. Cash balance approach in Quantity theory emphasis on Money as a store of value

39. In the classical theory, output and employment are determined by Both A & B
40. Under Keynesian theory employment and output is determined by effective demand.

41. The concept money illusion is firstly coined out by Irving Fischer

42. Which of the following equation is not true? APC-1=APS

43. Under classical theory, rate of interest is determined by Demand for capital and supply of
savings

44. This independence of real variables from changes in money supply and nominal variables is
called Classical dichotomy

45. The expansion in money supply doesn’t affect the real output and employment in the economy
indicates Neutrality of money

46. An increase in output and employment in the economy which arise out of increasing
consumption demand and rise in real wealth is called pigou effect

47. Which of the following measures have to be adopted to curb out inflation from the economy?
Decrease in Government expenditure and increase in taxation

48. During great depression period unemployment in USA rose by 25%

49. Keyne’s introduced the book General theory of employment, interest and money in the year

1936

50. Which of the following have to be adopted to remove recession from the economy? Increase in
Government welfare projects and decrease in taxation

51. The two cornerstones of classical economics are Say’s Law and the Quantity Theory of Money
52. In the classical view, the price level is determined by supply of money

53. Assume a consumption function of the following form: C = 50 + .8Y. If income is equal to $1,000,
then consumption is $850

54. During period of recession aggregate output declines

55. Keynesian economics came to be widely accepted because it finds solution to Great depression
of 1930s

56. Macroeconomics is a study of economics that deals with which 4 major factors: households,
firms, government and external sector

57. Average number of times a unit of money changes from one hand to another is called Velocity
of circulation

58. Who is considered as the father of modern macroeconomics?. J M Keynes

59. Under Keynesian theory of income determination, investment. Exogenous

60. In a three sector economy, Y equals C+I+G C

61. Under equation C= a+by, b=0.8, what is the value of expenditure multiplier 5

62. In equation C= a+by, a indicates consumption at zero level of income

63. Under Keynesian framework income is measured along Horizontal line

64. Factor income of household sector is equal to Factor payments by firms

65. Those goods which are meant for final use of consumption are known as Consumer goods

66. A laptop purchased by consumer is an example of A consumer good

67. The policy relates to the taxation, expenditure and borrowing of the government is known as
Fiscal policy

68. Which is the most liquid measure of money supply M1

69. If aggregate demand falls short of current output, it would result in business firms will cut
production to keep from accumulating inventories.

70. The expenditure multiplier is the ratio of the change in equilibrium output to a change in the
autonomous expenditure

71. In the Keynesian model of income determination, consumer expenditure includes spending by
consumers on personal computers.

72. The multiplier concept is important in the Keynesian model because both (b) and (c) of the
above.

73. Under Keynesian model aggregate expenditure is measures along Vertical axis

74. Which of the following is an example of capital expenditure spending on laptops by consumers,
spending on power-looms by business firms, spending on infrastructure by Government, Answer= Both
B&C

75. Under Simple Keynesian model the aggregate price level Fixed

76) The well known work formulated by j.m. Keynes: general theory of employment interests and
money

77) Transaction demand for money is a function of: income

78) The value of MPC in Keynesian model is: greater than zero and less than one

79) According to Keynesian multiplayer model the value of MPC is 0.75 what would be the value of
multiplayer 4.0

80) According to two sector Keynesian model the aggregate demand is summation of consumption
expenditure and investment expenditKeyne

81) Choose correct option

Statement 1: Model assumes stickiness prices

Statement 2: Classical model assumes flexibility of prices

statement one and two are correct

82) Interest rates and bond prices are;

negatively related

83) Keynes’s motivation in developing the aggregate output determination model from his concern
with explaining;. why the Great Depression occurred.

84) Statement 1:There exists an inverse relationship between market rates of interest and price of
bond Statement 2:The liquidity trap is a situation when at some very low rate of interest all asset
holders become bears

both are correct

85) The Foreign Trade Multiplier is the ratio of; the change in equilibrium output to a change in
import

86)) An increase in planned investment spending causes aggregate output to; increase by an amount
equal to the change in investment spending.
87) Keynes assumed that the price level was fixed because of both (a) and (b) of the above.

88) IS curve shows that when income increases Interest rate must fall to restore equilibrium in the
goods market

89) the LM curve slope: slope upward

90) the slope of IS curve slope downwards

91) A significant increase in public expenditure lead to:

right ward shift in IS curve

92) Multiplayer is the ratio of change in income to change in investment

93 In a closed economy, aggregate demand is the sum of consumer expenditure, planned

investment spending, and government spending.

94) Keynes assumed that the price level was fixed because of both (a) and (b) of the above.

95) Accelartor theory of investment is the ratio of: change in investment to change in income

96) IS curve represent the combination of: combination of income and interest

97) LM curve represents the combination of Demand for money and supply of money

98) Effective demand is where ; aggregate demand is equal to aggregate supply

99) according to Keynesian theory:

statement 1: price are sticky

statement 2: after full employment change in aggregate demand lead to istatements

both are correct

100) speculative demand for money is a function of

interest.

101) Which of the following is NOT a flow variable?

Wealth

102) Macroeconomics is concerned with: All the above

103) Which of the following is NOT a stock variable? Saving

104) The word Macro was first used in Economics by: Ragnar Frisch

105) National Income is a: Flow concept

1066) A variable which has no time dimension but is described at a specific moment of time is:

Stock Variable

107) Stock variable is measured : At a point of time

108) If a model has no equilibrium, it can be analysed only by : Dynamic method

109) Macro-static equilibrium implies:

A complete absence of change

110) Who introduced the terms ex-ante and ex-post? Myrdal

111) Ct = f(Yt-I) is:

Static model

112) Which of the following is a phase of Circular flow of income? All of these

113) Which of the following is NOT considered a factor income? Gifts from Abroad

114) Two sector economy consists of: Households, firms

115) Real flow is also known as: Physical flow

116) Which of the following is the consumption sector?

Household

117) Real flow refers to the flow of factor services from ------ to -----Households to firms

118 In a closed economy, is not included Foreign sector

119) which of the following constitute the reason for difference between Market prices and factor
cost? Both A and B

120) If factor cost is greater than Market price, then it means that: Indirect Taxes < Subsidies

121) Final goods refer to those goods which are used either for ............. or for .......... Consumption,
Investment

122) Net Factor Income from Abroad is:

F Factor Income Received From Abroad Minus Factor Income Paid Abroad

123) Depreciation means:

loss of fixed assets over time due to wear and tear

124) Market price ad factor cost would be equal when there is: no indirect tax and no subsidy

125) Which of the following is an example of Transfer Income? All of these

126) Which of the following is an example of an intermediate good?

all of these

127) Out of the following, which aggregate represents 'National Income'?

NNP FC

128) if facor income received from abroad is equal to factor income paid abroad, then which of the
following is not a valid statement?

NDP FC + depreciation = GNP MP

129) Cororate tax is not a part of : Personal Income

130) National Disposable income is equal to: all of these.

131) If economic subsidies are added to and Indirect taxes are substracted from the national income
at market prices, then it will be equal to : National Income

132) In which type of economy, domestic income is equal to national income? Closed Economy

133) Domestic factor income is another name for: NDP FC

134) Which of the following ia a part of National Income?PROFIT

135) NDP at FC is less than National Income when: Net factor income from abroad is positive

136) National income is equal to: domestic product plus net factor income earned from abroad

137) is the net amount available to households for consuption and saving : personal disposable
income

138) GNP exceeds NNP by: Difference between Gross investment and Net Investment

139) GDP MP = Rs.1000 and subsidies = Rs.50, then GDP FC will be : 1050

140) "Income method" is also known as: distributive share method

141) Which of the following is a synonym of "Undistributed Profits"?all of these

142) Which one is inclded in National Income : none of these.

143) 'Distributed Profits' is also known as: Dividend

144) If a farmer sells Wheat to miller for RS.500 and miller sells flour to baker for Rs.700 and baker
sells bread to consumer for Rs.1000, then total value added by Miller and baker is: 500

145) Which of the following is included in domestic income? pension on retirement

146) Expenditure method focuses on measurement of National income at:phase of income

disposition
147) which of the following is not an economic activity and hence not included while estimating
national income in india?

a housewife doing household work

148) National product at current prices is higher than national product at constant prices during a
period of : Rising prices

149) Net Factor Income from Abroad is taken into account when National Income is calculated by:
any of the three methods

150) Broker's commission on sale and purchase of second hand goods is included in national income
because:

it is an income earned for rendering productive services

(A) Multiple Choice Questions with Answer:

1. Who is considered as father of modern macroeconomics? Prof. J. M. Keynes

2. Who wrote the book “General Theory of Employment, Interest and Money”?Prof. J. M. Keynes

3. The term microeconomics and macroeconomics were first given by -----------Ragner Frisch

4. The book “General Theory of Employment, Interest and Money” was published in----------1936

5. Macroeconomics became popular after-------------Great depression of 1929- 33

6. The term ‘macro’ has been derived from--------------Greek word ‘makros’ which means large

7. In macroeconomics, we study about ------------------All of the above.

8. Which of the following is/are the goals of macroeconomics-----------All of the above.

9. What are the tools of macroeconomics? All of the above.

10. The study of groups and broad aggregates of the economy is known as-----------Macroeconomics.
(B) Multiple Choice Questions with Answer:

1. The market value of all final goods and services produced within domestic territory of the
country during a year is known as-------------GDPmp

2. The money value of all final goods and services produced in the domestic territory of a country
during a year plus Net factor income from abroad is called------------ GNPMP

3. The difference between the income received from abroad for rendering factor services by the
normal residents of the country to the rest of the world and income paid for the factor services
rendered by nonresidents in the domestic territory of a country is known as------- Net Factor Income
from Abroad

4. The difference between indirect tax and subsidy is known as-------------Net Indirect Tax.

5. Net National Product at Factor Cost (NNPFC) is also known as------------National Income

6. That part of personal income which is actually available to households for consumption and
saving is called-----------Personal Disposable Income

7. Real and nominal income is calculated respectively at-------------Constant price and Current price

8. GDP Deflator is equal to-----------

𝑎. 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷z

𝑅𝑒𝑎𝑙 𝐺𝐷𝑃

c9. Sum of all kinds of income received by the individuals from all sources is called---------Personal
income

10.GNPMP is equal to GDPMP + NFIA

(C)Questions for Review

Multiple Choice Questions with Answer:

1. A situation when a person is able and willing to take up a job and gets employed, it is called-
Employment .

2. A situation when people are engaged in jobs but they do not get these jobs according to their
capabilities, efficiency and qualifications, it is called-Under Employment

3. A situation when the workers are willing to work under any conditions and at any wage rate but
they fail to get employment, it is called- Involuntary Unemployment

4. A temporary unemployment which exists during the period of the transfer of labor from one
occupation to another is called-Frictional Unemployment

5. When more workers are engaged in a work than actually required to work, it is called- Disguised
Unemployment

6. Who developed the Classical Theory of Income and Employment? All of the above.

7. “The supply creates its own demand”. This is the famous law of----Market (Say’s Law of Market)

8. The book General Theory of Employment, Interest and Money was written by----J. M. Keynes

9. Keynesian theory of employment is based on the concept of------------Aggregate Demand and

Supply both

10. The investment which is undertaken independently of the level of income is known as---
Autonomous Investment

11. The components of aggregate demand is/ are------All

12. Determination equilibrium of an economy can be studied by-----Both a and b

(D)Review Questions

I. Multiple Choice Questions with Answer:

1. The French economist Jean-Baptiste Say transformed the equality of total output and total
spending into a law that can be expressed as follows: Supply creates its own demand.
2. The classical economists argued that the production of goods and services (supply) generates an
equal amount of total income and, in turn, total spending. This theory is called: Say's Law.

3. Which of the following statements is true about Say's law? It states that supply creates its own
demand.

4. The school of thought that emphasizes the natural tendency for an economy to move toward
equilibrium full employment without inflation is known as the: Non-interventionist school.

5. According to Keynes, what is the most important determinant of households' spending on goods
and services? Disposable income.

6. The consumption function shows the relationship between consumer expenditures and:
disposable income

7. The relationship between consumer expenditures and disposable income is the: Consumption
function.

8. Which of the following statements is true concerning the consumption function?

All of the above.

9. The consumption function shows the relationship between consumption and: Disposable
income.

10. At the point where the disposable income line intersects the consumption function, saving: is
equal to zero.

11. Autonomous consumption is consumption that: is independent of the level of disposable

income.
12. Autonomous consumption is equal to the level of consumption associated with: zero disposable
income.

13. Given the consumption function C = $100 billion + 0.75 ($300 billion), autonomous consumption
is equal to:$100 billion.

14. That part of disposal income not spent on consumption is defined as: saving.

15. If disposal income is $400 billion, autonomous consumption is $60 billion, and MPC is 0.8, what
is the level of saving?$20 billion.

16. The marginal propensity to consume (MPC) is computed as the change in: consumption divided
by the change in disposable personal income.

17. The marginal propensity to consume (MPC) is the slope of the:consumption function.

18. The slope of the consumption function is called the:marginal propensity to consume.

19. The change in consumption divided by a change in disposable income is defined as:the marginal
propensity to consume.

20. The marginal propensity to consume is:the change in consumption divided by the change in
disposable income.

21. The marginal propensity to consume measures the ratio of the:change in consumer spending to
a change in disposable income.

22. The marginal propensity to save (MPS) is computed as the change in:savings divided by the
change in disposable personal income.

23. If your disposable personal income increases from $30,000 to $40,000 and your savings
increases from $2,000 to $4,000, your marginal propensity to save (MPS) is:

0.2.

24. The marginal propensity to save is:(change in S) / (change in Y).

25. If the marginal propensity to consume = 0.75, then: since the marginal

26. As shown in Diagram 1, autonomous consumption is:$2 trillion.

27. As shown in Diagram- 2, if disposable income is $100 billion, saving is:-$75 billion.

28. As shown in Diagram- 3, autonomous consumption is $1 trillion.

29. As shown in Diagram 3, the marginal propensity to consume (MPC) is. 0.50.

30. Psychological law of consumption has been given by----- J. M. Keynes

31. The absolute income theory of consumption has been given by----- J. M. Keynes

32. Relative income theory of consumption has been given by-----J. S. Duesenberry

(E) Multiple Choice Questions:

Review Questions
1. Who developed the concept of IS- LM model? Hicks and Hansen.

2. When rate of interest falls, level of investment will—increase

3. The curve which shows different equilibrium levels of national income with various rates of
interest is called-IS curve

4. IS curve slopes—downward

5. The steepness of IS curve depends on--- both a and b

6. The position of IS curve depends on---autonomous expenditure

7. The curve which relates the level of income with the rate of interest which is determined by
money- market equilibrium corresponding to different levels of demand for money is known as-LM
curve.

8. LM curve slopes—upward to the right.

9. The LM curve is flatter if the interest elasticity of demand for money-high

10. The LM curve shifts to the right when the stock of money is-increased

11. Which of the following is the correct definition of the IS curve? The IS curve represents the
combinations of output and the interest rate where the goods market is in equilibrium.

12. Suppose the economy is operating on the LM curve but not on the IS curve. Given this
information, we know that:the money market and bond markets are in equilibrium and the goods
market is not in equilibrium.

13. Which of the following statements is consistent with a given (i.e., fixed) LM curve? An increase
in output causes an increase in money demand.

14. A reduction in government spending will cause:a leftward shift in the IS curve.

15. Suppose investment spending is NOT very sensitive to the interest rate. Given this
information, we know that:the IS curve should be relatively steep.

16. An increase in the aggregate price level, P, will most likely have which of the following effects?
an upward shift in the LM curve.

17. Which of the following will occur if there is an increase in taxes?The IS curve shifts and the
economy moves along the LM curve.

18. Suppose the current level of output and the interest rate are such that the economy is operating
on neither the IS nor LM curve. Which of the following is true for this economy?all of the above.
19. Suppose the economy is currently operating on both the LM curve and the IS curve. Which of
the following is true for this economy? All of the above

20. The IS curve will NOT shift when which of the following occurs?a reduction in the interest rate..

21. Based on our understanding of the IS-LM model that takes into account dynamics, we know that
a reduction in the money supply will cause: an immediate increase in r and no initial change in Y.

22. Which of the following best defines the LM curve? the combinations of r and Y that maintain
equilibrium in financial markets.

23. A reduction in consumer confidence will likely have which of the following effects? a leftward
shift in the IS curve..

24. For this question, assume that investment spending depends only on output and no
longer depends on the interest rate. Given this information, an increase in the money supply: will cause
a reduction in the interest rate.

25. Which of the following statements is consistent with a given (i.e., fixed) IS curve?A reduction in
the interest rate causes investment spending to increase.

26. Which of the following best defines the IS curve?the combinations of i and Y that maintain
equilibrium in the goods market.

27. Which of the following is the definition for the real supply of money?the stock of money
measured in terms of goods, not dollars.

28. Which of the following is true for a given point on the LM curve? none of the above.

29. Based on our understanding of the IS-LM model that takes into account dynamics, we know that
a reduction in government spending will cause: a gradual reduction in r and gradual reduction in Y.

30. Assume that investment does NOT depend on the interest rate.Reduction in the money
cause no change in output.

(F)Review Question

1. Investment means the purchase of-New machines, new buildings and other capital goods that
add to the existing stocks of capital.

2. Net investment is equal to-Gross investment less replacement or depreciation;

.

3. Which is/are the determinant/s of private investment-All of the above.

4. Expected revenues from the use of the capital asset minus variable cost is called-Prospective
income

5. The future return on the asset is called-Prospective yield

6. After t years, at a rate of interest of r per cent, the present value will be- B

7. What will be the future value of SR 100 at 5 % rate of interest after 2 years? SR 110.25;

7. A. SR 110.00;

8. What is the present value of SR 100 at 5 % rate of interest in two year?SR 90.70;

9. The rate of discount (r) which equalizes the present value of the prospective yield of an asset
with its supply price is known as-Marginal Efficiency of Capital (MEC).

10. With increase in investment, MEC- decreases

11. The change in income due to change in investment is known as-multiplier

12. Higher the value of MPC, Higher will be the value of multiplier;

13. Higher the value of MPS, Lower will be the value of multiplier;

14. If the marginal propensity to consume is 0.8 (80 %) then the multiplier will be 5.0;

15. If the marginal propensity to save is 0.2 then the multiplier will be- 5.0

.
16. If the Saudi economy plans to generate SR 100 billion of additional income, how much additional
investment will be required when marginal propensity to consume (mpc) is equal to 80 per cent of
disposable income?SR 20 billion;

17. An additional investment of SR 50 billion in the Saudi economy creates how much additional
income if the marginal propensity to consume (mpc) is equal to 0.5?

SR 100 billion;

18. The change in investment due to change in income is known as-Accelerator;

19. The concepts of investment multiplier and accelerator are given by-Prof. J. M. Keynes and Prof.
J. M. Clark respectively;

20. In trade/ business cycle, the cycles follow these sequence-

Prosperity or boom → recession → depression or slump and then → Recovery;

Multiple Choice Questions:

(G)Review Questions

1. An annual statement of the revenue and expenditure by the government is known as-Budget;

2. Those inflows of money to the government account against which no liability of repayment is
created, is called-Revenue receipts;

3. Those inflows of money to the government against which a liability of repayment devolves upon
the government, is known as-Capital receipts;

4. A statement relating to the revenue expenditure and revenue receipts of the government is
known as-Revenue budget;
.

5. A statement relating to the capital receipts and capital expenditure of the government is known
as-Capital budget;

6. A budget in which the receipts of the government exceed its expenditure is called-Surplus
budget;

7. A budget in which the receipts of the government fall short of its expenditure is known as-
deficit budget

8. A budget in which the receipts of the government are matched by its expenditure is known as-
Balanced budget;

9. When revenue expenditure of the government is greater than the revenue receipts, it is called-
Revenue deficit;

10. When overall expenditure of the government is greater than the overall receipts, it is called-
Budget deficit;

11. The excess of overall expenditure over the sum of revenue receipts, and recoveries of loans is
called-Revenue deficit;

12. When interest payment is deducted from fiscal deficit, it is called-Primary deficit.